05-20-2025
At the Daniels School’s 2025 Cornerstone for Business Conference, a compelling lunch discussion featuring Dean Jim Bullard and Dean Emeritus David Hummels shed light on the complex role of game theory and tariff pass-throughs in today’s U.S. trade strategy. Their insights unpacked the economic and strategic dynamics shaping current tariff policies and their broader implications for global trade and the U.S. economy.
Bullard and Hummels framed the current administration’s tariff approach as a high-stakes game theory scenario. Imagine a simple matrix where the U.S. and the rest of the world each choose between high or low tariffs. The administration’s strategy assumes the U.S. starts with low tariffs while others impose high tariffs, and by aggressively raising tariffs, the U.S. aims to force trading partners — especially China — to lower their barriers. This “tough opening move” is intended to shift the equilibrium toward mutual tariff reductions, ideally restoring freer trade.
However, the risk is significant. If trading partners retaliate with equally high tariffs, global trade could collapse, echoing the devastating effects of the 1930 Smoot-Hawley tariffs that worsened the Great Depression. The discussion highlighted that current tariff levels are comparable to those historic highs, making the stakes exceptionally high.
Moreover, deteriorating U.S.-China relations raise the possibility of economic decoupling, which could severely disrupt global supply chains and economic growth.
But tariffs aren’t the only inequity in free trade. What would open up markets is ending non-tariff barriers, including regulatory practices and policies that indirectly restrict market access, such as discriminatory technical standards and restrictions on foreign ownership or participation in key industries.
“The real argument is not about tariffs. It's about so-called non-tariff barriers, all the ways that different countries regulate activity within their economy, and which have an effect on the ability of foreign firms to compete,” Hummels said. While EU nations operate with “deep integration where Germany tells France how to regulate its economy and vice versa,” other efforts at deep integration have largely failed. And achieving that deep integration with China would be extremely difficult.
China’s requirement for domestic majority ownership in joint ventures and its inconsistent enforcement of intellectual property rights create significant hurdles for foreign firms, even without formal tariffs.
A critical part of the conversation focused on how tariffs affect prices and who ultimately bears the cost. Contrary to simplistic assumptions that tariffs directly increase consumer prices dollar-for-dollar, the reality is more nuanced. In the 2018–2019 trade war, evidence showed Chinese producers initially absorbed the full tariff cost rather than passing it entirely to U.S. consumers. Over time, however, production shifted to countries like Vietnam, mitigating price increases but complicating enforcement.
Bullard and Hummels explained that prohibitive tariffs, such as China’s 163% tariff on Australian wine or America’s 145% tariff on China, effectively eliminate trade. Consumers simply substitute other products, so inflationary effects are limited. Still, the uncertainty around tariff policies causes businesses to delay investments, slowing economic growth immediately rather than only in the longer term.
Bullard emphasized that the real economic damage from tariffs often comes not from price increases but from investment freezes caused by uncertainty. When companies don’t know what the “rules of the game” will be, they postpone major projects, which can quickly drag down GDP. This dynamic was evident during the 2019 slowdown, when trade tensions contributed to a palpable economic deceleration.
The discussion also touched on the complexity of enforcing tariffs in a globalized economy where supply chains span multiple countries. Firms may shift production or re-label goods to avoid tariffs, creating a regulatory challenge that requires sophisticated tracking and enforcement.
Finally, the conversation addressed national security concerns, highlighting semiconductors as a critical industry warranting protection and investment. While steel production in the U.S. faces challenges due to overcapacity abroad, new efficient plants demonstrate reshoring is possible. The key is ensuring vital industries are produced in trusted countries, not necessarily domestically.
This insightful dialogue at the Cornerstone for Business Conference illuminated the intricate interplay between economic theory, business strategy, and geopolitics behind current tariff policies. Game theory explains the administration’s aggressive stance, but the risks of escalation and economic disruption remain high. Meanwhile, the nuanced reality of tariff pass-through and investment uncertainty reveals why these policies have complex and sometimes unintended consequences.
For business leaders and policymakers, understanding these dynamics is crucial as trade policy continues to evolve in a volatile global environment.
