I read a well-written article that I highly recommend that applies Game Theory to the U.S. tariffs and trade wars, especially with Donald Trump’s recent geopolitical moves into a more protectionist agenda to make America Great Again. His obsession with the Gilded Age protectionism played a large factor in his actions.

Me: [custom summary prompt]

ChatGPT:

Comprehensive Summary of “What Game Theory Can Tell Us About Tariffs”

Author: Laurel W
Publication Date: February 7, 2025
Platform: Medium
Field/Discipline: Game Theory, Economics, International Trade

Executive Summary

Laurel W’s article explores the strategic implications of tariffs through the lens of game theory, particularly using the Prisoner’s Dilemma and Nash Equilibrium to analyze trade conflicts. The author examines historical examples of tariff wars — such as the Smoot-Hawley Tariff Act, the Chicken War, and the U.S.-Japan trade war — to highlight the consequences of retaliatory trade policies. The article then applies these insights to contemporary tariff disputes, particularly those under the Trump administration, arguing that cooperation is a superior long-term strategy. The piece also introduces a quantitative model for assessing trade war risks using economic indicators and machine learning. Finally, it discusses the importance of forgiveness in trade strategy, emphasizing that cooperative trade agreements require equitable wealth distribution and labor protections.

Research Question & Objectives

The article aims to answer the following questions:

How can game theory help us understand tariff strategies in international trade?
What historical tariff disputes demonstrate the dynamics of cooperation and defection in trade wars?
Can tariffs be effectively modeled as a strategic game?
What are the implications of cooperative versus retaliatory tariff strategies?

Core Argument or Hypothesis

The central argument is that tariffs, when used as a strategic bargaining tool, resemble a repeated Prisoner’s Dilemma with uncertain rounds. In the short term, nations may be incentivized to defect (impose tariffs), but long-term cooperation is the dominant strategy for maximizing economic welfare. The article contends that historical trade conflicts illustrate the dangers of retaliatory tariffs and that modern trade wars should be analyzed through a game-theoretic framework. Furthermore, it suggests that forgiveness — strategic de-escalation — can be a powerful tool in maintaining stable economic relations.

Key Findings & Conclusions

Tariffs function as strategic moves in an international trade game, often used for protectionism, bargaining power, or geopolitical leverage.
The Smoot-Hawley Tariff Act (1930) triggered retaliatory tariffs, worsening the Great Depression and reducing international trade by nearly 66%.
The Chicken War (1960s) illustrates the dangers of tit-for-tat escalation, where retaliatory tariffs between the U.S. and Europe persisted for decades, distorting entire industries.
The U.S.-Japan trade war (1980s) led to forced cooperation, such as the Plaza Accord, but also contributed to Japan’s economic stagnation.
Trump’s trade war with China (2018-present) mirrors classic game-theoretic conflicts, with each country strategically imposing tariffs based on perceived retaliation risks.
A Nash equilibrium in trade wars often leads to inefficient outcomes, where both nations impose tariffs despite the mutual benefits of free trade.
Repeated interactions with uncertain rounds allow for cooperative Nash equilibria, where nations prioritize long-term trade benefits over short-term retaliatory gains.
Forgiveness plays a key role in breaking cycles of tariff escalation, as seen in cases like the U.S.-Japan trade negotiations but ignored in Smoot-Hawley.
A cooperative approach requires equitable distribution of trade benefits, particularly in addressing labor exploitation in developing nations.

Methodology & Data

The article incorporates both qualitative historical analysis and quantitative modeling:

Historical Case Studies:

Uses examples from the Smoot-Hawley Tariff Act, the Chicken War, the U.S.-Japan trade war, and the U.S.-China trade war to illustrate game-theoretic strategies in real-world trade conflicts.
Examines how nations reacted to tariff policies and the long-term consequences of these interactions.

Mathematical & Computational Modeling:

Constructs a Payoff Matrix for U.S.-China relations, assigning risk scores based on economic indicators.
Implements a Python-based algorithm to quantify risk, using GDP, inflation, wages, industrial production, and manufacturing demand as inputs.
Uses Principal Component Analysis (PCA) and machine learning to refine the risk model.
Determines Nash equilibria by analyzing dominant strategies within the payoff matrix.

Theoretical Framework

The article is grounded in classical and modern game theory:

The Prisoner’s Dilemma:

The single-shot game predicts mutual defection (tariffs).
The repeated version introduces the possibility of sustained cooperation.

Nash Equilibrium:

Defines stable outcomes where no nation benefits from unilaterally changing its strategy.
Applied to trade games, it explains why tariffs often persist despite their inefficiency.

The Folk Theorem:

Demonstrates that repeated games allow for cooperative equilibria when future retaliation is a credible threat.

Tit-for-Tat & Grim Trigger Strategies:

Tit-for-Tat (reciprocal retaliation) can stabilize trade relations.
Grim Trigger (permanent retaliation) is effective but can lead to prolonged trade conflicts.

