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Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace
A provocative look at how today’s trade conflicts are caused by governments promoting the interests of elites at the expense of workers
Trade disputes are usually understood as conflicts between countries with competing national interests, but as Matthew C. Klein and Michael Pettis show in this book, they are often the unexpected result of domestic political choices to serve the interests of the rich at the expense of workers and ordinary retirees.
Klein and Pettis trace the origins of today’s trade wars to decisions made by politicians and business leaders in China, Europe, and the United States over the past thirty years. Across the world, the rich have prospered while workers can no longer afford to buy what they produce, have lost their jobs, or have been forced into higher levels of debt. In this thought-provoking challenge to mainstream views, the authors provide a cohesive narrative that shows how the class wars of rising inequality are a threat to the global economy and international peace—and what we can do about it.
Trade disputes are usually understood as conflicts between countries with competing national interests, but as Matthew C. Klein and Michael Pettis show in this book, they are often the unexpected result of domestic political choices to serve the interests of the rich at the expense of workers and ordinary retirees.
Klein and Pettis trace the origins of today’s trade wars to decisions made by politicians and business leaders in China, Europe, and the United States over the past thirty years. Across the world, the rich have prospered while workers can no longer afford to buy what they produce, have lost their jobs, or have been forced into higher levels of debt. In this thought-provoking challenge to mainstream views, the authors provide a cohesive narrative that shows how the class wars of rising inequality are a threat to the global economy and international peace—and what we can do about it.
288 pages, Hardcover
First published May 19, 2020
About the author
Matthew C. Klein
1 book34 followersMatthew C. Klein is the economics commentator at Barron's. He previously wrote for the Financial Times, Bloomberg, and The Economist, and was once an investment associate at Bridgewater Associates.
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May 20, 2020
This book deserves a mass-market push that it seems to not be getting. Instead, it's probably being read by people like me who are already familiar with the arguments from Pettis's writing but want it in book length. In terms of difficulty for the laymen, it lies somewhere between a book digestible enough for someone who doesn't remember their high school economics and an academic treatise for the economics PhD. That is to say, I found it cogent and surprisingly brief, but it does not seek to entice or convert the uninterested.
This is probably not necessary in a book review, but here goes: I buy the argument, and I find the argument inherently attractive. It satisfies the centrist liberal's appetite for free trade, cosmopolitanism and narrowing income inequality by resolving their seeming contradictions. In that sense, more people should be beating the drums for this case.
The issue, I think, is the argument is not intuitive. To argue that America spends more than it saves not because it's a nation of spendthrifts but because of financial inflows fueled by depressed consumer demand in other countries is...difficult. It is much more difficult than saying American would produce more if it imposed tariffs or saying Americans should just learn to save more like the Chinese. That's not even to mention the book concludes by saying the federal government should actually issue more debt, not less, to satisfy foreign demand. (It is interesting that none of the proposals at the end is discouraging overseas purchases of U.S. assets.)
This is not to reduce the book to a rhetorical exercise. Klein and Pettis make a very convincing case in the book, though I am also curious what dissenting economists would say.
This is probably not necessary in a book review, but here goes: I buy the argument, and I find the argument inherently attractive. It satisfies the centrist liberal's appetite for free trade, cosmopolitanism and narrowing income inequality by resolving their seeming contradictions. In that sense, more people should be beating the drums for this case.
The issue, I think, is the argument is not intuitive. To argue that America spends more than it saves not because it's a nation of spendthrifts but because of financial inflows fueled by depressed consumer demand in other countries is...difficult. It is much more difficult than saying American would produce more if it imposed tariffs or saying Americans should just learn to save more like the Chinese. That's not even to mention the book concludes by saying the federal government should actually issue more debt, not less, to satisfy foreign demand. (It is interesting that none of the proposals at the end is discouraging overseas purchases of U.S. assets.)
This is not to reduce the book to a rhetorical exercise. Klein and Pettis make a very convincing case in the book, though I am also curious what dissenting economists would say.
July 3, 2021
Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace, by Matthew C. Klein and Michael Pettis, is an interesting book that looks at financial flows within and between countries, and in particular, flows of goods and services related to as nations current account balance. The authors argue that governments and businesses alter the flow of financial movements to suit their needs, to the detriment of the lower classes within a nation. The authors examine China, Germany, and the United States particularly closely, showing how much each nation alters their own countries' well-being and those of others to keep the elite in power and flush with cash. Each nation trades with others, leading to current account balances. Although much has been said about China and the US' trade imbalances over the last few years, the reality of the situation is much more complicated. The life cycle of a product or service is no longer straightforward. China imports parts from Taiwan, Japan, and South Korea to build iPhones at a Foxconn plant, for example, and exports the finished product. The software and corporate services often come from the United States, and that is where most of the profits go. They are then funneled through shell companies in Ireland to pay lower corporate taxes. Who really made the product? How do we account for the trade flow? Which country received the profits?
China is a nation with a current account surplus - where they often export more than they import, resulting in a net gain in finances. In China, the government has an incentive to keep wages and household spending power low to ensure the CCP remains in power; their mandate, after all, is the rapid increase in living standards that has accompanied China's reforming and opening up face in the 1980s and into modern times. Although living standards have markedly improved for all Chinese during this time, the government has kept the number of financial flows reinvested in wages and spending power low. Infrastructure investment has boomed, to the point of a financial bubble. Subways to nowhere, empty housing complexes, mega-malls with no shoppers - we have all seen the stories around 2013/2014, and this was the result of the Chinese elite investing in the infrastructure boom that was being encouraged by Chinese banking and financial regulations. Rather than using the excess cash flow of China's financial boom in the early 2000s for wage increases, the government invested in construction projects. Alongside this, China has purchased many billions in foreign-exchange reserves from the United States, much of it in Mortgage-Backed Securities (pre-2008) and US Treasury Bills. China has realized that its wild investment in domestic infrastructure is unsustainable, and the authors posit that the push to the Belt and Road Initiative is a move to ensure that China can use its current account surplus somewhere; and that is to invest in infrastructure in other nations.
In Germany, similar issues abound. Germany also traditionally carries a current account surplus. In Germany, profits from the surplus are spent on infrastructure outside of Germany. Germany actually possesses a lower median income than other comparable nations - South Korea and Canada are both higher by almost $10000 a year, for example, as of 2021. There is also a massive infrastructure gap in Germany. As of 2019, German municipalities faced many billions of dollars in infrastructure deficit. There are many stories of bad roads, and closed bridges. This problem is reportedly being addressed in 2021 with a new infrastructure spending fund. Even so, the history of German finances is tied to a fanatical liaison with fiscal prudence and austerity. Germany has been obsessed with achieving what they call "the black zero" or a balanced budget. This comes at the expense of infrastructure, wages, and living standards for many in Germany, and as will be seen, in Europe. Instead of investing at home, German banks up to the Euro-Crisis had loaned money out to other banks, namely in Spain, Ireland, Italy, and Greece. These countries all experienced a massive boost in infrastructure and housing prices, which all, of course, came crashing down as the illusion vanished. Far from being profligate spenders, many of these nations, in particular Spain, had rather healthy economic indicators. The problem was the massive and destabilizing influx of cash that could not be balanced by a central bank in Spain, due to its membership in the Eurozone. Germany has sought to export its prudentials to other nations, and the narrative in Germany seems to be heavily in favour of other Europeans being profligate spenders, and Germans having conquered finance.
Both China and Germany are heavily connected to the third main actor in this book - the United States of America. As the reserve currency of the world, the US sought to set itself up as the guarantor of the post-WWII era, much to the chagrin of the Europeans, and in the modern world, China. The US can and does abuse its power frequently, often using sanctions as a form of economic warfare that other countries are compelled to follow, regardless of how it affects the well-being of households in each nation. The US has also historically controlled the IMF and World Bank in some form and sought to export its business-focused financial system to other nations, often through predatory conditions on loans from said organizations. Domestically, the US has seen a downturn in domestic production since the year 2000, as businesses moved manufacturing operations overseas to increase profits. Businesses have also created subsidiaries in tax havens to funnel profits and avoid paying US taxes. This has led to many issues in the US, including stagnant wages, infrastructure gaps between regions, and much more. Even so, the US has often floated high on stock and real estate bubbles. Sure, many of those have crashed, but the authors argue something different. The US has been able to implement a very unequal system that favours the elite due to its reserve currency status. Nations are continuously buying and selling US T-bonds and other US assets. Famously, this is what caused the 2008-recession, as Europeans and the Chinese poured money into MBS, and US banks, due to deregulation, were able to make those products available by offering loans to everyone they could, and creating fradulant investment vehicles to satisfy customer demand.
