Question

Each year the US considers its trading status with China, and vice versa. The trade relationship between the two countries is now rather cold. A trade sanction imposed by one country is likely to involve some retaliatory measures by another. The Game below reflects the potential economic gains associated with a two-outcome game between the US and China. The following table contains the hypothetical dollar value of all trade flow benefits to the United States and China.

Answer 1

A. If China imposes sanctions it will get the economic gains of 75 or 285, depending on US retaliation. If China does not impose sanctions it will get the economic gains of 5 or 275, depending on US retaliation. Clearly, its gains from imposing sanctions are greater, thus, it will impose sanctions against US.

B. If US imposes sanctions it will get the economic gains of 65 or 140, depending on China's retaliation. If US does not impose sanctions it will get the economic gains of 35 or 130, depending on China's retaliation. Clearly, its gains from imposing sanctions are greater, thus, it will impose sanctions against China.

C. The best policy for both countries is to impose sanctions to maximize their gains. The value of trade benefit in such a case is represented by first column first row. It will be 75 for China and 65 for US.

D. If trade negotiators communicate effectively and the two countries end up cooperating then the game outcome will be to not impose sanctions by both countries, represented by second row second column. The value of trade benefits will be 275 for China and 130 for US.