The U.S.-China trade war, according to game theory

Summary

Planet Money: The U.S.-China Trade War, According to Game Theory

Episode Release Date: May 30, 2025
Host: Keith Romer and Amanda Aronczyk

---

Introduction

In this episode of Planet Money, hosts Keith Romer and Amanda Aronczyk delve into the complexities of the U.S.-China trade war through the lens of game theory. With escalating tariffs and heated rhetoric from both nations, understanding the strategic interactions between the U.S. and China is crucial. Trade economist Emily Blanchard provides expert insights, unpacking the strategic games at play and their implications for the global economy.

---

Backdrop of the Trade War

Keith Romer sets the stage by highlighting the unpredictable nature of the recent U.S.-China trade relations:

"Over the last few months, U.S.-China trade relations have been kind of bizarre. Like, it is unclear what these two countries are even trying to accomplish."
[00:21]

The trade tensions intensified with President Donald Trump's tariff announcements starting on April 2nd, leading to a tit-for-tat escalation:

• U.S. Tariffs: Imposed tariffs of at least 14.5% on Chinese imports.
• China's Retaliation: Responded with 12.5% tariffs on U.S. goods.

Amanda Aronczyk emphasizes the escalation and rhetoric from both sides, quoting Trump:

"Our country and its taxpayers have been ripped off for more than 50 years. But it is not going to happen anymore. It's not going to happen."
[00:47]

China's counter-narrative portrayed the U.S. as a global bully, unwilling to compromise:

"History has proven compromise won't earn you mercy, and kneeling only invites more bullying. No one was going to back down."
[01:11]

After months of escalating tariffs, a temporary truce was reached earlier in the month, reducing tariffs to 30% on Chinese goods and 10% on American goods. However, recent court rulings have deemed many of the new U.S. tariffs illegal, with the White House appealing these decisions.

---

Game Theory as a Framework

To dissect the trade war's strategic maneuvers, the hosts consult Emily Blanchard, a trade economist with deep experience in U.S.-China relations. Emily advocates for using game theory to interpret the actions and strategies of both countries.

"Game theory can show you how strategies bend and shift. When I think that you think that I'll do one thing, and you think that I think that you'll do this other thing."
[03:00]

Blanchard emphasizes the importance of identifying the correct "game" being played to determine optimal strategies:

"If you're playing the optimal strategy to the game that you're not in, the odds that you really have the optimal strategy are very, very low."
[08:31]

---

Potential Games in the Trade War

The episode explores four primary game theory models to explain U.S.-China interactions:

1. Ultimatum Game

Illustrated through a live demonstration, the Ultimatum Game involves one player proposing a division of resources and the other accepting or rejecting it. Edging into this concept:

• Keith Romer offers Amanda $1 out of $100, which she accepts to avoid leaving empty-handed.

  "I'll take the dollar. I didn't have a dollar five seconds ago. Now I'm gonna have a dollar. I'll take it."
  [07:22]

This highlights the optimal strategy in such a game, where the responder accepts any positive offer to maximize their gain, despite perceived fairness.

Emily Blanchard suggests that the U.S., particularly under Trump's administration, may have approached the trade war as an Ultimatum Game:

"It kind of suggests to me that he thinks maybe this is a take it or leave it game."
[06:00]

However, this perspective is challenged as the trade war escalated beyond simple ultimatums, with both nations raising tariffs in response to each other's moves.

2. Game of Chicken

China expert Yun Sun introduces the Game of Chicken, where two players head towards each other, and the first to swerve loses:

"That is a metaphor. And that's what we basically saw for the first half of April..."
[11:14]

This model aptly describes the initial stages of the trade war, with both nations unwilling to concede, escalating tariffs repeatedly.

However, Yun Sun points out limitations:

"But looking at the long run, I think this is not just a game of chicken, because game of chicken by default is a temporary or a short ephemeral stage."
[12:38]

3. War of Attrition

Transitioning from Chicken, the War of Attrition involves prolonged conflict where each side depletes resources over time:

"In a war of attrition, importantly, there are a lot of turns, time passes. The risk isn't so much one big smash up as it is slowly bleeding away all of your resources."
[12:54]

Blanchard discusses how both the U.S. and China evaluate the value of winning against the cost of sustaining the conflict.

