China and the ‘prisoner’s dilemma’

Following years of denial, and in the face of overwhelming evidence, a grudging bipartisan consensus is emerging that China represents more than simply good-faith strategic competition to the United States. Having been welcomed — almost as if by acclimation — to join the international rules-based order after decades of self-imposed geopolitical and economic isolation, China’s position is now firmly established among the community of nations. That it seeks to disrupt the club of which it is a member presents political leaders with unprecedented challenges.

After decades of “hiding its strength and biding its time,” in Deng Xiaoping’s roughly translated phrase, in the 2010s China slowly began exerting its growing strategic leverage on the global stage. Initially it did so through domestic development and international trade; more recently, it has added diplomacy, foreign aid and an accelerated military buildup to the mix. The China the world was so eager to have accede to a significant role within a stable multilateral framework now looks to refashion — or make obsolete — that order for its own benefit. China desires not so much to displace America atop a web of interconnected postwar institutions and relationships, but to duplicate and replace those bodies traditionally led by America, leaving an outmoded order to wither. 

China’s rise within and subsequent challenge to this global postwar framework stands in contrast to the Cold War contest between the United States and the Soviet Union, as the USSR stood apart from the “First World” economically. The communist world competed with the West through a “war of ideas,” as well as diplomatically and occasionally militarily through proxies, but largely absented itself from economic congress with the Atlantic alliance and its market-oriented allies. China, a notionally socialist nation, set upon a course in the 1980s to fully integrate itself with the world’s market economies and, roughly 40 years on, arguably has succeeded beyond its post-Mao imagination.  

Now fully ensconced as an essential hub of global economic commerce, China has taken various actions outside of accepted norms, and has done so with increasing velocity and amplitude. It has snuffed out democracy and civil rights in Hong Kong; become increasingly bellicose with respect to Taiwan; extended its suppression of domestic entrepreneurial activity in favor of state-owned enterprises, impeded foreign direct investment (FDI) and frustrated overseas share listings; and used myriad commercial linkages with the West as another weapon in its foreign policy arsenal.  

Its treatment of foreign executives doing business in China — with cases such as that of Richard O’Halloran, an Irish aviation executive held in Shanghai for the sins of his Chinese employer — highlights its unrestrained, mercantilist approach to global commerce. It is unafraid to marshal diplomatic, media and other resources in service of its ambitions; that Jamie Dimon of JP Morgan felt the need to apologize for a joke for fear of offending China and being locked out of its market is one instance of China’s efforts to modify established norms of international commercial and diplomatic relations.

Such acts are not merely the reflexive nationalistic impulses of an emerging power, but cohere as an aggressive, comprehensive and coordinated strategy to reorder the international stage. The Belt and Road Initiative — with investments in global infrastructure designed to create “debt traps” — echoes the gunboat diplomacy of yesteryear. China engages in corporate espionage and has little respect for intellectual property rights. Its Confucius Institutes promote Chinese national interests. China’s investment in advanced technology, expansion of its surveillance state, and development of cutting-edge military weapons work in tandem to extend the reach of its hard and soft power — more deeply within its borders, and broadly around the world.

With a revisionist and increasingly hostile power inside the tent of a rules-based global regime, America finds itself faced with a classic “prisoner’s dilemma,” which derives from game theory.  It is used to demonstrate how two rational actors, each behaving in their own self-interest, might not cooperate even when it makes sense for them to do so. 

America’s current relationship with China can be viewed through the lens of the prisoner’s dilemma. In its simplest formulation, two parties fare well when cooperating and poorly when at odds, but can craft a superior outcome if they “rat”— or, in the case of international relations, cheat or engage in outre behavior — while the other party stays true or continues to play by the rules.

The analytical framework of the prisoner’s dilemma is particularly well-suited to today’s U.S.-China dynamic, in that it returns a higher expected value from transgressive behavior: The decision to be taken by the counter-party cannot be known in advance — resulting in each party acting badly. Accordingly, decisions about future cooperation or betrayal — or, in great-power relations, rule adherence or norm-breaking — cannot be inferred about one’s counter-party because of a lack of trust and understanding between the parties. 

This seems an accurate depiction of our world in 2021: a strident and assertive China matched against an erstwhile American hyperpower of uncertain resolve. That Chinese society possesses its own poorly understood and largely unacknowledged civil and demographic weaknesses, while American military prowess remains unmatched notwithstanding its own domestic challenges, further complicates the calculus.

The prospect of a more dangerous and less prosperous world as a result of such mutual distrust metastasizing into economic, diplomatic and, potentially, military conflict should focus the attention of U.S. policymakers on how best to create the conditions for bilateral cooperation — or, failing that, constructive engagement. As the prisoner’s dilemma framework suggests, enhanced visibility into a counter-party’s motivations and objectives offers clues into potential actions and reactions, and allows for better-informed decisions.  

Time will tell whether this geopolitical moment will prove to have been past “the point of no return,” with China and the United States on an unavoidable collision course. Nevertheless, every effort should be made to see if the two countries can find the optimal game theory outcome by which both — and the wider world — can “win,” ideally with each nation’s participation in an agreed and durable geopolitical framework. Even if the hour is late, this effort would produce insights essential to crafting rational policy responses to potentially hostile acts.

Nobody knows for certain how close the U.S. and the Soviet Union came to nuclear midnight during the Cold War. If there is one lesson we should have learned from that experience, it’s that one’s own willful ignorance — and the blinded decisions made as a result — can be as dangerous as any external adversary.

Richard J. Shinder is the founder of Theatine Partners, a financial consultancy, and a frequent lecturer, speaker and panelist on business and financial topics. He has written extensively on economic, financial, geopolitical, cultural and corporate governance-related issues.