Analysing U.S. Tariffs Using Game Theory: Single-Run vs. Multiple-Run Dynamics

Analysing U.S. Tariffs Using Game Theory: Single-Run vs. Multiple-Run Dynamics

Trump’s tariff strategy—highlighted by his April 2, 2025, “Liberation Day” reciprocal tariffs—can be analysed through these lenses:

Single-Run Perspective

• Setup: The U.S. imposes tariffs (e.g., 20% on most countries, 60% on China) as a one-time move to force immediate compliance on issues like trade deficits, border security, or drug trafficking.
• Payoff: If other countries concede quickly (e.g., Canada and Mexico tightening borders), the U.S. wins short-term gains. If they retaliate (e.g., China’s counter-tariffs), both sides lose via higher costs and disrupted trade.
• Ambiguity’s Role: Trump’s vague goals—calling tariffs “beautiful” without clear endgames—create uncertainty. Other countries don’t know if the tariffs are permanent or a bluff, making it harder to calculate their best response. This could push them to overreact (retaliate) or underreact (concede prematurely).

Multiple-Run Perspective

• Setup: Tariffs are an opening salvo in a repeated game, with Trump expecting negotiations, retaliations, and adjustments over months or years.
• Payoff: Over time, the U.S. could extract concessions (e.g., China buying more U.S. goods, India lowering its tariffs) while absorbing short-term economic hits. Cooperation might emerge if countries see long-term benefits in avoiding a trade war.
• Ambiguity’s Role: By keeping his strategy unclear—e.g., pausing tariffs on Canada and Mexico, then threatening them again—Trump signals unpredictability. In a repeated game, this can deter escalation: opponents fear he’ll double down in future rounds, so they might soften their stance early to test his limits.

Ambiguity and Uncertainty

Ambiguity is central to Trump’s approach. He’s not specifying whether tariffs are a single-run punishment or a multiple-run bargaining chip. This uncertainty:

• Raises the stakes: Countries can’t predict if retaliation will trigger worse tariffs or if compliance will lift them.
• Shifts the burden: Opponents must guess Trump’s “type” (bluffer or hardliner), giving him an informational edge.
• Amplifies volatility: Markets and policymakers hate uncertainty, which might pressure countries to negotiate rather than wait out the chaos.

Trump’s Play: Bargaining Through Ambiguity

Trump’s game-theoretic strategy leans on ambiguity to maximise bargaining power. Here’s how it works:

• Credible Threat (Big Stack Bully):
  • Like a poker player with a big chip stack, the U.S. has economic heft to impose costly tariffs. Trump’s willingness to risk a trade war—calling it “good and easy to win”—signals he’s not afraid to push the table. This is a classic “madman strategy”: act unpredictably to make others back down.
• Iterative Negotiation (Multiple Runs):
  • Evidence suggests Trump sees tariffs as a repeated game. He’s paused tariffs on Canada and Mexico after talks, imposed them on China then adjusted, and floated “reciprocal” tariffs without a fixed formula. Each move tests responses, aiming to extract concessions (e.g., border security from Mexico, trade balance from China).
• Ambiguity as Leverage:
  • By keeping goals vague—sometimes citing trade deficits, other times fentanyl or immigration—Trump keeps opponents off-balance. They can’t optimise their counter-strategies without knowing his payoff matrix. This mirrors a “mixed strategy” in game theory, where unpredictability forces others to hedge rather than commit.

Endgame?

Theories like the “Mar-a-Lago Accord” suggest a grand bargain: tariff relief for military alignment or trade reciprocity. But Trump’s silence on such plans keeps it speculative. More likely, he’s playing a flexible game, adjusting based on responses to maximise U.S. leverage.

Country-Specific Responses: China, India, Israel, Australia

Now, let’s examine how China’s aggression, India and Israel’s softening, and Australia’s stance fit into this game.

China: Aggressive Posture

• Strategy: China’s tit-for-tat tariffs (e.g., on U.S. steel after Trump’s 10% hike) and moves like probing Google or blacklisting U.S. firms signal a hardline stance. In game theory, this is a “grim trigger” strategy: any U.S. defection (tariffs) triggers sustained retaliation.
• Why Aggressive? China sees itself in a long-term rivalry, not a one-off game. It can absorb short-term losses (e.g., 0.7% GDP hit by 2026) and counter with currency depreciation or supply chain shifts, betting that Trump blinks first.
• Trump’s Counter: Higher tariffs (60% threatened) and sector-specific hits (e.g., tech) aim to exploit China’s reliance on U.S. markets, but ambiguity keeps China guessing about escalation.

India: Softening Stance

• Strategy: India’s high tariffs (e.g., on U.S. goods) make it a target, but it’s signaled willingness to negotiate rather than retaliate. This is a cooperative move in a repeated game, seeking tariff relief or trade deals.
• Why Softening? India’s 6.6% GDP28 GDP growth forecast for FY25 cushions it from a full trade war, and Trump’s “reciprocal” tariffs could shift demand toward Indian suppliers if China stumbles.
• Trump’s Play: Ambiguity pressures India to lower barriers, but its softening suggests it’s betting on long-term U.S. favor over short-term defiance.

Israel: Softening Stance

• Strategy: Israel canceled remaining tariffs on U.S. imports on April 1, 2025, just before Trump’s “Liberation Day.” This is a preemptive cooperative move, aligning with the U.S. to avoid reciprocal levies.
• Why Softening? Israel’s security ties with the U.S. outweigh trade friction. It’s playing a repeated game, prioritising alliance over economic posturing.
• Trump’s Play: Ambiguity here is less effective—Israel’s move clarifies its intent, reducing Trump’s leverage but securing goodwill.

