How will the US-China trade tussle end in a globalised world?

As economists scramble to find answers, game theory rather than history may be the best guide

The trade confrontation between the United States and China is heating up. After firing an opening salvo of steep tariffs on steel and aluminium, the US administration has released a plan for a 25% tariff on 1,333 Chinese imports - worth about $50bn (35bn) last year - to punish China for what it views as decades of intellectual property theft. China has fired back with a plan to slap 25% levies on a range of US goods, also worth about $50bn. In response to what he labels "unfair retaliation," President Donald Trump is now said to be considering yet another set of tariffs, covering another $100bn worth of imports from China. Economists and market analysts are scrambling to figure out what will come next.

One might be tempted to rely on historical experience. But, given today's economic, political and social conditions, history is likely to be a poor guide. More useful insights come from game theory, which can help us to determine whether this exchange of tariffs will ultimately amount to strategic posturing that leads to a more "cooperative game" (freer and fairer trade), or develop into a wider "non-cooperative game" (an outright trade war). The answer will have significant consequences for the economic and policy outlook, and markets prospects.