18.08.2025Trump, tariffs and the ‘bully game’ – A game theory analysis of negotiation strategies

Donald Trump, back in office, is once again causing a stir. At the beginning of April 2025, he launched a drastic package of tariffs that promptly provoked international reactions. Many countries responded not with countermeasures, but with offers of dialogue – which proved effective for Trump. But was his behaviour irrational or even erratic? Not necessarily – at least not from a game theory perspective. In this blog post, we take a negotiation theory look at Trump's tariff policy and analyse what his strategy means for international negotiations and for dealing with power imbalances. Author: Prof. Dr Michael Ambühl

In game theory, rationality means that a party acts rationally when, under the given circumstances, it chooses the measures that are best suited to achieving its own goals – regardless of whether these goals appear morally or economically sensible.

So what are Trump's goals? For the sake of simplicity, we will simplify our analysis: Trump wants to negotiate – especially with countries that have high trade surpluses with the US. His goal is to persuade these countries to make concessions, for example by increasing imports from the US or through other forms of compensation.

With this definition of his goal in mind, his tariff policy can suddenly be interpreted as effective and therefore rational: Trump's tariff hammer has provoked a willingness to talk because the countries affected saw no attractive alternatives.

Trump's approach is often compared to the famous ‘chicken game’. Two drivers race towards each other head-on. Whoever swerves first loses face. If neither swerves, both lose everything. The logic: cooperation is better, but no one wants to give in first.

However, this analogy only works if the balance of power is symmetrical. This has not been the case in most of the current trade conflicts – with the exception of China. There, Trump is indeed facing an equally powerful opponent, and there is a threat of a dangerous stalemate in which neither side wants to lose.

But for the majority of the countries affected, another game is more appropriate: the ‘Bully Game’.

In the ‘Bully Game’, there is a dominant power (the bully) who tries to assert his interests without compromise. The other player must choose between two bad options: give in or risk maximum damage to himself.

The game matrix (see ‘Bully’ section below) clearly shows that the bully wins because the other player is not willing to sacrifice themselves just to punish the bully. The result: the bully gets more without having to act particularly skilfully – simply through their position of power and ruthlessness.

In Trump's case, the US is the bully. They have the larger market, the greater bargaining power and a political leadership that is prepared to take a confrontational approach. The result: many countries give in before the situation escalates. It is not that all these countries are fundamentally unwilling to take countermeasures, but rather that they have no measures at their disposal that are capable of harming the bully more than themselves. In fact, countermeasures only make sense if they (i) have an effect and (ii) harm the other party more. From this perspective, the Swiss Federal Council's decision at the beginning of August not to take any measures against Trump's decision (to increase the tariff rate to 39%) was entirely rational.

An interesting aspect of Trump's approach: just a few days after announcing the extra tariffs in April, he suspended the measures (with the exception of China) – provisionally for 90 days.

In game theory, this can be explained by the "tit for tat" strategy: cooperate as long as your counterpart cooperates. Respond immediately, but not excessively, to unfair moves. This strategy is based on the famous prisoner's dilemma, where long-term cooperation yields more than short-term self-interest – provided both sides play along.

One can therefore speculate that Trump may have recognised – consciously or intuitively – a pattern of repeated interaction with room for manoeuvre. In any case, many countries have responded to his behaviour not with escalation, but with dialogue.

The situation is different when it comes to China. Here, two players of roughly equal strength are facing each other – economically, geopolitically and rhetorically. Both sides seem determined not to give in first.

The risk: a real chicken game with an open outcome. If no one backs down, it could lead to a crash – with economic costs on both sides. Whoever gives in loses prestige, especially at home. Whoever stands firm risks a trade war.

This is where the full significance of game theory becomes apparent: depending on the type of game – chicken or bully – the strategies for success vary fundamentally.

What does this mean for us – for negotiation practice, for example in an international context, in companies or in political negotiations?

• Firstly, the balance of power in the game determines the appropriate strategic approach. The stronger player can (but does not have to!) use the “bully game” – but should be aware of the long-term costs (loss of reputation, criticism of the system, counter-coalitions).
• Secondly, those who find themselves in the weaker role must carefully evaluate alternatives. Sometimes it is rational to make concessions in order to avoid greater damage – even if this seems politically unpopular.
• Thirdly, repeated games open up opportunities for cooperation – provided that both sides signal clear reactions to each other's behaviour. Tit for tat only works if behaviour is transparent and comprehensible.
• Fourthly, clarity of objectives is crucial. Only those who know their own objectives can make rational decisions. And only those who correctly assess their counterpart's objectives can act strategically.

Trump's tariff policy can be easily classified in terms of game theory – not as irrational, but as an expression of a clear power strategy in the ‘bully game’. For many countries, sitting down at the negotiating table remained the only way out.

Whether this strategy will pay off in the long term is questionable. The US could lose trust and the international order could erode further. At the same time, the crisis may also open up opportunities – for example, for reforms in the global trading system.

For negotiators, the analysis offers one thing above all: clarity about the rules of the game when it comes to asymmetrical power relations – a key skill for strategic negotiation in politics, business and diplomacy.

(This blog entry is based, among other things, on a publication by M. Ambühl / N. Meier on the topic of  «Trump und die Spieltheorie» in Schweizer Monat, June 2025, pp. 77-79.)

This game (‘Bully’) has a so-called Nash equilibrium in the strategy combination (b,d) [i.e. S1 plays b and S2 plays d], so it is not worthwhile for either player to choose a different strategy on their own, without consulting the other, because any unilateral change would put them at a disadvantage. In this game, the difference in the Nash equilibrium is maximal (2): S1 is the bully; he receives 4, while S2 receives only 2. It belongs to the category of ‘unfair’ games in which the difference in payoffs is maximal (2). In this game, S1 (but not S2) has a so-called dominant strategy (here: b); b is always better for S1 than strategy a, regardless of what S2 plays (3>1) and (4>2). This allows him to impose his will on S2, who can only choose the better (d) of the two bad strategies. If S2 were to choose c, he could punish S1 (who would lose 1), but he himself would pay a price (1) for doing so. So he will not do it, and both end up in a Nash equilibrium. This could be described as a ‘bully equilibrium’.

Prof. Dr. sc. ETH Michael Ambühl studied applied mathematics and business administration. He spent 30 years as a career diplomat in the FDFA. He became an ambassador, then State Secretary, first in the Foreign Ministry and later in the Finance Ministry. He negotiated several agreements with the EU, the USA, Germany, Austria, Great Britain and others. He mediated in the nuclear conflict between Iran and the USA and between Armenia and Turkey. In 2013, he returned to ETH Zurich as a full professor of negotiation and conflict management, where he was Dean of the ETH Department of Management, Technology and Economics in 2018/19. Since 2022, he has been working for a consulting firm and has mandates from foreign governments in Western and South-Eastern Europe as well as from Swiss ministries.

Our two-day Strategische Verhandlungen module, led by Prof. Dr. Michael Ambühl, provides an introduction to the theory and practice of negotiation. Participants learn basic skills and strategies for negotiating successfully in a wide variety of professional situations. The lessons are interspersed with short exercises, video clips from well-known films and role-playing.