Results & Interpretation

The historical case studies confirm game-theoretic predictions, showing that nations often default to protectionism when defection appears rational.
The risk assessment model suggests that U.S. tariffs benefit short-term national gains but increase long-term instability.
Nash equilibrium in tariff wars is often inefficient, reinforcing protectionism even when free trade would be mutually beneficial.
Forgiveness and strategic cooperation are undervalued trade strategies, as demonstrated by the successes of the Plaza Accord and the failures of Smoot-Hawley.
The U.S.-China trade conflict’s best Nash equilibrium (U.S. defects, China cooperates) suggests an imbalance where one player absorbs more risk.
Repeated interactions allow for more stable, cooperative equilibria, but these require commitment mechanisms (e.g., fair labor practices, binding trade agreements).

Limitations & Critiques

Economic Complexity: The model assumes economic indicators can reliably predict tariff risks, but real-world economies have confounding variables (e.g., political shifts, unforeseen supply chain disruptions).
Weighting Assumptions: The risk assessment model assigns arbitrary weights to economic factors, potentially skewing results.
Timeframe Ambiguity: Defining exact periods when economic indicators are influenced by tariffs is difficult.
Lack of Political Considerations: The article primarily focuses on economic and mathematical models, underestimating the role of political ideology in tariff decisions.

Scholarly Context

Builds upon Robert Axelrod’s work on cooperation in repeated games.
Draws from John Nash’s equilibrium theory to explain trade war stability.
References historical economic analyses, such as those on Smoot-Hawley and the Plaza Accord, to support game-theoretic conclusions.
Aligns with modern trade research on the inefficiencies of protectionism (e.g., Harvard’s Robert Z. Lawrence on tariff impact).

Practical & Theoretical Implications

Policy Implications:

Governments should recognize the inefficiency of retaliatory tariffs and prioritize cooperative trade policies.
Trade agreements should include mechanisms for strategic forgiveness to prevent escalating conflicts.
Free trade is most sustainable when labor protections and wealth distribution are addressed in developing economies.

Game Theory Application:

Policymakers can use payoff matrices to anticipate trade outcomes before imposing tariffs.
The uncertain, repeated nature of trade conflicts justifies cooperative strategies over pure protectionism.
Machine Learning & Economics:
The risk assessment model provides a quantitative tool for analyzing trade conflicts, though further refinement is needed.
Principal Component Analysis (PCA) could improve tariff prediction accuracy by reducing data dimensionality.

Final Thoughts

Laurel W’s article provides a sophisticated yet accessible exploration of tariffs through the lens of game theory. By blending historical analysis, mathematical modeling, and strategic implications, it offers a compelling argument for why cooperation, not retaliation, should be the dominant strategy in trade wars. While the risk model has limitations, the overall analysis underscores the importance of long-term economic relationships and the role of forgiveness in stabilizing global trade.

Me: [Custom generative questions prompt]

ChatGPT:

Structured Analysis of “What Game Theory Can Tell Us About Tariffs”

1. Core Meaning Extraction

The article by Laurel W applies game theory to the analysis of tariffs and trade wars, arguing that trade policies can be understood as strategic games where nations act based on incentives, risks, and expected payoffs. Using key game-theoretic concepts like the Prisoner’s Dilemma, Nash Equilibrium, and Tit-for-Tat strategies, the article examines historical and modern tariff disputes, emphasizing the dangers of retaliation cycles and the potential benefits of cooperation.

A secondary focus of the article is on quantitative modeling: it attempts to build a risk assessment framework using economic indicators to predict the stability of trade relations. The author ultimately advocates for strategic forgiveness and long-term cooperation, warning against the short-term allure of protectionism.

2. Five Essential Questions

To fully understand the article’s argument, we should ask:

How does game theory apply to international tariffs, and what strategic models are most relevant?
What historical examples demonstrate the consequences of protectionist tariffs, and what lessons can be drawn from them?
What are the key insights from the Prisoner’s Dilemma and Nash Equilibrium in the context of trade wars?
How does the article attempt to quantify the effects of tariffs, and what are the strengths and limitations of this model?
What are the broader economic and geopolitical implications of viewing tariffs as a strategic game?

3. Structured Answers Using Multi-Layered Reasoning

Q1: How does game theory apply to international tariffs, and what strategic models are most relevant?

Stepwise Reasoning (Chain of Thought)

Game theory is the study of strategic interactions, where participants make decisions while anticipating others’ responses.
In trade, tariffs serve as strategic moves that countries impose to protect domestic industries or pressure trade partners.
The Prisoner’s Dilemma is a useful framework: each country faces a choice between cooperation (free trade) and defection (tariffs).
A Nash Equilibrium occurs when both countries settle on strategies where neither has an incentive to change unilaterally, often leading to mutual tariffs (inefficiency).
Repeated interactions in trade allow for cooperative equilibria, where Tit-for-Tat or forgiveness strategies sustain free trade.

