Once a year, the heads of the world’s leading industrialized free-market democracies — the Group of Seven — get together. On the eve of this year’s meeting, President Donald Trump made a big bet. He imposed tariffs on steel and aluminum imported from the other G-7 countries, as well as on NAFTA partner Mexico.The leaders of those other G-7 countries — Canada, Japan, the United Kingdom, France, Germany and Italy — quickly counter-punched, threatening to levy their own retaliatory tariffs on a host of well-known and high-profile American products such as Kentucky bourbon and Harley-Davidson motorcycles.It was all rather shocking.

Although they served a useful purpose in the past, the G-7 meetings of late have produced little more than photo-ops and political gab fests.So what does this mean for the future of free markets? Are they dead, on life support, or just temporarily winded?After an initial plunge a few months ago, when Trump first announced the possibility of imposing tariffs, Wall Street seems to be handling the G-7 drama with aplomb. For the most part, investors appear to be discounting Trump’s bet as tactical brinkmanship.

Once a year, the heads of the world’s leading industrialized free-market democracies — the Group of Seven — get together. On the eve of this year’s meeting, President Donald Trump made a.

After all, an immense amount of relatively free trade and investment transpires every day among companies and private citizens in G-7 — and France, Germany and Italy are the economic titans of the entire EU.According to data from The Heritage Foundation’s Index of Economic Freedom, European Union countries have the same weighted average applied tariff rate as the United States. It is 1.6 percent. In terms of trade freedom, the U.S. Score in the Index is actually lower than all but two EU countries (France and Greece); Canada and Mexico are also ranked higher than the United States for trade freedom.

Japan has relatively less trade freedom, but its score, too, is way above the global average.So, based on these data, Trump’s claim of U.S. Victimhood at the hands of unfair trade practices by America’s best allies rings hollow.Which is not to say that other G-7 countries do not protect certain sectors of their economies. They most certainly do, especially in Japan and the EU.But at the core of this latest scuffle over trade is an elephant that will not be in the room at the G-7 in Canada: China and the global glut of steel caused by state-subsidized Chinese over-production.The best way to counter that problem is for the G-7 countries to unify against unfair Chinese trade practices. That’s far more reasonable than turning a G-7 family squabble into a devastating trade war a la the 1930s.Instead, the United States and its G-7 partners should work together to lower existing tariff and non-tariff barriers, allowing their citizens and companies to trade even more freely. Doing so will help to avoid self-inflicted damage to the American economy.Trump demonstrated outstanding leadership in his courageous decisions to end U.S.

Participation in the Iran nuclear deal and the Paris climate agreement — two pacts that were championed by other G-7 leaders.He also signed historic reform legislation to cut Americans’ taxes at a time when other G-7 leaders are pushing for higher taxes.The president should not abandon the moral high ground on which those decisions were made, for the swamp of wrongheaded — albeit politically appealing — trade policies that will weaken the U.S. Economy.A unified G-7 that remains faithful to the values of market-based Western democracy and economic freedom can be America’s ally in the economic battles that lie ahead. That’s far more valuable than anything that can be gained by a trade war.This piece originally appeared in T&D.

This article could be entitled, “How to Succeed in Business by Being Unreasonable.” Most businessmen are very skillful in this respect, although their behavior is popularly called negotiation, gamesmanship, or, perhaps most apt of all, brinkmanship. The art of being unreasonable is not, of course, restricted to smoke-filled rooms at corporate headquarters. The principles are regularly applied by labor union negotiators, diplomats, and extortionists as well as by businessmen.

Anatomy of Victory

The real dynamics of competition in the U.S. economy are frequently obscured by rationalization. A businessman often convinces himself that he is completely logical in his behavior when in fact the critical factor is his emotional bias compared to the emotional bias of his opposition. Writers and teachers, too, are likely to describe the decision-making process in purely rational terms, with perhaps a decision tree or simulation exercise suggested as a device for making it even more rational.

