Losing the Battles but Winning the War: A Game-Theoretic Analysis of the U.S.-China Trade Dispute
Abstract
This paper employs static and dynamic game-theoretic models to analyze the U.S.-China trade war, highlighting short-term losses and longterm strategic gains. Using a two-country, one-product framework, we demonstrate that the very factor that makes a country the loser in shortterm trade disputes-namely, a lower unit cost-becomes the key driver of long-term victory. While tariffs and subsidies may temporarily boost domestic production, they also lead to higher consumer prices and reduced welfare. Our dynamic model emphasizes the role of innovation and capital accumulation in shifting market power over time. Ultimately, our findings suggest that sustained competitiveness in a trade war hinges on strategic investments that reduce unit costs, offering valuable insights for policymakers navigating global trade tensions.
Fields of Study & Subjects
Global trade and economics
World Trade Organization Law
Publication details
- Journal / source
- Journal of Economic Analysis
- Publisher
- Anser Press Pte. Ltd.
- Volume
- 5
- Issue
- 3
- Pages
- 1–33
- Publication date
- 20 May 2026
- Language
- EN