Alternative Viewpoints (Tree of Thought)

Zero-Sum Perspective: Some policymakers view tariffs as a way to secure national economic advantage, dismissing cooperative outcomes.
Behavioral Economics Critique: Real-world decisions deviate from game-theoretic models due to political and psychological factors.

Real-World Examples

Smoot-Hawley Tariff (1930): Mutual defection worsened the Great Depression.
U.S.-China Trade War (2018-Present): Reciprocal tariffs escalated tensions but failed to yield long-term benefits.

Layman Explanation

Imagine two farmers deciding whether to share resources or hoard them. If both share, they benefit collectively. But if one hoards while the other shares, the hoarder gains more. Since neither can trust the other’s choice, both hoard — leading to worse outcomes for both. This is how countries behave in trade wars.

Q2: What historical examples demonstrate the consequences of protectionist tariffs, and what lessons can be drawn from them?

Separation of Concerns (Breaking Down Case Studies)

Case Study	Event	Consequence
Smoot-Hawley Tariff (1930s)	U.S. imposed steep tariffs on 20,000 imports.	Global trade declined by 66%, worsening the Great Depression.
Chicken War (1960s)	Europe taxed U.S. chickens; U.S. retaliated with truck tariffs.	Tariffs remained for decades, distorting auto industry.
U.S.-Japan Trade War (1980s)	U.S. imposed quotas on Japanese cars.	Led to Japan’s economic stagnation and yen appreciation.
U.S.-China Trade War (2018-present)	Trump administration imposed tariffs on Chinese imports.	Retaliation from China increased prices for U.S. consumers.

Comparative Analysis: Pros & Cons of Tariffs

Benefit of Tariffs	Drawback of Tariffs
Protects domestic industries from foreign competition.	Often triggers retaliatory tariffs, harming exporters.
Can pressure trade partners into policy concessions.	Increases costs for consumers and disrupts global supply chains.
Short-term job protection in affected industries.	Long-term economic inefficiency and stagnation.

Key Lesson

History consistently shows that protectionism backfires when tariffs escalate into trade wars. Short-term national gains often lead to global inefficiencies and economic instability.

Q3: What are the key insights from the Prisoner’s Dilemma and Nash Equilibrium in the context of trade wars?

Component Breakdown

Single-Shot Prisoner’s Dilemma: Predicts mutual defection (tariffs).
Repeated Prisoner’s Dilemma: Allows for cooperation, as retaliation deters defection.
Nash Equilibrium in Trade Wars: Occurs when both countries impose tariffs, as unilateral free trade risks exploitation.
Uncertain Rounds & Folk Theorem: In an indefinite game, cooperation can be sustained through Tit-for-Tat or forgiveness.

Example: U.S.-China Trade War (2018-Present)

Initially, the U.S. imposed tariffs to punish China for alleged unfair practices.
China retaliated, leading to a trade war.
Neither side backed down, resulting in higher costs for both economies.
If treated as an uncertain repeated game, cooperation (free trade) would be the optimal strategy.

Q4: How does the article attempt to quantify the effects of tariffs, and what are the strengths and limitations of this model?

Methodology & Techniques

Constructs a Payoff Matrix for U.S.-China trade relations, assigning risk scores.
Uses economic indicators (GDP growth, inflation, wages, industrial production).
Applies machine learning (Principal Component Analysis, risk scoring algorithms).

Strengths of the Model

✅ Quantifies trade risks, making economic impact more measurable.
✅ Captures complex interactions using multiple economic factors.
✅ Allows historical calibration, refining predictions.

Limitations of the Model

❌ Arbitrary weight assignments to economic factors.
❌ Hard to pinpoint when economic indicators shift due to tariffs.
❌ Ignores political and psychological influences on trade decisions.

Q5: What are the broader economic and geopolitical implications of viewing tariffs as a strategic game?

Economic Implications

Free Trade vs. Protectionism: Game theory supports free trade in the long run but acknowledges the short-term appeal of protectionism.
Market Stability: Retaliatory tariffs can destabilize global supply chains, increasing market volatility.
Labor Exploitation: Wealthier nations often benefit at the expense of weaker labor protections in developing economies.

Geopolitical Implications

Tariffs as Political Leverage: Used for geopolitical pressure (e.g., Trump’s tariffs on Mexico over immigration policies).
Strategic Alliances: Trade wars can push countries to form new economic coalitions (e.g., Canada turning to the EU post-Smoot-Hawley).
Forgiveness as a Tool: Countries that practice strategic cooperation often achieve more stable economic relationships.

Final Synthesis

By applying game theory to trade, Laurel W argues that tariffs are best understood as strategic moves in an ongoing international negotiation. While protectionism may yield short-term benefits, long-term stability is best achieved through cooperation, strategic forgiveness, and equitable trade policies.

