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Comment by acd | Hacker News Reader

There is math model Prisoners dilemma that says that both sides is better of cooperating. So unless Chinas industrial subsidies was a defeat move and the Us trade tariffs is an answer move everyone both Us and China will be worse off after the customs tariffs.

There is chance that the tarrifs will lead to higher consumer prices as economic production will not be optimally allocated. Inflation will follow higher consumer prices. Central banks have already used zero interest policy to stimulate the economy so we cannot use that as a tool. Something better will emerge after this but it might be a rough ride until it’s sorted.

Prisoners dilemma game theory https://en.m.wikipedia.org/wiki/Prisoner%27s_dilemma

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Trade isn't a Prisoner's Dilemma though. Moving from Tariffs to No Tariffs increases your country's utility even when your opponent is playing Tariffs.

So the Nash equilibrium is free trade, even though cooperation actually isn't the equilibrium in the Prisoner's Dilemma.

That's not correct. See 'second best'.

Can you explain how that applies here? Are you saying that in the situation where China has tariffs it's optimal for the US to also have tariffs?

That's just not true. If the US government doesn't set tariffs then all the gains from trade on the US side go to the US traders. Since these people also set the price they will set it so as to maximise gains to (themselves and therefore) the US. So a US tariff can only hurt the US as a whole. This argument applies whether or not China has tariffs.

If we imagine both governments are controlled by special interests, specifically the producers of the goods whose foreign competition is to be tariffed, then it's prisoner's dilemma for those that are making decisions. (The domestic buyers of the tariffed goods suffer, but I guess we don't care about them.) I'm not entirely sure if this is what the others in this thread mean, though.

>The domestic buyers of the tariffed goods suffer, but I guess we don't care about them.

Only if we consider the first order effects -- and only if we consider them simplistically as mere consumers.

Because the wider view is that those "consumers", are also workers, and the "race to the bottom" effect of modern global trade with the developing world hurts their bottom line, and leaves them without money to be consumers anyway.

The US, and other western countries, have used tariffs to great effect throughout their capitalistic development.

this is a bit late, but hope this helps: 1 there is a standard argument for free trade, which states it is optimal for all countries to have zero tariffs (given usual conditions for such arguments).

2 there are arguments that, in certain, very special conditions, optimal for a single country to have no tariffs even if others do

3 more generally one cannot say - this is called argument of second best - and adding a tariff may make situation better not worse

suggest you google 'second best', which has a particular meaning in economics.

The thing is, even before the tariffs were even talked about, things were already not looking good on the outlook of the global economy ("L" shaped recovery) and even in how the markets are trading on what volumes compared to the avg (at least looking at long ETFs, short/inverse etfs seem to be increasing their volumes over avg and notional outstanding).

I'm unsure if we'll see things change that much even after we see a correction (and back to higher trading volumes), unless I start seeing other modes of resource allocation successfully obsoleting presently entrenched modes.

>There is math model Prisoners dilemma that says that both sides is better of cooperating.

Prisoners dilemma is a contrived example though, within a contrived scenario. There are not just 2 parties but 100s of parties (countries) they can cooperate or not with, and lots of leeway and secondary factors, not just some binary prisoner's style dilemma.

The Nash equilibrium strategy is mutually defecting -- not cooperating -- for Prisoner's Dilemma.

This is the so-called Tragedy of the Commons.

The Tragedy of the Commons has the same payoff matrix as the Prisoner's Dilemma. Its Nash equilibrium is also defecting (otherwise it wouldn't be a tragedy).

But when it cones to Trade, the Nash equilibrium for the people of the countries really is cooperation. The problem is just that the incentives of the decision makers aren't aligned with what's best for their countries.

Game theory is not a tool to describe economy, and moreover a war.

Time and time again, wars of mutual annihilation were fought and lost by both sides. Modern economists are simply wrong on this point, plainly and simple.

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