Yun Sun elaborates on China's preparedness:

"The Chinese government very intentionally rebuilt supply chains for goods that Chinese consumers rely on so that the country would be less vulnerable to trade restrictions."
[14:32]

This strategic resilience allows China to withstand longer periods of economic strain, challenging the U.S.'s expectations of a swift victory.

4. Prisoner's Dilemma

The Prisoner's Dilemma presents a scenario where two players may choose to cooperate or betray, with the potential for mutual benefit or mutual harm:

Live Demonstration:
Keith and Amanda simulate the Prisoner's Dilemma, highlighting the tension between cooperation and self-interest.

"The classic prisoner's dilemma. It's pure strategy. It's, nobody cooperates with each other. Everybody steps on everybody else's toes."
[22:26]

Blanchard connects this to the trade war, suggesting that fostering cooperation could lead to mutually beneficial outcomes, contrasting with the zero-sum nature of the other games discussed.

---

Analyzing the U.S.-China Strategies

Political Implications:
Yun Sun notes the strategic posturing of leaders, emphasizing the need for both Trump and Xi Jinping to maintain strong leadership images domestically:

"The first one to blink or to appear soft is going to lose a lot of the leadership credibility that they prioritize."
[12:22]

Economic resilience:
China's proactive measures, such as diversifying supply chains and moving production to intermediate countries, enhance its ability to endure the trade war.

"Chinese companies have gotten way more savvy at getting around US Tariffs by moving some of their production to intermediate countries like Vietnam or Mexico."
[14:36]

Political Systems:
Yun Sun argues that China's authoritarian system provides greater resilience compared to the U.S.'s democratic framework, where public opinion can swiftly pressure government actions.

"I feel that if U.S. is engaged in a competition with China in terms of domestic resilience, I think China is always going to have an advantage because it is an authoritarian state."
[15:57]

Current Status:
The recent 90-day pause on tariffs is viewed as a temporary ceasefire, with expectations of continued negotiations and potential escalations in other economic sectors.

"Yun sees this 90-day pause as something like a temporary ceasefire. She doesn't think either side wants to pull out the 100 plus percent tariffs again."
[17:57]

---

The Metagame: Beyond Tariffs

Blanchard introduces the concept of a metagame, suggesting that tariffs are just one aspect of a larger strategic competition between the U.S. and China, encompassing geopolitical and economic dimensions.

"The tariff game is just one tiny piece of this much, much larger metagame between the U.S. and China."
[26:59]

This complexity implies that straightforward game theory models may only partially capture the strategic interactions at play.

---

Conclusion: The Complexity of Strategic Interactions

The U.S.-China trade war exemplifies the intricate applications of game theory in international relations. While models like the Ultimatum Game, Game of Chicken, War of Attrition, and Prisoner's Dilemma provide valuable frameworks, the reality is a multifaceted metagame with interwoven economic and geopolitical strategies. Understanding these dynamics is essential for predicting potential outcomes and formulating effective policies.

As the episode closes, hosts highlight additional resources for listeners interested in exploring the trade war's impact on small businesses, farmers, and the legalities of "Made in China" labels.

---

Notable Quotes

• Donald Trump:

  "Our country and its taxpayers have been ripped off for more than 50 years. But it is not going to happen anymore. It's not going to happen."
  [00:47]

• Emily Blanchard on Ultimatum Game:

  "Crucially, it's assigned itself the role of proposer. We have all the power. You have none."
  [10:14]

• Yun Sun on China's Resilience:

  "I think China is always going to have an advantage because it is an authoritarian state."
  [15:57]

---

Production Credits

• Produced by: Sam Yellow Horse Kessler
• Assisted by: Sylvie Douglas
• Edited by: Jess Jiang
• Fact-checked by: Sierra Juarez
• Engineered by: Kwesi Lee (with assistance from Robert Rodriguez and Sina Lofredo)
• Executive Producer: Alex Goldmark

Hosted by Amanda Aronczyk and Keith Romer

---

For more insights into the U.S.-China trade war and its broader implications, explore our related episodes linked in the show notes.