Several elements seem basic to success in the cold wars of business. The executive must know the character, perspective, motivation, and values of his competitors. Using such knowledge, he may be able to achieve competitive success with a minimum of actual conflict by convincing the competition that it can gain more by accepting a compromise of its objectives than by having a test of strength. There is plenty of evidence, it seems to me, that such persuasion takes place often. It accounts for the fact that most business competitors achieve stability in their relationships with one another. Indeed, as we shall see presently, cooperation with one’s competitors appears to be an unofficial goal of competition.

The personal element is crucial in all this. Unfortunately, some businessmen and students take the attitude that competition is some kind of impersonal, objective, colorless affair, with a company competing against the field as a golfer does in medal play. A better case can be made that business competition is a battle royal in which there are many contenders, each of whom must be dealt with individually. Victory, if achieved, is more often won in the mind of a competitor than in the economic arena. Consider situations like the following:

• The labor union calls a strike. The wages lost during the strike can easily exceed the added benefits which the union hopes to gain. On the other hand, if there is a strike, the employer accepts losses far greater than the cost of meeting the union demands without a strike. Thus, both parties lose by the strike. Both gain if they can agree without the strike. But who gains the most in the settlement?

If either party assumes that the other is unreasonable and sufficiently stubborn, then the logical thing to do is settle in advance without incurring the additional costs of the strike. The obvious deterrent to such surrender is the fear that the next time such an event happens, the other party will make exorbitant demands. Either way it is not logic, but the assessment of the opponent’s attitude, which counts.

• A metal manufacturer can supply molten metal to a nearby foundry and save it a substantial sum in transportation and remelting costs. The molten metal can be sold to no one else, and the foundry can buy molten metal from no one else. How should the profit be shared?

Here the situation is clearly a standoff. Both parties lose unless they can agree. Any division of the profit is arbitrary. The only leverage either party possesses is the threat to break off negotiations, and that would clearly be an irrational, emotional decision.

• A steel manufacturer and an electrical manufacturer enter into a joint research agreement. They develop a very superior electric steel. With this steel, transformers cost far less and perform better. The steel can be sold only to the research partner. What should the price be? That is, how should the profit be shared?

No escape from agreement is possible here. Although there are many arguments that have some validity and bear on the price, the only possible agreement depends on a compromise which is primarily based on the attitude of the two partners.

In this article I shall emphasize two points. The first is that the management of a company must persuade each competitor to voluntarily stop short of his maximum effort to acquire customers and profits. The second point is that persuasion depends on emotional and intuitive factors rather than on analysis or deduction. I base my arguments on a considerable amount of experience with businessmen and observation of their behavior. Admittedly, my impressions run counter to most management theory and are not to be found in any text on managerial economics.

Uses & Applications

Nonlogical behavior has great potential value in three kinds of activity. (By “nonlogical” I mean reasoning which leads to decisions that could not be predicted or reached except by an arbitrary subjective process.) These three activities are:

1. Negotiation—This is rarely a straightforward analytical process. It starts as a mutually advantageous exchange of values. When a really attractive deal is formulated, both parties stand to gain if they agree to it, while both stand to lose if they do not. The real object of the negotiation is to decide who will benefit more.

2. Mutual self-restraint or cooperation between competitors—This is the normal condition of business competition. If it were not, the most efficient producer would normally use his advantage to increase his market share until his competitors were squeezed out. The fact that this rarely happens merely confirms the existence of a common decision to protect profit margins rather than to increase market share.

3. Inhibition of aggressive competitors—Aggressive competition usually exists even though there may be considerable mutual self-restraint. Some inhibition or restraint of competition is a necessity; otherwise it would rapidly escalate into mutually destructive all-out competition. For example, every so-called “capital intensive” industry has a powerful incentive to be extremely aggressive whenever any idle capacity exists; any extra unit of output often costs far less than the normal revenue for the unit. Yet price wars are very rare in these industries.

In business we seldom see the foregoing efforts and activities as major problems. We are accustomed to reaching agreement in negotiations, to achieving some stability between competitors, and to having some self-imposed limits on competitive aggression. We take these things for granted in spite of the fact that logically they are unstable conditions. The stability and agreement are reached by some quite arbitrary behavior which is based on production according to definite mutual expectations between the contenders. How is such behavior guided? What tactics are useful?