This book argues that trade wars are class wars. In short, that the elite in a country look for places to dump surplus cash, and it is almost never in areas that will improve domestic wellbeing to its maximal point. Instead, banks look for easy and guaranteed profits - look at Germany lending money out at a low interest rate instead of investing in infrastructure. Or China building phantom towns instead of raising wages. The authors also argue that the US Dollar as the reserve of the world leads to many issues in the US, which includes a great interconnectedness with other financial centres, and a constrained ability to make financial decisions autonomously, for risk of global financial catastrophe. It also leads to poor decision making, as politicians and financial elite push to deregulate, save on taxes, and dismantle welfare. An interesting read through and through, and an eye-opening perspective on global financial flows and how they are interconnected.
China is a nation with a current account surplus - where they often export more than they import, resulting in a net gain in finances. In China, the government has an incentive to keep wages and household spending power low to ensure the CCP remains in power; their mandate, after all, is the rapid increase in living standards that has accompanied China's reforming and opening up face in the 1980s and into modern times. Although living standards have markedly improved for all Chinese during this time, the government has kept the number of financial flows reinvested in wages and spending power low. Infrastructure investment has boomed, to the point of a financial bubble. Subways to nowhere, empty housing complexes, mega-malls with no shoppers - we have all seen the stories around 2013/2014, and this was the result of the Chinese elite investing in the infrastructure boom that was being encouraged by Chinese banking and financial regulations. Rather than using the excess cash flow of China's financial boom in the early 2000s for wage increases, the government invested in construction projects. Alongside this, China has purchased many billions in foreign-exchange reserves from the United States, much of it in Mortgage-Backed Securities (pre-2008) and US Treasury Bills. China has realized that its wild investment in domestic infrastructure is unsustainable, and the authors posit that the push to the Belt and Road Initiative is a move to ensure that China can use its current account surplus somewhere; and that is to invest in infrastructure in other nations.
In Germany, similar issues abound. Germany also traditionally carries a current account surplus. In Germany, profits from the surplus are spent on infrastructure outside of Germany. Germany actually possesses a lower median income than other comparable nations - South Korea and Canada are both higher by almost $10000 a year, for example, as of 2021. There is also a massive infrastructure gap in Germany. As of 2019, German municipalities faced many billions of dollars in infrastructure deficit. There are many stories of bad roads, and closed bridges. This problem is reportedly being addressed in 2021 with a new infrastructure spending fund. Even so, the history of German finances is tied to a fanatical liaison with fiscal prudence and austerity. Germany has been obsessed with achieving what they call "the black zero" or a balanced budget. This comes at the expense of infrastructure, wages, and living standards for many in Germany, and as will be seen, in Europe. Instead of investing at home, German banks up to the Euro-Crisis had loaned money out to other banks, namely in Spain, Ireland, Italy, and Greece. These countries all experienced a massive boost in infrastructure and housing prices, which all, of course, came crashing down as the illusion vanished. Far from being profligate spenders, many of these nations, in particular Spain, had rather healthy economic indicators. The problem was the massive and destabilizing influx of cash that could not be balanced by a central bank in Spain, due to its membership in the Eurozone. Germany has sought to export its prudentials to other nations, and the narrative in Germany seems to be heavily in favour of other Europeans being profligate spenders, and Germans having conquered finance.
Both China and Germany are heavily connected to the third main actor in this book - the United States of America. As the reserve currency of the world, the US sought to set itself up as the guarantor of the post-WWII era, much to the chagrin of the Europeans, and in the modern world, China. The US can and does abuse its power frequently, often using sanctions as a form of economic warfare that other countries are compelled to follow, regardless of how it affects the well-being of households in each nation. The US has also historically controlled the IMF and World Bank in some form and sought to export its business-focused financial system to other nations, often through predatory conditions on loans from said organizations. Domestically, the US has seen a downturn in domestic production since the year 2000, as businesses moved manufacturing operations overseas to increase profits. Businesses have also created subsidiaries in tax havens to funnel profits and avoid paying US taxes. This has led to many issues in the US, including stagnant wages, infrastructure gaps between regions, and much more. Even so, the US has often floated high on stock and real estate bubbles. Sure, many of those have crashed, but the authors argue something different. The US has been able to implement a very unequal system that favours the elite due to its reserve currency status. Nations are continuously buying and selling US T-bonds and other US assets. Famously, this is what caused the 2008-recession, as Europeans and the Chinese poured money into MBS, and US banks, due to deregulation, were able to make those products available by offering loans to everyone they could, and creating fradulant investment vehicles to satisfy customer demand.
This book argues that trade wars are class wars. In short, that the elite in a country look for places to dump surplus cash, and it is almost never in areas that will improve domestic wellbeing to its maximal point. Instead, banks look for easy and guaranteed profits - look at Germany lending money out at a low interest rate instead of investing in infrastructure. Or China building phantom towns instead of raising wages. The authors also argue that the US Dollar as the reserve of the world leads to many issues in the US, which includes a great interconnectedness with other financial centres, and a constrained ability to make financial decisions autonomously, for risk of global financial catastrophe. It also leads to poor decision making, as politicians and financial elite push to deregulate, save on taxes, and dismantle welfare. An interesting read through and through, and an eye-opening perspective on global financial flows and how they are interconnected.
August 25, 2020
When the United States imposed sanctions on government officials in the City of Hong Kong for their enactment of a draconian "National Security Law" earlier this month (August 2020), the largest banks in China complied. For all of the hollowing out of the capacity of the current administration in the past four years, for all of its missteps, blatant corruption, and pie in the sky plans, it shows only the dollar is still almighty if Chinese banks must comply.
For all the dollar's strength as a global reserve currency, other countries still have room to maneuver within someone else's hegemony. Global and regional powers can still compete, even if they don't always go to war. Klein and Pettis here draw from John Hobson's study, "Imperialism", instead of Lenin, who said that those financial competitions would always lead to war.
In their study, they focus on two countries that were the greatest beneficiaries of the post-Cold War financial system - Germany and China. After the fall of the Berlin Wall and the reunification of Germany, it was able to expand rapidly on the basis of new labor markets elsewhere. In China, post-Tiananmen, the new stage of economic reforms was based on low wages, dismantling the bloated and inefficient state-owned enterprises, and export promotion. Germany became the pre-eminent manufacturing power in Europe, and China now expands its capacity to its neighbors with lower wages. Suppliers of raw materials also benefit. But the result is that while the United States is awash in cheap manufactured goods, the domestic manufacturing center is hollowed out.
Yet cutting American domestic spending would not be enough - that would not be enough to drive up savings and attract investment. The government, while still a massive driver in spending, would not be enough to influence the balances of savings and investment in the economy - those countries which have a massive surplus built up from exports invest in American sovereign debt. And so trade wars are class wars - from the exporters who suppressed domestic purchasing power through low interest rates to drive up manufacturing; to the United States which saw its own manufacturing centers disproportionately affected; and to big business which has continued to profit from the world's largesse. This arrangement has been uneven in its benefits.
And even so it is unstable - Germany's trapeze act in the Eurozone and the many millions of Chinese who are still poorer withstanding. Where will a 'rebalance' come from? There are rumors of Chinese moves towards boosting consumption through a 'dual circuation' policy; and on the American side coherent policies can only come up after the Trump administration is gone. But the question in framing of all this as war, and bringing up Germany and China in the same breath. Even the most frenzied hawk in the US national security apparatus would not dare treat Angela Merkel the same way as Xi Jinping. Klein and Pettis are right in bringing up this framing of current accounts and how trade, consumption, and investment are all intertwined; but I'll leave by saying this is a comprehensive and well-argued framing of one issue out of many.
For all the dollar's strength as a global reserve currency, other countries still have room to maneuver within someone else's hegemony. Global and regional powers can still compete, even if they don't always go to war. Klein and Pettis here draw from John Hobson's study, "Imperialism", instead of Lenin, who said that those financial competitions would always lead to war.
In their study, they focus on two countries that were the greatest beneficiaries of the post-Cold War financial system - Germany and China. After the fall of the Berlin Wall and the reunification of Germany, it was able to expand rapidly on the basis of new labor markets elsewhere. In China, post-Tiananmen, the new stage of economic reforms was based on low wages, dismantling the bloated and inefficient state-owned enterprises, and export promotion. Germany became the pre-eminent manufacturing power in Europe, and China now expands its capacity to its neighbors with lower wages. Suppliers of raw materials also benefit. But the result is that while the United States is awash in cheap manufactured goods, the domestic manufacturing center is hollowed out.
Yet cutting American domestic spending would not be enough - that would not be enough to drive up savings and attract investment. The government, while still a massive driver in spending, would not be enough to influence the balances of savings and investment in the economy - those countries which have a massive surplus built up from exports invest in American sovereign debt. And so trade wars are class wars - from the exporters who suppressed domestic purchasing power through low interest rates to drive up manufacturing; to the United States which saw its own manufacturing centers disproportionately affected; and to big business which has continued to profit from the world's largesse. This arrangement has been uneven in its benefits.