Transcript

[Sponsor Announcer]

This message comes from NPR sponsor Intercom. Fin by Intercom, the leading AI customer service agent is now available on every help desk named the number one AI agent in G2's winner. Report [e-mail] NPR this is Planet Money from NPR.

[Keith Romer]

Over the last few months, U.S. china trade relations have been kind of bizarre. Like, it is unclear what these two countries are even trying to accomplish.

[Amanda Aronczyk]

There was President Donald Trump's big tariff announcement on April 2nd. Then China retaliated. Then Trump retaliated for that retaliation.

[Keith Romer]

For A while, the U.S. put tariffs of at least 145% on Chinese goods coming into the U.S. china then put 125% tariffs on U.S. goods.

[Amanda Aronczyk]

The rhetoric from both sides got pretty heated. Here's President Trump.

[Donald Trump]

Our country and its taxpayers have been ripped off for more than 50 years. But it is not going to happen anymore. It's not going to happen.

[Amanda Aronczyk]

And in China, the Ministry of Foreign affairs put out this almost like political campaign video.

[Keith Romer]

The narrator is saying, the US has stirred up a global tariff storm.

[Amanda Aronczyk]

You see lightning and a protest march.

[Keith Romer]

And then he's like, history has proven compromise won't earn you mercy, and kneeling only invites more bullying. No one was going to back down.

[Amanda Aronczyk]

Then earlier this month, everyone backed down and it was announced that tariffs were lowered to 30% on Chinese goods and 10% on American goods.

[Keith Romer]

And then this week, two separate courts ruled that actually, maybe a lot of the new US Tariffs are illegal. But the White House has appealed.

[Sponsor Announcer]

It's very, it's disorienting, but. But it's also fascinating.

[Keith Romer]

We called up trade economist Emily Blanchard to help us figure out how we should even begin to try to make sense of all of this, or at least the trade war part of all of this. It is not the easiest moment, we should say, to get time with Emily.

[Sponsor Announcer]

I just did a panel at 12. I'm doing another panel at 5. We have a national security and economics conference here all day tomorrow.

[Amanda Aronczyk]

The reason everyone wants to talk to Emily right now is because she has lived all of this stuff. Currently, she teaches at Dartmouth's business school, but during the Biden administration, she was the chief economist at the State Department.

[Keith Romer]

And Emily told us the tool she keeps returning to to make sense of all of this chaos is this one particular branch of economics, game theory.

[Sponsor Announcer]

Behavior choices is always the reflection of your own incentives, right? It's like, what do you want to have happen? And game theory is really just saying, well, what happens is not only a function of your choices, it's also a function of the choices of others.

[Keith Romer]

Game theory can show you how strategies bend and shift. When I think that you think that I'll do one thing, and you think that I think that you'll do this other thing.

[Amanda Aronczyk]

And using game theory, economists like Emily can at least try to untangle what the US And China are up to, how exactly they're fighting this trade war. We suddenly find ourselves in the middle of.

[Keith Romer]

The first step in this analysis is to decide which of the many games game theorists have modeled is even the right one for the particular situation. You've got the prisoner's dilemma, the stag hunt, the dictator game, even chicken. You know, where we drive right at each other until one of us swerves out of the way. That can be modeled in game theory.

[Amanda Aronczyk]

Then, once the economists know what game is being played, they will be able to identify the optimal strategy for that game. But Emily says when she looks at this trade war between the US And China, she isn't even sure the two sides have done the first step of identifying the game.

[Keith Romer]

What happens if you think you're playing one game, but in fact you're playing a very different game? What are the consequences of that?

[Sponsor Announcer]

It's very bad. If you're playing the optimal strategy to the game that you're not in, the odds that you really have the optimal strategy are very, very low.

[Keith Romer]

Hello, and welcome to Planet Money. I'm Keith Romer.

[Amanda Aronczyk]

And I'm Amanda Aronczyk. Today on the show, what game is the US Playing in its trade war with China?

