Readers who remember the Ron Howard film, “A Beautiful Mind,” may recall the ideas developed by mathematician John Nash regarding game theory. The basic concept is that decisions made by a group affect individuals and one individual acting in his or her best interest can harm the group and themselves.

There are two examples in global politics and markets these days that demonstrate how that theory can play out.

The first is trade relations. There has been a sharp escalation of tensions this week between the U.S. and much of the rest of the world – particularly China. The U.S. has moved forward with planned tariffs that it announced as retaliation for intellectual property theft. China responded with tariffs of their own and now President Trump has upped the ante by directing U.S. Trade Representative Robert Lighthizer to identify an additional $200 billion of Chinese imports that may be subject to tariffs. China has promised to respond to those tariffs as well in some form.

On their own, these tariffs make up a small portion of U.S. and global GDP. But the fear is that this tit for tat will keep building, with each country responding to the other's actions, as each side seems focused on retaliation rather than on de-escalating.

The other example is the Organization of the Petroleum Exporting Countries (OPEC), which is meeting at the end of this week in Vienna to discuss production quotas. That is an even better example of game theory, as each OPEC country has an interest in limiting the supply of oil on the open market in order to keep prices high. But those high prices create an incentive to cheat and produce more oil for the world market with those high prices. If enough countries do that then prices fall as the result of that increased supply.

The OPEC meeting has interesting dynamics this time. First, the re-imposition of sanctions on Iran by President Trump has changed the supply dynamics, since some Iranian oil has been taken off the market. Secondly, the recent rise in oil prices in general has restarted production of shale oil in the U.S., though that production must ramp up before shale oil will be sold on the open market.

Meanwhile, Saudi Arabia and Russia want to increase oil production, the latter primarily due to a need for more U.S. dollar reserves. Other OPEC members like Venezuela, Iraq and Libya prefer keeping production quotas in place because these countries have supply chain issues that prevent them from ramping up their production.

My View: John Nash earned his doctorate from Princeton in 1950 with a dissertation titled “Non-Cooperative Games.” It earned Dr. Nash a Nobel Prize in Economics in 1994 and it clearly stands true today. I expect the Trade frictions to get worse before they get better and I expect OPEC to increase their production quotas somewhat.

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