Why Tariff Negotiators Have a Prisoners’ Dilemma

Tariff negotiations could remind us of the prisoners’ dilemma.

The Prisoners’ Dilemma

The traditional description of the prisoners’ dilemma typically starts with an arrest. Separated at the police station, two burglary suspects know that each one’s sentence depends on who confesses. Most crucially though, It also relates to whether they compete or cooperate.

As you can see in the following diagram, if both confess, they each get three years. And if both don’t confess then the sentence is 6 months. However, denial could bring the longest jail time if the other person tells all. We could say that confession is the best strategy as long as only one prisoner does it:

Oligopolies like Coke and Pepsi have a prisoners’ dilemma when they devise a pricing strategy. Like the burglary suspects, each one’s decision affects the other firm. Implicitly cooperating, both can charge a high price. But then one can decide to lower its prices and attract so many buyers that its profits surge. At that point though, unable to resist, the second firm lowers its price, divides the market, and each rake in much less. We could say that the low price is like a confession, the high price, silence. When they go low, they are competing; high is cooperation.

Our Bottom Line: Tariff Negotiations

Similarly, contemplating U.S. China tariff talks, we could chart the prisoners’ dilemma:

Like the burglary suspects and oligopolies, tariff negotiators have a prisoners’ dilemma.

But here, it gets even more complicated. About much more than China and the U.S., other nations need to select a position in the negotiating queue. Whereas the EU will have the same prisoners’ dilemma as will Japan and more than 100 other nations, when you talk makes a difference. The EU has to decide whether a China/U.S deal should precede their talks with each country. Also, as you can see (below) the impact depends on the EU country:

All negotiators, though, are balancing competition and cooperation.

My sources and more: Though not referring to the prisoner’s dilemma, Bruegel echoed it in a paper and a podcast on Europe and the tariffs. Then though Asia Times had the graphic. But if you need a general discussion of the prisoners’ dilemma, Econlib is ideal.