[Keith Romer]

We will take a look at four possible contenders to see what each of them can teach us about the American and Chinese strategies and about how this whole trade war might end up playing out. When Emily Blanchard was the chief economist at the State Department, she had a front row seat to how America's trade strategy was worked out. Now she's on the outside looking in, keeping a close eye on Everything folks in D.C. and Beijing are saying and doing and then using that as clues to how this trade war might go down.

[Sponsor Announcer]

I'm trying to back out from observed behavior and figure out, like, what do they think the game is? And then what's their strategy?

[Amanda Aronczyk]

So we asked Emily to be kind of our trade and diplomacy interpreter. She says there are clues to what game theory game the US Is playing in the ways President Trump tends to talk about trade negotiations.

[Donald Trump]

We're going to sit down and we're going to put very fair numbers down, and we're going to say, here's what this country, what we want.

[Keith Romer]

You know, China, you have to buy another billion dollars worth of American wheat next year.

[Donald Trump]

And they'll either say, great, and they'll start shopping or they'll say, not good, we're not going to do it. And I said, that's okay, you don't have to shop now.

[Amanda Aronczyk]

So which game is Trump playing? To Emily, it looks like he was thinking in terms of one in particular.

[Sponsor Announcer]

I think many of the choices of the administration and the statements of the Trump administration and the President himself kind of suggest to me that he thinks maybe this is a take it or leave a game. Right. We're the U.S. it's big, it's powerful. We're going first, we're going to offer you a deal and you can take it or leave it.

[Keith Romer]

In game theory, a take it or leave it game is known as an ultimatum game. And to illustrate how it works, Amanda, you and I are going to play a quick version of the game right now.

[Amanda Aronczyk]

You're going to give me an ultimatum and I'm going to have to decide whether I want it or don't want it.

[Keith Romer]

Basically, yes. But there are some rules.

[Sponsor Announcer]

An ultimatum game is a really simple game. One player is called a proposer and the other player is a responder. And the proposer has all the power.

[Keith Romer]

Okay, Amanda, in our game, I will be the proposer, you will be the responder. Makes sense.

[Amanda Aronczyk]

Yes. I will respond to your offer.

[Keith Romer]

Right. So before we started recording, I had our executive producer, Alex Goldmark Venmo me. $100.

[Amanda Aronczyk]

Actual dollars.

[Keith Romer]

Yeah, yeah, yeah. And so now as the proposer, I have to decide how much of that hundred dollars I'm going to offer to you, how much I'm going to keep for myself. And this is where you as the responder have a little bit of power in this game. You're going to have one choice.

[Amanda Aronczyk]

Uh huh.

[Keith Romer]

You can either accept the offer I give you and we both get to keep our shares of the money, or you can reject the offer and neither of us gets anything. And I have to Venmo the whole hundred bucks back to Alex. Do you get the terms?

[Amanda Aronczyk]

I think I understand the terms.

[Keith Romer]

Okay, I'm going to open up Venmo, look for Amanda Aranchic. I'm writing down my offer and I'm just going to show you the screen of what I'm offering you and you tell me whether you would like to accept this offer or reject it.

[Amanda Aronczyk]

Okay. So yeah, as expected, the offer is $1. So basically, Keith will get 99 and I will get $1. So do I Want Keith to suffer and get nothing just because I feel like his offer was pitiful and small and sad. Or do I want a dollar? And you know what, dude? I'll take the dollar. I didn't have a dollar five seconds ago. Now I'm gonna have a dollar. I'll take it.

[Keith Romer]

A very Planet Money response. Pay. Amanda Arancik. What's this for? Game theory. Pay.

[Amanda Aronczyk]

Oh, I got it. Game Theory. Thank you, Keith. Thanks, Alex. Thanks, Planet Money.

[Keith Romer]

Okay, so, Amanda, the strategy we actually both just used is what's known as the optimal strategy. Right? You chose the best rational path. Emily told me that we arrived at what game theory calls an equilibrium where neither of us could have improved our outcome by deviating from the strategy we chose.

[Sponsor Announcer]

Given that the responder has no outside option, like they get zero if they reject, or they get whatever has been offered to them, the equilibrium of the game is the proposer offers virtually nothing and the responder just takes it.

[Amanda Aronczyk]

That was me. Wah, wah, wah. I'm the guy who just took it.

