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American Focus > Blog > Economy > TACO vs. the Game-Theoretic Art of the Deal
Economy

TACO vs. the Game-Theoretic Art of the Deal

Last updated: June 3, 2025 9:25 am
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TACO vs. the Game-Theoretic Art of the Deal
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It’s clear that President Trump’s response to the “TACO” (“Trump Always Chickens Out”) moniker isn’t likely to earn him any accolades from the Nobel Committee in economics. As reported by the Wall Street Journal in the article titled “The ‘TACO Trade’ That Has Trump Fuming” (May 28, 2025):

The president dismissed allegations of backing down on tariffs, asserting that his tactic involves establishing an “absurdly high number” before negotiating it down in return for concessions. “You call that chickening out,” Trump stated in the Oval Office, asserting that “it’s called negotiation.”

However, negotiation only holds water when the threat is credible, and the issuer can convincingly commit to following through on it.

In exploring Mr. Trump’s negotiation theory, let’s operate under the premise that international trade negotiations are deemed successful if they achieve the ruler-negotiator’s explicit aim—maximizing exports while minimizing imports. This perspective, however, conveniently overlooks that the burden of protectionist policies often falls squarely on the shoulders of the populace under a protectionist regime.

The Chicken game, a concept from game theory, serves as a fitting lens for this situation. Imagine a scenario where two players, C (Charlie) and D (Donald), are racing toward one another on a road, each waiting to see who will swerve first to avoid a collision. The payoff matrix illustrates each player’s ordinal utility: the first number in each cell represents C’s utility, while the second represents D’s. A collision results in the worst outcome for both, yielding a payoff of 0,0. If both players avoid the crash, they walk away with a better outcome of 2,2. If, say, D swerves, he earns a 2, but C, having not flinched, achieves his optimal result of 3. If the roles were reversed, the same logic applies. This metaphor resonates profoundly in the context of a trade war between two autocratic leaders: the one who swerves loses out compared to their most favorable outcome (which they’d rank as 3).

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The lower section of the matrix provides a broader framework for characterizing the Chicken game. In such scenarios, T > R > S holds true. The payoff structure in the upper portion satisfies this condition because 3 > 2 > 0.

Another apt metaphor is the Hawk-Dove game, which shares the same structural dynamics (T > R > S). Here, players can choose to be hawks (attack) or doves (submit). The optimal outcome occurs when one plays hawk (gaining T) while the other capitulates (receiving R). However, if both adopt hawk behavior, they risk the worst outcome, S, which could lead to mutual destruction. If both opt for dove (R, R), they might reconsider their strategies in future rounds. In a one-off game, the two so-called “Nash equilibria”—situations where neither player has an incentive to unilaterally deviate—arise when one is a dove and the other a hawk. The Hawk-Dove interpretation is particularly useful in analyzing conflicts and instances of bullying. If a bully convinces their target they’ll play hawk, the latter is incentivized to submit and act as a dove. This concept was notably discussed by economist Thomas Schelling in his groundbreaking 1960 work, The Strategy of Conflict.

In this realm of strategic conflict, a threat is only effective if the issuer can convince their opponent of their genuine commitment to follow through—essentially, that they aren’t bluffing. When player D claims they will adopt a hawk stance (backed by “a ridiculous high number”) but simultaneously indicates a willingness to retreat if challenged, they inadvertently invite their opponent to engage as a hawk. Announcing a threat as a bluff is not a tactical win but a recipe for defeat. If I proclaim my hawkish intentions while simultaneously undercutting my credibility, I’m merely inviting you to confront me as a hawk. By signaling that I’m prepared to back down, I’m not the one who will ultimately flinch.

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Mr. Trump has publicly demonstrated that he will relent in trade negotiations if his opponent stands firm. Indeed, many on Wall Street speculate that the financial markets have not plummeted more dramatically because “Trump Always Chickens Out.”

It’s highly probable that within the EU or Chinese governments, advisors to figures like Ms. Van der Leyen or Mr. Xi are well-versed in negotiation strategies rooted in game theory and are unafraid to share insights that their leaders may not want to hear. The question then arises: why is there a conspicuous absence of such advisors in Mr. Trump’s circle?

 

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The king studies strategy

The king studies strategy, by ChatGPT

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