US and Chinese actions had led to an unintended embargo of trade between the world’s two largest economies.
In recent days there has been discussion of the temporary “cease fire” in the tariff war between the US and China.
The situation was that both countries had levied tariffs on each other more than 125%. This had led to a mutual embargo of trade between the two world is two largest economies. Then as a result of negotiation between the Deputy Premier of China and US Treasury Secretary Scott Bessent both China and the US agreed to a 90 day pause in “hostilities” where both sides agreed to reduce the US tariff on the China to 30 percent and the Chinese tariff on the US to 10%.
Some suggested that this meant that “China had won” others suggested that the “US had won.” To us this really suggests that both parties were playing in a different game. The was a game in which both sides had won.
To understand why this is the case we must understand a little of the theory of this type of competition. Economists usually use discuss competition in terms of markets where millions of people are involved. In such a case we find a solution by finding the intersection of supply and demand which model the exchange between vast numbers of people.
But here we are ware talking of a competition where only two parties are involved.
When exceedingly small numbers like this are involved, we find the solution to the competition by what is called “Game Theory.”
In this game there are only two players. One is called China, and the other is called the US. Game theory teaches us that are there three different types of games. The first is a zero-sum game. In this game there two sides are competing over a fixed amount of product. Again, this is called " A zero sum game “. Either one party gets a bigger share of the total sum at stake and the other side gets less. This zero-sum game is how most of the Media views the competition between the US and China.
A second form is a decreasing sum game. An example of this is a war. Some of the total amount that is fought over is destroyed in the process. Usually both sides will wind up worse than when they started.
Then there is a third form. This form is called an ‘increasing sum game.’ This is where both sides cooperate so that the total sum in the game grows because of this cooperation. We think that what happened in the US and China negotiation was an increasing sum game.
As Scott Bessent said at the Saudi Investment Forum in Riyadh soon after the agreement was signed, “both sides came with a clear agenda with shared interests and great mutual respect.”
He said, “after the weekend, we now have a mechanism to avoid escalation like we had before. We both agreed to bring the tariff levels down by 115% which I think is very productive because where we were with 145% and 125% was an unintended embargo. That is not healthy for the two largest economies in the world.”
He went on, “when President Trump began the tariff program, we had a plan, we had a process. What we did not have with the Chinese was a mechanism. The Vice Premier and I now call this the ‘Geneva mechanism’”.
Both sides cooperated to make both sides better off. Bessent added “what we do not want, and both sides agreed, is a generalised decoupling between the two largest economies in the world. What we want is the US to decouple in strategic industries, medicine, semiconductors, other strategic areas. As to other countries; we have had very productive discussions with Japan, South Korea, Indonesia, Taiwan, Thailand. Europe may have collective action problems with the French wanting one thing and the Italians wanting a different thing. but I am confident that with Europe, we will arrive at a satisfactory conclusion.
We have a very good framework. I think we can proceed from here.”
What we think we can see here is that the United States and China have cooperated to both become better off. This is what we call an increasing sum game.
They will continue their negotiation using that approach. This will do much to allay the concerns that so many had about the effect of these new tariffs.
