Wine tax against GAFA tax: a game theoretical perspective
Just arrived in France, Donald Trump reiterated his threat to tax French wines “as they have never seen it before”. In fact, the American President’s reaction was anything but unpredictable : from the moment France decided to unilaterally apply a tax on GAFAs – undoubtedly legitimate in principle – Trump’s best response is to retaliate by imposing taxes on emblematic French products in turn. Trump only applies the basic principles of… game theory, the relevance of which is verified every day in geopolitics as well as in business.
As with chess, game theory is about asking yourself, every time you make a decision, what will be the best response from your partner/adversary: for example, if country A decides to protect itself against country B, it is almost certain that B’s best response will be to respond by protecting itself. All the anticipated gain from protectionism will then be cancelled : what country A has gained in terms of reduced imports will be offset by a loss of export opportunities to B. This is exactly what happened in the US-China trade war: the US trade deficit with China, which was supposed to be reduced thanks to protectionism, reached a record level of $419 billion in 2018, partly because US exports to China fell. A fine example of failure announced.
What applies to international trade applies to any decision taken in an interactive context. Let’s take the example of M&A strategies. Company A may want to buy B, in order to handicap its competitors C and D, by obtaining a larger critical size. But competitors C and D will react, by merging in turn and all the anticipated gain of the first merger will be cancelled. Worse still : competition between two giants, instead of four small companies, will become even more strong ! In economics as elsewhere, the right reflex is always to put yourself in the other’s shoes and ask yourself what your best reaction will be.
Game theory also teaches us that the main function of a threat is to promote peace, as long as it is perceived as credible by the adversary: if I am convinced that if I launch war he will retaliate by doing the same, then I prefer not to launch hostilities. The credibility of threat depends on many factors, including its magnitude: a disproportionate threat can be rational. Donald Trump’s sentence about French wine then took on its full meaning : he intended to tax the French “as they had never seen it before”. It also depends on the reputation of the person who implements it : is he someone who bluffs or who is used to carrying out his threat if we resist him ? One way to find out is to observe what he has done in the past with other opponents. This is exactly the case today: given what Trump did with China, it was quite credible that he would do the same with France. Trump has acquired the reputation of being a “tough guy” in the negotiations and it would therefore be wise to take this into account when we make decisions. This will avoid disappointments, which were… predictable.