Game Theory and Trump's Climate Negotiations

(Bloomberg View) -- The run-up to the announcement by President Donald Trump on Thursday that the U.S. was withdrawing from the Paris climate agreement illustrated the inconsistent approaches being taken by America and other major countries. The longer this persists, the greater the possibility that America's pursuit of short-term benefits in certain areas would come not just at the risk of longer-term damage, but would also undermine an overall global construct that has served it well and could still do so over time.

After earlier threats to dismantle the North American Free Trade Agreement and impose punishing tariffs on China and Mexico, Trump alerted the other 194 signatories of the 2015 Paris accord that the U.S. was thinking about withdrawing from this laboriously negotiated agreement. This was met with dismay from several leaders of U.S. industry, countries, the United Nations and the Catholic Church, among others. It also led other systemically important countries to announce a commitment to abide by the terms of the agreement, regardless of what the U.S. ended up doing.

In this case, unlike with international trade, Trump made good on his warning. He announced that the U.S. would no longer be part of the accord, stop meeting financial and other requirements, and only rejoin if terms were renegotiated in his nation's favor.

Also, in contrast to existing trade arrangements where America's major trading partners (Canada, China and Mexico) signaled openness to negotiation before the U.S. took unilateral action, the rest of the world's positioning on the Paris accord issue failed to be sufficiently enlightened by the insights of game theory. As a result, it was ineffective in the short run and will likely prove unsustainable over the longer term.

To best understand this in simplified game theoretics, and using its terms, think of the U.S. as now having decided to play what used to be a cooperative global game in an uncooperative manner. Given that it is the most powerful country in the world, it is a credible approach for the U.S. and one that, in certain circumstances, could even deliver immediate gains in the short term.

In the particular case of the Paris accord, for example, the possible short-term benefits come from the notion that the U.S. can free-ride on the climate commitments of others, while minimizing its own financial contributions and retaining wide flexibility on how it promotes and uses its energy resources. Over the longer term, however, the absence of the U.S. would severely undermine the beneficial impact of the agreement. And since the U.S. cannot insulate itself from the effects of global climate change, it would also face an array of environmental and environment-related threats.

This situation also puts other participants in a tough position.

While other nations can collude and try to go it alone, their collective action is unlikely to be sufficient to meet the objectives of the accord, which was meant to be a building block rather than a destination. They would find themselves locked with the U.S. in a "prisoner's dilemma" -- that is, a scenario in which both parties end up in a worse situation than they would have otherwise realistically attained had they cooperated in a credible fashion. If they care about environmental sustainability, and they must, they would then have no choice but to try and come together with the U.S. in pursuit of a new collective solution to a common problem and a shared responsibility.

In the interim, the potential damage would not be limited to the environment. Given the deep nature of cross-border interconnections and interdependencies, such episodes erode the integrity and effectiveness of the global system, threatening costly fragmentation that reduces win-win outcomes, undermines collective action and forces a greater need for self-insurance by individual countries.

Had they been more open to insights from game theory, leaders of other systemically important countries might have been able to reduce the potential damage by pursuing an approach similar to the one U.S. trading partners adopted in response to American rhetoric on dismantling existing trade agreements and imposing large tariffs: preemptively signaling their willingness to negotiate and thereby giving the U.S. more incentives to retain a cooperative approach.

Many countries find distasteful the unilateral transactional approach that the U.S. is now willing to adopt on important cross-border interactions. Yet as long as America is dominant in certain areas and pursues tactical gains at the risk of longer-term strategic harm, they have few choices but to realign themselves for now to this new reality.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He was chairman of the president's Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the IMF. His books include "The Only Game in Town" and "When Markets Collide."

To contact the author of this story: Mohamed A. El-Erian at melerian@bloomberg.net.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.

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