US–China Trade Relations: A global prisoner’s dilemma 

• Onur Von Burg
  Managing Director, Member of the Investment Committee, CIIA
  Banque Heritage

Following a renewed escalation in tensions in early April, both countries recently reached a tentative truce, following intensive talks in London and Geneva. President Trump declared that a trade agreement had been “reached”, pending final approval by both heads of state. 

This agreement provides for the United States to maintain tariffs of up to 55% on Chinese products. These measures are based on several justifications: 

• Protecting domestic industries from trade practices deemed unfair, including subsidies and intellectual property violations, 
• National security concerns (particularly for steel and aluminium), 
• A response to domestic political pressure linked to de-industrialisation and the trade deficit. 

China, for its part, retains tariffs of 10% on American products. Although this rate has fallen sharply from the peaks reached during previous episodes of tension, it is still a major brake on bilateral trade. 

Beyond tariffs, the negotiations have also addressed critical issues such export controls on rare earth elements, strategic resources for the automotive, aerospace and semiconductor sectors, in which China holds a near-monopoly. 

Despite this apparent appeasement, tensions are far from over. The effective rate of customs duties on most Chinese products remains above 30%, and some categories are still subject to rates of 50% or more. The truce therefore remains fragile. Both parties fear a resumption of hostilities and global markets closely monitoring for any signs of renewed escalation.

Game theory as an interpretive framework

Game theory offers compelling lens through which to decode the dynamics of confrontation, mistrust, and opportunism that characterize the current trade negotiations between China and the United States.

Widely used in economics, political science and international relations, game theory studies the strategic interactions between players, whose decisions depend on both their own choices and those of others. One of its best-known concepts, introduced in 1950 by Albert Tucker at Princeton, is the prisoner’s dilemma.

In this scenario, two individuals are arrested and questioned separately. Each has a choice: to cooperate (by remaining silent) or to betray the other (by confessing). The consequences vary depending on their decisions:

• If both individuals cooperate (remain silent), they receive moderate sentences. 
• If one betrays and the other cooperates, the betrayer is released while the cooperator receives a harsh sentence. 
• If both betray, they both receive heavy sentences, but not the maximum. 

While mutual cooperation yields the best collective outcome, self-interest and lack of trust often push both players to betray — resulting in a suboptimal outcome for both.

This logic echoes the dynamics of the US–China trade relationship. Each of the two powers has objective reasons for imposing tariffs to protect its industrial fabric, respond to domestic political pressures and strengthen its negotiating position. However, when the two adversaries simultaneously adopt this defensive strategy, world trade suffers: costs rise, growth slows, and instability sets in. In other words, individual logic leads to a collectively damaging outcome.

Although economically beneficial, cooperation remains difficult to sustain. Each party fears the other might renege on its commitments to gain a short-term advantage. This deep-seated mistrust undermines any attempt at lasting stabilization — particularly in the absence of credible enforcement or penalty mechanisms.

However, unlike the theoretical model, trade negotiations are not one-off events but repeated interactions, which allows for evolving strategies such as tit-for-tat: cooperate if the other party cooperates, sanction if it fails. 

This logic also applies to other large-scale trade relations, notably between China and the European Union. Here again, the risk of ‘defection’ – in other words, a sudden increase in customs duties – remains high, fuelling uncertainty on world markets. Import-export players need to factor this volatility into their strategies, by diversifying their suppliers and adapting their supply chains.

A strategic trap

The ongoing tariff discussions between the United States and China are a classic example of the prisoner’s dilemma applied to the global economy. Cooperation would be the rational path in the long run, yet mutual distrust, domestic political agendas, and asymmetrical interests continue to drive a cycle of suspicion and reciprocal sanctions. The result is a string of fragile truces punctuated by persistent tensions — weakening the stability of the global trading system.

Whether these two superpowers will be able to escape this lose–lose logic, or remain trapped by their own strategic rationality, remains to be seen.