And even so it is unstable - Germany's trapeze act in the Eurozone and the many millions of Chinese who are still poorer withstanding. Where will a 'rebalance' come from? There are rumors of Chinese moves towards boosting consumption through a 'dual circuation' policy; and on the American side coherent policies can only come up after the Trump administration is gone. But the question in framing of all this as war, and bringing up Germany and China in the same breath. Even the most frenzied hawk in the US national security apparatus would not dare treat Angela Merkel the same way as Xi Jinping. Klein and Pettis are right in bringing up this framing of current accounts and how trade, consumption, and investment are all intertwined; but I'll leave by saying this is a comprehensive and well-argued framing of one issue out of many.
May 31, 2020
This is basically an exercise in balance of payments accounting, with some financial history thrown in. The main thesis is that the functional distribution of income determines savings rates, which determine the current account balance, and that political economic forces which have redistributed income away from workers, have been the major drivers of recent patterns of global imbalances. The focus is placed on Germany, where high national savings is attributed to policy changes post unification that have kept wages and government spending on social programs down, and China, where more direct control of wages and financial repression have been used. The flip side of this is persistent current account deficits in the US, which, due to (they argue) predictable and highly precedented patterns of misallocation of external capital inflows, has led not to productive investment or enhanced consumption, but instead, via Dutch disease and widening transfers to the financial sector, a rise in inequality in the US as well. Taken together, these forces also depress global demand and play a role in persistent stagnation.
Throughout, basic balance of payments accounting identities and detailed historical figures are used to make the case (a clear upgrade over popular arguments which do not make the effort to ensure basic accounting consistency), but the style of argument is rather informal, with alternative causal explanations presented but dismissed casually with appeal to a few charts or basic historical facts. This is suitable for the informed business reader likely to make up the target audience for this book, but the academic economist in me will remain at least somewhat skeptical without a more formal framework for evaluating the causal claims. That said, I did find the argument clear and provocative, to the point that I think it merits further study.
Overall, I found this a worthwhile read, especially for the historical coverage. For one, I learned a lot about German domestic politics. The coverage of post-financial crisis events was also helpful, as the academic literature has not quite caught up. Essentially, after the Euro crisis, Europe as a whole has shifted from a position of current account balance to net surplus while Asian surpluses have decreased, events the authors attribute to fiscal retrenchment in southern Europe post crisis and the deceleration of reserve accumulation in Asia. Their policy prescriptions, which I guess are mandatory in books like this, while sensible given their story, seem particularly unlikely to be implemented for exactly the same political reasons they suggest have lead to the issues, though I don't hold that against their descriptive analysis.
Throughout, basic balance of payments accounting identities and detailed historical figures are used to make the case (a clear upgrade over popular arguments which do not make the effort to ensure basic accounting consistency), but the style of argument is rather informal, with alternative causal explanations presented but dismissed casually with appeal to a few charts or basic historical facts. This is suitable for the informed business reader likely to make up the target audience for this book, but the academic economist in me will remain at least somewhat skeptical without a more formal framework for evaluating the causal claims. That said, I did find the argument clear and provocative, to the point that I think it merits further study.
Overall, I found this a worthwhile read, especially for the historical coverage. For one, I learned a lot about German domestic politics. The coverage of post-financial crisis events was also helpful, as the academic literature has not quite caught up. Essentially, after the Euro crisis, Europe as a whole has shifted from a position of current account balance to net surplus while Asian surpluses have decreased, events the authors attribute to fiscal retrenchment in southern Europe post crisis and the deceleration of reserve accumulation in Asia. Their policy prescriptions, which I guess are mandatory in books like this, while sensible given their story, seem particularly unlikely to be implemented for exactly the same political reasons they suggest have lead to the issues, though I don't hold that against their descriptive analysis.
July 25, 2020
If you read enough debates about the poor pay practices of various big box retailers, a simple question eventually comes up. “If you don’t pay your workers more than a minimal wage, how are they going to be able to afford the stuff you sell?” That is a good place to start in considering “Trade Wars are Class Wars”.
Trade politics is just about always messy and the closer one looks the more political it appears. Formal rational economic models seem out of place. If one has followed recent gyrations around US-China tariffs and trade agreements, this is crystal clear. Matthew Klein and Michael Pettis have written a book in which they try to develop the logic of trade politics by tying trade wars to income inequality. The idea is that ideally production and consumption should match up in a national economy and that the pressure for foreign trade will increase consumers cannot buy all that is produced. So conflicts over foreign trade may have nominal causes in particular situations but will be better understood as a function of inequality within a nation rather than differences between nations. This is a problem of more extreme inequality not just a matter of richer or poorer. The idea is that trade disputes reduce to elites exploiting the much poorer masses, after which they are forced to sell their excess production internationally or else take their surplus profits and invest them in overseas financial vehicles. Klein and Pettis go through a number of contemporary cases to show how this works and bring their arguments up to the present in the US-China disputes and the various EU financial crises and the role of Germany.
Does this work? Hmmm... I am not a trade specialist but it seems reasonable and the general logic is appealing. I also like that the authors do not go deep into the weeds in covering various tariff strategies or how to win trade wars and get better agreements. The current US-China kerfuffle casts doubt on any effort to do that. Rather, they propose solutions based on policies to fight inequality. Of course, how to defeat entrenched elites and put such policies into practice is another matter but it makes some intellectual sense. I will be reading more on trade and this book is a helpful addition to my reading list.
Trade politics is just about always messy and the closer one looks the more political it appears. Formal rational economic models seem out of place. If one has followed recent gyrations around US-China tariffs and trade agreements, this is crystal clear. Matthew Klein and Michael Pettis have written a book in which they try to develop the logic of trade politics by tying trade wars to income inequality. The idea is that ideally production and consumption should match up in a national economy and that the pressure for foreign trade will increase consumers cannot buy all that is produced. So conflicts over foreign trade may have nominal causes in particular situations but will be better understood as a function of inequality within a nation rather than differences between nations. This is a problem of more extreme inequality not just a matter of richer or poorer. The idea is that trade disputes reduce to elites exploiting the much poorer masses, after which they are forced to sell their excess production internationally or else take their surplus profits and invest them in overseas financial vehicles. Klein and Pettis go through a number of contemporary cases to show how this works and bring their arguments up to the present in the US-China disputes and the various EU financial crises and the role of Germany.
Does this work? Hmmm... I am not a trade specialist but it seems reasonable and the general logic is appealing. I also like that the authors do not go deep into the weeds in covering various tariff strategies or how to win trade wars and get better agreements. The current US-China kerfuffle casts doubt on any effort to do that. Rather, they propose solutions based on policies to fight inequality. Of course, how to defeat entrenched elites and put such policies into practice is another matter but it makes some intellectual sense. I will be reading more on trade and this book is a helpful addition to my reading list.
January 23, 2021
You may be forgiven if you think from reading the title that this is a Marxist analyst of international trade. It isn't. Actually, it doesn't even mention Marx, and uses the famines under Stalin and Mao as illustration for the central thesis of the book.
This thesis can be summarized as follows.
First, the book starts with something that is completely uncontroversial for anyone who had a two hours cours about national accounting (even if it is something people often overlook): any surplus (deficit) on a country's current account must be compensated by a deficit (surplus) of the same magnitude on its capital account. Why? Because (if we simplify somewhat and reduce the current account to the trade balance) a deficit on your trade balance means you spent more on imports than you earn from exports. And you can only spend more than you earn if the rest of the world gives you credit (which means you import capital). Conversely, if you earn more than you spend, this means you give credit to the rest of the wold - which means that you export capital.
Economists have often emphasized that a trade deficit is not necessarily a bad thing. In a closed economy, your only source of funding for your investment is national savings. If your investment needs are large and your savings small (the typical situation for a poor country, it makes perfect sense to have a trade deficit and let the rest of the world contribute to funding your investment. Again, there is nothing controversial in this step.
Where things get more complicated, is in the identification of causal links. Is it trade imbalances that drive international capital flows, or is it international capital flows that drive trade imbalances? And is it the policies of the trade surplus countries that determine global imbalances or the policies of the deficit countries?
The second step in the book's argument pertains to those question, and is certainly more controversial than the first one: the authors claim that it is the internal policies of the large surplus countries (Germany, China) that are the driving forces. According to them, it is surplus savings in Germany and China that have lead to massive capital inflows in the United States but also in the deficit countries in the EU. Those capital flows were larger than the productive investment needs of those countries, and have led to housing booms that contribute nothing to economic growth - with the financial crisis of 2008 as outcome.
This is a bold claim, but the authors carefully underpin their argument with a list of policies in Germany and China that (purposefully or not) reduce national consumption - actually, those policies are well known and have been discussed for quite a while, even before the financial crisis (remember Lawrence Summer's speech about the "glut of savings").
I guess that the real controversy here lies in the representation of the deficit countries (including the USA) as passive actors that cannot do much except accommodate those capital inflows. Putting the responsibility of global imbalances squarely with the surplus countries is, let's say, a daring claim.
The third (and even more controversial) step in the book is the claim that the policies that lead to the surpluses in Germany and China are the result of measures that deliberately increase the share of capital income in GDP at the expense of income from labour (which are supposedly linked to someone's 'class' - hence the title).