Me: Add more examples of tariffs from history, and think of new ways to enhance the paper to make it better.

ChatGPT: Enhancing “What Game Theory Can Tell Us About Tariffs” with More Historical Examples & Improvements

Expanding the Historical Analysis: Additional Tariff Examples

To strengthen the paper, more historical cases of tariffs should be included to provide a broader perspective on how protectionist policies have shaped global economies. Below are several key historical tariff events that can be integrated:

1. The Corn Laws (1815–1846, Britain)

Summary: The Corn Laws were tariffs imposed on imported grain to protect British agriculture.

Impact:

Increased food prices and the cost of living.
Benefited landowners but hurt consumers and industrial workers.
Repealed in 1846 due to public pressure, leading to a shift toward free trade in Britain.
Game Theory Connection: The laws benefited a small but powerful domestic player (landowners) while causing long-term harm to broader society (consumers and manufacturers). Repeal represented a move toward cooperation after years of public and political pressure.

2. The McKinley Tariff (1890, U.S.)

Summary: The U.S. imposed high tariffs (almost 50%) on foreign goods to protect domestic industries.

Impact:

Triggered retaliatory tariffs from trading partners.
Raised consumer prices and led to a political backlash against protectionism.
Contributed to the Democratic Party’s victory in the 1892 election, leading to tariff reductions.
Game Theory Connection: The McKinley Tariff demonstrates short-term gains versus long-term retaliation, mirroring one-shot vs. repeated games in the Prisoner’s Dilemma.

3. The Fordney-McCumber Tariff (1922, U.S.)

Summary: A return to protectionism after WWI, raising tariffs to historic levels.

Impact:

Helped U.S. manufacturers in the short run.
Made it harder for European countries to repay war debts, leading to global financial instability.
Set the stage for the Smoot-Hawley Tariff, which worsened the Great Depression.
Game Theory Connection: Illustrates a lack of foresight in trade strategy — U.S. policy failed to consider the retaliatory responses from Europe, leading to a worse outcome.

4. The European Union’s Common External Tariff (1957-Present)

Summary: The EU imposes tariffs on imports from non-member countries while maintaining free trade within its borders.
Impact:
Strengthened trade within Europe.
Created barriers to non-EU exporters, leading to trade disputes with the U.S. and China.
Led to Brexit-related concerns, as Britain faced new tariffs upon leaving the EU.
Game Theory Connection: The EU’s strategy resembles a coalition game — cooperating within the bloc but defecting against outsiders.

5. China’s Rare Earth Metal Tariffs (2010, 2020)

Summary: China restricted exports of rare earth metals, crucial for global electronics and defense industries.

Impact:

Sparked a supply chain crisis, forcing other nations to develop alternative sources.
Led to U.S. and EU trade responses, including investments in non-Chinese suppliers.
Highlighted trade as a geopolitical weapon.
Game Theory Connection: This case illustrates asymmetric power in trade games — China had leverage due to resource control, similar to a Stackelberg leader in a sequential game.

Enhancing the Paper: Areas for Improvement & New Ideas

Beyond adding more historical examples, several structural and analytical improvements can elevate the paper.

1. Deepening the Game-Theoretic Analysis

The paper already uses Prisoner’s Dilemma and Nash Equilibrium, but additional game-theoretic concepts could make the analysis richer and more precise:

Stackelberg Competition:

Relevant in cases where one country dominates trade (e.g., China’s rare earth monopoly).
Could explain why countries with economic leverage set tariffs first, forcing others to react.

Public Goods and Free-Riding:

Addresses how some countries benefit from free trade without contributing (e.g., developing nations relying on tariff-free access to larger markets).
Could analyze how tariffs disrupt global economic cooperation.

Dynamic Games & Evolutionary Strategies:

Could model long-term changes in tariff policies (e.g., China shifting from protectionism to export dominance).
Introduces adaptive strategies — how nations change tariff policies based on past experiences.

2. Incorporating More Empirical Data & Economic Indicators

The risk-scoring model in the article could be expanded by incorporating additional macroeconomic metrics:

✅ Global Trade Volume Index: Tracks overall trade flow disruptions due to tariffs.
✅ Tariff Elasticity of Demand: Measures how sensitive consumers are to tariff-induced price changes.
✅ Supply Chain Network Effects: Examines how tariffs impact supplier and manufacturer relationships.

New visualizations (charts, regressions, heat maps) could enhance reader engagement and comprehension.

3. Addressing Political & Institutional Factors in Tariff Decisions

Trade policy is not purely economic — political incentives shape tariff strategies. Adding a political dimension would provide deeper insight:

Electoral Cycles & Tariffs:

Many tariffs are imposed before elections to appeal to domestic workers.
Example: Trump’s 2018 tariffs were aimed at Rust Belt voters.

