World Trade Policy and the Game Theory - Overcoming the Prisoner's Dilemma?

Table of Contents

1. Introduction: Renaissance of protectionist developments

1.1 Protectionism – a Jack-in-the-box?

1.2 Motivation and objective

2. Theoretical approach: A concise overview of game theory

2.1 Determinants of decision making: Strategic choices

2.2 Typical situations in a 2-player-game: The Prisoner’s dilemma

2.3 Iterated 2-by-2-bimatrix games and solution possibilities for the Prisoner’s dilemma

2.3.1 Discovering the cheaters

2.3.2 Punishing the cheaters

2.3.3 Characteristics of effective punishments

2.3.4 An optimal strategy to solve the prisoner’s dilemma: Tit for Tat

2.3.5 An additional option: Threats and promises

2.4 Is the Game Theory an appropriate model to explain decision making in World Trade?

2.4.1 Is international trade a non-cooperative game?

2.4.2 Payoff structure in the prisoner’s dilemma and in international trade

2.4.3 International trade as an iterated prisoner’s dilemma?

3. Linking Theory to the real world: World Trade policy as an Iterative Prisoner’s Dilemma

3.1 Decision making in World Trade Policy: Who is in charge?

3.1.1 Responsible organs in the United States of America

3.1.2 Responsible organs in the European Union

3.1.3 International Organizations: WTO and GATT

3.2 Historic perspective: Development of World Trade in the 20th century

3.2.1 The United States of America

3.2.2 The European Union

3.3 Current developments in World Trade Policy explained

3.3.1 The United States of America

3.3.2 The European Union

3.4 Prospects for future development: Problems and solutions in World Trade Policy

3.4.1 Changing the rules of the game

3.4.2 Empowerment and increase in effectiveness of the liberal trading system

3.4.2.1 National solutions: incorporation of WTO/GATT rules into domestic legislation

3.4.2.2 Multilateral approach: reduction of complexity of the WTO dispute settlement system

3.4.2.3 Increased independence: an institutional change of the WTO

4. Summary and Conclusion

Research Objectives and Topics

This thesis examines the recent resurgence of protectionist trends in global trade policy by applying game theory, specifically the Prisoner’s Dilemma, to the trade relationships between the United States and the European Union from 1947 to the present.

• Game theory as a model for international trade negotiations.
• Structural similarities between the Prisoner’s Dilemma and international trade conflicts.
• Historical evolution of trade policies in the USA and the EU.
• The impact of institutional frameworks like the WTO on strategic decision-making.
• Proposed reforms to shift trade policy from mutual defection to cooperation.

Excerpt from the Book

Summary of Chapters

1. Introduction: Renaissance of protectionist developments: Outlines the recent return to protectionist policies in global trade and establishes the research goal of linking these trends to game theory.

2. Theoretical approach: A concise overview of game theory: Provides the foundational concepts of game theory, specifically non-cooperative games, and introduces the Prisoner’s Dilemma as the core analytical model.

3. Linking Theory to the real world: World Trade policy as an Iterative Prisoner’s Dilemma: Applies the theoretical model to actual historical and current trade conflicts between the US and the EU, evaluating the role of institutions like the WTO.

4. Summary and Conclusion: Synthesizes the findings and proposes structural reforms to the international trading system to foster greater cooperation.

Keywords

Game Theory, Prisoner’s Dilemma, International Trade, Protectionism, World Trade Organization, WTO, Tit for Tat, US Trade Policy, European Union, Trade Policy, Reciprocity, Fair Trade, Dispute Settlement, Strategic Choice, Liberalization.

Frequently Asked Questions

What is the primary focus of this thesis?

The work investigates why nations engage in protectionist policies despite the economic benefits of free trade, using the Prisoner's Dilemma from game theory to model these strategic interactions.

What are the central themes discussed?

The central themes include the strategic interdependence of nations, the role of political lobbying, the impact of international organizations, and the persistence of protectionist behavior in developed economies.

What is the main research question?

The research seeks to determine whether the iterative decision-making in world trade policy can be explained by traditional game theory and if there are strategies or structural changes to overcome the resulting suboptimal outcomes.

Which methodology is employed?

The author uses a qualitative, game-theoretical framework to analyze historical and current international trade policies, treating states as players in a non-cooperative, iterated game.

What does the main part of the work cover?

The main section analyzes trade relations between the US and the EU, detailing their specific political systems, trade legislations (like Section 301), and the functioning of the WTO dispute settlement mechanism.

Which keywords characterize this study?

Key terms include Game Theory, Prisoner's Dilemma, International Trade, Protectionism, World Trade Organization (WTO), Reciprocity, and Fair Trade.

How does "Tit for Tat" apply to trade negotiations?

The thesis describes "Tit for Tat" as a strategy of reciprocal response, which is reflected in trade concepts like "fair trade" and the retaliatory mechanisms within the WTO dispute settlement process.

What institutional change does the author propose for the WTO?

The author suggests an institutional reform to increase the independence of the WTO, potentially through a council of commissioners to mitigate national protectionist lobbying and enhance the enforcement of liberal trade rules.