19 Pages Posted: 7 Aug 2017
Date Written: August 3, 2017
The U.K.’s decision to exit the E.U. (popularly known as “Brexit”) sets the stage for a potential retaliatory trade war. Similarly, the aggressive nationalism of U.S. President Donald Trump does also. In both cases, game theory suggests how such a conflict might be resolved. This paper first examines three standard game theory models—the Chicken Game, the Prisoner’s Dilemma, and the Stag-Hunt Game—and then turns to the strong incentives for rent-seeking by special interests and considers how rent-seeking likely affects how these games might play out. Although the conventional wisdom expects that the U.K. will suffer retaliation for Brexit, this paper argues that retaliation will produce counter-retaliation in a mutually destructive cycle. Thus, it proposes a strategy to produce a more clearly iterated game and hence increase the potential for cooperation and a compromise aimed at enhancing public welfare, rather than private interests.
Keywords: Brexit, Chicken Game, E.U., Euro clearing, Prisoner's Dilemma, Rent-Seeking, Trade War
JEL Classification: B27, F10, F13, F22, F51, G01, G20, G38, K33, K37, N70, O24, P45
Suggested Citation: Suggested Citation
Coffee, John C., How Should the E.U. Respond to Brexit and Trump?: The Lessons from Trade Wars (August 3, 2017). Available at SSRN: https://ssrn.com/abstract=3012733