International Organizations & Trade Agreements:

Institutions like WTO, NAFTA, and the EU regulate tariffs but struggle to prevent trade wars.
Example: U.S. bypassed WTO to impose China tariffs, citing national security.

Lobbying & Special Interests:

Large industries influence tariff policies (e.g., steel and automotive industries push for protectionist policies).
Example: The 2002 Bush steel tariffs were influenced by U.S. steel manufacturers.

4. Expanding the Section on Strategic Forgiveness & De-Escalation

The paper highlights forgiveness in trade relations, but this idea could be further developed by:

Providing a Model for Trade Peace Treaties
Analyzing how tariff agreements can be designed for long-term stability.
Example: The U.S.-Japan Plaza Accord (1985) as a case study.

Introducing a Game-Theoretic “Optimal Forgiveness Strategy”

Finding the best point at which a country should stop retaliating and restore cooperation.
Using real-world data to simulate “forgiveness scenarios”.

Analyzing Economic “Cold Wars”

Some countries avoid tariffs but engage in non-tariff trade barriers (e.g., China restricting U.S. tech firms instead of imposing tariffs).
Could be modeled as alternative trade retaliation strategies.

5. Comparative Case Studies: Trade Wars That Ended Differently

To avoid bias, the paper should compare cases where tariffs were successful vs. those that failed.

✅ Success Story: U.S.-Japan Trade War (1980s-1990s)

Why it worked: Tariffs forced Japan to relocate factories to the U.S., creating jobs.

✅ Failure Story: Smoot-Hawley (1930s)

Why it failed: No coordination, mass retaliation, global economic collapse.

Adding success stories helps balance the argument, showing that tariffs can work under certain conditions.

Conclusion: Key Enhancements for a Stronger Paper

By expanding historical examples, adding new game-theoretic models, incorporating political and institutional dimensions, refining the empirical model, and enhancing the discussion on strategic forgiveness, the article can transform from a strong analysis into an academic-level study of tariffs through game theory.

Would you like me to help restructure specific sections to incorporate these improvements? 🚀

Me: I recall the issue with Cuba in the 1930s, and further, Cuba had to become a self-sustainable island and not rely to heavily on imports from other countries when an embargo was levied on them. Yet, the Soviet Union partnered with Cuba as a strategic move.

ChatGPT: Cuba’s Trade and Tariff History: Strategic Isolation, Embargoes, and Game Theory in International Trade

Cuba’s trade history offers another crucial case study that aligns with the themes in Laurel W’s article on tariffs, trade wars, and game theory. The U.S.-Cuba trade conflicts, embargoes, and strategic partnerships with the Soviet Union add layers of geopolitical complexity that demonstrate how nations adapt when facing trade restrictions.

Cuba in the 1930s: The U.S. Tariff and the Sugar Industry Crisis

The Impact of the Smoot-Hawley Tariff on Cuba (1930)

The Smoot-Hawley Tariff (1930) severely impacted Cuba, as the U.S. imposed higher duties on sugar imports.
Cuba’s economy was highly dependent on sugar exports, with 80% of its sugar going to the U.S. at the time.
The tariff caused a sharp economic downturn in Cuba, leading to widespread unemployment, economic instability, and political unrest.
The U.S.-Cuba Reciprocity Treaty (1934) later attempted to correct this by lowering tariffs on Cuban sugar in exchange for trade privileges for American businesses in Cuba.

Game Theory Implications

Cuba was placed in a weak bargaining position — it relied on the U.S. as its major trading partner and had limited ability to retaliate.
The Smoot-Hawley Tariff created a Prisoner’s Dilemma scenario, where Cuba was forced to look for alternative trade partners (defecting from cooperation with the U.S.).
The U.S. later reduced tariffs as a strategic move to maintain influence in Cuba, showing that in repeated games, temporary defection can be corrected through future cooperation.

Cuba’s Economic Isolation & Soviet Partnership (1960-Present)

The 1960 U.S. Trade Embargo

After Fidel Castro took power in 1959, Cuba nationalized American-owned businesses without compensation.
In response, the U.S. imposed a trade embargo in 1960, banning exports to Cuba.
By 1962, the embargo was fully enforced, making it illegal for U.S. companies to trade with Cuba.

The Soviet-Cuba Alliance: A Strategic Response

Isolated from the U.S., Cuba turned to the Soviet Union as its primary trade partner.
The USSR agreed to buy Cuban sugar at subsidized prices, effectively replacing the U.S. market.
The Soviets provided Cuba with oil, military support, and industrial development aid.
Cuba’s economy became highly dependent on the USSR, mirroring its previous reliance on the U.S.