Not surprisingly, the authors conclude that, in order to maintain the benefits from globaliZation, the surplus countries need policies that increase the labor share in national income - essentially, a social democratic call to action.
I don't know whether this book will end up as an international bestseller as Thomas Piketty's work has. It certainly deserves to do so - and not only because it is much more pleasant to read.
Agree or not with the arguments (and there's a lot that has made me frown), but they are carefully laid out, and the authors refrain from any ideological saber rattling.
Following the financial crisis, we have seen tonloads of criticisms of the current economic order, and proposals for reform. This one stands out for the clarity of its argument, and for the concreteness of its policy proposals. It is a welcome addition to the public debate, and deserves to be widely read.
This thesis can be summarized as follows.
First, the book starts with something that is completely uncontroversial for anyone who had a two hours cours about national accounting (even if it is something people often overlook): any surplus (deficit) on a country's current account must be compensated by a deficit (surplus) of the same magnitude on its capital account. Why? Because (if we simplify somewhat and reduce the current account to the trade balance) a deficit on your trade balance means you spent more on imports than you earn from exports. And you can only spend more than you earn if the rest of the world gives you credit (which means you import capital). Conversely, if you earn more than you spend, this means you give credit to the rest of the wold - which means that you export capital.
Economists have often emphasized that a trade deficit is not necessarily a bad thing. In a closed economy, your only source of funding for your investment is national savings. If your investment needs are large and your savings small (the typical situation for a poor country, it makes perfect sense to have a trade deficit and let the rest of the world contribute to funding your investment. Again, there is nothing controversial in this step.
Where things get more complicated, is in the identification of causal links. Is it trade imbalances that drive international capital flows, or is it international capital flows that drive trade imbalances? And is it the policies of the trade surplus countries that determine global imbalances or the policies of the deficit countries?
The second step in the book's argument pertains to those question, and is certainly more controversial than the first one: the authors claim that it is the internal policies of the large surplus countries (Germany, China) that are the driving forces. According to them, it is surplus savings in Germany and China that have lead to massive capital inflows in the United States but also in the deficit countries in the EU. Those capital flows were larger than the productive investment needs of those countries, and have led to housing booms that contribute nothing to economic growth - with the financial crisis of 2008 as outcome.
This is a bold claim, but the authors carefully underpin their argument with a list of policies in Germany and China that (purposefully or not) reduce national consumption - actually, those policies are well known and have been discussed for quite a while, even before the financial crisis (remember Lawrence Summer's speech about the "glut of savings").
I guess that the real controversy here lies in the representation of the deficit countries (including the USA) as passive actors that cannot do much except accommodate those capital inflows. Putting the responsibility of global imbalances squarely with the surplus countries is, let's say, a daring claim.
The third (and even more controversial) step in the book is the claim that the policies that lead to the surpluses in Germany and China are the result of measures that deliberately increase the share of capital income in GDP at the expense of income from labour (which are supposedly linked to someone's 'class' - hence the title).
Not surprisingly, the authors conclude that, in order to maintain the benefits from globaliZation, the surplus countries need policies that increase the labor share in national income - essentially, a social democratic call to action.
I don't know whether this book will end up as an international bestseller as Thomas Piketty's work has. It certainly deserves to do so - and not only because it is much more pleasant to read.
Agree or not with the arguments (and there's a lot that has made me frown), but they are carefully laid out, and the authors refrain from any ideological saber rattling.
Following the financial crisis, we have seen tonloads of criticisms of the current economic order, and proposals for reform. This one stands out for the clarity of its argument, and for the concreteness of its policy proposals. It is a welcome addition to the public debate, and deserves to be widely read.
July 16, 2020
A refreshing book with some unusual arguments:
1. Trade wars happen because manufacturing jobs have moved from advanced to developing countries such as China and Mexico. Trade unions become powerless. Blue collared workers lose their jobs. Poor people overdose themselves with opioids or commit suicide. Civic societies disappear. They vote for populists like Trump. So Trump start trade wars.
2. This is possible only because of inequalities in exporting countries like China and Germany. Their workers’ wages are suppressed in favour of capital and the elite. So their goods can be sold cheaply and then they accumulate a trade surplus which they reinvest mainly back in American assets. This leads to financial and housing bubbles, and debt-fueled consumption of the American people.
3. The only way to fix this is for America to pressuring surplus countries to reduce their inequality and let their own people spend more. Tariffs and decoupling simply do not work as long as exporting countries are unequal.
Amazing fact: Germany’s GDP per capita is higher than Spain but because it is more unequal, it’s median wage is actually lower than that of Spain.
1. Trade wars happen because manufacturing jobs have moved from advanced to developing countries such as China and Mexico. Trade unions become powerless. Blue collared workers lose their jobs. Poor people overdose themselves with opioids or commit suicide. Civic societies disappear. They vote for populists like Trump. So Trump start trade wars.
2. This is possible only because of inequalities in exporting countries like China and Germany. Their workers’ wages are suppressed in favour of capital and the elite. So their goods can be sold cheaply and then they accumulate a trade surplus which they reinvest mainly back in American assets. This leads to financial and housing bubbles, and debt-fueled consumption of the American people.
3. The only way to fix this is for America to pressuring surplus countries to reduce their inequality and let their own people spend more. Tariffs and decoupling simply do not work as long as exporting countries are unequal.
Amazing fact: Germany’s GDP per capita is higher than Spain but because it is more unequal, it’s median wage is actually lower than that of Spain.
March 6, 2021
Wealth inequality abroad causes wealth inequality domestically.
I do not have a strong business or economic background and I struggled through the first half of this book with some dense economic history that was over my head. However, by the end of the book, I started to see the light at the end of the tunnel and finally get what these authors are trying to teach the reader. Their argument, as I understand it, is as follows:
1. Trade deficits are when a country imports more than it exports, trade surplus is the opposite. Deficits typically can occur when there is domestic investment opportunity and surpluses when growth is stagnant or the working class is underpaid and consumption is suppressed. Neither state is inherently good or bad, it all depends on the global financial context.
2. The US runs a massive trade deficit, countries like Germany and China run enormous trade surpluses. If you live in a trade surplus country, you likely have poor standard of living because you are deliberately receive less wages as seen in China, where a worker gets 40% of their labor production, and in Germany where the median (not average) household income is dismal. Countries with a surplus don't have enough investment opportunity within their own countries and thus invest abroad, typically in American assets and financial vehicles. The US is an enormous sink of global surplus. This sounds great, but the investment is happening at the elite level currently where the American finance sector is absorbing capital, not the US manufacturing industry, which is stagnant. While a trade deficit may be the envy of advanced countries, the deficit currently benefits US elites, not average Americans because the capital is not reinvested into jobs, which are still abroad for cheap labor.
3. The consequence of global surplus running into the US is the creation of financial bubbles--a false demand for goods and services pushed by the banking industry. The authors argue that this is the exact cause of the 2008 housing bubble: US elites pushing subprime mortgages on poor people who took on risky debt to ensure flow of foreign investments. This enriched financial elites and bankrupted average Americas. The current trade deficit of the US, while traditionally was used for infrastructure growth that helped stimulate the US in the 1970s, now only goes to the coffers of the elites for hoarding and investing.
4. The current trade imbalance directly contributes to wealth concentration at the top. In trade surplus countries, like China, workers are intentionally subjugated to poor working conditions. China suppress consumption with the Hukou system, basically making rural workers illegal immigrants in their own countries with oppressive rules that discourage them from moving more urban. Unions are illegal in China to suppress wages. On the other side of the coin, the US absorbs all this surplus and does not re-invest it into actual job growth for average workers. This results in a very cozy relationship between all global elites: the Chinese elites make money off their American investments and American elites make money from hoarding and investing that surplus. Everyone else is screwed over.
5. Globalization is currently bad for the average person. Globalization and open trade facilitates the bidirectional wealth concentration. Getting out of the TTP and NAFTA were probably good ideas. However, Trump's other acts of decrying the trade deficit and raising tariffs is puzzling and nonsensical. The trade deficit is not inherently bad and starting a trade war simply shifted unemployment from steel manufacturing to farmers.
6. The solution is to tax the rich--the global rich. This would help redistribute wealth from the top and aid re-investment in infrastructure, manufacturing and job growth. China must give surplus back to its workers, end the hukuo social system and tax their high earners.
Great read!
I do not have a strong business or economic background and I struggled through the first half of this book with some dense economic history that was over my head. However, by the end of the book, I started to see the light at the end of the tunnel and finally get what these authors are trying to teach the reader. Their argument, as I understand it, is as follows:
1. Trade deficits are when a country imports more than it exports, trade surplus is the opposite. Deficits typically can occur when there is domestic investment opportunity and surpluses when growth is stagnant or the working class is underpaid and consumption is suppressed. Neither state is inherently good or bad, it all depends on the global financial context.
