Rubinstein’s Bargaining Model and the 2018 Trade War between China and the U.S.

Table of Contents

1. Introduction

2. Trade war between China and the U.S.

2.1. Trade war

2.2. History of the Sino-American relationship

2.3. The current situation

3. The Rubinstein Bargaining Model

3.1. The basic idea of the Rubinstein Bargaining Model

3.2. The Rubinstein Bargaining Model in the Sino-American trade war context

4. The perfect equilibria of the Sino-American trade war expansion of the Rubinstein Bargaining Model

4.1. Theoretical solution of the Rubinstein Bargaining Model

4.1.1. Rubinstein’s equilibrium of the Fixed Cost Model

4.1.2. Rubinstein’s equilibrium of the Fixed Discounting Factor Model

4.2. Assumptions for the numerical example

4.2.1. Current market sizes

4.2.2. Fixed proposal Costs

4.2.3. Fixed discounting factor

4.2.4. Market share elasticities

4.2.5. Different ways of tariff adaption

4.3. Outcomes of the different scenarios

4.3.1. Results of the numeric Fixed Cost Model scenario

4.3.2. Results of the numerical Fixed Discounting Factor Model example

4.4. Interpretation of results

5. Assessment of the model

5.1. Limits to the model to explore the Sino-American relationship

5.2. Advantages of the model to explore the Sino-American relationship

6. Conclusion and outlook

Objective & Research Topics

This thesis investigates the ongoing trade conflict between the United States and China through a game-theoretical lens, specifically by applying and expanding Rubinstein’s Bargaining Model to model the interaction between the two nations regarding steel and soy bean market tariffs.

• Analysis of the historical and current Sino-American trade relationship.
• Application of the Fixed Cost Model (FCM) and Fixed Discounting Factor Model (FDM) in a trade war context.
• Evaluation of how varying market share elasticities influence bargaining duration and tariff levels.
• Assessment of how different strategic approaches—aggressive versus friendly—affect outcomes.

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Summary of Chapters

1. Introduction: The introduction outlines the relevance of the 2018 Sino-American trade conflict and sets the objective of applying a game-theoretical expansion of Rubinstein’s Bargaining Model to analyze this trade war.

2. Trade war between China and the U.S.: This chapter defines the concept of a trade war and details the historical and political developments in the relationship between the two nations leading up to the current trade conflict.

3. The Rubinstein Bargaining Model: This chapter explains the theoretical foundations of the Rubinstein Bargaining Model and describes how it is adapted for the Sino-American context using two sub-models: the Fixed Cost Model and the Fixed Discounting Factor Model.

4. The perfect equilibria of the Sino-American trade war expansion of the Rubinstein Bargaining Model: This chapter presents the numerical analysis of the bargaining outcomes under various scenarios, including different market elasticities and strategic behaviors of the two nations.

5. Assessment of the model: This section discusses the methodological limitations and practical advantages of the developed model in representing real-world trade negotiations.

6. Conclusion and outlook: The final chapter summarizes the findings, noting that aggression in trade policy leads to prolonged conflicts and mutual losses, and provides suggestions for further research.

Keywords

Rubinstein Bargaining Model, Trade War, China, United States, Steel Tariffs, Soy Bean Tariffs, Game Theory, Fixed Cost Model, Fixed Discounting Factor Model, Protectionism, Market Share Elasticity, Economic Nationalism, International Trade, Equilibrium, Negotiation.

Frequently Asked Questions

What is the primary focus of this thesis?

The thesis focuses on analyzing the trade conflict between China and the U.S. by applying a game-theoretical expansion of Rubinstein’s 1982 Bargaining Model to understand tariff-based negotiations.

What are the central themes examined in the research?

The central themes include the dynamics of protectionist trade policies, the impact of bargaining costs and time preferences on trade negotiations, and the effectiveness of tariff adjustments in bilateral markets.

What is the core objective or research question?

The objective is to replicate the Sino-American trade interaction using a model to examine the existence and characteristics of equilibria in a trade war scenario and how these outcomes are affected by various economic variables.

Which scientific methodology is utilized?

The author employs a game-theoretical methodology, specifically expanding Ariel Rubinstein’s Bargaining Model into a "Fixed Cost Model" and a "Fixed Discounting Factor Model" to conduct numerical simulations of trade war scenarios.

What topics are covered in the main section?

The main section covers the formal definition of the models, the estimation of parameters like market size and negotiation costs, and the presentation of results regarding tariff levels and the duration of negotiations across different scenarios.

Which keywords best characterize this work?

Keywords include Rubinstein Bargaining Model, trade war, game theory, tariffs, market share elasticity, and protectionism.

How does the author define the "Fixed Cost Model" within the trade war context?

The Fixed Cost Model (FCM) is defined as a scenario where each player faces a specific cost per negotiation round, which impacts their decision-making process and willingness to prolong or end the trade war.

What conclusion does the author reach regarding protectionism?

The author concludes that protectionism generally leads to mutual losses and economic decline, suggesting that aggressive trade stances prolong conflicts to the detriment of both nations' welfare.