Negotiation Techniques

The negotiator’s skill lies in being as arbitrary as necessary to obtain the best possible compromise without actually destroying the basis for voluntary mutual cooperation or self-restraint. There are some commonsense rules for success in such an endeavor:

1. Be sure that your rival is fully aware of what he can gain if he cooperates and what it will cost him if he does not.

2. Avoid any action which will arouse his emotions, since it is essential that he behave in a logical, reasonable fashion.

3. Convince your opponent that you are emotionally dedicated to your position and are completely convinced that it is reasonable.

It is worth emphasizing that your competitor is under the maximum handicap if he acts in a completely rational, objective, and logical fashion. For then he will cooperate as long as he thinks he benefits at all. In fact, if he is completely logical, he will not forgo the profit of cooperation as long as there is any net benefit. If he acts in this manner, and you have followed the preceding rules, you can give him a token reward and keep the rest for yourself.

If this statement seems theoretical or contrived, consider everyday experience in business. Here are some typical examples I know of:

• A muffler manufacturer sells only in the automobile “after-market.” Another supplier who has previously been active only in the original equipment market wants to obtain distribution in the after-market. To gain entry, he cuts prices on his equipment. The first muffler manufacturer retaliates by going to original equipment manufacturers and offering to sell to them at drastically reduced prices (even though he has no contracts). The second muffler manufacturer must meet the price cuts or lose a major amount of his former business. Instead he stops his efforts to cut prices in the after-market—and, coincidentally, the first manufacturer withdraws his cut-price offer to the original equipment manufacturer on the plea of insufficient capacity.

These two manufacturers are having a border incident which verges on a hot war. They pull back when they realize the risk of mutual damage. This is a case of tacit cooperation between competitors. The tacit agreement is completely dependent on the mutual evaluation of attitudes.

• A major steel company makes it widely known that it will meet any competitive price shading by quoting an equivalent price publicly to all of its customers. While this is an illogical policy (it will cost the steel company more than anyone else), it effectively removes any potential benefits of price competition and stabilizes prices at a satisfyingly high level. The threat is effective as long as competitors believe that a price concession to a single customer will indeed precipitate an across-the-board price cut to all of the steel company’s customers.

This episode represents a pure form of psychological warfare and tacit cooperation between competitors. The entire relationship is dependent on mutual self-restraint, which in turn is based on an assessment of the probable behavior of competitors.

• A paper company builds a large new mill. It is very expensive but has a low operating cost. The company then starts cutting prices to get added business in the new mill. Many competitors refuse to meet the prices, reasoning that the new mill has to get its share and obviously must cut prices until it does. They feel it is better to let the new mill get its share than to start a price war to keep it out. They assume that the new mill’s low out-of-pocket cost should enable it to sell effectively below their own out-of-pocket cost.

In short, the conviction that conflict will not win produces a willingness to exercise self-restraint without forcing a test of strength. The case suggests that actual conflict is often waged solely for the purpose of producing a conviction about the consequences of economic war in the mind of a competitor.

Friendly Competitors

It may strike most businessmen as strange to talk about cooperation with competitors. But it is hard to visualize a situation in which it would be worthwhile to pursue competition to the utter destruction of a competitor. In every case there is a greater advantage to reducing the competition on the condition that the competitor does likewise. Such mutual restraint is cooperation, whether recognized as such or not.

Without cooperation on the part of competitors, there can be no stability. We see this most clearly in international relationships during times of peace. There are constant encroachments and aggressive acts. Without mutual self-restraint, these acts would rapidly escalate into all-out war. There are also many benefits in cooperation on all kinds of matters involving trade, security, and communication. Constant confrontations occur. And the eventual consequence is always either voluntarily imposed self-restraint or all-out mutual destruction. Thus international diplomacy has only one purpose: to stabilize cooperation between independent nations on the most favorable basis possible. Diplomacy can be described as the art of being stubborn, arbitrary, and unreasonable without arousing emotional responses.

Businessmen should notice the similarity of their economic competition to the peacetime behavior of nations. The object in both cases is to achieve a voluntary, cooperative restraint on the aggressiveness of competitors. Complete elimination of competition is almost inconceivable. The goal of the hottest economic war is an agreement for coexistence, not annihilation. The competition and mutual encroachment do not stop; they go on forever. But they do so under some measure of mutual restraint.