2. The US runs a massive trade deficit, countries like Germany and China run enormous trade surpluses. If you live in a trade surplus country, you likely have poor standard of living because you are deliberately receive less wages as seen in China, where a worker gets 40% of their labor production, and in Germany where the median (not average) household income is dismal. Countries with a surplus don't have enough investment opportunity within their own countries and thus invest abroad, typically in American assets and financial vehicles. The US is an enormous sink of global surplus. This sounds great, but the investment is happening at the elite level currently where the American finance sector is absorbing capital, not the US manufacturing industry, which is stagnant. While a trade deficit may be the envy of advanced countries, the deficit currently benefits US elites, not average Americans because the capital is not reinvested into jobs, which are still abroad for cheap labor.
3. The consequence of global surplus running into the US is the creation of financial bubbles--a false demand for goods and services pushed by the banking industry. The authors argue that this is the exact cause of the 2008 housing bubble: US elites pushing subprime mortgages on poor people who took on risky debt to ensure flow of foreign investments. This enriched financial elites and bankrupted average Americas. The current trade deficit of the US, while traditionally was used for infrastructure growth that helped stimulate the US in the 1970s, now only goes to the coffers of the elites for hoarding and investing.
4. The current trade imbalance directly contributes to wealth concentration at the top. In trade surplus countries, like China, workers are intentionally subjugated to poor working conditions. China suppress consumption with the Hukou system, basically making rural workers illegal immigrants in their own countries with oppressive rules that discourage them from moving more urban. Unions are illegal in China to suppress wages. On the other side of the coin, the US absorbs all this surplus and does not re-invest it into actual job growth for average workers. This results in a very cozy relationship between all global elites: the Chinese elites make money off their American investments and American elites make money from hoarding and investing that surplus. Everyone else is screwed over.
5. Globalization is currently bad for the average person. Globalization and open trade facilitates the bidirectional wealth concentration. Getting out of the TTP and NAFTA were probably good ideas. However, Trump's other acts of decrying the trade deficit and raising tariffs is puzzling and nonsensical. The trade deficit is not inherently bad and starting a trade war simply shifted unemployment from steel manufacturing to farmers.
6. The solution is to tax the rich--the global rich. This would help redistribute wealth from the top and aid re-investment in infrastructure, manufacturing and job growth. China must give surplus back to its workers, end the hukuo social system and tax their high earners.
Great read!
June 1, 2020
Really enjoyed the mix of history, policy, politics, economics, and finance that this book was able to pack in without being overly long or dense. The ability to simply and clearly explain why intra-nation distribution of resources affect the rest of the world is done exceptionally well by the authors and made for very enjoyable reading.
July 24, 2022
Really interesting to read this now, as it documents economic history right up to 2019 and makes recommendations for the future, without any information about the impending pandemic, supply crunch, and inflation to come. I'd be majorly interested in a sequel that incorporates this new information, though Klein has been doing it in iterative fashion at The Overshoot. The big takeaway for me is how Germany is just a bunch of monsters.
August 21, 2022
Klein & Pettis' book is a huge achievement in synthesising important strands of recent political economy and international economics research. They combine a deep understanding of the literature on rising income & wealth inequality, the financialisation of the real economy and the class struggles in import/export nations, and provide a novel interpretation of recent trade conflicts as the manifestation of countries' internal class conflicts.
The argument is a fairly simple theoretical claim, but which is backed up by mountains of evidence on both the largest surplus and deficit countries in the world economy. It could be summarised as: with increasing trade openness and interdependence of economies, no country's economic position can be understood solely by looking at its internal dimensions or its bilateral trade relationships - instead, we must look at its place in the world economic system, and how its internal class settlement reflects its economic relationship with the rest of the world.
By using this thesis to examine the past 50 years of economic history (although they do go into previous periods in the first few chapters too), we are able to see that rising income & wealth inequality as the result of class domination in large surplus countries such as Germany and China have greatly distorted the world economy, including by causing a saving's glut which contributed to the US's financial crisis.
Klein & Pettis stress that we cannot understand these relationships as conflicts between China and the US, or between Germany and deficit countries in Europe, but as a manifestation of the dominance of the hyper rich and their preferred political-economic settlement which depresses domestic consumption, increases savings by transferring wealth upwards and increases exports.
The US, due to its status as the producer of the world's reserve assets (dollars and treasury bills), manages to do something even stranger due to its place in the world system - it has wildly increased its income & wealth inequality whilst becoming the world's biggest deficit country. It is through the spread of global finance that the savings of countries such as China have been transferred to the United States, which is then relied on to prop up world demand and consumption. This situation is neither beneficial to most people in the United States or China, but is particularly beneficial to their elites.
Klein & Pettis end the book with a call for the reform of the global economic order along the lines of John Maynard Keynes' call for a world reserve asset - the bancor - at the Bretton Woods conference in 1944. However, due to this being a work by a finance professor and an economic correspondent, it lacks any proscription of a political strategy for any sort of left-liberal alliance to achieve this new order. The brevity of the books concluding chapter where it offers proscriptions to solve the class wars (and thereby solve the trade wars) is its weakest point - even if I would broadly agree with what is outlined in it.
Overall, the book is an excellent read and combines deep knowledge of international finance and trade, domestic politics and class composition, as well as a sense of the urgency and injustice of the situation which is often missing from books about international economic issues. The book avoids getting in to unnecessary details which would put off the non-trained reader, so I really would recommend this to anybody who wants to understand what is really behind the 'trade conflicts' which have been shaking the world for at least the past decade.
The argument is a fairly simple theoretical claim, but which is backed up by mountains of evidence on both the largest surplus and deficit countries in the world economy. It could be summarised as: with increasing trade openness and interdependence of economies, no country's economic position can be understood solely by looking at its internal dimensions or its bilateral trade relationships - instead, we must look at its place in the world economic system, and how its internal class settlement reflects its economic relationship with the rest of the world.
By using this thesis to examine the past 50 years of economic history (although they do go into previous periods in the first few chapters too), we are able to see that rising income & wealth inequality as the result of class domination in large surplus countries such as Germany and China have greatly distorted the world economy, including by causing a saving's glut which contributed to the US's financial crisis.
Klein & Pettis stress that we cannot understand these relationships as conflicts between China and the US, or between Germany and deficit countries in Europe, but as a manifestation of the dominance of the hyper rich and their preferred political-economic settlement which depresses domestic consumption, increases savings by transferring wealth upwards and increases exports.
The US, due to its status as the producer of the world's reserve assets (dollars and treasury bills), manages to do something even stranger due to its place in the world system - it has wildly increased its income & wealth inequality whilst becoming the world's biggest deficit country. It is through the spread of global finance that the savings of countries such as China have been transferred to the United States, which is then relied on to prop up world demand and consumption. This situation is neither beneficial to most people in the United States or China, but is particularly beneficial to their elites.
Klein & Pettis end the book with a call for the reform of the global economic order along the lines of John Maynard Keynes' call for a world reserve asset - the bancor - at the Bretton Woods conference in 1944. However, due to this being a work by a finance professor and an economic correspondent, it lacks any proscription of a political strategy for any sort of left-liberal alliance to achieve this new order. The brevity of the books concluding chapter where it offers proscriptions to solve the class wars (and thereby solve the trade wars) is its weakest point - even if I would broadly agree with what is outlined in it.
Overall, the book is an excellent read and combines deep knowledge of international finance and trade, domestic politics and class composition, as well as a sense of the urgency and injustice of the situation which is often missing from books about international economic issues. The book avoids getting in to unnecessary details which would put off the non-trained reader, so I really would recommend this to anybody who wants to understand what is really behind the 'trade conflicts' which have been shaking the world for at least the past decade.
January 20, 2021
I place this book at the front of a line of new economic theories that look to rethink what money means and its workings at the international level. My lasting impression from this book is another plea for governments to stop treating national finances as anything comparable to household/business finances and to turn the common belief around that in many cases it is not indebted countries which are to blame but those forcing their surplus reserves (often at the expense of their own population) onto these countries.
Klein and Pettis expertly pick apart international asset flows to display how domestic policies, concentrates wealth in the wrong hands, leads to imbalances in the global financial system and ultimately trade wars. They explain the failures of the existing structure through plentiful supporting data and historical examination which is both thorough yet simple to comprehend and offer actionable policies to remedy them.
Notes:
Three regions are central to the book: China, US and Europe but all are split into two halves:
There are the nations that suppress their population’s consumption to a level below their productivity; and the resulting nations which are absorbing the surplus capacity.
China has for a long time prioritised its industrialisation over its population, quashing consumption and producing a large financial surplus. It has done this through stringent capital controls and domestic policies such as regulating rural-urban migration (hukou). The surplus is either invested in domestic infrastructure or the acquisition of foreign assets. An interesting point they make that the Belt and Road initiative as a method for providing more demand for its surplus as opposed to military or geopolitical positioning.
The US is a special case due its currency propping up the global financial plumbing. It is not seen as a string puller but one bound to free market policies that allow it to be picked off by surplus countries and it is subsequent difficult for it to unilaterally change its situation. Redressing the economic inequality and degrading infrastructure requires shifting foreign investment from the private sector which has few places to spent productively and into the public purse where it can be used for these purposes.