Australia: Steady but Watchful

• Strategy: Australia’s leaders (PM Albanese and opposition leader Dutton) vow to defend national interests against U.S. tariffs. No major retaliatory moves yet, suggesting a wait-and-see approach.
• Why Steady? Australia’s trade surplus with the U.S. and reliance on security ties (AUKUS) temper aggression. It’s likely playing a repeated game, hoping to negotiate exemptions or ride out uncertainty.
• Trump’s Play: Ambiguity tests Australia’s resolve, but its resource exports (e.g., iron ore) may limit U.S. pressure unless Trump targets broader commodities.

Conclusion

Trump’s tariff strategy blends single-run threats with multiple-run bargaining, using ambiguity to sow uncertainty and gain leverage. He’s betting that countries, fearing unpredictable escalation, will concede rather than fight a prolonged trade war. China resists aggressively, confident in its resilience; India and Israel soften, prioritising long-term ties; Australia holds steady, balancing trade and alliance. Trump’s game hinges on others’ inability to pin down his endgame—whether it’s a grand bargain or just chaotic dealmaking remains unclear, and that’s his edge.

--
Let's create some simplified game theory matrices based on the information provided, focusing on the US interactions with Israel, China, and India, both in a single-run and multiple-run context.

Key:

• US: United States
• Other: Israel, China, or India (depending on the matrix)
• Win: Significant gains for the country (e.g., major concessions, favorable trade terms)
• Lose: Significant losses for the country (e.g., economic damage, strained relations)
• Draw/Neutral: Moderate impact, no clear winner or loser.

1. US vs. Israel

• Single-Run Matrix:

US / Israel	Concede (No Tariffs)	Retaliate (Tariffs)
Impose Tariffs	US: Win, Israel: Lose	US: Lose, Israel: Lose
No Tariffs	US: Neutral, Israel: Win	US: Neutral, Israel: Neutral

• Explanation:

  • If the US imposes tariffs and Israel concedes, the US wins (gets its way), and Israel loses (economic damage).
  • If both impose tariffs, both lose (trade war).
  • If the US does not impose tariffs, and Israel concedes, Israel wins goodwill, and the US is neutral.
  • If neither imposes tariffs, it is a neutral situation.

• Multiple-Run Matrix:

US / Israel	Cooperate (Align)	Compete (Tariffs)
Impose Tariffs	US: Neutral, Israel: Win	US: Lose, Israel: Lose
No Tariffs	US: Win, Israel: Win	US: Neutral, Israel: Neutral

• Explanation:
  • In a repeated game, Israel's cooperation (canceling tariffs) leads to long-term US goodwill, leading to a win for both.
  • If both compete, both lose.
  • If the US imposes tariffs and Israel cooperates, Israel gains long-term political wins, and the US gains moderate trade wins.
  • If neither imposes tariffs, it is a neutral situation.

2. US vs. China

• Single-Run Matrix:

US / China	Concede (Trade Deal)	Retaliate (Tariffs)
Impose Tariffs	US: Win, China: Lose	US: Lose, China: Lose
No Tariffs	US: Lose, China: Win	US: Neutral, China: Neutral

• Explanation:

  • If the US imposes tariffs and China concedes, the US wins (gets trade concessions), and China loses (economic impact).
  • If both retaliate, both lose (trade war).
  • If US does not impose tariffs, China wins in the single run by maintaining the status quo of trade imbalance.
  • If neither imposes tariffs, it is a neutral situation.

• Multiple-Run Matrix:

US / China	Cooperate (Negotiate)	Compete (Tariffs)
Impose Tariffs	US: Neutral, China: Lose	US: Lose, China: Lose
No Tariffs	US: Lose, China: Win	US: Neutral, China: Neutral

• Explanation:
  • In a repeated game, sustained competition leads to long-term losses for both.
  • If the US imposes tariffs and China attempts to cooperate with minor negotiations, China still loses due to the economic damage of the tariffs.
  • If the US does not impose tariffs, China gains a short term win, but risks future tariffs.
  • If neither imposes tariffs, it is a neutral situation.

3. US vs. India

• Single-Run Matrix:

US / India	Concede (Lower Tariffs)	Retaliate (Tariffs)
Impose Tariffs	US: Win, India: Lose	US: Lose, India: Lose
No Tariffs	US: Lose, India: Win	US: Neutral, India: Neutral

• Explanation:

  • If the US imposes tariffs and India concedes, the US wins (gets lower tariffs), and India loses (economic impact).
  • If both retaliate, both lose (trade war).
  • If the US does not impose tariffs, India wins in the single run by keeping their tariffs high.
  • If neither imposes tariffs, it is a neutral situation.

• Multiple-Run Matrix:

US / India	Cooperate (Trade Deal)	Compete (Tariffs)
Impose Tariffs	US: Neutral, India: Neutral	US: Lose, India: Lose
No Tariffs	US: Win, India: Win	US: Neutral, India: Neutral

• Explanation:
  • In a repeated game, cooperation (trade deal) leads to long-term wins for both.
  • If the US imposes tariffs and India cooperates by negotiating, it is a neutral situation.
  • If the US does not impose tariffs, and India cooperates, both countries win with long term trade deals.
  • If neither imposes tariffs, it is a neutral situation.

These matrices simplify complex interactions, but they illustrate the core game-theoretic dynamics at play.