In economics and international trade, decision-making under uncertainty often leads rational players to adopt strategies that, while individually rational, result in collectively suboptimal outcomes. One of the most powerful theoretical frameworks to understand such behavior is the Prisoner’s Dilemma, a foundational concept in game theory. Though abstract in origin, the dilemma plays out repeatedly in real-world scenarios – from freight markets in dry bulk shipping to the macro-level frictions of global trade.
The Prisoner’s Dilemma is a two-player non-zero-sum game illustrating why two individuals might not cooperate, even when it appears that cooperation is in their best interest. In the classic version, two prisoners are accused of a crime and interrogated separately. Each must choose whether to betray the other or remain silent.
If both remain silent (cooperate), they receive light sentences.
If one betrays (defects) while the other remains silent, the defector goes free and the other receives a heavy sentence.
If both betray, they both receive medium sentence.
In the absence of trust or cooperation, the dominant strategy is to defect – minimizing personal risk regardless of the other’s choice. However, the paradox is that this rational strategy leads to a worse collective outcome than mutual cooperation would (Nash equilibrium but not Pareto efficient).
.In dry bulk shipping, the Prisoner’s Dilemma is frequently observed during freight market downturns, especially when supply outpaces demand and owners compete for a limited number of cargoes. In a typical spot market situation, two shipowners with similar vessels open in the same region are faced with two options:
Wait (Cooperate): Hold out for higher rates, preserving the market level.
Undercut (Defect): Offer lower rates to secure cargo before the other.
The outcome hinges not only on market fundamentals but also on expectations and competitive dynamics among participants. Even when shipowners understand the long-term value of exercising rate discipline, concern that a competitor might undercut first compels them to act pre-emptively. In such environments, the dominant strategy becomes defection – accepting lower freight rates to secure employment – despite the broader impact on overall earnings. This pattern is most evident in oversupplied markets, particularly when newbuilding deliveries are elevated or cargo demand weakens due to seasonal or structural factors. The result is a “race to the bottom,” where individual rational decisions, taken in isolation, collectively erode profitability in a fragmented and decentralized market.
The logic of the Prisoner’s Dilemma also extends to macroeconomic conflicts such as the U.S.–China trade war, which escalated from 2018 onward. At its core, this was a strategic confrontation where both sides implemented protectionist policies, largely framed as a response to perceived unfairness in trade balances, intellectual property rights, and market access. From a game-theory perspective, the two global superpowers faced a version of the Prisoner’s Dilemma:
While the specifics are more nuanced, the pattern fits the dilemma: Both cooperating (free trade) would have yielded mutual economic benefits. One side defecting while the other cooperates could temporarily tilt power or economic advantage. But mutual defection, as occurred during the height of a trade war, resulted in tariffs on hundreds of billions in goods, disruptions to global supply chains, increased costs for consumers and producers, and slower global GDP growth. What drove the present conflict seems to be a lack of trust, fear of long-term structural disadvantages, and domestic political pressures. The Phase One agreement in January 2020 offered a partial reset, but strategic hedging and domestic political pressures kept both sides from fully returning to a cooperative equilibrium. The interaction became a repeated game – each round marked by fresh escalations.
Whether in shipping or geopolitics, the Prisoner’s Dilemma illustrates the tension between short-term individual rationality and long-term collective welfare. In decentralized markets or international systems where enforceable cooperation is difficult, players are often trapped in suboptimal equilibria. Recent data reflect this logic. The U.S. economy contracted by 0.3 percent in the first quarter of 2025 – its first decline since early 2022 – due in part to an import surge aimed at front-running potential tariff hikes. Consumer sentiment in April fell sharply, down 32 percent to levels not seen since the 1990 recession. This decline in confidence signals weakening domestic momentum and heightened policy uncertainty. In contrast, China reported stronger-than-expected growth, with GDP rising 5.4 percent year-on-year in the first quarter of 2025, supported by robust export performance. March exports surged by 12.4 percent compared with the previous year, sustaining the positive momentum from late 2024. Yet this export strength may prove unsustainable. As the U.S. moves forward with new tariffs – some exceeding 100 percent – analysts expect China’s external demand to weaken. Moreover, early signs of strain are emerging. China's manufacturing Purchasing Managers' Index (PMI) declined into contraction territory in April, falling to 49.0 – a 1.5-point drop month-on-month. This reflects not only a high base from earlier growth but also mounting external headwinds. As Zhao Qinghe of the National Bureau of Statistics noted, these changes stem from shifting global dynamics and growing economic uncertainty.
Be it fragmented freight markets or adversarial trade policies, the Prisoner’s Dilemma offers a powerful lens to understand how individual rationality can drive collective irrationality. In decentralized systems lacking enforcement or shared long-term vision, optimal strategies devolve into defensive postures. In dry bulk shipping, this results in volatile freight rates and underperformance. In global trade, it fosters uncertainty, inefficiency, and missed opportunities for shared prosperity. The way forward lies not only in rational calculus but in building institutions and norms that reward restraint, credibility, and sustained cooperation.
Data source: Doric