Game theory and trade tensions between advanced economies

Abstract

Purpose: This article aims to study trade tensions between advanced economies and to express the difference between “currency war” and “trade war” and the respective effects on the global economy‎. Design/Methodology/Approach: The analysis of trade relations between countries is always one of the main concerns of policymakers and economists‎. ‎In this paper‎, ‎interactions Dollar-Yuan‎, ‎Yuan-Euro and Dollar-Euro are modeled using game theory, being the effect of protectionism and currency devaluation in trade tensions studied by introducing a new game defined as threat game‎. Findings: Our findings show that protectionism and negotiation strategy is a credible deterrent threat and can be a brake for a total currency war‎. Also, we use the concept of rational choice to demonstrate that, for advanced economies, the cooperation strategy is the best way to overcome the Covid-19 pandemic crisis. Practical Implications: The subject discussed in the paper refers to issues related to protectionism, currency war and negotiation. The holistic perspective that is applied in this study includes the expression of a dominant strategy in trade relations between countries that helps to prevent the competitive devaluation of money. The consequences of the currency war have been catastrophic for the global economy and have ultimately led to a global depression. It also outlines ways to converge in overcoming the COVID-19 pandemic. Originality/Value: This paper focuses on the prospects for trade relations between advanced economies such as the United States, Europe and China. As a result, the perspective proposed allows us to make a significant and innovative contribution to the literature because it can equip relevant stakeholders in the Global Economic System with the necessary strategies to make efficient decisions.