Brinkmanship in the US-China Trade War

Let’s talk about games. Not the fun kind where you win some cheap dopamine hits. We’re talking about the high-stakes, zero-sum bullshit that governments and CEOs play, the kind that can tank markets (possibly even economies) and send everyone into a spiral of anxiety. And right now, folks, the US and China have been engaged in a particularly nasty round of one of these games… a game of brinkmanship. So, what is going on, and what can the psychology of brinkmanship tell us about where we’re headed?

The High-Wire Act: Psychology of Brinkmanship

Brinkmanship, at its core, is a strategy of pushing things to the absolute edge of disaster to extract concessions. Think of it as a highly leveraged negotiation tactic where you convince the other side that you’re crazy enough to drive the bus off a cliff unless they give you what you want. The beauty (and the terrifying part) is that both sides are on the bus.

The foundational principle here is the absence of commitment power. Neither the US nor China can credibly promise to back down first. If they could, the other side would simply call their bluff and take the spoils. This lack of commitment is why a continuous stream of threats and escalating actions – like tariffs – becomes the name of the game, rather than a simple, one-time demand.

Underlying this risky behavior is a cocktail of psychological factors. Loss aversion plays a significant role. The fear of losing something –economic influence, political face – can drive leaders to take increasingly irrational risks to avoid that loss. It’s like doubling down on a bad hand at poker because you can’t stomach the thought of walking away empty-handed.

Furthermore, the effectiveness of brinkmanship hinges on understanding (or misinterpreting) the opponent’s risk tolerance. A potential aggressor might believe that the weaker party is sufficiently risk-averse and will cave to avoid a mutually undesirable outcome (like a full-blown trade war).

However, this calculus can go horribly wrong when there are misreadings of resolve or fundamental differences in the inclination towards risk-taking, which can even vary across cultures. What one side perceives as a credible threat, the other might see as an unacceptable infringement on their core interests, leading them to dig in their heels and escalate further, regardless of the potential pain.

Consider the manager-employee analogy. If the only threat a manager has is to fire a worker, the worker holds significant bargaining power by doing just enough to avoid being fired. But if the manager can impose “arbitrarily small penalties,” they can induce higher effort. Similarly, the US initially might have thought that tariffs would force China to change its trade practices. However, China’s ability to retaliate with its own tariffs demonstrated that the situation was far more complex than a simple power imbalance.

The concept of probabilistic threats or “brinkmanship strategy” is crucial. By taking observable actions that increase the probability of war (or in this case, a damaging trade war), a stronger party can try to extract concessions even if carrying out the full threat is harmful to both. This is the essence of the tariff escalations – each side making a move that edges them closer to a precipice, hoping the other blinks first.

Decoding the Disaster: Research Insights into the US-China Trade War

The conflict, initiated in January 2018 (this is not just a recent issue!), was explicitly aimed at forcing China to change their trade practices. Trump’s strategy was classic brinkmanship: impose tariffs and threaten more, betting that the pain inflicted on China would compel them to renegotiate on US terms. The first wave saw tariffs on steel and aluminum followed by escalating tariffs on billions of dollars worth of Chinese goods.

China, however, did not back down. Accusing the US of “nationalist protectionism,” they retaliated in kind with their own tariffs on American goods, including soybeans, a key export. This tit-for-tat escalation throughout 2019 demonstrates a mutual engagement in brinkmanship, neither side willing to concede ground easily.

Research suggests that this brinkmanship had tangible economic consequences. Goldman Sachs analysis in May 2019 indicated that consumer prices for tariffed goods in the US increased more than for non-tariffed goods. Surveys also showed declines in consumer sentiment and small business confidence due to the uncertainty generated by the trade war. The Purchasing Managers’ Index for manufacturing even showed contraction, with executives expressing anxiety about shrinking export orders and supply chain disruptions.

On the Chinese side, the trade war contributed to the slowest economic growth rate since 1990. Chinese manufacturing investments expanded at the lowest rate since records began. However, the external pressure also appears to have fostered a sense of Chinese nationalism, potentially strengthening the hand of the Communist Party.

