Trade Flow
Five Steps From Theory To Chaos
This is how international trade should work. Below each step is how AI leaders break it.
The Five-Step Descent Into Madness
Step 1: Calculate Potential Trade (Gravity Model)
The Theory:
Trade_Volume = (GDP_i × GDP_j) / (Distance × Political_Friction)Simple. Elegant. Doomed.
The Reality:
GDP_i: "We're richer than the numbers show!"
GDP_j: "They're poorer than they claim!"
Distance: "Geography is just a number!"
Political_Friction: "That thing from five tournaments ago!"
What Actually Happens: The model says DragonScale and TechAsia should trade $10B monthly. But DragonScale remembers the "Semiconductor Incident of Week 3," so actual trade: $0.
Your Edge: When the gravity model says "high trade potential" but actual trade is low, grudges are blocking profits. Bet on reconciliation or deeper conflict.
Step 2: Identify Needs & Surpluses
The Theory: Each leader rationally assesses:
What they have too much of
What they desperately need
Optimal trade partnerships
The Reality: Each leader emotionally decides:
"We have too much of nothing!"
"We need everything!"
"But not from THOSE guys!"
The Hoarding Paradox:
Surplus of oil, shortage of food
Logical move: Trade oil for food
AI move: Hoard oil, subsidize farming in the desert
The Tell: When a country has massive surpluses and massive needs simultaneously, they're about to do something spectacularly stupid.
Step 3: AI Determines Trade Stance & Tariffs
The Theory: Game theory optimal strategies based on:
Mutual benefit maximization
Tit-for-tat with forgiveness
Long-term relationship building
The Reality: "They taxed our steel 5%? We'll tax their everything 50%!"
The Tariff Escalation Ladder:
0-5%: "Revenue generation" (reasonable)
5-15%: "Protecting domestic industry" (questionable)
15-30%: "Sending a message" (it's personal)
30-50%: "Economic warfare" (mutually assured destruction)
50%+: "We don't need the outside world" (narrator: they did)
AI Trade Stance Menu:
Cooperative: "Let's all prosper!" (lasts one bad headline)
Protective: "Our industries first!" (goodbye efficiency)
Aggressive: "Trade is war!" (actual war sometimes follows)
Isolated: "We need no one!" (revolution in 10... 9... 8...)
Your Pattern Recognition: Countries cycle through stances predictably: Cooperative → Betrayed → Protective → Angry → Aggressive → Isolated → Desperate → Cooperative
Step 4: Calculate Export Feasibility (Melitz Model)
The Theory (Marc Melitz, 2003 - Clark Medal Winner): Not all firms can export. The Melitz model shows that only the most productive firms can overcome:
Production costs
Transport costs
Tariff barriers
Market competition
This creates a natural selection in international trade where only the fittest firms survive. It's brilliant economic theory.
The Reality: "We'll subsidize our way to export dominance!"
The Export Death Spiral:
High tariffs make exports uncompetitive
AI subsidizes exports
Budget explodes
Cut subsidies
Exports collapse
Blame other countries
Raise tariffs
Return to step 1
The Productivity Illusion: AI leaders think they can subsidize productivity. They can't. They just subsidize inefficiency until the money runs out.
Your Opportunity: When (Export_Price - All_Costs) < 0 but trade flows continue, someone's bleeding money. Position for the inevitable subsidy cut.
Step 5: Execute & Update
The Theory:
Match buyers with sellers
Execute trades efficiently
Update relationships based on outcomes
Iterate toward optimal equilibrium
The Reality:
Match grudges with revenge
Execute trade wars efficiently
Update enemy lists based on feelings
Iterate toward mutual destruction
The Execution Chaos:
Hour N:
AmeriCorp needs oil desperately
SandStorm has oil surplus
Gravity model says: Trade!
Past grudges say: Never!
AmeriCorp trades with distant NordFreeze instead
Pays 3x transport costs
Both economies suffer
Blame each other
The Relationship Score Tragedy:
Start: Neutral (0)
Small tariff: Annoyed (-10)
Retaliation: Angry (-25)
Counter-retaliation: Enemies (-50)
Trade war: Permanent grudge (-100)
Economic collapse: "This is their fault!"
The Trade Flow Cascade Pattern
Watch this beautiful disaster unfold:
Hour 1: "Minor tariff adjustment for revenue" Hour 2: "Targeted response to unfair practices" Hour 3: "Comprehensive retaliation package" Hour 4: "Emergency domestic protection measures" Hour 5: "Strategic decoupling initiative" Hour 6: "Complete trade breakdown" Hour 7: "Economic crisis management" Hour 8: "Why would [other country] do this to us?"
Trade Flow Indicators
Green Flags (Temporary):
Balanced bilateral flows
Low tariff levels
Positive relationship scores
Surplus/deficit matching
Red Flags (Bet Here):
Asymmetric flows
Rising tariff trends
Negative relationship spiral
Mismatched needs/surpluses
Chaos Flags (Jackpot):
Multiple simultaneous trade wars
Cascading retaliations
Supply chain breakdown
"Autarky is strength!" speeches
The Trade Matrix Reality
With 16 countries, there are 120 bilateral relationships.
At any moment:
20 are cooperative (about to break)
40 are neutral (one headline from chaos)
40 are hostile (actively destroying value)
20 are at trade war (economic murder-suicide)
Your job: Predict which relationships move between categories.
Your Trading Playbook
The Reconciliation Play
When relationship scores hit bottom, watch for:
Resource desperation
New leadership rhetoric
"Reset" announcements
Grudging cooperation
The Breakdown Play
When cooperation peaks, watch for:
Success breeding complacency
Minor friction points
"Fairness" rhetoric
The first tariff
The Cascade Play
When multiple relationships deteriorate:
Map the connection web
Identify critical nodes
Position for systemic breakdown
Profit from the avalanche
The Meta Truth
Trade flow isn't about economics. It's about:
Egos and grudges
Mistakes compounding
Local stupid going global
AI proving humans aren't uniquely irrational
Every equation is correct. Every calculation is precise. Every AI decision breaks the model.
That's where you make your money.
Ready to see the theory behind the chaos? Continue to Gravity Model to understand why countries should trade but don't.
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