After China, Germany has the highest trade surplus where policies favour business and sustaining wealth over workers. More obvious fiscal solutions exist here; reforming taxes and strengthening social nets. While this might limit the exasperation which occurred when an overheated lending market (from excess surplus) caused countries such as Spain to spend beyond its ability to productively invest it doesn’t not solve European problem which does not seemingly have a solution beyond multilateral organisation and ultimately federalism.
Klein and Pettis expertly pick apart international asset flows to display how domestic policies, concentrates wealth in the wrong hands, leads to imbalances in the global financial system and ultimately trade wars. They explain the failures of the existing structure through plentiful supporting data and historical examination which is both thorough yet simple to comprehend and offer actionable policies to remedy them.
Notes:
Three regions are central to the book: China, US and Europe but all are split into two halves:
There are the nations that suppress their population’s consumption to a level below their productivity; and the resulting nations which are absorbing the surplus capacity.
China has for a long time prioritised its industrialisation over its population, quashing consumption and producing a large financial surplus. It has done this through stringent capital controls and domestic policies such as regulating rural-urban migration (hukou). The surplus is either invested in domestic infrastructure or the acquisition of foreign assets. An interesting point they make that the Belt and Road initiative as a method for providing more demand for its surplus as opposed to military or geopolitical positioning.
The US is a special case due its currency propping up the global financial plumbing. It is not seen as a string puller but one bound to free market policies that allow it to be picked off by surplus countries and it is subsequent difficult for it to unilaterally change its situation. Redressing the economic inequality and degrading infrastructure requires shifting foreign investment from the private sector which has few places to spent productively and into the public purse where it can be used for these purposes.
After China, Germany has the highest trade surplus where policies favour business and sustaining wealth over workers. More obvious fiscal solutions exist here; reforming taxes and strengthening social nets. While this might limit the exasperation which occurred when an overheated lending market (from excess surplus) caused countries such as Spain to spend beyond its ability to productively invest it doesn’t not solve European problem which does not seemingly have a solution beyond multilateral organisation and ultimately federalism.
September 17, 2020
Alarmingly, the trend in which we see workers handing over their hard earned money to the wealthy elite, is far from a national crisis. It's a global crisis. You would think that if each country has its own laws and policies, you would see very different outcomes. But, it seems that laws and policies in individual countries only serve to globally make the poor poorer and rich richer. It can be confusing to think about because we all know that even some poor people in America today are able to eat more diverse foods than what was available to even the richest kings of the past. Life seems to be getting better for everyone, right? Our healthcare gets better, farming and trade have made it so that I can have a delicious avocado with my salad any time of the year, no matter how cold it is in my local region. This might be true, but it is also true that at the same time, the small percent of the very wealthy are learning ways in which they can secure more and more of the common person's wealth, and policies are helping the wealthy succeed.
You might think it's just China doing this to their citizens, but it's not. Even the UK has increasingly reduced worker protections and increased taxes for the workers. These authors think there is definitely cause for concern and urge the reader to take caution when accepting various narratives generated by governments and companies. For example, when we hear what the Chinese are doing, do we accept that what seem like sketchy policies are being perpetrated by all Chinese? Or can we recognize that the policies of the government (policies such as using coal and not using filters for factory waste, which has been written about extensively in other books) have caused its poor citizens to breathe polluted air and drink dirty water? It's not hard for me to empathize with the average Chinese worker. After all, I really hope people in other countries realize that only some American's are terrible enough to elect someone as dangerous and harmful as Trump.
In this book the authors depict a really wonderful history of trade that sets the reader up to understand how class wars, going on right now, feed into trade wars, and how trade wars create the perfect conditions to take money out of the hands of workers and put it into the hands of the very wealthy. The authors examined how globalization is affecting America. They looked at seemingly unconnected situations in various countries and how an "unconnected" situation in one country ended up affecting the environment in a country across the vast ocean.
This book was published in 2020, which means you read the authors' perspective on Trump's trade war with china. They discussed in detail what the role of Trump's trade policies with China played in the 2016 election.Trump's stance on China was popular across the political spectrum and were praised by democrats such as Chuck Schumer. The authors go so far as to claim that Donald Trump might have actually lost the election if it had not been for the trade war between America and China, because he got the votes from the 89 of the 100 counties most negatively affected by the trade war with China.
My review isn't doing the book justice. Extremely informative. The authors covered so much ground. I highly recommend putting it on your reading list.
You might think it's just China doing this to their citizens, but it's not. Even the UK has increasingly reduced worker protections and increased taxes for the workers. These authors think there is definitely cause for concern and urge the reader to take caution when accepting various narratives generated by governments and companies. For example, when we hear what the Chinese are doing, do we accept that what seem like sketchy policies are being perpetrated by all Chinese? Or can we recognize that the policies of the government (policies such as using coal and not using filters for factory waste, which has been written about extensively in other books) have caused its poor citizens to breathe polluted air and drink dirty water? It's not hard for me to empathize with the average Chinese worker. After all, I really hope people in other countries realize that only some American's are terrible enough to elect someone as dangerous and harmful as Trump.
In this book the authors depict a really wonderful history of trade that sets the reader up to understand how class wars, going on right now, feed into trade wars, and how trade wars create the perfect conditions to take money out of the hands of workers and put it into the hands of the very wealthy. The authors examined how globalization is affecting America. They looked at seemingly unconnected situations in various countries and how an "unconnected" situation in one country ended up affecting the environment in a country across the vast ocean.
This book was published in 2020, which means you read the authors' perspective on Trump's trade war with china. They discussed in detail what the role of Trump's trade policies with China played in the 2016 election.Trump's stance on China was popular across the political spectrum and were praised by democrats such as Chuck Schumer. The authors go so far as to claim that Donald Trump might have actually lost the election if it had not been for the trade war between America and China, because he got the votes from the 89 of the 100 counties most negatively affected by the trade war with China.
My review isn't doing the book justice. Extremely informative. The authors covered so much ground. I highly recommend putting it on your reading list.
May 5, 2022
I really appreciated the proposition that the current day trade wars are really just class wars spearheaded by ultra elites against the working class, this work is fully of actually fleshed out economic explanations for the surpluses and deficits of different world powers and how they came to be that way.
March 19, 2021
A macroeconomics masterclass! I would highly recommend this book to anyone interested in understanding global trade and it’s implications. At this moment one of my life’s side quests is to understand how the US got to be the superpower that it is today and this book gives some very important knowledge upon the topic, it also gives perspective on how different countries developed and how China and Germany have got to were they are today. On the down side, it’s somewhat difficult to read if you are not familiar with some basic accounting and economic principles and in some arguments —especially does compelling the US and current European system— I felt bias. Besides this downsides it’s an amazing read and it undeniably deserves five stars.
July 28, 2020
Summarizing my thoughts/takeaways from the book:
Capital flows lead, and not follow, current account flows. Meaning an EM fad ends up forcing a Brazil or India to run deficits just from pure accounting. EM countries realized this through multiple painful experiences and started sterilizing these flows to prevent sudden stops. Can't blame their action but this artificially kept domestic wages low. When wages are low, capitalists are not forced to innovate i.e. increase productivity. For the American worker, the capitalist threatened jobloss to China to keep wages low. Either way labor lost out and capital won. The sterlization of capital inflows by EM central banks or the financial repression followed by Germany (to keep local wages low thereby producing more than could be consumed locally and hence running up surpluses) meant the global supplier of safe assets (USA) had to run deficits (or in other words continuously come up with USD assets others could buy). When that job was left to the private sector you got CDO squared. Now we are seeing a simpler version of the same. Every other day the US govt issues billions of dollars of treasuries without any price impact. Safe asset scarcity is real and probably changes only when USD is no more THE reserve currency. Reserve currency status is not just because of one's financial position (size of economy or market depth) but other factors like rule of law and military might (history and ability of honoring contracts). All that means is the end is likely to be a BANG! as Ray Dalio has been voicing in his notes over the last few months. How do we restore global imbalances?
Solve the labor vs capital problem. As in solve inequality. Let wages go up. Consumption will automatically go up. You don't have to force your produce down someone else's throat. Consumption preferences will drive resource allocation and the marginal dollar of credit will likely chase the highest return on investment rather than zombie towns. In other words capitalism can work once again. Capital will need labor power though. On its own, might instead end capitalism. Things look dire today with an overlevered system with no growth, lots of imbalances and till now an inability to inflate out of the debt (more of a political problem rather than operational to be fair). But its not over until its over. We need clear eyes and full hearts as Ben Hunt says.
