GUEST COLUMN – A Game Theoretic Perspective of Trump’s trade war
(Image: Bellergy, Pixabay.com)
By PETER TSIGARIS
Thompson Rivers University
PRESIDENT TRUMP has launched a trade war against Canada, the United States’ largest trading partner and closest ally. By imposing tariffs under the pretense of national security concerns, the U.S. administration has wrecked decades of economic cooperation between the two nations.
Dr. Peter Tsigaris.
Canada, in turn, has no choice but to retaliate with counter-tariffs on American goods. From a game-theoretic perspective, Trump’s move was not only economically damaging, but it was also strategically dumb.
Decisions on trade between nations are not one-time, isolated events. Instead, they are iterated, where decisions in each period influence future interaction. The U.S. and Canada had long operated in a cooperative manner, one that benefited both nations, including the U.S.-Mexico-Canada Agreement enacted during Trump’s first term in office.
The puzzle, therefore, is why the Trump administration chose to defect now from this mutually beneficial arrangement, knowing that retaliation, under the well-established tit-for-tat strategy, was the most likely response?
The Rational Strategy: Cooperation
John von Neumann, the father of game theory, and Oskar Morgenstern laid the foundation for understanding strategic interactions in their seminal work Theory of Games and Economic Behavior. In a repeated interactions scenario, rational players recognize that cooperation yields the highest long-term payoffs.
Applying this to trade, the United States and Canada had enjoyed a stable, cooperative outcome, one where both nations benefited from reduced trade barriers and economic interdependence. John Nash further emphasized that players would settle on strategies that no one has an incentive to unilaterally deviate.
Before Trump’s tariffs, the U.S. and Canada were effectively in a Nash stable cooperative outcome of free trade. Neither had an incentive to impose tariffs because doing so would provoke retaliation, leading to mutual losses including higher cost of goods and services.
The Puzzle of Defection
If rational players should avoid destructive trade wars, why did Trump defect? The answer likely lies outside rational-choice models. One explanation could be that Trump underestimated Canada’s response, assuming Ottawa would not retaliate forcefully. Another possibility is that he prioritized domestic political messaging over economic rationality, playing a different game altogether, one where signaling toughness on trade mattered more than the actual economic outcome.
Trump, in his speech to Congress, stated that “tariffs are about making America rich again and making America great again.” Tariffs, according to Trump, would stimulate domestic production since the costs of goods produced and exported by Canada would rise and demand for them would drop.
However, this reasoning assumes that the transition to domestic production would be smooth, and in addition that Canada would not retaliate. Perhaps Trump is attempting to drive the Canadian economy into a deep recession to make it easier for the U.S. to annex Canada as our Prime Minister Justin Trudeau recently stated.
One thing is certain that tariffs were not imposed for national security concerns, but for Trump to have the right to issue this executive order. Whatever the reason, Trump’s strategy aligns more with irrationality where political incentives override economic strategic choices.
The inevitability of retaliation
The tit-for-tat strategy, introduced in iterated prisoner’s dilemma experiments, predicts that cooperation can persist if players reciprocate each other’s actions. The strategy starts with cooperation on trade.
However, when one player defects, the best response of the other player is to punish the defector until cooperation is restored. Canada’s retaliatory tariffs were not an act of aggression but rather a predictable and credible response to Trump’s move.
Why did Peter Navarro, Trump’s economic advisor, overlook the fundamental rule of iterated games, that cooperation should prevail, since the defection strategy predictably leads to retaliation damaging the economies of both nations?
Historically, trade wars have rarely ended well. The Smoot-Hawley tariffs of the 1930s worsened the Great Depression by triggering retaliatory tariffs from U.S. trading partners, leading to a decline in global trade. Economic isolationism has repeatedly proven costly. In game theory terms, a trade war represents a negative-sum game—both sides end up worse off than they would have been under free trade.
Trump’s trade war with Canada is not a rational strategy within a game-theoretic framework. It disrupted a long-standing cooperative outcome, provoked predictable retaliation, and will inflict unnecessary economic costs on both nations. Whether driven by political incentives or irrationality, the decision to defect remains a puzzle.
