Prospects of Protectionism: Application of Prospect Theory’s S-shaped Value Function to the U.S.-China Trade War

comparison to free trade policies. Despite this, the United States has threatened to utilize protectionism to induce better trade terms with its trade partners. This paper seeks to descriptively model the U.S.-China trade relationship through prospect theory to demonstrate points of leverage that exists in negotiations in the event of a trade war. Prospect theory’s S-shaped value function can help show differences in leverage between the two parties based on their gains and losses within their trade relationship that can provide insight in determining negotiation outcomes.