Capital flows lead, and not follow, current account flows. Meaning an EM fad ends up forcing a Brazil or India to run deficits just from pure accounting. EM countries realized this through multiple painful experiences and started sterilizing these flows to prevent sudden stops. Can't blame their action but this artificially kept domestic wages low. When wages are low, capitalists are not forced to innovate i.e. increase productivity. For the American worker, the capitalist threatened jobloss to China to keep wages low. Either way labor lost out and capital won. The sterlization of capital inflows by EM central banks or the financial repression followed by Germany (to keep local wages low thereby producing more than could be consumed locally and hence running up surpluses) meant the global supplier of safe assets (USA) had to run deficits (or in other words continuously come up with USD assets others could buy). When that job was left to the private sector you got CDO squared. Now we are seeing a simpler version of the same. Every other day the US govt issues billions of dollars of treasuries without any price impact. Safe asset scarcity is real and probably changes only when USD is no more THE reserve currency. Reserve currency status is not just because of one's financial position (size of economy or market depth) but other factors like rule of law and military might (history and ability of honoring contracts). All that means is the end is likely to be a BANG! as Ray Dalio has been voicing in his notes over the last few months. How do we restore global imbalances?
Solve the labor vs capital problem. As in solve inequality. Let wages go up. Consumption will automatically go up. You don't have to force your produce down someone else's throat. Consumption preferences will drive resource allocation and the marginal dollar of credit will likely chase the highest return on investment rather than zombie towns. In other words capitalism can work once again. Capital will need labor power though. On its own, might instead end capitalism. Things look dire today with an overlevered system with no growth, lots of imbalances and till now an inability to inflate out of the debt (more of a political problem rather than operational to be fair). But its not over until its over. We need clear eyes and full hearts as Ben Hunt says.
November 19, 2021
Well worth the read. There are details that can be quibbled over, especially as it regards the history of economic thought and the economic history, yet the meat and potatoes are interesting and, if not necessarily novel, well laid out. There are aspects of the argument that I still find troublesome and, perhaps, not well developed. Still, Trade Wars are Class Wars has changed the way I think about international trade and capital flows, causing me to review some of my priors.
The bare-bones economic theory is as follows (spoiler alert?) —
(1) In countries with high income inequality, savings — which distribution is skewed toward the rich — are spent on assets because there aren't worthwhile physical investments (italicized to show Jonathan's Doubt #1).
(2) In countries with high income inequality, wages are suppressed and therefore domestic demand for domestic production is suppressed (Jonathan's Doubt #2...ish). If there is excess production, that excess must necessarily be exported. Thus, countries with high income that have positive savings will also have current account surpluses, such as with Germany and China. There is one exception: the United States.
(3) The United States is an exception to (2) because the U.S. Dollar is the world's primary reserve currency, playing a similar role as gold did prior to 1971 in the sense of being used as hard currency when local currencies go bust. High demand for dollars keeps the dollar strong with respect to other currencies, reducing exports. Increased U.S. demand, in the form of borrowed foreign savings, goes into imports, explaining why the U.S. is unique in having high income inequality, positive savings, but a trade deficit.
(4) Trade wars between current account deficit and current account surplus countries are therefore class wars because its net capital flows in the form of excess savings invested in financial assets that determine net trade flows as opposed to the other way around — and it's the rich who are using these savings in this way.
The underlying assumption here is that if the distribution of savings was more in the direction of wage-workers, they would use that future consumption to buy consumer goods thereby making investment in domestic manufacturing more attractive. The authors' solution is straightforward-ish: capital controls combined with progressive tax and fiscal policies (Jonathan's Doubt #3-ish).
Jonathan's Doubt #1: Throughout the book the authors point out investment opportunities. Indeed, they imply that governments could re-route excess savings into infrastructural investments that would have positive ROI. I find it hard to believe that only government investments would have positive ROI, especially knowing how poorly government manages investment in general. I do think that perhaps investment in dollar-denominated assets is seen as more lucrative but how much of that is driven by domestic monetary policy that protects and buoys asset prices? The U.S. is not just a passive recipient of foreign savings; the Federal Reserve actively moves around overnight discount rates to promote monetary base and, indirectly, credit growth. Investment in assets like mortgage-backed securities and collateralized debt obligations followed the Fed's lead, not the other way around.
Jonathan's Doubt #2-ish: Suppressed wages may in fact be true in some countries, but at face value share of income seems like a poor metric to judge this by. Median incomes for the top three U.S. income quintiles have grown, albeit the top two much faster than the third. No income quintile has seen an income drop, and all have seen income gains post-redistribution. The doubt is a doubt-ish because maybe a decline in income share, taking the authors' arguments for granted,
will decrease future demand for physical output and therefore incentivizes the flow of savings into financial assets. All the same, how much of the shift in income share is driven by monetary policy that rewards/buoys asset prices?
Jonathan's Doubt #3: Timothy Snyder, in The Great Leveller, suggests that progressive tax and fiscal schemes most inequality by a few percentage points at best, meaning they are not effective solutions to inequality. I wonder to what degree inequality is relevant, anyway. Because we're talking about the distribution of demand across physical and financial assets. If it were less lucrative to invest in financial assets with respect to physical assets, we'd see the distribution of demand shift toward the latter. In other words, I think there is a bigger story that Trade Wars are Class Wars doesn't quite capture.
Still, I am now more in favor of certain capital controls. This is because of the book's insight that today's world is more integrated than ever. We are no longer dealing with closed economies, but increasingly one big economy. Labor market distortions in China will affect its neighbors, Europe, and the U.S. Likewise, we know that U.S. monetary policy will affect China, Europe, and the rest of the world. Global governments don't tend to respond to economic forces that push against their distortions by allowing the distortion to be corrected, they tend to double down. In this imperfect world, perhaps certain capital controls would offer us some degree of protection against capital flow distortions that, in turn, feed trade distortions.
Finally, I'll call out the capture that discusses the accuracy of trade data. It's incredibly interesting and shows why much of that data can't be trusted as a result of capital tax loopholes. Through the use of subsidiaries and shells, companies can report income earned in one country in another to avoid tax obligations. This income flow will be represented in trade data by how it's reported by the company, which again is determined by tax policy and loopholes. Thus, U.S. exports are overstated by about 20% and imports by 16%. Chinese imports and exports are overstated by about 30%. This insight is not really used elsewhere in the book. More importantly, for the book, it shows how the rich lower the effective tax rates on their investments, reducing the general progressivity of the tax/fiscal system.
Update 1 or Jonathan's Doubt #4: Another thought that I forgot to mention is that the book relies heavily on classical Ricardian trade theory. I wonder to what extent the conclusions would change if we started from a trade flow baseline informed by New Trade Theory. On a minor note, it would at least change the authors' perception that rich economies should naturally export capital goods to poor economies — we know that this isn't empirically true since at least Wassily Leontief's 1953 article, "Domestic Production and Foreign Trade; The American Capital Position Re-Examined." We also know that countries will tend to be exporters where they have the largest domestic markets. For example, China's domestic market for steel is much larger than the U.S., and most Chinese steel production flows internally, even if China has also become the US' primary source of steel. Economies with very large internal markets may therefore be net exporters and may also be financing the purchase of these exports with their savings, something which would skew income share toward financiers.
The bare-bones economic theory is as follows (spoiler alert?) —
(1) In countries with high income inequality, savings — which distribution is skewed toward the rich — are spent on assets because there aren't worthwhile physical investments (italicized to show Jonathan's Doubt #1).
(2) In countries with high income inequality, wages are suppressed and therefore domestic demand for domestic production is suppressed (Jonathan's Doubt #2...ish). If there is excess production, that excess must necessarily be exported. Thus, countries with high income that have positive savings will also have current account surpluses, such as with Germany and China. There is one exception: the United States.
(3) The United States is an exception to (2) because the U.S. Dollar is the world's primary reserve currency, playing a similar role as gold did prior to 1971 in the sense of being used as hard currency when local currencies go bust. High demand for dollars keeps the dollar strong with respect to other currencies, reducing exports. Increased U.S. demand, in the form of borrowed foreign savings, goes into imports, explaining why the U.S. is unique in having high income inequality, positive savings, but a trade deficit.
(4) Trade wars between current account deficit and current account surplus countries are therefore class wars because its net capital flows in the form of excess savings invested in financial assets that determine net trade flows as opposed to the other way around — and it's the rich who are using these savings in this way.
The underlying assumption here is that if the distribution of savings was more in the direction of wage-workers, they would use that future consumption to buy consumer goods thereby making investment in domestic manufacturing more attractive. The authors' solution is straightforward-ish: capital controls combined with progressive tax and fiscal policies (Jonathan's Doubt #3-ish).
Jonathan's Doubt #1: Throughout the book the authors point out investment opportunities. Indeed, they imply that governments could re-route excess savings into infrastructural investments that would have positive ROI. I find it hard to believe that only government investments would have positive ROI, especially knowing how poorly government manages investment in general. I do think that perhaps investment in dollar-denominated assets is seen as more lucrative but how much of that is driven by domestic monetary policy that protects and buoys asset prices? The U.S. is not just a passive recipient of foreign savings; the Federal Reserve actively moves around overnight discount rates to promote monetary base and, indirectly, credit growth. Investment in assets like mortgage-backed securities and collateralized debt obligations followed the Fed's lead, not the other way around.
