How Should the E.U. Respond to Brexit and Trump? : The Lessons from Trade Wars

The U.K.'s decision to exit the E.U. (popularly known as “Brexit”) sets the stage for a potential retaliatory trade war. Similarly, the aggressive nationalism of U.S. President Donald Trump does also. In both cases, game theory suggests how such a conflict might be resolved. This paper first examines three standard game theory models—the Chicken Game, the Prisoner's Dilemma, and the Stag-Hunt Game—and then turns to the strong incentives for rent-seeking by special interests and considers how rent-seeking likely affects how these games might play out. Although the conventional wisdom expects that the U.K. will suffer retaliation for Brexit, this paper argues that retaliation will produce counter-retaliation in a mutually destructive cycle. Thus, it proposes a strategy to produce a more clearly iterated game and hence increase the potential for cooperation and a compromise aimed at enhancing public welfare, rather than private interests