A Re-Run: “Who Will Relent – Xi or Trump? On Actual and Perceived Payoff Matrices”

“Re-run” is an archaic phrase from my generation. It means to replay a previously recorded and broadcast television show. Here, this “rerun” seems appropos. I think that the cost to Xi of backing down is even greater given Trump’s tariff threat came close to the day of the 100th Anniversary of the May 4th Movement — a sensitive occasion for the CCP. From an August 2018 post.

Notable differences. US GDP fundamentals less robust than in August. Chinese growth fundamentals (in the short run) are stronger. Remember this despite the fact that that Liu He is joining the negotiating team coming to Washington, D.C.

NEC Chair Kudlow in response to the Chinese threat to impose tariffs on an additional $60 billion worth of goods (from Bloomberg).

“Their economy’s weak, their currency is weak, people are leaving the country. Don’t underestimate President Trump’s determination to follow through.”

When I hear Kudlow, and/or Mr. Trump, say something along these lines, I think back to a pungent aphorism I once heard being used between my parents, describing overweening hubris. I bet it’s being used in the hallways of Zhongnanhai (it was a sufficiently arcane phrase, so at the time I had to ask for a translation from my father).

Instead of engaging in debate over toughness, I think a more profitable route to understanding is to consider the payoff matrix to Mr. Trump vs. Mr. Xi. In other words, we should just consider the amount of pain that can be inflicted on each nation (e.g., US imports much more from China than China imports from the US), but rather what costs and benefits each leader faces.

For Trump, imposing tariffs just before the midterm elections would push up prices of imported goods — but with tariffs imposed on an additional $200 billion Chinese goods, some of those goods must necessarily be consumer goods, and so directly visible in terms of impact. The benefits would be to shore up the xenophobic elements of the Trump base.

For Xi, imposing tariffs will raise food costs, hit economic activity in sectors (particularly export) dependent on US imports. But the state could step in to subsidize food costs, subsidize agricultural production (already being done), and let the currency depreciate in order to offset decreased export competitiveness. None of these are painless, but for a regime that has incurred tremendous costs to buy domestic stability, I don’t think they weigh heavily. On the other hand, what’s the cost to Xi of seeming to kowtow to Turmp, in terms of perceptions of the Party leader’s strength? I’d say (as a non-expert on Chinese domestic politics) it’s probably high.

So, draw a net payoff matrix for Trump/Xi. Let’s say it’s in reality:

But Trump/Kudlow think it’s:

Then Trump will (mistakenly) believe that Xi will back down, and will therefore see that he can’t lose by adding on more tariffs. Xi knows his own payoff matrix, and opts to retaliate because he can’t lose.

If Trump knew Xi’s payoff matrix, he would not retaliate. But if we know anything, we know that Trump knows little of the world.

That’s why I don’t expect a backdown…

26 thoughts on “A Re-Run: “Who Will Relent – Xi or Trump? On Actual and Perceived Payoff Matrices”

  1. Moses Herzog

    Interesting, your logic is sound as usual. And as someone who lived over there 7 years who feels they have, at minimum, a rough idea of domestic politics I’d say you’ve got it right. I don’t think people can quite perceive how much kowtowing to foreigners (perceived kowtowing or in reality) bothers Chinese. Reasonable people can argue and debate whether China has “a culture of victimization” (I personally believe there is a certain mentality over there which “feeds off of” a feeling of victimization by foreigners, fed by CCTV and China Daily, Xinhua etc., but reasonable people can take the other side of that line of argument). In other words, it’s a topic I could cross swords with someone on, but also hoping in a friendly way, as I feel there’s a lot of gray area there.

    What you have done (although I’m not sure if it meets the technical definition or not) is some of Yanis Varoufakis’ Game Theory. Which I think is a pretty good way of looking at it. I’m right on the border line on this one, I got my toes right on the borderline of the fence on this one. But. this is one of the rare rare ones I am going to “disagree” with Menzie (not so much disagree as “take an alternative view”). I think donald trump will “cave”. “Cave” is actually the wrong word here, because I think donald trump has already made up in his own mind he’s bluffing on this. Of course, it’s a game of street craps guessing what the “VSG” will do—still I can’t resist.

    1. Barkley Rosser

      I agree with you and Menzie regarding likely response of the Chinese. Anyone thinking Xi will just “cave” has note seen the monument in the middle of Tienanman Square about the Opium Wars. The Chinese nurse their historical grudges, as the Japanese keep relearning.

