Global Trade and the Prisoner's Dilemma Game

 Global trade volume is decreasing. Export volumes seem to have peaked, not just in one economy, globally, towards the end of 2014.  Although the declines are not as large as those in 2008, a huge 18% peak to trough globally, the widespread pressure on exports is weighing down growth and instigates the type of crazy monetary policy we have seen lately.

Extra-EU trade volume, trade exported outside Europe, has increased 1.5% over the last three years.  However, the value of this volume is 8% lower due to the real EU effective exchange rate falling 5.2% in the same period. Global trade is structurally challenged. How vital are exports to economies?

Central banks seem to be in a huge game of prisoner’s dilemma. Central banks worldwide are competing to maintain domestic growth and they are doing ‘whatever it takes’ to achieve it. They are all in a situation where if they do not devalue their currency, defecting in the prisoner’s dilemma, and expand policy, other central banks will do so and therefore they will lose the game. However, now it seems we are in a situation whereby all central banks are easing and devaluing, prisoners are defecting, and global output is therefore structurally lower; all payoffs for players are lower.

And once you leave the Nash equilibrium, it is not easy to get back there!