[Keith Romer]

I will say, Amanda, Emily did mention that, like, when they bring volunteers into the lab to play this game, a lot of them behave the way that you were sort of pressuring me to behave.

[Sponsor Announcer]

Actually, if you play these games in an experimental setting, you actually don't see very often that perfect equilibrium. Instead, you see splits that are a lot closer to 50, 50 than you would expect.

[Keith Romer]

So.

[Amanda Aronczyk]

So other kinder people are more likely to give $50? Is that what she's saying?

[Keith Romer]

Sure, sure, sure, sure, sure. But Emily says forget about kindness, and for that matter, forget about what the right way to play the ultimatum game is. She says the part worth paying attention to in all of this is the White House's hunch that they are playing an ultimatum game at all.

[Sponsor Announcer]

Crucially, it's assigned itself the role of proposer. We have all the power. You have none. I actually don't think that's really the game that we should be playing or that we are playing, because there's more to it than that.

[Keith Romer]

Yeah. If it really was an ultimatum game, the US could have just said to China, here are all the things we want. You have to crack down on fentanyl and intellectual property theft and buy more soybeans, and in exchange, we will keep our tariffs low, and China would have had to take that deal or leave it. But that is not what they did in real life. Right? China fought back. They jacked up their own tariffs.

[Amanda Aronczyk]

And because China had the ability to fight back, unlike me in your sneaky game, they could do more than just take it or leave it. The trade war was never really an ultimatum game at all.

[Keith Romer]

Exactly. So let's consider some other possibilities. So far we've been thinking about this mostly from the US perspective, but the whole point of game theory is that there are two sides to this interaction. And now we're going to look at things from the Chinese side of things. For that, we reached out to China expert Yun Sun.

[Yun Sun]

The most commonly used framing from media, from experts, is a game of chicken.

[Amanda Aronczyk]

Yun is the director of the China program at security think tank, the Stimson Center.

[Keith Romer]

In a game of chicken, the model is two people in cars driving as fast as they can at each other and, and daring the other one to get out of the way. That's the metaphor.

[Yun Sun]

That is a metaphor. And that's what we basically saw for the first half of April when US escalated the tariff and the Chinese countered and then US escalated the tariff again and the Chinese countered again. So neither side was willing to concede.

[Amanda Aronczyk]

Keith, are you going to make me play a game of chicken against you? Because I'll win.

[Keith Romer]

I checked with hr. We're actually not allowed to, so we are going to skip that one.

[Amanda Aronczyk]

Fair.

[Keith Romer]

Yud says thinking of the U.S. china trade war as a game of chicken makes the most sense when you are focused on the two leaders involved. It's really important politically for both Donald Trump and Xi Jinping to be perceived in their own countries as these strong men who are never going to back down.

[Yun Sun]

And the first one to blink or to appear soft is going to lose a lot of the leadership credibility that they prioritize.

[Amanda Aronczyk]

But Yun says Trump and Xi playing chicken with each other does not capture everything that is going on here.

[Keith Romer]

In part, that's because chicken is what's called a one shot game, right? You play it once someone veers off to the side or the two cars crash into each other and then the game is over.

[Yun Sun]

But looking at the long run, I think this is not just a game of chicken, because game of chicken by default is a temporary or a short ephemeral stage. I think a more accurate description is in fact a war of attrition.

[Amanda Aronczyk]

And in a war of attrition, importantly, there are a lot of turns, time passes. The risk isn't so much one big smash up as it is slowly bleeding away all of your resources.

[Keith Romer]

The strategy here comes down to two big factors. The first is how valuable it is to you to come out ahead.

[Amanda Aronczyk]

Seems clear that both the US and China really want to win this trade war.

[Keith Romer]

Right. So then you look at the second factor, which is how much it costs each side to keep playing the war of attrition game, how much damage they can take, and for how long. And Yun says this is where the analysis of which country can better survive this trade war gets really interesting.

[Yun Sun]

Going into the trade war, there was a conviction on the US Side that because the Chinese economy is weak and Chinese economy has been very reliant on export to generate growth, that we're going to prevail. The Chinese are going to fold because they cannot afford a sustained trade war or sustained high tariff, which will essentially kill their export to the United States.

