U.S.-China Hegemonic Competition
analyzed by Game Theory
: A New Form of Protectionism
Jayoon Byun
The Cold War era, which had been tense between the United States and the Soviet Union, was changed by the collapse of the Soviet Union in the 1990s. The collapsed Soviet Union position was replaced by China, which was rapidly growing, and the era of a new Cold War(United States vs China) began. The new Cold War is centered around a trade war. The trade war began in March 2018 when U.S. President Donald Trump signed an executive order to impose high tariffs on Chinese products. The trade war, which began with tariffs, later expanded to technical issues such as U.S. sanctions on Huawei and China's restrictions on exports of rare earth materials. The trade war seemed to flow into a peaceful atmosphere as the two countries signed the phase-one trade deal on January 15th this year. However, negotiations for the phase-two agreement did not begin as China failed to fulfill its promised purchase due to the COVID-19. Also, the conflict between China and the U.S. has intensified since Trump said that he would ban the use of the SNS platform, TikTok. In the following column, we are going to analyze the U.S. and China's actions, which are currently competing for hegemony through game theory.
On January 15th, the U.S. and China finally signed the Phase One trade agreement, forming a positive atmosphere. Despite these efforts, the relationship between the U.S. and China went sour as the COVID-19 in Wuhan, China, infected the whole world. In Phase One of the deal, China had agreed to purchase $200 billion more in U.S. goods and services over the next two years compared to 2017. The global economic downturn has made it difficult for China to implement trade deals, and the two countries are back on a path of conflict. No one can come up with a clear answer on whether to implement a trade agreement in the future. So, Ha Gunhyung of Shinhan Financial Investment Research Institute said we should approach this issue with game theory. Game theory is an economic theory that studies decision-making behavior at a time when one has to decide one's optimal behavior in consideration of rivals' responses. A representative example of the theory is the prisoner's dilemma. Prisoner's dilemma refers to a phenomenon in which a collaborative choice is the best choice of both, but a choice that focuses on one's own interests, resulting in bad consequences for each other. Assuming that the U.S. and China are participants in the trade war game and ”implementation/deferred of trade agreements” is an option, each option can be drawn on a graph below that appears to be very bad(-2, bad(-1), neutral(0), good(+1), and very good(+2).
If the U.S. maintains an agreement and China also expands imports, the U.S. can achieve economic results, but it is difficult to use anti-China sentiment to rally its supporters. In this case, the U.S. can be rated as +1 for economic performance, and -1 for China because trade disputes do not deepen but increase unnecessary imports.
If China fails to comply with the agreement when the U.S. maintains the agreement, the U.S. misses both economic and political achievements. The United States becomes -2, and China gets the best result +2 because there is no unnecessary import without deepening trade disputes.
If China fails to comply with the trade agreement when the U.S. scraps the trade agreement, the U.S. will not achieve economic results, but it will be able to use anti-centralization politically. China has no unnecessary income, but it gets -1 from deepening trade disputes.
Finally, if China implements the trade agreement while the U.S. abrogates the trade agreement, the U.S. gets +2 points for economic and political achievements, and China gets -2 points for deepening trade disputes despite unnecessary imports.
According to the graph, it is a superior strategy for the U.S. to break the agreement, whether or not China implements it. China, too, is the best option not to implement whether the United States maintains or reneges on the trade agreement. If both the U.S. and China make the most reasonable choices for each country in this situation where trade agreements are being delayed, they face the wall again: the entire irrational outcome, as shown in the graph, before the trade agreement was reached.
In the early days of the trade war, the U.S. and China imposed mutual tariffs and retaliatory tariffs, continuing in the form of "strong versus strong" (mutual non-cooperation). As the damage to their economies grew over time, the two countries tried to find a balance through the means of "trade agreements," but have yet to reach that balance. Repetition of choices such as this graph formed a “new protectionism” stance between the two countries. New protectionism is a new trend of protectionism that developed economies have put forward to strengthen regulatory measures against trade and foreign currencies, unlike traditional protectionism in which developing countries enforce various regulations to protect their markets. What is different from the past is that trade disputes are competition to secure and maintain technological hegemony. It is a conflict between countries to secure technological hegemony at a time when the source of high value-added creation is shifting to technology-intensive industries. Thus the number of new non-tariff measures such as technical and institutional measures increased sharply. In addition, the scope of protectionism including restrictions on technology exports, security, environmental and labor issues, and anti-immigration laws was also expanded.
The latest issue that characterizes this neo-protectionism is the "TikTok" dispute. TikTok is an SNS application developed by Chinese company ByteDance that allows users to produce and share short-form videos within a minute. Currently, the number of users worldwide has exceeded 1 billion, with 100 million in the United States. Donald Trump announced on August 1st that they would ban the use of TikTok in the United States. The reason is that TikTok is a Chinese company, so it is linked to the Chinese government which can steal the personal information of its citizens in the U.S. and poses a threat to national security. On August 14th, Trump signed an executive order that states, "If TikTok is not disposed of to a U.S. company within 90 days, TikTok will be banned from trading in the U.S." The U.S. government induced the "forced sale" by making it impossible for TikTok to operate its services if it did not hand over its business rights to the U.S. company. However, the U.S. court refused to recognize the ban on the grounds that restrictions on the use of certain SNSs could infringe on the right to freedom of expression guaranteed by the U.S. Constitution. Byte Dance is now appealing to the U.S. federal court for the unfairness of the forced sale of TikTok. Oracle and Wal-Mart are focusing on creating proposals to meet the needs of the Trump administration. As U.S. companies tried to take over TikTok, China began to regulate exports. According to China's official Xinhua News Agency, China's Ministry of Commerce and the Ministry of Science and Technology revised the list of technologies that cannot be exported without permission from authorities. The list also included TikTok's core technologies such as text analysis, content recommendation, speech modeling, and voice recognition. The current TikTok dispute between the U.S. and China can be described in a game-theory based graph as follows.
As can be seen in the graph, it is beneficial for the U.S. to strengthen its TikTok-related stance not depending on whether China restricts its export regulation. Therefore, the U.S. will keep its order for the disposal of TikTok or ban the use of TikTok in the U.S. When the United States maintains its current position, China will enforce export-related regulations to reduce losses. If the two countries continue to make game-based choices, it will be a chicken game for both countries. The U.S. will suffer from tightened export restrictions in other areas where collaboration with China is needed, and China will find it difficult to enter the U.S. market as well as TikTok.
The two examples of game theory show that both countries choose their own best interests and minimum losses rather than 'cooperation'. If the U.S. and China continue their current uncooperative moves at a time when facing the TikTok conflict, in the long term, the whole global economy will be in jeopardy. It will not only be fatal to the U.S. which has started a trade war, but also cause huge economic losses for China, which has endured a drastic counter-offensive. In addition, the trade war is a game that both the U.S. and China should play more carefully at a time when the global economic recession is severe that caused by the COVID-19. We already know the consequences of not trusting each other in an uncooperative game that creates a prisoner's dilemma. Assuming that the penalty for prisoners is not a fine or a longer prison term but a collapse of each country's economies and its regime, the two countries must make a consensus to reach an agreement
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