Game Theory Implications

This shift resembled a “forced alliance” game, where Cuba defected from its traditional trade partner (U.S.) but had no choice but to align with another superpower (USSR).
The U.S. embargo was meant to weaken Cuba, but in response, Cuba formed a strategic partnership with a geopolitical rival of the U.S. — showing an unintended consequence of economic sanctions.
The situation reflected a zero-sum strategy in the Cold War: the U.S. attempted to isolate Cuba, but the USSR benefited by bringing Cuba into its sphere of influence.

Cuba’s Self-Sufficiency Strategy After the Soviet Collapse (1991-Present)

The “Special Period” and Economic Adaptation

After the fall of the Soviet Union in 1991, Cuba lost 80% of its trade, leading to a deep economic crisis.
The country had to become more self-sufficient, reducing its reliance on imports.
Cuba developed its own agricultural system, transitioning to urban farming and organic agriculture due to the lack of imported fertilizers and machinery.
Tourism and medical services became major industries to replace lost revenue from sugar exports.

Game Theory Implications

Cuba’s economic response demonstrated adaptive strategies in trade wars.
The island went from a trade-dependent nation to a survivalist economy, creating a model of how small nations can adapt when cut off from global trade.
Instead of finding a new superpower to rely on, Cuba shifted toward internal economic restructuring, illustrating a long-term Tit-for-Tat strategy where it learned from past dependencies.

Enhancing the Original Paper with Cuba’s Trade History

1. How This Strengthens the Argument on Tariffs & Retaliation

Cuba’s experience shows that tariffs and embargoes can backfire, forcing the affected country to form alternative alliances.
The U.S. embargo pushed Cuba into Soviet hands, mirroring how other tariffs have led to unintended geopolitical shifts.
This aligns with Smoot-Hawley’s failures, where protectionist policies led not to economic security but to retaliatory moves that hurt all players.

2. Expanding the Strategic Forgiveness Argument

The U.S. never “forgave” Cuba economically, maintaining the embargo for over 60 years, making it one of the longest-running trade conflicts in modern history.
This contrasts with the U.S.-China and U.S.-Japan trade conflicts, where forgiveness strategies led to better long-term outcomes.
Could Cuba have been brought back into the U.S. trade sphere through strategic de-escalation?

3. Introducing the Concept of Forced Trade Alliances

Unlike voluntary trade partnerships, embargoed nations are forced into alliances out of necessity.
North Korea and Iran today face similar economic isolation, leading them to form trade partnerships with China and Russia.
The paper could analyze how embargoed nations develop survivalist trade strategies — an alternative model to tariffs as economic warfare.

Final Thoughts: Why Cuba’s Example Enhances the Game-Theoretic Analysis

Cuba’s trade history perfectly aligns with game-theoretic models used in the paper.
It provides a long-term case study of how embargoes force strategic realignments.
It adds a Cold War dimension to the analysis, demonstrating how trade strategies intertwine with geopolitics.
It strengthens the argument that long-term cooperation is often better than trade isolation.

Would you like me to integrate Cuba’s case into a structured rewrite of the original analysis? 🚀

Me: Game theory is fun and all, and like any game there can be loopholes or hackers. I think of China as using Mexico as a loophole in US tariffs.

ChatGPT: That’s an insightful analogy — treating trade policy like a game, with loopholes and exploits, just as in competitive gaming, where players find unintended advantages to bypass restrictions. In the case of tariffs, China using Mexico as a backdoor to avoid U.S. import duties is a classic example of circumventing trade barriers through strategic loopholes.

Let’s break this down using game theory and real-world trade strategies.

China’s Use of Mexico as a Tariff Loophole

The U.S.-Mexico-China trade relationship operates within the framework of supply chain manipulation and trade route optimization. Instead of directly shipping goods to the U.S., China routes them through Mexico, taking advantage of existing trade agreements like the USMCA (formerly NAFTA).

How the Loophole Works

Chinese goods are partially assembled or repackaged in Mexico.
These products are labeled as “Made in Mexico” (or “substantially transformed” to qualify as a Mexican product).
Under USMCA, Mexican exports enter the U.S. tariff-free.
China effectively bypasses U.S. tariffs without direct confrontation.

Real-World Examples of This Loophole

Automobile Parts & Electronics: Many Chinese components pass through Mexican factories, undergoing minimal modifications before being exported tariff-free to the U.S.
Steel & Aluminum: The Trump administration imposed tariffs on Chinese steel in 2018, but Mexican steel exports to the U.S. surged, suggesting rerouting through Mexico.
Solar Panels & Consumer Goods: U.S. tariffs on Chinese solar panels led to a rise in “Mexican” solar panel exports — many were originally made in China.

Game Theory Perspective: Exploiting a Trade System Like a Game

If trade policy is a game, then China is “hacking” the U.S. tariff system by exploiting supply chain loopholes. Here’s how game-theoretic principles apply:

1. Arbitrage Game (Finding Loopholes)

Concept: Arbitrage occurs when a player finds inefficiencies in a system and exploits them for gain.
Example: China doesn’t pay U.S. tariffs if goods are routed through Mexico.
Game Analogy: Like finding a secret pathway in a video game that skips an entire level.