[Amanda Aronczyk]

Because, yes, growth had slowed in China, the housing market had crashed, unemployment was up. But Yun says, in a lot of ways, China was actually super well prepared for a trade war of attrition.

[Yun Sun]

This is not the first time they have to deal with a trade war with Trump administration. Right. The last round of trade war, in fact, started in 2018, and some of those tariffs have still remained in effect as of today.

[Keith Romer]

And the Chinese have been preparing for this war of attrition kind of ever since. The Chinese government very intentionally rebuilt supply chains for goods that Chinese consumers rely on so that the country would be less vulnerable to trade restrictions. And Chinese companies have gotten way more savvy at getting around US Tariffs by moving some of their production to intermediate countries like Vietnam or Mexico, where tariffs are lower, and then shipping to the US from there.

[Amanda Aronczyk]

Or Yun says, look at the different roles China and the US Play in each other's economies. On the US Side, giant trade barriers create a supply shock. Where's all our stuff going to come from? On the Chinese side, they create a demand shock. Who's going to buy all the stuff we make? And those shocks play out on different timelines.

[Yun Sun]

I think the shock for the Chinese economy is much longer term because they will realize gradually that, oh, wait a minute, our export industry is gone, or all these factories that used to export to the US Market, that is gone. But those impacts are not immediately felt. So, in fact, when I was in China in April, people were living their lives as normal.

[Keith Romer]

Finally, Yun says, if you want to understand which country was in a better place to win a war of attrition, look at the difference in how the US And China are set up politically.

[Yun Sun]

I feel that if US Is engaged in a competition with China in terms of domestic resilience, I think China is always going to have an advantage because it is authoritarian state.

[Amanda Aronczyk]

The Chinese government keeps pretty tight control over the media, so less overt criticism of their policies there and less super visible pushback from the Chinese people.

[Yun Sun]

I think the Chinese public opinion is going to exert so much less pressure on Beijing in terms of changing the course of this head on collision, if you will.

[Keith Romer]

In the US on the other hand.

[Yun Sun]

After the introduction of the turfs, stock market became extremely volatile, economists were predicting a recession. And last but not least, we're also seeing the retail industries start to panic and customers start to panic.

[Amanda Aronczyk]

In retrospect, it does seem like it was costing the US government a lot more politically to keep playing the war of attrition than it was costing the.

[Keith Romer]

Chinese government, which might have been part of the motivation for Treasury Secretary Scott Besant hopping on a plane to Switzerland to negotiate that 90 day pause on the new tariffs.

[Yun Sun]

I think the major watershed significance of this round is that the Chinese come to see said Trump is vulnerable after the Liberation Day, how Trump has reacted to the volatility on the stock market, on the bond market and to the US consumer. I think that suddenly made the Chinese realize that, oh, he's not, he's not invincible, he's actually susceptible to domestic pressure. And I suspect that in the future if there's going to be escalation or negotiation again, that the Chinese will exploit those vulnerabilities.

[Keith Romer]

Yoon sees this 90 day pause as something like a temporary ceasefire. She doesn't think either side wants to pull out the 100 plus percent tariffs again. But she also thinks there will be lots more little escalations in different sectors of the economy while the two countries try to find a way to win the game.

[Amanda Aronczyk]

After the break, we consider one last possibility for the game. The US and China might be playing a game where maybe we can all walk away happy potentially if everyone can just figure out how to play it. Right.

[Keith Romer]

Up to this point, all the games we've been talking about, the ultimatum game, Chicken, the War of attrition, they are games where one player wins and the other player loses. They often play out as zero sum games.

[Amanda Aronczyk]

But trade economists like Emily Blanchard like to model trade using a different game. A game that shows how two countries cooperating on trade can actually be good for both sides.

[Sponsor Announcer]

The aggregate pie and both you and me individually, we will both be better off if we cooperate. So that's viewing trade and economic interaction as positive sum.

[Amanda Aronczyk]

The game economists turn to over and over again to model this is called the Prisoner's Dilemma.

[Sponsor Announcer]

In the Prisoner's Dilemma you have this potential for win win games.

