The Art of No Deal
Game Theory, Tariffs, and the Bluff That Broke the Bank
If trade wars are "easy to win," someone forgot to read the rules of the game.
Game theory—an academic framework for understanding strategic decision-making—has been used to model everything from Cold War standoffs to reality TV alliances. But when it comes to trade policy, particularly the Trump administration's scattershot tariff regime, it's clear that strategy took a back seat to spectacle.
Rather than engage in the delicate balancing act game theory prescribes—mutual deterrence, credible threats, calculated cooperation—we got a crash course in how not to play. Tariffs were fired off like tweets: impulsively, inconsistently, and often at allies. The result? Disrupted supply chains, retaliatory strikes, and a global eye-roll from economists.
This isn’t a partisan broadside. It's an exploration of how powerful players, unmoored from coherent strategy, can destabilize complex systems. And how game theory, if it had been on the table, might have helped us avoid some of the more self-inflicted wounds.
What Is Game Theory, and Why Should We Care?
Game theory, simply put, is the study of strategic interaction between rational decision-makers. It's about predicting what others will do based on what they know (or think they know) about your intentions, resources, and potential actions. It’s less about chess masters and more about poker players, bluffing and reading the table.
One of the most famous illustrations is the Prisoner’s Dilemma. Two accomplices are arrested and interrogated separately. If both stay silent, they each get a light sentence. If one talks and the other stays silent, the talker goes free and the silent one takes the fall. If both talk, both get medium sentences. The best collective outcome is for both to stay silent. But the temptation to defect—to talk—often wins.
I learned this the hard way in high school.
Without getting too deep into the weeds, let’s just say that a couple of precocious friends and I put together an underground newspaper. It was anonymous, mischievous, and poked harmless fun at school policy and administration—not people’s looks or character, just student-life satire. We’d show up early on publication days and scatter copies around campus. After a few issues, I was summoned to the vice principal’s office—a classic American archetype: the no-nonsense enforcer who means business.
He told me they knew I was involved. Claimed my friends had already caved and named names. I cracked. I confessed. But they hadn’t sold me out—he’d picked a group of students likely to be the culprits and bluffed me into folding. It was a textbook application of the Prisoner’s Dilemma, and I failed the test.
Had I just clammed up and my friends stayed silent, nobody would’ve been caught. Instead, I earned myself a week of in-house detention and a valuable, if humbling, lesson in strategic trust, pressure, and how institutions play the game.
Now replace prisoners (and smart-aleck high school students) with trading partners. Replace confession with tariffs.
The Tariff Tango: Misplays and Misreads
In theory, tariffs can be used as leverage. One country imposes a tariff to compel the other to change behavior—say, open its markets or stop intellectual property theft. If both players understand the stakes and the consequences, they can negotiate an outcome that's better than mutual escalation.
But that’s not what happened.
The Trump administration treated tariffs less like bargaining chips and more like badges of honor. They weren’t timed strategically or targeted surgically. They were lobbed like grenades. China, predictably, responded in kind. U.S. farmers were collateral damage. American consumers paid more. Manufacturers scrambled.
This is what game theorists call a non-cooperative game gone wrong: no credible commitment to cooperation, no stable equilibrium, just tit-for-tat punishment spiraling downward.
As economist Adam Posen put it, the administration's tariff conflict with China had "echoes of the Vietnam War," with both sides locked in a harmful standoff without a clear path to resolution. He warned that such zero-sum thinking in trade undermines the very foundation of mutual economic benefit (The Guardian).
Seriously: the president seems like a guy who gleefully punts on first down.
Missed Opportunities and Mixed Signals
Game theory also emphasizes signaling—the ability to send credible messages about your intentions. But under Trump, signals were murky at best. One day, tariffs were on. The next, they were off. Negotiators were undercut by tweets. Agreements were made, then unmade, often on a whim.
This created what economists might call a high-noise, low-signal environment. In game theory terms: if players can’t trust the game board to stay still, they stop playing by the rules. They hedge, they delay, they retaliate.
Even some conservative voices were alarmed. Former U.S. Senator and economist Phil Gramm cautioned that the high tariffs were not only economically damaging but also politically perilous. He warned of potential recessionary effects and emphasized that the strategy was detached from long-term economic logic (Houston Chronicle).
A Better Strategy Was on the Table
Game theory doesn’t guarantee peace, prosperity, or perfect outcomes. But it does encourage clear thinking. It requires a framework—goals, timelines, fallback plans. It values credible threats and rewards credible commitments. It pushes decision-makers to think several moves ahead.
Had the administration adopted this approach, it might have crafted targeted tariffs with expiration dates. It might have built coalitions to apply pressure multilaterally, rather than picking fights with friends. It might have used backchannel diplomacy instead of public humiliation. It might have won something.
Trade Wars Are Real Wars, Just Slower
Game theory isn’t just a thought experiment. It’s a tool for navigating complex relationships where trust is scarce and stakes are high. In trade policy, as in geopolitics, it pays to understand the game you’re in before you upend the board.
The Trump administration played checkers on a chessboard. The rest of the world noticed. And the U.S. economy, particularly the working class it claimed to champion, picked up the tab.
Easy to win? Only if you don’t understand the rules.