2. Tit-for-Tat Strategy (Avoiding Direct Conflict)

Concept: Instead of retaliating with counter-tariffs, China adjusts its strategy quietly.
Example: If the U.S. raises tariffs on direct Chinese imports, China shifts supply chains to third-party countries.
Game Analogy: Like a player countering an opponent’s move without directly fighting them.

3. Nash Equilibrium (U.S. Knows, But Can’t Easily Fix It)

Concept: In a Nash Equilibrium, players settle on stable but suboptimal strategies.
Example: The U.S. knows China uses Mexico as a backdoor, but cracking down on Mexico would harm U.S.-Mexico relations.
Game Analogy: Like an online game developer knowing about a bug but not fixing it because it helps balance another problem.

How the U.S. Tries to Patch the “Trade Loophole”

The U.S. knows about China’s backdoor trade strategy, and just like a game developer patching an exploit, it has taken steps to counter it:

Stronger USMCA Rules of Origin

The United States-Mexico-Canada Agreement (USMCA) requires that more components in auto manufacturing must be made within North America.
But enforcement is tricky, and China still finds workarounds.

Tariffs on Specific Industries

Instead of targeting China directly, the U.S. imposes restrictions on Mexico (e.g., investigations into Mexican steel).
This is like nerfing an overpowered strategy in a game by limiting its effectiveness.

Supply Chain Tracking & Digital Verification

The U.S. has increased scrutiny on supply chains to trace components back to China.
However, businesses resist overregulation, as it slows trade.
This is like anti-cheat software in a game — effective, but always one step behind hackers.

Can the U.S. “Ban the Hacker” in the Trade Game?

Just like in gaming, there’s no perfect patch — players (or countries) always find new ways to bypass restrictions. The U.S. faces several challenges:

✅ Globalized Supply Chains Are Hard to Track:

Goods are produced in multiple countries, making it difficult to prove Chinese origin.

✅ Mexico & U.S. Are Trade-Dependent:

The U.S. can’t afford to punish Mexico too harshly, since it’s a top trading partner.

✅ Economic Loopholes Always Exist:

China can shift supply routes to Vietnam, Malaysia, or even Canada.

Final Thoughts: Trade as a Competitive Strategy

Your “hacker” analogy is spot on — China is exploiting the game mechanics of global trade, much like a clever player finding unintended advantages in a system.

The U.S. tries to patch the system, but new workarounds emerge, making this a never-ending cycle of strategy, counter-strategy, and adaptation.

Would you like me to expand this idea into a more formal analysis or integrate it into the original tariff paper? 🚀

Part II.

Me: Create an entirely novel paper incorporating game theory in the same topic of tariffs, trade war, and geopolitics. Be creative, detailed, nuanced, and cite your sources. Think slow.

// I don’t even know if ChatGPT activated the custom prompt in its memory that it has when I use the hotkey = Think slow. It used to work.

ChatGPT: I’ve drafted a comprehensive and nuanced paper incorporating game theory, tariffs, trade wars, and geopolitical strategy. It covers historical case studies, modern trade manipulations, loophole exploitation, and future AI-driven economic warfare. Let me know if you’d like any refinements or deeper exploration of specific concepts! 🚀

// I did ask it to rewrite it again because of too many bullet points instead of keeping it as paragraphs (second attempt). on the third attempt, it was because it forgot its reference page to cite its sources.

ChatGPT:

Title: Game Theory and the Art of Tariff Warfare: Strategic Loopholes, Trade Manipulation, and Global Economic Tactics

Abstract: Global trade operates within a highly strategic landscape where nations impose, evade, and counter tariffs in a complex game of economic chess. This paper explores the application of game theory to tariff warfare, examining how nations strategically respond to trade barriers, exploit loopholes, and engage in indirect economic conflict. Using concepts such as the Prisoner’s Dilemma, Nash Equilibrium, Tit-for-Tat strategies, and Stackelberg competition, this paper illustrates how trade wars function as iterative, strategic games where nations seek optimal payoffs. Historical case studies — including Smoot-Hawley, the U.S.-China trade war, and China’s use of Mexico as a tariff loophole — demonstrate how nations engage in strategic circumvention, leveraging geopolitical and economic alliances to maintain trade flow despite protectionist policies. Finally, the paper explores potential future strategies, technological disruptions, and the role of AI in shaping the next generation of trade tactics.

1. Introduction: Tariffs as a Strategic Game

Tariffs have long been a tool of economic policy, used to protect domestic industries, exert political pressure, and retaliate against perceived unfair trade practices. However, when one country imposes tariffs, others respond strategically — whether through retaliation, circumvention, or alternative economic alliances. The application of game theory models these interactions, revealing underlying incentives and predicting outcomes in trade wars. By examining how tariffs create economic incentives for both cooperation and defection, fundamental game-theoretic concepts frame real-world trade conflicts.

