“Luncheon of the Boating Party” by Auguste Renoir. Source: Wikipedia.
Markets around the world were roiled recently by the announcement of more US tariffs on Chinese-made goods. The President announced the levies as punishment for China’s failing to buy more agricultural products or stem the flow of illegal drugs into the US. But the real frustration many have with China has been the persistent trade gap we have with them: the fact that we buy more goods from them than they buy from us.
International trade is a tricky thing. The economics are clear: when everyone does what they do best – the situation where all the parties embrace free trade – each economy is better off: more production, more consumption, more exchange. But if one side defects, it seems like the “Prisoner’s Dilemma.” I can do better if you do worse, and vice versa. So the world tends to devolve into trade wars and trade skirmishes.
Prisoner’s Dilemma. Source: Wikipedia
The Prisoner’s Dilemma is a thought experiment from Game Theory. Two prisoners (who committed a crime) are interrogated separately. If one of them rats out the other, the informer goes free while his accomplice serves 3 years. If both remain silent, they both just serve one year. In most circumstances, both prisoners inform on each other, and both serve two years. In fact, trade isn’t really a Prisoner’s Dilemma, it’s more complicated than that. But that’s how it feels to many people.
Trade wars happen because we don’t know and trust the people that are far away from us. In a famous impressionist painting (shown above), the people look like they’re relaxed and enjoying themselves, but no single is looking directly at anyone else. Some have conjectured that the picture illustrates a deeper alienation that’s part of human nature. In a recent study where the website “Fivethirtyeight” let people pretend to be completely in charge of US trade policy, players became more cranky, combative, and uncooperative over time.
There’s no way to tell precisely where the current trade conflicts will go. Government officials probably don’t know. Chances are, however, that the challenges will just get more intense.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”