Profits in Self-Restraint

Most businessmen almost instinctively try to be friendly and cooperative with their competitors no matter how bitter the competition. There is a reason for this. The emotional reactions of competitors are far more dangerous than their logical, rational pursuit of self-interest. Emotional behavior by competitors can lead to arbitrary, nonlogical aggressiveness which, while benefiting them only a little, can be very damaging to rival companies.

Almost any business can hurt its competitors seriously with little cost to itself—at least at first. This punishment can take many forms. Key people can be hired away. Salary structures can be disturbed. Trade practices can be upset. Price structures can be distorted. Such punishment rarely happens, though, because it accomplishes very little and may cause the competitor to retaliate in kind.

Therefore economic warfare becomes psychological. In testing a management group’s prowess at such fighting, an analyst might well ask questions such as these:

• Can you cause your competitor to follow your lead in price policy?

• Can you convince your competitor that you will hold on to your share of the market regardless of his price policy?

• Can you convince your competitor that if he raids your engineering department, he will start a wage war?

• Can you convince your competitor that you will load up your new mill even if it does depress prices?

• Can you convince your supplier that if he does not cut the price, you will put in your own production facility?

• Can you convince your labor union that the strike will be a very long one if it is called?

Self-restraints in business are not imposed as “rules of the game.” Quite the opposite, they are imposed for the sake of profitability. The real game is to see how far you can push the other fellow before he declares war. If you push him too far, his self-restraint breaks down, and you both lose.

Cold war is the natural state of business competition; this is why military strategy is so rarely an apt example for business strategy. Occasionally, hot wars break out—the famous “white sales” in the electrical industry in the mid-l950’s, for example, or the gasoline price wars that erupt from time to time. But, ordinarily, such outbreaks represent a rupture in tacit agreements which previously had been mutually beneficial.

‘Cold War’ Tactics

A breakdown in negotiations is inevitable if both parties persist in arbitrary positions which are incompatible. Yet we have identified major areas in business where some degree of arbitrary behavior is essential for protecting a company’s self-interest.

In effect, a type of brinkmanship is necessary. The term was coined to describe cold war international diplomacy, but it describes a normal pattern in business, too.

In a confrontation between parties who are part competitors and part cooperators, the decision as to what to accept is essentially emotional or arbitrary. The decision as to what is attainable is essentially an evaluation of the other party’s degree of intransigence. The purpose is to convince him that you are arbitrary and emotionally committed while trying to discover what he would really accept in settlement. The competitor known to be coldly logical is at a great disadvantage. Logically, he can afford to compromise until there is no advantage left in cooperation. If, instead, he is emotional, irrational, and arbitrary, he has a great advantage.

Although arbitrary and obstinate behavior can be a necessity, it can also be self-defeating. There are two obvious limits:

(1) Arbitrary positions which are mutually exclusive become an absolute obstacle unless compromised. If both parties are irrational, then agreement, cooperation, or settlement is impossible. However, if one party is in fact truly irrational and the other party realizes it but is not himself irrational, then the agreement will be reached on the irrational party’s terms. That becomes the only possibility.

(2) The second limitation has to do with the emotional process. Arbitrary, stubborn, uncompromising attitudes produce corresponding emotional reactions. Emotional behavior produces and escalates emotional responses. Emotion can cause irrational responses. Therefore, creating an emotional response in a competitive situation is self defeating.

Successful Behavior

We can now outline the behavior rules which are the most effective in cooperation-conflict confrontations. They apply in labor negotiations, politics, and international diplomacy as well as in business competition:

Rule #1: Be as cooperative and friendly as possible. (Minimize emotional responses and arbitrary behavior as much as possible.)

Rule #2: Be uncompromisingly stubborn in the attitudes you take. (Convince the opponent that you are indeed dedicated and immovable in your convictions.)

Rule #3: Be as friendly and warmly responsive as possible. (Leave the possibility of compromise open if necessary. Discourage a hostile emotional posture by your opponent; if he should start to take such a posture and see he is inducing an equally hostile response in you, the danger of his tactics will be more obvious to him.)

