Beggar Thy Neighbour - Extended Application

Extended Application

"Beggar thy neighbour" strategies of this kind are not limited to countries: overgrazing provides another example, where the pursuit by individuals or groups of their own interests leads to problems. This dynamic has been called the "tragedy of the commons", though it appears as early as the works of Plato and Aristotle.

"Beggar thy neighbour" trade policies can lead to trade wars between countries. These trade wars follow the prisoner's dilemma game theory analysis developed through Nash equilibrium in which two countries are poised against each other to produce in the market. Production requires export subsidies for the domestic firm to capture the market, effectively deterring the competing entity. Imagine two companies: Boeing and Airbus, one American, one European firm. They can either chose to produce or to not produce. The matrix follows that if both produce both will lose market share (−5,−5) as they compete in the industry. If they both don't produce (0,0) nobody benefits. If one produces whilst the other does not (100,0) the producing company will capture the industry and have 100% share (0,100). Game theory states that the first mover, or the initial firm in the industry, will always win. The competing firm will have no incentive to enter the market once the competitor has the advantage and thus will be deterred. However, with a strategic trade policy of an export subsidy, the matrix changes as the protecting government covers some of the costs. The matrix now changes from (−5,−5) to (−5,20) in favour of the domestic firm with the subsidy. This will see the protected firm "win" in the game and capture more of the market share as the subsidies burden the costs, which would otherwise deter the company. The game does not finish here, as the other company, being usurped on the second move, will then itself become protected through export subsidies, leading to a trade war between countries. Ergo, beggar-thy-neighbour is evident in trade wars as it increases the domestic welfare at the expense of the competing country.