Game Theory, Trump Tariffs, and Scott Bessent’s Manufacturing Revival Vision
China’s $350 billion, Mexico’s $150 billion, and Vietnam’s $100 billion. Game theory: an ultimatum to force concessions, a P. dilemma to avoid a trade war, and a repeated game to reset trade norms.
On April 3, 2025, the Trump administration rolled out a new wave of tariffs, starting with a 10% baseline on all imports and higher rates for countries like China (an additional 10%), Vietnam, Taiwan, and the EU. Treasury Secretary Scott Bessent champions these tariffs as part of a broader strategy to revive U.S. manufacturing, integrating them with tax relief (like 100% depreciation write-offs for U.S. factories), deregulation, and cheap energy. Bessent dismisses short-term disruptions, stating, “Access to cheap goods is not the essence of the American Dream,” prioritizing long-term industrial growth over immediate consumer costs. While this approach could work, it’s not without flaws. Using game theory frameworks—ultimatum game, prisoner’s dilemma, and repeated game—alongside U.S. trade deficit data, we’ll explore the strategy’s potential, address its critics, and highlight its weaknesses.
The U.S. Trade Deficit:
The graph, U.S. Trade Deficit with Major Commercial Partners (Billions USD), tracks deficits with key partners from 2016 to 2025:
China: Peaking at $400 billion in 2018, stabilizing around $350 billion by 2025.
Mexico: Rising steadily from $75 billion to over $150 billion.
EU: Fluctuating between $150 billion and $200 billion, slightly up by 2025.
Vietnam, South Korea, India, Taiwan: All show growth, with Vietnam’s deficit doubling to $100 billion, and India and Taiwan nearing $50 billion.
Canada and Japan: More stable at $20 billion and $60 billion, respectively, with slight increases.
These persistent deficits, especially with manufacturing hubs like China, Mexico, and Vietnam, fuel Bessent’s push to rebalance trade and bring production home. But the strategy’s success hinges on global reactions, which game theory helps us predict.
Ultimatum Game: Tariffs as a Strategic Demand
In the ultimatum game, the U.S. (proposer) uses tariffs to demand better trade terms: “Negotiate fairer deals, or face higher costs.” Acceptance means concessions; rejection risks mutual harm.
Data Connection: The graph shows China’s $350 billion deficit and Mexico’s $150 billion, highlighting their reliance on the U.S. market. Smaller players like Vietnam ($100 billion) are even more exposed, giving the U.S. leverage.
Bessent’s Vision: Bessent believes countries will accept the ultimatum, as some are already negotiating. Tariffs make foreign goods pricier, while tax breaks and cheap energy pull production to the U.S., aiming to shrink deficits over time.
Critics’ Arguments: Economists like Larry Summers call Bessent’s optimism “ludicrous,” arguing that countries might reject the ultimatum if they doubt U.S. resolve—especially if domestic backlash over price hikes forces a retreat. The EU, with a $200 billion deficit, could lead a coordinated rejection, escalating tensions.
Weakness: The strategy assumes trading partners will fold, but the graph’s persistent deficits suggest they’ve adapted to past tariffs (e.g., China’s post-2018 dip was temporary). If they resist, the manufacturing shift could stall, leaving the U.S. with higher costs and no gains.
Prisoner’s Dilemma: The Trade War Trap
In the prisoner’s dilemma, free trade (cooperation) benefits all, but tariffs (defection) tempt short-term gains, risking mutual harm if both defect.
Data Connection: Rising deficits with Mexico ($150 billion) and Vietnam ($100 billion) show their reliance on U.S. imports, often in manufacturing sectors. Tariffs aim to protect U.S. industries, but retaliation could hit U.S. exports, like agriculture to Mexico.
Bessent’s Vision: Bessent assumes the U.S. can defect without triggering a spiral, predicting a “one-time price adjustment.” His manufacturing plan—deregulation, cheap energy, and tax relief—aims to pull production home while others refrain from defecting, prioritizing industrial strength over cheap imports.
Critics’ Arguments: Critics warn of a trade war. Goldman Sachs predicts growth at just 0.6% this quarter, citing tariff costs. Retaliation from China or the EU could raise prices further—estimates suggest a $4,711 increase per vehicle if auto tariffs fully hit—hurting consumers and slowing economic activity.