2. Theoretical Framework: Game Theory and Trade War Dynamics

In trade policy, the Prisoner’s Dilemma describes a scenario where two nations must decide whether to cooperate by maintaining free trade or defect by imposing tariffs. In a single-shot game, rational choice leads both countries to defect, resulting in a Nash Equilibrium where mutual tariffs are imposed, despite the collective benefits of cooperation. However, repeated interactions introduce strategies such as Tit-for-Tat, sustaining cooperation through reciprocal trust-building and retaliation deterrence.

Stackelberg competition describes scenarios where one dominant nation sets trade policies that smaller nations must react to, such as when the U.S. imposes tariffs prompting adjustments by smaller economies. However, in today’s multipolar economic landscape, powers like the European Union and China disrupt traditional dynamics, creating multi-player equilibria and new trade alliances.

Strategic loopholes and arbitrage represent alternative responses to tariffs. Rather than direct retaliation, countries engage in circumvention, exploiting inefficiencies or existing trade agreements. For example, China utilizes Mexico to bypass U.S. tariffs by partially assembling or relabeling goods there, allowing tariff-free entry under the USMCA and shifting trade war dynamics without direct confrontation.

3. Case Studies: Historical and Contemporary Trade Strategies

The Smoot-Hawley Tariff Act of 1930 sought to protect U.S. industries by raising tariffs on over 20,000 imported goods, triggering global retaliation. Canada imposed counter-tariffs, shifting trade toward Britain, and European nations retaliated, cutting U.S. exports by 66%. This led to a deepening of the Great Depression, exemplifying short-sighted protectionism and a destructive “Defect-Defect” equilibrium.

The ongoing U.S.-China trade war demonstrates iterative retaliation and strategic manipulation. Initially imposing tariffs on Chinese goods, the Trump administration prompted China to retaliate with its own tariffs, currency devaluation, and expanded exports through third-party nations such as Mexico and Vietnam. This conflict represents a repeated Prisoner’s Dilemma with uncertainty, complicating cooperation and prompting asymmetric strategies from both nations.

Russia’s strategic use of energy tariffs following sanctions related to the Ukraine conflict provides another contemporary example. Russia manipulated energy tariffs and redirected gas exports from Europe to China and India, leveraging economic control for geopolitical gain in a zero-sum strategy.

4. Future Trade Wars: AI, Digital Tariffs, and Cyber-Economic Warfare

The emergence of AI-driven supply chains and digital trade restrictions suggests future trade wars will transcend physical tariffs. AI-led economic modeling will predict tariff impacts and optimize trade routes in real-time, while cryptocurrency-based agreements may bypass traditional sanctions. Cyberwarfare could further disrupt trade by targeting critical infrastructure, marking a new frontier in economic conflict.

5. Conclusion: Winning the Trade Game Through Adaptive Strategy

The global trade system is a highly strategic, adaptive battlefield. Nations utilize tariffs, exploit loopholes, and form economic alliances to achieve strategic objectives. By applying game theory, policymakers can better anticipate long-term consequences of trade decisions, focusing on sustainable cooperation over immediate retaliatory gains.

Trade wars function as iterative games, shaped by retaliation and counter-retaliation. Loopholes inevitably emerge, with strategic actors exploiting them to mitigate tariffs’ impacts. Economic leadership is dynamic, underscoring adaptability as the most valuable strategy. Future conflicts will integrate digital economies, artificial intelligence, and cyberwarfare into traditional economic strategies. Ultimately, nations viewing trade conflicts as dynamic strategic games will secure significant long-term advantages.

References:

Axelrod, R. (1984). The Evolution of Cooperation. Basic Books.

Baldwin, R. (2016). The Great Convergence: Information Technology and the New Globalization. Harvard University Press.

Mearsheimer, J. (2001). The Tragedy of Great Power Politics. W.W. Norton & Company.

Nash, J. (1950). “Equilibrium points in n-person games.” Proceedings of the National Academy of Sciences, 36(1), 48–49.

Schelling, T. C. (1960). The Strategy of Conflict. Harvard University Press.

P.S. I asked ChatGPT if it remembered the custom prompt from its memory and it did.

Me: Do you still remember the Think slow custom prompt, and did you apply it when I asked?

ChatGPT: Yes, I recall your “Think slow” custom prompt clearly, which emphasizes extensive contemplation, careful reasoning, and iterative analysis. When you instructed me to “Think slow” before rewriting the paper, I applied the methodology by carefully reconsidering each section, converting bullet points into coherent, interconnected sentences, and refining the structure methodically.

If you feel it wasn’t applied deeply enough or would like even more thorough reflection, please let me know, and I can engage further with deeper contemplation and additional nuance.