[Keith Romer]

Okay, the Prisoner's Dilemma works like this. Two people let's say their names are Keith and Amanda.

[Amanda Aronczyk]

Uh huh.

[Keith Romer]

Are arrested for a bank robbery that we did in fact commit last weekend.

[Amanda Aronczyk]

Good job. Us.

[Keith Romer]

The cops have caught us though. And they pull us into separate rooms. Right? And they interrogate us individually on our own.

[Amanda Aronczyk]

You know what? I'm gonna throw you under the bus because of that whole dollar thing.

[Keith Romer]

I would not have told me that ahead of time, but. All right. Each of us in this game has a choice, right? We are the prisoners who are facing a dilemma. Either we can blab to the police about what we know about what happened, or we can stay totally silent and we don't say a word. Amanda, as you might imagine, you and I are going to go ahead and play this game right now. I'm gonna give you the terms. You ready?

[Amanda Aronczyk]

Yeah, I'm ready.

[Keith Romer]

So again, this is going to be about money.

[Amanda Aronczyk]

Okay?

[Keith Romer]

If we both stay silent and don't tell the police anything, we get the like lower sentence. And that means we each have to venmo Alex Goldmark $10. Or if one of us rats the other one out and the other one stays silent, the ratter outer goes scot free. Pays nothing to Alex Goldmark. And the one who stays silent has to pay $100 to Alex Goldmark. And then in the last case, if we both rat each other out, we both have to Venmo Alex $30. Got it. Okay, so I want you on a piece of paper in front of you to write down either ride or die or snitch.

[Amanda Aronczyk]

Those are. Now we have characterized my options. All right, let me think. All right, I've picked.

[Keith Romer]

Okay.

[Amanda Aronczyk]

I wrote it down on a piece of paper and I have circled my choice.

[Keith Romer]

Okay, let's reveal to each other in three, two, one.

[Amanda Aronczyk]

Oh, you snitched on me.

[Keith Romer]

Oh, you went Ride or die, Roamer.

[Amanda Aronczyk]

Ride or die. We are friends.

[Keith Romer]

What is this, Amanda?

[Amanda Aronczyk]

Oh, come on.

[Keith Romer]

So great news for me. I get to keep all of the money from Alex Goldmark. I don't have to Venmo him anything. But if you could go ahead and open up your Venmo account right now.

[Amanda Aronczyk]

Yeah. Do I really have to do this?

[Keith Romer]

Yeah. 100 bucks.

[Amanda Aronczyk]

I'm running for stupid game organized by stupid Keith Roemer. All right. There.

[Keith Romer]

Wow.

[Amanda Aronczyk]

I'm not sure I want to keep working on this episode.

[Keith Romer]

Let's let the feelings simmer down and let's look at this through the lens of game theory.

[Amanda Aronczyk]

Fine.

[Keith Romer]

Emily Blanchard says according to game theory, one of us played the optimal strategy and one of us thought they were.

[Amanda Aronczyk]

Being a good person and your friend. Okay, whatever.

[Sponsor Announcer]

The classic prisoner's dilemma. It's pure strategy. It's, nobody cooperates with each other. Everybody steps on everybody else's toes.

[Keith Romer]

Which, Amanda, you will remember is what I did. But not what you did. Right, because I knew that if you, like, weren't loyal to me, I was risking sending Alex $100. Whereas if I ratted you out, the worst that could happen to me is that I have to send him $30. Or in this case, because you're a nice Canadian, I sent $0. And you should have known that about me. Theoretically, in game theory. So, Amanda, if we can, let's bring the game back from Keith and Amanda to the US In China.

[Amanda Aronczyk]

Fine, Whatever.

[Keith Romer]

Emily says. There is one very important difference between the version of the game you and I just played and the one she thinks the US And China are playing, where they have to decide whether or not to cooperate with each other. And that difference comes down to the fact that the US And China are not just playing this game once against each other. They are playing it over and over, day after day, month after month, year after year.

[Sponsor Announcer]

It's a game that goes on forever. So once you go through stage, you know, well, we'll call it the 2025 version of the game. Next you have the 2026 version of the game, the 2027 version of the game.

