Two cars are hurtling towards each other down a narrow country lane. Both have the option to pull over but neither driver wants to give way first. What happens next?
This is the sort of scenario that lies at the heart of game theory, the use of models to show how rational decision-makers interact with each other. Game theory is big in economics and, in the current circumstances, that’s hardly surprising because two key political issues lend themselves to game theory analysis.
The first is the US-China trade war, with the two cars heading towards each other down the country road being driven by Donald Trump and Xi Jinping. The vehicles have already ignored plenty of passing places along the way and a head-on crash is a distinct possibility.
Both drivers are aware of the risks but neither wants to lose face in the game of chicken. Trump has made getting concessions out of China a totemic issue for his political base; Xi is another self-styled strongman already facing an internal threat to his authority from the protests in Hong Kong.
Last week, trade talks between officials from Washington and Beijing were held in Shanghai. This was seen as a hopeful sign – an indication that the leaders of the world’s two biggest economies were fully aware of the dangers of protectionism.
But Trump’s way of playing the game is to keep his opponent guessing. So he chose this moment to announce something unexpected: plans for a 10% tariff on $300bn of Chinese imports into the US, which – if actually implemented on 1 September – will mean virtually nothing China sells to the US will be exempt from duties.
Trump says he wants a deal with Xi and that is true. But he wants a deal that involves Xi slipping into the passing place while he zooms past. His strategy for getting what he wants involves putting his foot on the accelerator rather than on the brake. The White House is assuming that this is a rerun of the Cuban missile crisis – another classic example of game theory – in which John F Kennedy’s threat to push the nuclear button forced Nikita Khrushchev to back down.
Xi, meanwhile, has continued to trundle down the road at a steady pace. He thinks Trump will be wary of spooking the stock market and of making American consumers pay more for their smartphones and laptops. After four decades of rapid economic growth, Beijing reckons it is in a much stronger position today than the Soviet Union was in October 1962.
In the real world, head-on collisions happen relatively rarely. More often, both drivers slam on their brakes at the last minute and after waving their fists at each other grudgingly work out a way to pass. But accidents do happen. And when they do they cause lots of damage.
The “game” between the US and China has been between two well-matched opponents. Up until now, the “game” between the UK and the EU over Brexit has been much more one-sided. Michel Barnier, the EU’s chief negotiator, operated from the outset on the assumption that for all her tough talk, Theresa May would always be the first to blink. And in the negotiations that culminated in the draft withdrawal agreement last autumn, he was proved absolutely right.
The dynamics of the game, though, have changed since the start of the year when it first became clear that the inclusion of the Northern Ireland backstop in the withdrawal agreement meant May could not get her deal through parliament.
May’s failure to actualise the result of the referendum led to the rise of the Brexit party, which came first in the elections for the European parliament. Conservatives – aware that the party is facing an existential crisis – dumped May and replaced her with someone they thought could see off the threat posed by Nigel Farage.
Boris Johnson has arrived in Downing Street and has reshaped the cabinet so that it is run by Brexit true believers rather than those who backed remain in the referendum. Preparations for a no-deal departure have been ramped up in order to show the rest of the EU that the government means what it says. Johnson has made it clear that he is in no hurry to start negotiations and, by spraying money, is creating the impression that he would be willing to call a general election in order to get a mandate for his tougher Brexit approach.
From a game theory perspective, all this makes complete sense. Like Trump with Xi, the prime minister is trying to keep the EU guessing.
What is potentially helpful to the new prime minister is that the eurozone economy is in worse shape than it was a year ago. Germany, in particular, is struggling. Its manufacturing exports have been hit by the global slowdown and Berlin fears it will be targeted by Trump when he launches the second front in the trade war. Angela Merkel does not want a no-deal Brexit.
So far the EU has kept to its course, refusing to countenance the idea that it might need to reopen the withdrawal agreement. That is because it thinks parliament will wrench the wheel out of Johnson’s hands at the last minute to prevent a crash.
That may prove correct but the new sense of nervousness in Dublin is a measure of how the nature of the UK-EU game of chicken has changed. Leo Varadkar is worried about the impact of a no-deal Brexit on the Irish economy. What should also concern the taoiseach is whether the EU would be prepared to sell Ireland out in order to avoid one.
