US-China Trade War Stuck In A Prisoner's Dilemma

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Deals can be reversed, tariffs can be raised and imposed without warning and the political logic often shifts depending on domestic electoral swings and business lobby desires.
Second, this is not a repeated game, at least from China's perspective. In game theory, repeated interactions encourage cooperation because each side knows it must live with the consequences over multiple rounds.

Here, China knows it might only need to weather one term or possibly just another year of Trump's administration. With US midterms on the horizon, there is little incentive for Trump to make serious concessions now.
When the game is short-term, the safest move becomes defecting, regardless of the broader economic cost. Vietnam offers a sobering illustration of what happens when a player tries to cooperate too early.

When Vietnam floated a plan to eliminate tariffs on US goods in the hope of reciprocal treatment from the Trump administration, rather than rewarding the offer, US officials flatly rejected it, criticizing Vietnam's trade surplus and accusing it of“dumping” cheap products such as shrimp into the American market.
The lesson for China was obvious – caving early does not guarantee leniency. Indeed, it may simply invite more demands.

More than just trade

The consequences of the mutual defection extend far beyond the tariffs themselves. Global supply chains continue to shift – companies are accelerating efforts to diversify away from US-centric or China-centric models.

Instead, they are investing across Southeast Asia, Latin America and even Africa, viewing them as potential final demand destinations and not just as offshore manufacturing bases. Intra-Asian trade is strengthening as countries seek alternatives in a polarized global order.
Meanwhile, the political framing, particularly in the US, has become increasingly zero-sum: if China benefits, America must be losing. This leaves little room for the nuance and compromise that international trade agreements typically require.
As a result, the tariff war is no longer just an economic dispute. It is a contest over narrative, pride and geopolitical influence.

No easy exit

In an ideal world, both sides would recognize the mutual damage and seek a face-saving solution.

But with trust eroded, incentives misaligned and the political cost of losing face ever so high, mutual defection has become the Nash Equilibrium. Neither side wants to back down and both would rather lose economically than appear weak.

The real tragedy isn't just in the tariffs themselves. It is in how deeply trust has broken down, making cooperation harder not only today, but well into the future. Still, two broad paths remain for breaking the destructive cycle – changing the payoffs and finding a face-saving exit.