      Menzie is also right about the importance of May 4th. It is not just the Standing Committee of the CCCP Politburo that will support Xi standing up to Trump, but the unofficial Sitting Committee of former leaders lurking in Zhongnanghai that will do so.

      I do not know what the “arcane phrase” Menzie’s dad used is, but “drongo” might be suitable for Kudlow and Trump, not to mention the not-so arcane “shit-for-brains.”

  2. 2slugbaits

    And yesterday’s Iowa soybean cash prices fell an average of 12 cents, to $7.44/bushel:

    IA Dept. of Ag-USDA Market News Interior Iowa Daily Grain Prices

    Closing cash grain bids offered to producers as of 1:30 p.m.
    Dollars per bushel, delivered to Interior Iowa Country Elevators.

    US 2 Yellow Corn Prices were mostly 7 cents lower for a state average of 3.36.

    US 1 Yellow Soybean Prices were mostly 12 cents lower for a state average of 7.44.

    Iowa Regions #2 Yellow Corn #1 Yellow Soybeans
    Range Avg Range Avg
    Northwest 3.35 – 3.58 3.43 7.37 – 7.47 7.40
    North Central 3.24 – 3.40 3.35 7.30 – 7.42 7.36
    Northeast 3.22 – 3.35 3.31 7.31 – 7.60 7.44
    Southwest 3.35 – 3.46 3.41 7.36 – 7.76 7.51
    South Central 3.26 – 3.53 3.35 7.35 – 7.67 7.43
    Southeast 3.15 – 3.49 3.30 7.37 – 7.69 7.55

    Corn basis to STATE AVERAGE PRICE for the CBOT JULY contract -.28
    Soybean basis to STATE AVERAGE PRICE for the CBOT JULY contract -.87


    1. pgl

      Oh Lord – watching Stephen Moore on a friendly MSNBC interview bragging how his forecasts are always right and the rest of us are intellectually inferior to the genius known as Stephen Moore. Wish I had a tape of this farce as it is really funny in its own sad things.

      1. Menzie Chinn Post author

        pgl: Happened to catch the end. You should see Moore’s face after he signs off, and thinks he’s off camera … but isn’t. Priceless.

          1. Menzie Chinn Post author

            pgl: I think (from what little I saw) that he was being gracious to someone who had just been humiliated. He is more of a gentleman than I would be. Also, from what I have heard him say, he would be anathema to FoxNews.

        1. pgl

          TalkingPointsMemo has this interview!


          ‘Stephen Moore doesn’t know why people are so hung up on his old articles. When asked about his past misogynistic comments, Stephen Moore asserted on Tuesday that there should be a “statute of limitations on saying stupid things.”’

          A statute of limitation on saying stupid things? LOL! Moore has said so many stupid things – he’ll need a Presidential pardon!

        2. Moses Herzog

          I assume the off-camera facial expression was on the Velshi one?? I’m enough of a sadist when it comes to particular people I would LOVE to see that. I think the Gorka is radio. Gorka (I’m assuming pgl and Menzie already now, but for those who don’t know) is part of the Stephen Miller and Bannon KKK tribe. So, he’s obviously calling in favors to repair his reputation damage. Little does Moore know people at Heritage Foundation and Hoover Institute don’t care about womanizing and abusing a wife. They love a president who brags about sexually molesting women, so why would Hoover Institute or Heritage Foundation care about Moore’s History?? He’s going into the Gordon Liddy, Oliver North, Michael “Heckuva Job” Brownie “Club for Perennial and Eternal Losers”. He’ll still be doing written commentaries and will probably have his own radio show inside the next 6 months.

    2. Moses Herzog

      This is just a small taste of some of the history on Gorka. Bastard should just save us all some time and put on a swastika armband.



      Ask yourself “How racist do you need to be to get kicked out of the donald trump White House??” When you look at Gorka’s face, there’s your answer.

      Another question: How’d you like to see this guy hanging out at your child’s Yeshiva with a gun tucked in the back of his pants?? Good luck with that scenario.

  3. Willie

    The impact of tariffs is going to be an interesting wild card in the economy. There’s always some kind of shock, big or small, that seems to give the economy permission to lie down and take a nap when it’s been going full steam for a while. Maybe this is it. It’s sure more choppiness. The matrices are telling. I don’t know enough about China to be sure about Xi’s motives and rewards, but it also doesn’t surprise me much to see how he could approach this. It’s following the currency, even if the currency is leverage, prestige, and power, rather than actually money. Putin’s behavior is another joker in the deck, but he doesn’t have the same levers Xi has.

