May 16, 2025 l Manila Times
The global trade war can be analyzed through the lens of risk management and the prisoner’s dilemma, revealing the challenges of cooperation in a com-petitive global economy.
Managing international trade risks involves balancing economic, political and strategic considerations. The risks of retaliation, supply chain disruption and market instability are already affecting the way we conduct our day-to-day businesses. We hear about the escalating tensions and hard-line tit-for-tat actions marking the latest developments in the simmering trade war.
US President Donald Trump’s promises of tariffs and later reversals and delays have also resulted in slower first-quarter US economic growth — the worst quarterly performance since early 2022 when the economy was in recovery after Covid. The slowdown in the world’s biggest economy will undoubtedly be felt by the rest of us.
Everyone is using all tools at their disposal. Reciprocal tariffs and economic sanctions are being implemented, and bilateral and regional trade agree-ments are being accelerated. Diversification strategies are also being crafted to reduce a dependence on traditional markets. It is a question of balancing short-term losses versus long-term stability and gains.
How is the prisoner’s dilemma playing out in all the turmoil? Recall that this is a game theory thought process involving two rational agents, each of which can cooperate or betray each other. It involves a situation where two parties separated and unable (or unwilling as in the case of two countries) to communicate must choose between cooperating with each other or not. The highest reward for each occurs when both parties choose to cooperate.
In the game, the best outcome for both is to cooperate and stay silent, instead of betraying each other, as they face the least punishment. However, this is often not the most likely outcome due to the incentive to betray and engage in a “tit-for-tat” strategy in the hopes of gaining an advantage. It seems that it is human nature to advance one’s own agenda for a better payoff — the dominant strategy in what is believed to be a zero-sum game.
In international trade, countries face incentives to protect domestic industries. This is a common political platform that wins votes, especially in de-pressed communities that have fallen on hard times because of globalization. Although most countries would like to cooperate — just like the prisoners in game theory — and engage in free trade, the Trump administration believes that this has made the US vulnerable to exploitation by trading partners who engage in unfair practices to bring down prices.
According to Trump, this has resulted in disadvantageous trade deficits, especially with China. The imposition of tariffs on Chinese products, however, has resulted in retaliatory tariffs. The strategic framing of a trade war is a result of a view that this is a zero-sum game and betrayal or defection is the best strategy to force the other to seek better terms. A suboptimal outcome has resulted from countries “betraying” each other, just like the prisoner’s dilemma.
There are lessons to be learned from this situation, but we have to wait for the dust to settle in this extremely volatile environment before we can even catch a glimpse of the outcome. Clearly, there is a lack of trust in the world and institutions like the World Trade Organization have to step up and strengthen frameworks to enforce cooperation. We now face the risks of an escalating trade war and worse, possible long-term damage to the global econ-omy.
Many economists are predicting a recession, especially with the fractured alliances. To prevent this economic disaster, we have to move toward cooper-ative strategies, diplomacy and trade reforms that advance mutual interests. Furthermore, understanding the dynamics of the prisoner’s dilemma can help us understand the situation. This can give us broad relevance for future trade negotiations to ensure global economic stability.
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email rsgoseco@gmail.com. Photo is from Pinterest.