The Name of the Game

In view of the foregoing, one might conclude that the art of negotiation has certain inherent characteristics. In the first place, real success requires an accurate and objective assessment of exactly what each party has to gain or lose. This assessment determines the absolute limits of a mutually profitable settlement. Overcooked 2 xbox one achievements. It also determines how much is at stake when emotional behavior or brinkmanship is involved.

Secondly, it is important to demonstrate to the opponent that you know exactly what he has to gain or lose. This reduces his ability to act irrationally or arbitrarily outside this range and to be convincing. Conversely, the less an opponent knows about your own situation, the greater his handicap. If he thinks you do not understand your own limits, he is under an even greater handicap.

Finally, a full understanding of the opponent’s characteristic behavior is essential. It is particularly important to know how intelligent he is, how logical, and how emotional. And it is a great advantage to know his typical biases. The name of the game is this: Be as sweetly unreasonable as possible in a convincingly logical fashion without permitting your opponent to decide that it is impossible to deal with you!

Strategy & Attitude

It is obvious that strategy must be concerned with inducing cooperation from competitors. This explains some of the examples cited earlier in this article:

• The labor negotiator agreed to a contract because he was convinced that he would lose on balance if he did not agree. The same thing was true of both sides of the bargaining table.

• The metal supplier and the foundry agreed on price because they were convinced they could negotiate terms no more favorable. The same was true of the steel company and the electric manufacturer.

• The two muffler manufacturers quit cutting prices because they were more afraid of a price war than they were anxious to get more volume.

• The steel company could enforce price stability because it seemed willing to accept a loss. Its competitors refrained from price cutting because they were more afraid of potential punishment than they were anxious to obtain added volume.

• The paper company’s competitors were convinced that it would cut prices further if they did not voluntarily refrain from matching the price cuts.

In all of these examples, the action words—convinced, seemed, afraid, anxious—are subjective evaluations. Victory must be won first in the competitor’s mind. Then it can be obtained in the factory and market.

Many strategic losses are the converse of the foregoing situations. If you believe your advantage is so great that you are invulnerable, you are likely to assume that your competitor sees it the same way. If he does not, however, he may well catch you without your defenses prepared. A classic example of this was Control Data Corporation’s entry into the computer business. When it started marketing the world’s largest and most sophisticated design to the most sophisticated users, it was a very small, unknown newcomer. It had already succeeded before IBM and other major competitors recognized it even as a threat.

The purest kind of strategic victory occurs when your competitive advantage is minimal or nil, but your competition can be induced to believe that your behavior will be so irrational that both of you will be involved in unacceptable costs or risks. If you can convince your competitor that you are reckless enough or irrational, you can win without actually playing Russian roulette. The classic example is the bank robber who threatens to blow up everyone, himself included, unless his demands are met.

What Antitrust Wants

The federal government is a very active umpire in all matters which affect business competition. The attitude which it takes in antitrust administration essentially constitutes a demand for tacit cooperation between competitors even though explicit cooperation is prohibited by law. This paradoxical situation is inevitable, since the end result of unlimited competition means eventual elimination of the weaker competitor. That violates the prohibitions of the law against reduction of competition and against monopoly. Self-restraint is a reduction of competition, too, but it does not threaten to eliminate competition.

An example of the government’s point of view was provided immediately after the antitrust trials in the electrical industry were won by the government in the late 1950’s:

During the price conspiracy, prices were held high enough for many marginal producers to expand. When the trial destroyed the explicit agreement on price, the prices fell to the level set by supply and demand. This was quite low because of the overexpansion that had taken place in the industry. The government stepped in and brought great pressure on the major producers not to lower prices beyond a certain point because then the weaker producers would not be able to compete.

The implications are clear. The federal government wants only a vigorous cold war between competitors even though this may mean a tacit mutual agreement that they will not exceed certain limits. On the other hand, it wants neither the extreme of open agreement nor the extreme of all-out competition.

