Trump’s Tariffs Fail the Game Theory Test

When viewed through the lens of game theory, President Donald Trump’s use of tariffs to compel economic change and extract concessions from trading partners was always doomed to fail."

Few tools in economic policy are as politically charged or economically disruptive as tariffs. When the Trump administration reimposed sweeping import tariffs – after already deploying them during the first term – the rationale was familiar: rebalance trade, pressure adversaries, and restore domestic manufacturing.

But through the lens of game theory, President Donald Trump’s tariff philosophy and policies never had a real chance of succeeding – and still don’t. Restructuring global trade to favor the U.S. without causing lasting harm to the American economy is a practical impossibility. There are too many variables, and success hinges on everything breaking in Trump’s favor.

Spoiler alert: it hasn’t.

Despite calls from administration officials urging other countries not to retaliate, many – China, Canada, and the European Union – moved swiftly to erect their trade barriers.

Despite the Trump administration’s faith in the U.S. dollar's preeminence, Canada, Japan, and European nations began selling off U.S. securities, weakening the dollar and driving up federal borrowing costs.

And despite repeated assurances that tariffs would bring back manufacturing jobs and revitalize domestic industry, financial markets experienced one of the fastest corrections in history, erasing between $6 trillion and $11 trillion in value.

From a game theory standpoint, Trump’s tariff strategy lacked the structure and foresight needed for success.

If you’ve ever seen the films A Beautiful Mind, The Spanish Prisoner and The Departed, you’re familiar with game theory.

Game theory is a framework for analyzing how decision-makers – “players” – interact when the outcome of each move depends on the actions of others. It’s widely used in economics, politics, and military planning to anticipate responses, identify stable outcomes (equilibria), and model strategic behavior.

Game theory assumes that all players are rational actors trying to maximize their advantage based on the information available and their expectations of others’ behavior.

In this context, tariffs become a strategic move – one country’s attempt to alter the balance of trade, costs, or policy alignment. If the opposing country values continued access to the tariff-imposing market, it might yield and offer concessions. If not, it may retaliate. The outcome depends on how credible the threat is and what each side perceives it has to gain or lose. This is where Trump’s strategy faltered.

The blanket tariffs announced on April 2 began as a universal 10% import duty but quickly evolved. The administration anticipated some backlash – but not the full scope of the global reaction. Within a week, as markets buckled and the U.S. economy veered toward recession, Trump rolled back the broad tariffs, pausing most of them for 90 days. At the same time, he raised tariffs on China to 145%. China retaliated with 125% tariffs on U.S. goods. The partial pause calmed markets temporarily, but the ongoing instability and unpredictability have left businesses and investors on edge.

Trump’s approach resembles a sequential game, in which the U.S. acts first and expects other players to follow with concessions. That only works if the threat is credible and the costs of defiance are higher than compliance costs.

The administration claimed over 70 countries entered trade talks after announcing the tariffs. However, few of those negotiations have been disclosed publicly, and even major concessions – such as Vietnam’s offer to eliminate all tariffs on U.S. goods – were dismissed by Trump advisors as “insufficient.”

This brings in a key game theory concept: incomplete information. The game becomes harder to play when one side doesn’t understand the other’s true objectives. Was the U.S. trying to raise revenue? Secure better trade terms? Reduce fentanyl imports? Curb immigration? Pressure allies to boost defense spending? Or, in one infamous example, acquire Greenland? The absence of a clear, stable goal made it impossible for other nations to calculate a rational response. Some retaliated. Others disengaged entirely.

The China standoff devolved into a Chicken Game, where both sides escalate and hope the other flinches first. Trump’s tariffs dared China to fold. China, in turn, showed it was willing to absorb the pain. Once that message was sent, the game shifted from strategic leverage to endurance.

The same logic applied to the European Union, but with a twist. The EU isn’t a single actor – it’s a coalition of 27 member states with collective economic power that rivals the U.S. Trump appeared to believe that individual European countries would peel away and negotiate separately under tariff pressure. That misread ignored the EU’s structural cohesion on trade matters. Instead of folding, the bloc hardened its stance, coordinated its retaliatory measures, and began seeking stronger trade ties with Asia and Latin America to reduce dependency on the U.S. Rather than blinking, Europe stayed the course, absorbing short-term pain for long-term autonomy. In game theory terms, the EU called the bluff.

In stark contrast, the United Kingdom broke from the global pattern by choosing not to retaliate and quietly accepting its 10% tariff burden. While this could be seen as passive, game theory suggests it may be a calculated play in an asymmetric, multi-round game. With limited economic leverage and greater post-Brexit dependency on favorable trade optics, the UK may have assessed that retaliation would do more harm than good.

By staying out of the tit-for-tat escalation, the UK preserved optionality for future talks. It positioned itself as a cooperative player, potentially banking on long-term diplomatic returns over short-term economic theatrics. In repeated games, such trust-building can pay dividends. But it also carries risk: the U.S. might interpret silence as weakness, inviting further pressure down the line.

Still, the UK’s restraint is the exception, not the rule. Among the dozens of affected nations, most responded forcefully – either to defend their economic interests or signal that unilateral pressure from Washington would not go unchallenged.

The Chicken Game with China was inevitable because the goals of each side are fundamentally incompatible. The U.S. wants job-driven economic revival. China’s ruling party wants to maintain power and doesn’t rely on public approval to stay in control. That gives China a significant advantage: it can outlast political or economic pressure that would undermine a U.S. administration. Europe, while democratic, has similar long-game capabilities by its institutional stability and shared market.

In game theory, a War of Attrition occurs when both players endure rising costs, waiting for the other to concede. That only works if one side has greater endurance. But Trump’s tariffs raised prices for American businesses, disrupted supply chains, and fueled inflation, eroding domestic support for continued confrontation. In a globalized economy, unilateral pressure tends to backfire.

Tariffs can be effective within a coherent, goal-oriented strategy. But the Trump administration used them as a stand-alone tactic, without consistent objectives or predictable outcomes. Game theory teaches that when rules are unclear, objectives shift, and players don’t understand the game they’re in, the likelihood of success collapses.

In the end, Trump’s tariffs weren’t strategic. They were speculative, reactive, and disconnected from real-world constraints. Without a defined win condition or a credible path to resolution, the U.S. boxed itself into a corner, where every move triggered a stronger response. That’s not how you win in game theory.

That’s how you lose control of the board.