Game Theory Analysis: Shifting Economic Power and Trade Wars

This report analyzes the application of game theory to understand the dynamics of international trade and shifting economic power, particularly focusing on the trade relations between the USA and China. The report explores how game theory models, such as the prisoner's dilemma, can explain the st...Read More

Running head: GAME THEORY
Game Theory
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to 1......................................................................................................................................2
Answer to 2......................................................................................................................................3
Reference list...................................................................................................................................6

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Answer 1
Data suggests that the economic power has been started shifting from the developed
countries of the USA and Europe to the developing countries of China, Brazil and India since the
last decade. The overwhelming presence of the multilateralism and dynamism are considered as
the causes of this change in the international economic power. During 2000, China’s economy
was around one eighth of the USA economy. However, the situation has been started changing
since the early of 2010. China has exhibited a dramatic change owing to improvement in the
exogenous economic factors including foreign direct investment, dumping price and devaluation
of the exchange rate. On this account, China’s growth is expected to surpass the growth of the
USA economy by 2030. The anti-immigration policy adopted by the USA government can cut
down the employability of the country (Athukorala 2017). Moreover, the increasing tariff rate
further discourages the foreign traders to trade with the USA exporters. This will bring
regressive impact on the earnings of the USA economy. In response, the USA economy will lose
its international market size. As per the researchers, the Chinese economy might be advanced by
50% more than the USA economy. China has been successful to continue its strong position in
the international economy due to steady reliance on the capital investment and exports. This has
resulted in the improvement in the domestic consumption level and contraction in the import
demand.
Answer 2
It has been observed that the USA and China have initiated the trade war more than a
year ago. Over the last year several goods have been imposed by high tariff rate. This has caused
a loss of billions of dollars (Berthou et al. 2018). The unfair trade practice including the dumping
polices and adoption of fixed exchange rate of China is considered as the source of its explosive

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growth in the international export market. The fixed exchange rate makes the Chinese products
and services cheap in the export sector undermining the currency value of China. This aggravates
the trade deficit condition of as the USA economy as the consumption of the USA goods gets
declined with respect to the international market (Swanson 2018). On the contrary, the USA
government has been accused of hiding the trade policy to the international market. In this way,
the USA strives to hold the economic power in the international market. The intention behind the
tariff imposition makes the imported goods expensive for the USA customers. Therefore, the
people will consume more domestic goods and services. China is considered as one of the largest
importers of the USA economy (Hosain and Hossain 2019). Hence, the income of the Chinese
economy will receive detrimental impact from the imposed tariff rate. In retaliation, the Chinese
government has also decided to impose restrictions on the USA exported goods. The China’s
tariff rate for the American product varies from 5% to 25%. This increasing tariff rate has further
aggravated the international oil price as 5% levy has been imposed on the USA crude oil as a
consequence of the trade battle.
Answer 3
As the China’s trade pattern is not clear to the international market, the imposition of
tariff seems a best option as to curb the China’s international market share. In this regard, China
retaliates against the USA by hiking the tariff rate for the USA products. This trade conflict can
be considered as the part of prisoners` dilemma of the game theory. The expectation from the
USA government to China is to adopt the floating exchange rate instead of the fixed exchange
rate (E-International Relations 2020). Therefore, the price of the Chinese product will not remain
cheap as compared to the USA product. This will enhance the competitive structure of the
international market. On the other hand, the Chinese government will want to know the secret

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strategy of the USA’s trading pattern. In this way, both the countries attain to achieve their
optimal outcomes. However, the certain theory asserts that betterment of China is not possible
without deteriorating the outcome of the USA. This may cause either preventive war or
preemptive strike between these two countries. The objective of the preventive war is to counter
the growth of the competitors and the prremptive strike refers to preempt the competitor’s
retaliating power. As USA economy is hegemonic in nature, the Chinese economy is expected to
face a relatively huge loss as a result of the trade war. However, the data states that, the trade
deficit of the USA has been aggravated more than 10% as compared to China in the last year
(Tankersley and Bradsher 2018).

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Reference list
Athukorala, P.C., 2017. China’s evolving role in global production networks: Implications for
Trump’s trade war. China’s New Sources of Economic Growth: Human Capital, Innovation and
Technological Change, 2, pp.363-388.
Berthou, A., Jardet, C., Siena, D. and Szczerbowicz, U., 2018. Quantifying the losses from a
global trade war. Banque de France ECO Notepad, 19.
E-International Relations. (2020). Transcending the Security Dilemma in International Relations.
https://www.e-ir.info/2012/11/18/transcending-the-security-dilemma-in-international-relations/
Hosain, M.D. and Hossain, M.S., 2019. US-China trade war: Was it really necessary?.
International Journal of Business and Economics, 4(1), pp.21-32.
Swanson, A., 2018. US and China Expand Trade War as Beijing Matches Trumpʼs Tariffs.
Tankersley, J. and Bradsher, K., 2018. Trump hits China with tariffs on $200 billion in goods,
escalating trade war. New York Times.