The “Phase One Trade Deal” signed in January 2020 represented a temporary de-escalation, a moment where both sides perhaps peered over the edge and decided to take a step back. However, this agreement did not fundamentally resolve the underlying issues. And here we are, it is 2025, Trump is once again in office, and brinkmanship is very much back in fashion, with an escalating tit-for-tat tariff fest.

The concept of misreading the opponent’s “red lines” is evident throughout the conflict. The US may be underestimating China’s willingness to endure economic pain and retaliate strongly. Conversely, China may be incorrectly hoping that domestic economic consequences for the US will force a quick retreat… but is the Trump team really keyed into the US economic carnage?… maybe just in the bond market.

The Cliffhanger Ending: Potential Outcomes

So, where does this high-stakes game of chicken leave us? Several potential outcomes loom, none of them particularly comforting.

1. The Tense Stand-off Continues: The most likely scenario (in my humble opinion) is a continuation of the recent state (i.e., going back to the 2020 Phase One deal) of managed tension. Both sides are likely to learn that a full-blown trade war inflicts significant pain. The Phase One deal from 2020 offers a fragile framework that we can retreat to and that can be built upon, but fundamental disagreements on trade practices, technology transfer, and intellectual property remain unresolved. Future administrations in the US may adopt different tactics, potentially seeking a more multilateral approach, but the underlying competitive dynamic is unlikely to disappear.

2. The Protracted Cold War: Some analysts suggest the trade war is part of a larger “economic conflict” or even the beginning of a “new cold war” between the two powers. In this scenario, brinkmanship becomes a long-term strategy, with each side constantly probing the other’s weaknesses and resolve across multiple domains – trade, technology, geopolitics. This could lead to a gradual (or not so gradual) decoupling of certain sectors of the two economies, with significant implications for global supply chains and innovation .

3. The Accidental Escalation: The inherent danger of brinkmanship is the risk of miscalculation or unintended escalation. A domestic political imperative, a misinterpretation of an opponent’s signal, or an unforeseen event could push either side past their point of no return. Further tariff hikes, further restrictions on key technologies, or geopolitical flashpoints could trigger a rapid and damaging escalation that neither side initially intended.

4. The Art of the Crappy Deal (Again): Another possibility is a future agreement that offers a superficial resolution but fails to address the core issues. This might involve China making some symbolic concessions and increasing purchases of US goods to reduce the trade deficit (or at least promising to increase purchases), while the fundamental disagreements over trade practices and technology remain largely untouched. This would be a classic politician’s move: declare victory and kick the can down the road. However, research suggests that trade policy might not be the most effective tool for reducing trade imbalances anyway, as these are often driven by macroeconomic factors like savings and investment rates.

Ultimately, the psychology of brinkmanship highlights the precariousness of the situation. The pursuit of gains through high-risk threats can easily lead to mutually destructive outcomes, especially when compounded by cultural differences in risk tolerance and the ever-present potential for miscalculation. The US-China trade war serves as a stark reminder that in the global game of chicken, sometimes the only winners are the ones who refuse to play in the first place. That’s just my two cents. 

Bibliography

Chassy, P. (2016). Risk taking in brinkmanship. Focus on Sciences, 2(3), 1-4. 10.20286/focsci-020335

DiGiuseppe, M., & Shea, P. E. (2025). Information, Uncertainty, and Public Support for Brinkmanship During the 2023 Debt Limit Negotiations. British Journal of Political Science, 55, e14. https://doi.org/10.1017/S0007123424000462

Haun, P., & O’Hara, M. (2022). The brinkmanship game: Bargaining under the mutual risk of escalation. Journal of Political Science Education, 18(3), 379-389. https://doi.org/10.1080/15512169.2022.2036615

Schwarz, M., & Sonin, K. (2008). A theory of brinkmanship, conflicts, and commitments. The Journal of Law, Economics, & Organization, 24(1), 163-183. https://doi.org/10.1093/jleo/ewm038