    With all that, I’m concerned that Trump will start a war somewhere if his reelection chances are not doing too well. Expanding a war worked for Nixon. Invading Iraq instead of going directly after a known enemy worked for George W. Bush. Trump isn’t particularly bright or perceptive, but he’s cunning, which is a concern. Coming back full circle, if Xi retaliates and there’s no indication that Xi will ever back down, then Trump has bumbled into limiting his own options. This cannot end well.

    1. pgl

      All of this talk about how this trade war might just continue – just for kicks, let’s check the stock market:


      Way down. But hey Iowa farmers can expect a surge in soybean prices according to our new economist at the Department of Agriculture – CoRev!

  4. Yifan Fu

    I think China’s recent strong economy is based on the expectation that trade war will end with a deal and it’s not strong enough to bear the cost of a upgraded trade war. Lots of sectors in China link with each other: export companies hurt—government tax revenue decrease, stock price falls—financial and fiscal instability (local government debt default risk, and the risk of closing out of shareholding pledge associated with falling stock price, the reduction of government based shanty towns transformation which supports the housing market)—possibly, a recession. These risks, in my opinion, are the cost of maintaining past stability of the economy, and now these risks makes the economy too fragile to bear the cost of a upgrade trade war. Considering the fact that Xi does not have a re-election pressure, I think Chinese government would not add more risk to the economy by conducting aggressive monetary policy or allowing local government issuing more bonds, instead, they would either consider a further backup on the clauses of the deal or relaliate with same level of tarriff.

  5. ilsm

    I was just reminded of Thomas Schelling and “conflict”..

    Might a shared perspective come about?

      1. ilsm

        True, however, Kubrick got the idea for Dr Strangelove from reading an article by Schelling……….

        The choice for Armageddon is not rational. A major criticism of Schelling and the broader theory behind mutual assured destruction.

        Critics of Schelling and other RAND alums’ usually argue for disarmament on logic and moral grounds.

        Trump or not rational and moral cannot be assumed in players at the world level..

        1. Barkley Rosser

          Aside from convincing LBJ to set up the “Red Phone” hotline to the Kremlin, the most important thing Schelling did to prevent nuclear war (and many credit him as more important than anybody else in bringing about the fact that we have not had such a war since 1945) was to establish as a focal point that no nation would engage in a first use of nuclear weapons, something that was being advocated well into the 1960s and even into the 197-s by some influential figures in the US on these matters. The idea of a focal point appears in this book, The Strategy of Conflict, which was on JFK’s bedside table during the Cuban missile crisis reportedly. This idea was the one that above all others got him his Nobel Prize in economics.

          Now this does not necessarily require full rationality to work, with reasonably bounded rationality sufficient. Clearly what gets involved here is the following of some established norms that evolve, even if they are not openly stated, and in fact the US has avoided officially adopting a no-first-use of nuclear weapons policy, even as it has assiduously followed it. Some of these norms work best if they remain tacit, but understood by the key players.

          The relevance of this to the current trade policies of Trump is that he is violating established norms regarding trade and putting on tariffs when and where he should not be. After all, the supposed excuse for his steel and aluminum tariffs on Canada and Mexico (and China) is “national security,” an allowed exemption under WTO rules. But until he came along, the DOD viewed Canadian steel as virtually American, as safe and securely available as any steel produced I Gary or Pittsburgh. Not only that, he also claimed he was imposing these tariffs to get Canada and Mexico to renegotiate NAFTA, but when a deal was cut, he did not remove the tariffs.

          In short, he has engaged in smashing the existing focal point norms, clearly completely ignorant of the underlying economics involved (see his fantasy that bilateral trade balances determine whether a nation is gaining or losing from trade). The upshot is that we have gotten into a quite dangerous situation with all this, with a more serious trade war still possible.

  6. David O'Rear

    There is next to no chance that Xi Jinping will openly and significantly cave in; he can’t afford it, regardless of how many titles he holds (recall that Deng Xiaoping famously held one title: chairman of the Chinese bridge association).
    While former leaders have only a fraction of the power they did when Deng’s previous hand-picked men were in charge, there are plenty of folks who would really rather not have Mr. Xi in power for the rest of their lives. First, because they saw (or more likely, heard about) Mao’s crazy years, but also because it severely limits their own career upsides.
    The Chinese economies – both domestic and international, and both coastal and interior – are not a single thing that will be damaged by a deepening of the trade war.

