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The article below provides some context for Questions 1-2 What might a trade war between America and China look like? Punitive American tariffs on China would leave everybody worse off Feb 5th 2017, The Economist DONALD TRUMP vilified the Chinese government on the campaign trail, accusing it of manipulating China’s currency, stealing America’s intellectual property and “taking our jobs”. This hostility was not just posturing for the election season. In 2012 he had falsely accused the Chinese of inventing the concept of global warming—to make American manufacturing uncompetitive, he said. Tensions are high: Xi Jinping, the Chinese president, reminded global elites assembled at Davos that “no one will emerge as a winner in a trade war”. If America targets Chinese trade, China will hit back. So what might a trade war between the two economic powers play out? There are two ways in which talk might translate to action. Mr Trump might try simply to enforce the rules of global trade in the court rooms of the World Trade Organisation (WTO). Since America has no bilateral trade deal with China, WTO rules define what is and is not allowed. Mr Trump might, with some justification, accuse China of boosting its economy with subsidies and flooding some American markets with cheap imports. He will find that the Obama administration had already initiated a number of legal cases against China at the WTO. His underlings have suggested that the Trump administration might go further, for example by launching cases against suspected Chinese dumpers, rather than leaving it to American industry. Crucially, however, while the Chinese would probably retaliate, perhaps suddenly finding health-and-safety problems with American food exports, this chain of events need not descend into a trade war. The rules of the WTO are designed specifically to handle this kind of dispute. If it finds that China is indeed not playing by the rules, then there are clear limits on how America can retaliate. If the system works as it should, any recriminations would be contained. … There would be some winners from a trade war: in the short run the American government might well see more tax revenue, and some American companies would enjoy being sheltered from foreign competition. The biggest casualty may not even be the American consumer. After the Second World War, rich countries coordinated to avoid a race towards higher tariffs, creating the General Agreement on Tariffs and Trade, which in 1995 grew into the WTO. By clubbing together they recognized the destruction of the 1930s, when countries erected trade barriers to protect their domestic economies but ended up harming themselves as a result. A trade war would mean abandoning an institution that recognizes that countries are stronger when they work together.

NOTE: A blanket tariff is a tariff that is applied on all goods originating from the same country.

End of the article (QUESTION 1) The author of the article writes: ‘Tensions are high: Xi Jinping, the Chinese president, reminded global elites assembled at Davos that “no one will emerge as a winner in a trade war”.’ Show how a trade war can be modelled as a prisoner’s dilemma, including how it relates to the quoted statement above. Ensure you differentiate between a single-period and repeated prisoner’s dilemma.

(QUESTION 2) If the USA applies a blanket import tariff on China, who are the winners and losers in the USA? Is it efficient? Ensure you pay attention to whether the USA is a large or small country according to the definition in neoclassical trade theory.

Answer 1

QUESTION 1 -The US -Chines economic relationship has reached a critical juncture. Over the past year , the US has imposed tariffs on $250 billon worth of chines imports and chines has retaliated raising tariffs on US exports. At the G -20 Leader 's submmit in November 2018, Presidents Trump and Xi agreed to resolve the trade dispute within 90 days- by march 1, 2019 through this deadline has been recently extended.

The U.S. concerns that underpin these bilateral trade tensions stem from specific practices endemic to China’s economic model that systematically tilt the playing field in favor of Chinese companies domestically and globally. Progress on specific trade issues will require China to comply with its World Trade Organization (WTO) commitments and to make certain reforms that will likely touch on areas of state control over the economy. In addition, new trade rules are needed to address China’s economic practices not covered by its WTO commitments, including in areas such as state-owned enterprises (SOEs), certain subsidies, and digital trade. These issues also come at a time of increasing U.S. concern over the national security risks China presents, particularly with respect to technology access.

Despite the challenges the U.S. has had at the WTO, the WTO should be central to resolving U.S.-China trade tensions. From this perspective, we outline a multipronged strategy, including bilateral, multilateral, and unilateral actions, as well as working with allies, that together would constitute positive next steps for this critical economic relationship. In taking this multifaceted approach, the U.S. also needs to stay true to its values and not accept short-term gains or “fig leaf” deals. In particular, creating a managed trade relationship with China would not be a constructive outcome. The resulting deal should address the real issues at hand in a free Joshua P. Meltzer and Neena Shenai POLICY BRIEF February 2019 The US-China economic relationship A comprehensive approach 2 The US-China economic relationship: A comprehensive approach market manner and strengthen the multilateral global trading system and rule of law that the U.S. has championed in the post-World War II era.

QUESTION :2 Neoclassical theory is limited in their analysis by the laboure theory of value and the assumption of constant costs

The neoclassical trade theory provides tools of analysis and studies the impact of trade in more rigorous and less restrictive manner .

The application of neoclassical theory and later refinement of these idea onsistute the basis of modern theory of international trade.

tThe principal changes in trade theory since Ricardo's time have centred on a fuller development of the demand side of the economy that does not rely on the labour theory of value.

Making progress on China’s compliance with its WTO commitments will be most effective where the U.S. is also complying with its WTO commitments. This would require the U.S. to calibrate its unilateral use of tariffs, which have undermined the WTO. Instead, the U.S. should expand its use of trade remedy measures—anti-dumping and countervailing duties—that are consistent with U.S. WTO obligations and provide recourse to U.S. business for China’s unfair trade practices.