Cooperation on Prices

Since price is such an obvious area of potential cooperation among competitors, it deserves to have certain characteristics recognized. Price is usually an unrewarding area for cooperation except within very narrow limits. Near-term cooperation is self-defeating. It usually favors the large company over the small one. It also invites the noncooperating competitor (usually small) to revert to price cutting as soon as the nonprice competition costs more than it is worth to the user. A short-term price agreement can only shift the form of competition unless there is a detente on the other aspects of competition.

Over the long run, price cooperation tends to produce increased capacity, which is also self-defeating—at least in the absence of market allocations or productive restrictions.

Conclusion

The heart of business strategy for a company is the creation of attitudes on the part of its competitors that will cause them either to restrain themselves or to act in a fashion which management deems advantageous. In diplomacy and military strategy the key to success is very much the same.

The most easily recognized way of enforcing cooperation is to exhibit obvious willingness to use irresistible or overwhelming force. This requires little strategic skill, but there is the problem of producing conviction in the competing organization that the force will be used without actually resorting to it (which is expensive and inconvenient). The classic name for this approach is Pax Romana. The Roman peace was based on the demonstrated willingness to use force. Most police effectiveness as well as underworld peace is based on the well-developed general conviction that force will be used without hesitation.

In industry, however, the available force is usually not overwhelming, although one company may be able to inflict major punishment on another. If each party can inflict such punishment on the other, we have the classic case. If there is open conflict in such a case, then, as earlier pointed out, both parties lose. In the event of cooperation, both parties are better off but not necessarily equally so—particularly if one is trying to change the status quo.

When each party can punish the other, the prospects of agreement depend on three things:

1. Their respective willingness to accept the risk of punishment.

2. Their beliefs about each other’s willingness to accept the risk of punishment.

3. Their degree of rationality in behavior.

If these conclusions are correct, what can we deduce about how advantages are gained and lost in business competition?

First, management’s lack of willingness to accept the risk of punishment is almost certain to produce either the punishment or progressively more onerous conditions for cooperation—provided the competition recognizes the attitude.

Secondly, beliefs about a competitor’s future behavior or response are all that determine competitive cooperation. In other words, it is the judgment not of actual capability but of probable use of capability that counts.

Thirdly, the less rational or less predictable the behavior of a competitor appears to be, the greater the advantage he possesses in establishing a favorable competitive balance. This advantage is limited only by his need to avoid forcing his competitors into an untenable position or creating an emotional antagonism that will lead them to be unreasonable and irrational (as he is).

Many illustrations of these three factors are easy to recall from the diplomatic and military history of the past 30 years. For instance, the whole history of World War II is the story of the successes and failures in making such threats and assumptions. After the war, there was the cold war—another story of bluffs, counterbluffs, and assumptions. Then Korea demonstrated again the balance struck because of mutual expectations about the use of potential force. Today the war in Vietnam is laced with checks and balances. The word “escalation” has a particular meaning in describing balance changes in such a conflict.

Unfortunately while similar examples are common in business, they are not so public, with the exception of labor disturbances and unusually dramatic government-business confrontations.¹ But, as informal observers know, the same kinds of interplay affect customer-supplier negotiations, sales reciprocity, price policy, facility expansion, and every other relationship in which there is a benefit from cooperation to be shared.

Rules for the Strategist

If I were asked to distill the conditions and forces described into advice for the businessman-strategist, I would suggest five rules.

1. You must know as accurately as possible just what your competition has at stake in his contact with you. It is not what you gain or lose, but what he gains or loses, that sets the limit on his ability to compromise with you.

2. The less the competition knows about your stakes, the less advantage he has. Without a reference point, he does not even know whether you are being unreasonable.

3. It is absolutely essential to know the character, attitudes, motives, and habitual behavior of a competitor if you wish to have a negotiating advantage.

4. The more arbitrary your demands are, the better your relative competitive position—provided you do not arouse an emotional reaction.

5. The less arbitrary you can seem to be, the more arbitrary you can act in fact.

These rules make up the art of business brinkmanship. They will guide a businessman to winning a strategic victory in the minds of competitors. Once he has won it there, he can convert it into a competitive victory in terms of sales volume, costs, and profits.

1. See, for example, Michael C. Jensen, “Gamesmanship With the Guideposts” (Problems in Review), HBR November–December 1966, p. 168.