Jonathan's Doubt #2-ish: Suppressed wages may in fact be true in some countries, but at face value share of income seems like a poor metric to judge this by. Median incomes for the top three U.S. income quintiles have grown, albeit the top two much faster than the third. No income quintile has seen an income drop, and all have seen income gains post-redistribution. The doubt is a doubt-ish because maybe a decline in income share, taking the authors' arguments for granted,
will decrease future demand for physical output and therefore incentivizes the flow of savings into financial assets. All the same, how much of the shift in income share is driven by monetary policy that rewards/buoys asset prices?
Jonathan's Doubt #3: Timothy Snyder, in The Great Leveller, suggests that progressive tax and fiscal schemes most inequality by a few percentage points at best, meaning they are not effective solutions to inequality. I wonder to what degree inequality is relevant, anyway. Because we're talking about the distribution of demand across physical and financial assets. If it were less lucrative to invest in financial assets with respect to physical assets, we'd see the distribution of demand shift toward the latter. In other words, I think there is a bigger story that Trade Wars are Class Wars doesn't quite capture.
Still, I am now more in favor of certain capital controls. This is because of the book's insight that today's world is more integrated than ever. We are no longer dealing with closed economies, but increasingly one big economy. Labor market distortions in China will affect its neighbors, Europe, and the U.S. Likewise, we know that U.S. monetary policy will affect China, Europe, and the rest of the world. Global governments don't tend to respond to economic forces that push against their distortions by allowing the distortion to be corrected, they tend to double down. In this imperfect world, perhaps certain capital controls would offer us some degree of protection against capital flow distortions that, in turn, feed trade distortions.
Finally, I'll call out the capture that discusses the accuracy of trade data. It's incredibly interesting and shows why much of that data can't be trusted as a result of capital tax loopholes. Through the use of subsidiaries and shells, companies can report income earned in one country in another to avoid tax obligations. This income flow will be represented in trade data by how it's reported by the company, which again is determined by tax policy and loopholes. Thus, U.S. exports are overstated by about 20% and imports by 16%. Chinese imports and exports are overstated by about 30%. This insight is not really used elsewhere in the book. More importantly, for the book, it shows how the rich lower the effective tax rates on their investments, reducing the general progressivity of the tax/fiscal system.
Update 1 or Jonathan's Doubt #4: Another thought that I forgot to mention is that the book relies heavily on classical Ricardian trade theory. I wonder to what extent the conclusions would change if we started from a trade flow baseline informed by New Trade Theory. On a minor note, it would at least change the authors' perception that rich economies should naturally export capital goods to poor economies — we know that this isn't empirically true since at least Wassily Leontief's 1953 article, "Domestic Production and Foreign Trade; The American Capital Position Re-Examined." We also know that countries will tend to be exporters where they have the largest domestic markets. For example, China's domestic market for steel is much larger than the U.S., and most Chinese steel production flows internally, even if China has also become the US' primary source of steel. Economies with very large internal markets may therefore be net exporters and may also be financing the purchase of these exports with their savings, something which would skew income share toward financiers.
September 27, 2022
Fantastic book. The authors provide an in-depth overview of the forces at play currently underpinning global trade wars. Against popular/mainstream opinion, trade wars are a direct result of domestic inequality between the working class and wealthy. As wealth ( purchasing power) is transferred from WC to Elites, it depresses domestic consumption, drives down working wages, and results in the flight of wealthy capital, as searches for better investment opportunities, abroad. The result, a fiscal surplus - typically lauded - historically, a negative for the nation operating at a surplus. Periods of government austerity are associated with decreased infrastructure investment, less spending on social nets, and the crushing of domestic consumption, all the expense of GDP growth ( Europe, a once great nation now reports lower median wealth than the Chinese). The U.S economy is at the center of the thesis (no spoilers). The U.S has been running a fiscal deficit for decades, and has become the dumping ground for the globe's excess capital due to its 'exorbitant privilege' (later called 'burden') of owning the global reserve currency: the almighty dollar. This book has certainly expanded my point of view on global flows.
September 1, 2020
The authors put forth a very important thesis: trade surpluses are not some grand accomplishment by a country making itself critical to the world economy, but rather the result of austerity measures that strip workers of their purchasing power. They explain how domestic class war underpins global trade war, and the continuing negative effects we can expect from such policies.
The problem is that this book is far too technical for a layperson, and I wish it were as accessible as it's portrayed by its publisher. Also, it seems rushed to print -- there are quite a few places where sentences were incomplete or missing words, which certainly doesn't help comprehension. As someone with expertise in an adjacent field, I got a lot out of this book, but it's not something I can widely recommend.
The problem is that this book is far too technical for a layperson, and I wish it were as accessible as it's portrayed by its publisher. Also, it seems rushed to print -- there are quite a few places where sentences were incomplete or missing words, which certainly doesn't help comprehension. As someone with expertise in an adjacent field, I got a lot out of this book, but it's not something I can widely recommend.
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October 11, 2021i don't know enough macroeconomics to tell if the book's thesis is unorthodox. for that same reason ( or perhaps it being an audiobook i could only grasp the theoretical aspects which were browbeaten ) i got confused in places during the actual case studies as to how the specific circumstances being described fit in with the larger thesis.
that said, the thesis is a compelling one with plenty of examples. all in all, a great econ-history lesson.
i learned quite a bit from the primer on 20th-century global monetary policy in the chapter on usa.
let's hope i can make a little more sense of macroeconomic news going forward.
that said, the thesis is a compelling one with plenty of examples. all in all, a great econ-history lesson.
i learned quite a bit from the primer on 20th-century global monetary policy in the chapter on usa.
let's hope i can make a little more sense of macroeconomic news going forward.
April 29, 2023
A fantastic overview of the evolution of the global economic system and all the issues that it is plagued by. This can easily be seen as a primer on the geo-political and economic issues of the present through a big picture perspective. Also, the writing is rooted in a historical context, so it doesn't present ideas in isolation. This is the kind of work that attempts to answer - 'How did we get here?'. It can be said that this book is greater than the sum of it's parts, and even if one doesn't agree with the argument made in the book and the conclusions drawn by the authors, it is still an invaluable resource. Highly recommend.
July 12, 2023
A real eyeopener that makes the global economy a little more understandable. Explains quite a lot of events in a clear and logical manner that is otherwise often explained through things like "this country is just very thrifty" or "their laziness makes them poorer". Turns out that is usually not the case when it comes to the fortunes of developed economies. Definitely worth a read if you are into economics.
May 3, 2022
Nice little book on economic history. Kind of reminds me a bit of Ray Dalio's debt cycles book in that it has a big idea that they repeatedly hammer home and then some nicely researched historical accounts to back it up. Super interesting learning about the German and Chinese economic model (and perhaps the US one for those who don't know). Still lots of economics terminology I don't know though :'D current account deficit and financial account deficit; what's the difference??
August 6, 2022
Moeizame read maar een eye opener.
September 30, 2023
Trade deficits = boy math
December 9, 2021
By the end, I actually might’ve given it a three, but some parts were difficult to understand and not exactly written in a clear manner. I read the book for my international trade and finance class, and I think it’s a good read for those interested in the field.
October 17, 2021
Excellent book.
June 5, 2020
Great book. Not only does it argue its thesis well, you'll also learn a lot about the history and present of international trade and finance. Very readable and not longer than it needs to be.
May 24, 2020
What an excellent overview of State current account balances and how this is deeply intertwined with the question of inequality. After a quick overall historical approach describing the growth of global trade and finance, the authors provide a deep dive on the trade situation in China, Germany, and the US in each describing the status with respect to their historical and current day drivers for international trade flows (the German chapter amazing, but I’m biased in living here). Naturally this is tied up with country specific saving & imbalances.
The framing for the inequality discussion does not often get put through the lens of international trade, but one can see the strong connection established in the authors’ arguments. The final conclusions / recommendations are sound: overall it could have been just a bit more in depth but this is also one I wouldn’t mind revisiting down the road.
The framing for the inequality discussion does not often get put through the lens of international trade, but one can see the strong connection established in the authors’ arguments. The final conclusions / recommendations are sound: overall it could have been just a bit more in depth but this is also one I wouldn’t mind revisiting down the road.
August 1, 2020
Disappointing in its execution of a well-reasoned and argued premise. Instead of an examination of trade wars and a detailed analysis of the class wars existing in the societies discussed by the authors, the book focuses on international economic/financial history and national accounts of economic policymaking decisions of the 20th and 21st century. The 'trade wars' aspect of the book is confined to brief allusions to the current trade conflict between the United States and China and the somewhat hidden role played herein played by European (German) excess savings. Whereas the 'class wars' are not even really mentioned whatsoever, except for simplifications like the 'ultra-rich versus the rest of the population' that blot out all the intricacies of the three societies discussed. Moreover, the link to the threat to international peace didn't even seem to be discussed whatsoever (unless the interweaving of WWI and WWII in the general historical overviews provided count).
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