Dr. Peter Tsigaris is a professor at Thompson Rivers University in Kamloops.
References:
Axelrod, R. (1984). The Evolution of Cooperation. Basic Books
Irwin, D. A. (2017). Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton University Press.
Nash, J. F. (1950). The bargaining problem. Econometrica, 18(2), 155-162.
Nash, J. (1953). Two-person cooperative games. Econometrica: Journal of the Econometric Society, 128-140.
Prisoner’s Dilemma: A Study in Conflict and Cooperation. By Anatol Rapoport and Albert M. Chammah. (Ann Arbor: The University of Michigan Press, 1965
Stringer, C. (2025, February 27). White House official threatens to redraw Canadian border. The Telegraph. https://www.telegraph.co.uk/us-politics/2025/02/27/white-house-canadian-border-trump-trudeau/
Swanson, A. (2024, December 4). Peter Navarro, Trump trade adviser, sentenced to prison. The New York Times. https://www.nytimes.com/2024/12/04/us/politics/peter-navarro-trump-trade.html
U.S. Congress. (1930). Smoot-Hawley Tariff Act, Pub.L. 71–361, 46 Stat. 590.
Von Neumann, J., & Morgenstern, O. (1947). Theory of games and economic behavior, 2nd rev.
ArmchairMayor.ca 
Dr. Tsigaris’s analysis of the U.S. decision to impose tariffs on Canada frames it as a strategic misstep, economically harmful, and politically driven rather than rational. Utilizing game theory principles from von Neumann, Morgenstern, and Nash, Tsigaris highlights that the pre-tariff state represented a Nash equilibrium, where both nations thrived through cooperation. This column underscores that U.S. interests are often better served by nurturing global trade, especially with a neighbor and NATO ally like Canada, rather than erecting barriers. However, the analysis also warns of inevitable Canadian retaliation through a tit-for-tat strategy, which risks straining diplomatic ties and creating regional instability as this is an America geopolitical strategy in many parts of the world, usually one for economic gain.
While Tsigaris critiques the tariffs as irrational, the domestic political context in the U.S. offers some explanation for the decision. For instance, in manufacturing-heavy states like Michigan and Ohio, tariffs resonate with voters who see them as a defense against perceived unfair trade practices, even if the economic logic is flawed. This suggests Trump might have prioritized short-term political gains over long-term economic costs, potentially underestimating Canada’s response or banking on the ability to shift blame. Additionally, the tariffs could be a high-stakes gambit to gain leverage in future negotiations, akin to his first term renegotiation of NAFTA into the USMCA. Though risky, this approach might aim to secure better terms for U.S. industries, even at the expense of short-term pain, challenging the notion of outright irrationality.
Economically, the mutual losses from a trade war are significant for both nations. Canada, as one of the U.S.’s top export markets, plays a critical role in American industries like agriculture, automotive, and energy. Retaliatory tariffs could drive up costs for U.S. consumers and threaten jobs in export-dependent sectors, while Canadian industries face similar pressures, risking broader economic fallout across North America. Politically, Trump’s tariffs may appeal to nationalist sentiments in the U.S., offering a narrative of protecting domestic industries like steel and aluminum, even if the broader costs outweigh these benefits. In Canada, leaders like Freeland, Singh, and Poilievre grapple with balancing national pride and economic pragmatism, often leaning on historical grievances rather than forward-looking solutions.
Rather than escalating tensions, saner heads like Mark Carney advocate for cooperative strategies to address trade grievances. The U.S. and Canada could explore joint frameworks to tackle issues like supply chain resilience or unfair trade practices, fostering mutual gains over zero-sum conflicts. Documented policy goals, such as enhancing North American competitiveness against global rivals like China, should guide discussions, avoiding speculative claims like annexation, which lack evidence and inflame tensions. By focusing on data-driven trade flows and specific impacts, both nations can better navigate the political incentives and economic realities, ensuring a partnership that benefits all.
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This silly “economic skirmish” could be easily overcome if the Canadian government would to immediately announce (and with great fanfare) that all new military equipment be sourced from our European allies from now on.
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