Modeling the US-China trade conflict: a utility theory approach

TL;DR

This paper uses expected utility theory to model the US-China trade conflict, revealing strategic behaviors and outcomes under different information scenarios, emphasizing the impact of utility and costs on net gains.

Contribution

It introduces a mathematical utility theory framework to analyze the strategic choices in the US-China trade conflict, highlighting new insights into optimal strategies and responses.

Findings

Expected net gains decrease as utility of winning increases.

China has a best response function; US does not.

Maintaining the status quo benefits China and reduces US gains.

Abstract

This paper models the US-China trade conflict and attempts to analyze the (optimal) strategic choices. In contrast to the existing literature on the topic, we employ the expected utility theory and examine the conflict mathematically. In both perfect information and incomplete information games, we show that expected net gains diminish as the utility of winning increases because of the costs incurred during the struggle. We find that the best response function exists for China but not for the US during the conflict. We argue that the less the US coerces China to change its existing trade practices, the higher the US expected net gains. China's best choice is to maintain the status quo, and any further aggression in its policy and behavior will aggravate the situation.