MAP Insights

Introduction

 

The global trade landscape in 2025 is poised for significant shifts, particularly as protectionist measures, national interests, and multi-lateral alliances converge. Tools, like game theory, offer a robust framework for assessing the strategies at play among nations. This article explores three inter-related aspects: the impending tariff war led by the U.S., the potential responses from key global players, and the lessons for strengthening institutional frameworks, such as the WTO, IMF, and other economic bodies, to mitigate disruptions in both real and financial markets.

 

This article can be the basis of a position paper and action programs for the MAP CEO Academy for continuous learning on Game Theory and the 2025 Tariff War, with actual applications to individual firms or industry groups designing practical steps to avert disastrous consequences of non-collaboration.

 

The United States’ blanket tariffs

 

The U.S. has intensified its stance on trade imbalances, insisting on blanket tariffs against nations with significant trade surpluses. This unilateral approach reflects a zero-sum framework in trade relations, where the U.S. seeks tangible benefits by penalizing surplus-holding economies, such as China, the EU, Japan, and Canada.

 

However, the dilemma to serve U.S. selfish interests versus its desire to continue as leader in global economic stability or shared growth has converted the problem into one of purpose for looking at the common good. That is what 21st C leadership should be all about as humanity’s existence is challenged by humanoids, climate change, and networked disinformation.

 

Strategic alliances and countermeasures

 

Countries targeted by these tariffs have begun exploring avenues for collective action. Two distinct groups have emerged:

 

• Canada and the EU + Japan: These nations are reportedly discussing a coordinated sell-off of U.S. Treasuries. Such a move, if executed, could destabilize U.S. financial markets, serving as a counterweight to the economic pressures created by the tariffs. Its implications on the role of the U.S. dollar may trigger responses, such as the Nixon moving the dollar from the gold standard to more freely convertible currencies of its economic partners.

 

One reaction of Pres. Trump in mid-April 2025   to the decline in returns on both U.S. public and private financial obligations (bonds and shorter-term issues) held by foreigners was a move that could have been expected from game theory:  to demand the independent Federal Reserve Board (US central bank) to lower interest rates to counter the trade in goods impact on inflation as the capital flows of coordinated sell-off of U.S. Treasuries will impact on employment. The combined effect will be stagflation – simultaneous higher costs and more joblessness.

 

• China and BRICS: China, while managing its own trade surplus, is considering aligning with BRICS nations to focus on the broader issue of global trade payments. A key aspect of this strategy is the exploration of an alternative world currency that could reduce reliance on the U.S. dollar as the dominant international trade medium.

 

In game theory terms, these alliances represent cooperative strategies aimed at maximizing collective benefits while minimizing individual losses. The interplay of these groups, paired with U.S. actions, forms a complex multi-player game that could redefine the global trade order. U.S. global economic leadership may be lost if it insists on acting without regard for its own immediate neighbors (NAFTA has been softened into the US-Mexico-Canada Agreement) or allies in ASEAN (supporting the QUAD initiative critical to world shipping routes across continents).

 

The Role of Financial Systems and Alternative Currency Proposals

 

China’s dual strategy

 

China’s approach combines short-term tactical measures with long-term structural objectives. While allying with BRICS on collective trade concerns, its focus on developing an alternative world currency underscores its intent to establish a more stable and equitable trade framework. Such a currency could include digital mechanisms leveraging blockchain technology, offering transparency and reduced dependency on dollar-dominated systems.

 

Implications of U.S. Treasury sell-off

 

A coordinated sell-off of U.S. Treasuries by Canada, the EU, Japan, and potentially other nations could have profound implications for global financial markets. The ripple effects would likely include:

• Increased volatility in bond markets.
• Pressure on U.S. interest rates, potentially affecting domestic economic growth.
• A shift in global investment patterns, favoring emerging economies or alternative currency systems.

 

Such actions highlight the intricate links between trade policies and financial systems, underscoring the need for multi-lateral engagement to prevent systemic disruptions.

 

Lessons for Strengthening Global Institutions

 

The role of WTO coordination

 

The World Trade Organization (WTO) remains the cornerstone of global trade governance. However, its effectiveness is increasingly challenged by unilateral actions, regional alliances, and new financial mechanisms. Strengthening the WTO’s capacity to mediate complex disputes is essential for stabilizing markets. Coordination with institutions, such as the IMF and World Bank, could provide a more comprehensive approach to addressing trade and financial imbalances.

 

Integration of non-tariff players

 

Beyond the traditional trade-focused bodies, organizations, such as IOSCO (International Organization of Securities Commissions) and regional development banks, must play a larger role in analyzing the inter-connectedness of real goods markets and financial systems. Their expertise in securities, investments, and financial regulations can offer insights into mitigating risks arising from shifts in trade policies. Treasury bureaus across all forms of governments can also have information systems alerting key global economic players on impending changes in their programs.

 

 

Adopting multi-disciplinary approaches

 

The interplay between real markets (goods and services) and financial systems requires multi-disciplinary analysis. Institutions must invest in studying these interactions to design policies that align trade and financial stability. For instance:

 

• Mechanisms to ensure liquidity in financial markets during trade disruptions.
• Strategies for diversifying global payment systems to reduce reliance on a single currency.
• Tools for predicting and managing the contagion effects of protectionist measures.

 

Conclusion

 

The emerging dynamics of the 2025 tariff war, coupled with strategic international responses and financial system inter-dependencies, highlight the need for robust institutional coordination. Game theory provides a valuable lens to predict and analyze the outcomes of these complex interactions. Strengthening global institutions, such as the WTO, IMF, and non-tariff players, will be imperative to maintaining order in both trade and financial markets. As nations navigate these challenges, the lessons learned will shape the future of global economic governance and cooperation.

 

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.  The author is Chair of the Education Committee of the MAP. He is also a Board Member of Bayan Innovation Group Inc. and St. Paul University Philippines.  Feedback at <map@map.org.ph> and <fmmacaranas@gmail.com>).