Weakness: The strategy underestimates retaliation risks. The graph’s upward deficit trends suggest countries like Vietnam and Mexico might not back down easily, as they’ve built export-driven economies. A tit-for-tat spiral could disrupt supply chains, delaying Bessent’s manufacturing revival.
Repeated Game: A Long-Term Reset?
Trade is a repeated game, where tariffs can punish past imbalances to reset future cooperation.
Data Connection: Persistent deficits—China at $350 billion, Vietnam doubling to $100 billion—justify Bessent’s push for a reset. Tariffs target these imbalances to force fairer terms.
Bessent’s Vision: Bessent sees tariffs as a temporary jolt, after which trade can stabilize. His long-term plan—tax incentives, deregulation, and cheap energy—aims to rebuild manufacturing over years, reducing reliance on imports from high-deficit countries.
Critics’ Arguments: Critics argue that global supply chains are too entrenched to shift quickly. Automation and competition from low-cost countries like Vietnam (as seen in its deficit growth) make a full manufacturing revival unrealistic. They also warn that prolonged tariffs could lock in protectionism, not cooperation.
Weakness: The strategy’s long timeline is a double-edged sword. The graph shows deficits growing over a decade, suggesting a slow reversal. If companies don’t relocate soon, political pressure from short-term pain (higher prices, market volatility) could force a policy reversal before benefits materialize.
Bargaining and Signaling: Manufacturing as the Goal
Tariffs are leverage in a bargaining game and a signal of U.S. resolve in a signaling game.
Data Connection: The U.S.’s leverage is clear—China’s $350 billion deficit and Vietnam’s $100 billion show their market dependence. Tariffs signal that the U.S. is serious about rebalancing trade.
Bessent’s Vision: Bessent uses this leverage to push his manufacturing agenda. Tariffs pressure negotiations, while domestic incentives make the U.S. a production hub. His American Dream redefinition signals a focus on industrial strength over consumption.
Critics’ Arguments: Critics highlight the signaling risk—if countries think the U.S. will back down under consumer pressure, leverage weakens. They also note that global competition—e.g., Vietnam’s low-cost manufacturing—might deter companies from relocating, even with incentives.
Weakness: The strategy assumes companies will move to the U.S., but the graph’s data suggests manufacturing has shifted to countries like Vietnam for cost reasons. Tax breaks and cheap energy might not outweigh these advantages, especially if tariffs raise input costs (e.g., steel prices are already up).
Why It Could Work – But the Critics Have a Point
Bessent’s strategy could succeed if:
Countries negotiate, shrinking deficits and boosting U.S. manufacturing.
Tax relief and cheap energy lure companies, as seen with potential factory investments.
The U.S. weathers short-term pain, as Bessent predicts, leading to long-term gains.
However, the critics highlight real weaknesses:
Retaliation Risk: A trade war could spike costs, as seen with potential auto price hikes, disrupting supply chains and stalling manufacturing growth.
Entrenched Global Chains: The graph’s rising deficits with Vietnam and Mexico suggest manufacturing has moved abroad for structural reasons—reversing this is a slow, uncertain process.
Domestic Pushback: Higher prices could erode public support, forcing a policy retreat before benefits emerge.
Conclusion: A Bold Vision with Real Risks
Scott Bessent’s tariff strategy, backed by tax relief, deregulation, and cheap energy, is a data-driven gamble to revive U.S. manufacturing, targeting the trade deficits shown in the graph—China’s $350 billion, Mexico’s $150 billion, and Vietnam’s $100 billion. Game theory reveals the strategic tightrope: an ultimatum to force concessions, a prisoner’s dilemma to avoid a trade war, and a repeated game to reset trade norms. While Bessent’s American Dream vision could work, critics rightly point to risks—retaliation, entrenched global supply chains, and domestic backlash. The data underscores the challenge, but also the opportunity. Whether this bold play reshapes the U.S. economy or stumbles under global pressure remains to be seen.
Thanks for reading,
Guillermo Valencia A
Co-Founder MacroWise
April 3, 2025
Strong arguments, thanks Guillermo for sharing your vision and analisys