  7. Steven Kopits

    I personally feel like events have moved past a trade war. I think this is now a kind of economic war and US citizens — at least on the right — are gearing up for a prolonged period of disconnect with China and are resigned to higher prices for consumer goods. In essence, Xi has allowed Trump to brand China — for which Xi himself takes most the blame.

    I have said for the last four years that the attempt to annex the South China Sea would paint China as an aggressor nation. This has been reinforced by placing minorities in concentration camps. and more recently by giving a death sentence to a Canadian over the Huawei executive detention. China has become a scary country to a lot of Americans. The lens through which the trade deal is viewed is therefore one of political and security, not economic, rivalry. Tariffs in this context are part of a containment strategy, not one of leveling the business playing field.

    Consequently, I do not expect an easing of conditions by either Trump or Xi. We will see how Biden reacts in two years, assuming polling numbers take us to its logical conclusion. But I am not convinced that US terms will be better then, because the emotions of the electorate are hardening, I think. So this takes us to the Ben lu version of events, with the US and China steadily disengage from each other.

    I don’t like it, but that’s the trend line.

    1. Menzie Chinn Post author

      Steven Kopits: I agree that we are on this trend. However, I’d say this is more Trump’s intent, than an accident. Xi is definitely part of the equation, but I’d give 50% to Trump’s moves. And recall, you don’t appoint Navarro (my former coauthor) to the White House if you’re not prepared – and intending – to go all out aggressive.

      1. Barkley Rosser

        Wow, I never knew you coauthored with Navarro, Menzie. Yes, it appears that at one time he was more or less not too unreasonable, but then he clearly went off some deep end. Do you have an explanation as to what made him do that?

        1. Moses Herzog

          “Crotchety syndrome”. Known to hit many men around the age 65 mark. You probably personally know many of them [ runs and hides in the corner after tossing the grenade ]

    2. Steven Kopits

      I don’t disagree with you. But Trump and Navarro are increasingly winning this debate. There’s no uproar from the public (not the financial public, I mean ordinary people) about tariffs. I think people are aware the China is an increasingly powerful rival and further believe that interacting with China is detrimental to the US. China is not Canada or Mexico. This is not about trade. It’s about security.

      Might this have been different under a different president? Possibly.

      Nevertheless, I see China diverging farther and farther from rule of law, and I don’t see Xi making any effort to dispel that impression. As I have said, the SCS was a disaster for China, because it prevents China from behaving as an ordinary hegemon. Has militarizing the SCS protected China’s trade? Today, it has achieved exactly the opposite effect with China’s most important trading partner.

      China has no friends. It speaks for no one other than itself. That’s an unaffordable luxury for a hegemon and a potentially mortal danger to other countries.

      Now, this is to take nothing away from the Chinese people. I am a huge Sinophile (and Anglophile, for that matter). But this is about leadership, not the country itself. Perhaps I am being too pessimistic, Menzie. But putting ethnic minorities in concentration camps? This constant stories about espionage and IP theft. This is not the behavior of countries with whom the US has cordial relations (at least shouldn’t be). This is the behavior of country where we should be calling for regime change. It’s a country you do your best to quarantine. That’s not only where I think we’re headed, I think that’s where much of US opinion is already. China is being treated as a threat because it is perceived to be a threat.

      As I have written many times before, you cannot expect to trade with people you are threatening. In such a world, trade disputes will manifest as security issues. That’s where we are today.

      1. Barkley Rosser


        For all the talk of China “having no friends,” at the moment many nations, including most (former?) US allies are viewing China as a responsible nation upholding international agreements and organizations in contrast with the US, which has been going around trashing them right and left. The Iran nuclear deal? the WTO? the Paris Climate Accord? It is the US, not China that has either completely withdrawn from these to widespread condemnation or denounced them, not China, not that anybody is buddying up to China too closely. But then, the only nations buddying up to the US right now seem mostly to be dictatorships and absolute monarchies, while most of our traditional allies are thoroughly alienated. There are only a handful of nations in the world where Trump has a higher approval rating than did Obama, and that very small list does not include the US, btw.

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