Strategic Trade, Industrial Power, and Geopolitical Rivalry: A Two-Country Differential Game of the U.S.–China Conflict

Heng-Fu Zou ()

No 774, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: This paper develops a dynamic two-country differential game model to examine the long-term economic and geopolitical implications of the trade war between the United States and China. Departing from classical com parative advantage theory, the model incorporates national preferences for industrial self-sufficiency, trade balance, and strategic power accumulation. Each country is represented as a national agent optimizing intertem poral welfare based on consumption, production, trade, and geopolitical rivalry. Endogenous capital accumulation, productivity growth through learning-by-doing, and disutility from foreign dependence are central to the analysis. Strategic power is derived from both capital stock and trade surpluses, reflecting their role in underwriting technological leadership and military influence. Through simulations, we demonstrate how persistent trade surpluses allow China to accumulate strategic advantage, while sustained U.S. deficits weaken industrial capacity and global leverage. The framework challenges the orthodoxy of free trade and provides a basis for evaluating nationalist economic strategies and decoupling policies in a multipolar world.

Keywords: Trade war; U.S.–China rivalry; differential game; capital accumulation; strategic power; tariffs; industrial policy; geopolitical economy; learning-by-doing; reindustrialization; dynamic optimization; economic nationalism (search for similar items in EconPapers)
Pages: 41 pages
Date: 2025-06-10
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