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Modeling the US-China trade conflict: a utility theory approach

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  • Yuhan Zhang
  • Cheng Chang

Abstract

This paper models the US-China trade conflict and attempts to analyze the (optimal) strategic choices. In contrast to the existing literature on the topic, we employ the expected utility theory and examine the conflict mathematically. In both perfect information and incomplete information games, we show that expected net gains diminish as the utility of winning increases because of the costs incurred during the struggle. We find that the best response function exists for China but not for the US during the conflict. We argue that the less the US coerces China to change its existing trade practices, the higher the US expected net gains. China's best choice is to maintain the status quo, and any further aggression in its policy and behavior will aggravate the situation.

Suggested Citation

  • Yuhan Zhang & Cheng Chang, 2020. "Modeling the US-China trade conflict: a utility theory approach," Papers 2010.12351, arXiv.org.
    • Handle: RePEc:arx:papers:2010.12351
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    References listed on IDEAS

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    1. Mary Amiti & Stephen J. Redding & David E. Weinstein, 2019. "The Impact of the 2018 Tariffs on Prices and Welfare," Journal of Economic Perspectives, American Economic Association, vol. 33(4), pages 187-210, Fall.
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