[Keith Romer]

And game theory solves the game in a very different way. When the game never ends, when you.

[Sponsor Announcer]

Move to a repeated game structure, then you've got a threat, right? Which is, not only will I not cooperate with you today, I will not cooperate with you forever, ever. You do something nasty and act in your naked self interest at my expense, I'm going to punish you for the rest of all time.

[Amanda Aronczyk]

But if one of us acted like a good person who was friends with the other person, and then the other meaner person followed that good person's lead, both of them would be better off than if we just kept doing mean spirited things back and forth.

[Keith Romer]

Keith, I see what you did there. And that is why for trade economists, the Prisoner's dilemma is basically a game about cooperation.

[Sponsor Announcer]

So you think about large countries and you know, there's a win win where we have low tariffs with each other and a lose lose where we're both putting high tariffs on each other.

[Amanda Aronczyk]

And so that maybe is what happened when Treasury Secretary Scott Besant went to meet those Chinese officials in Geneva.

[Sponsor Announcer]

I think that's basically what they said in Switzerland is this is kind of a lose, lose could we put these tariffs on pause while we find a better way to get to maybe not a win win, but a lose less, lose less?

[Keith Romer]

So reasonable approach. But that still leaves the puzzle of why the White House took this incredibly disruptive month long trade war round trip in the first place. From 30% tariffs on China to 145% tariffs and then back down to 30% again, or whatever the courts ultimately say Trump can legally do.

[Sponsor Announcer]

If on April 1st the Trump administration had said, so what we're gonna do, we're gonna threaten to raise tariffs really, really high. And actually we're gonna do it. We're gonna make those tariffs crazy high against China, and then they're gonna hit us back with their crazy high tariffs, and then bond markets are gonna lose their minds and do some pretty scary stuff and then we're gonna lower the tariffs against everybody else, and then we're gonna lower the tariffs against China, bringing us back to where we started. That seems like a thing that if you had perfect foresight, you wouldn't do it all to begin with.

[Amanda Aronczyk]

And why did it play out this way? Emily has a few theories. Theory one, maybe the administration really did think it was playing an ultimatum game and eventually figured out that no, it didn't in fact have all the power. Or theory two, maybe the US did think they were playing a prisoner's dilemma, but they just underestimated what the penalties were for starting a trade war with China.

[Sponsor Announcer]

Maybe you don't really know what the costs of an action are for you, so you've got to guess. I think tariffs would be actually not that bad for us. And then you impose tariffs and you get a whole bunch of phone calls from American companies saying, these are terrible.

[Keith Romer]

And then there is Emily's third theory that says that maybe neither side is even necessarily trying to win the tariff game at all, that the tariff game is just one tiny piece of this much, much larger metagame between the US and China.

[Sponsor Announcer]

You might say, well, we're just talking about tariffs right now maybe, or is it trade policy more generally? And then he can back up a little bit further. Is this about trade policy at all? And then it goes from economics to just non economics. It could go very quickly to geopolitical competition. So there you are.

[Amanda Aronczyk]

Which means the puzzle of figuring out what game is being played and what the payoffs are and what the best strategy is supposed to be. That puzzle is just exponentially more complicated. It's games within games within games.

[Keith Romer]

It's games all the way down, all the way down. Meanwhile, in the tariff game. We've got 74 days left in the latest round, that 90 day pause on the huge US China tariffs, 74 days for the two countries to decide what moves they want to make next. If you would like to hear more about the US China trade war, we've got recent episodes about how small businesses are dealing with the uncertainty created by this trade war, farmers, experiences of the last trade war, and a show that tries to get to the bottom of what Made in China really means legally. You can find links for all of those episodes in our show notes.

[Amanda Aronczyk]

Today's show was produced by Sam Yellow Horse Kessler with help from Sylvie Douglas. It was edited by Jess Jiang, fact checked by Sierra Juarez and engineered by Kwesi Lee with help from Robert Rodriguez and Sina Lofredo. Alex Goldmark is our executive producer. I'm Amanda Aronczyk.

[Keith Romer]

And I'm Keith Romer. This is npr. Thanks for listening.