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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
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6821 people want to read
About the author
Matthew C. Klein
2 books45 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.
April 10, 2025
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!
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 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.
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.
December 5, 2024
The word of 2025 is definitely going to be tariffs!
(Sorry, I promise no more assaults on your eyeballs by terribly edited overused memes)
Therefore, it is with great interest I ordered this book, hoping it would tell me a bit more about how to think about this whole trade war thingy from an economists POV.
The primary thesis of this book is that wealth inequalities in one country can cause distortions in another country or countries.
The idea is that this inequality suppresses consumption at the expense of savings because richer people spend a lower proportion of their income and save a higher proportion relative to a poorer person.
(How do you suppress consumption? There are many interesting examples in the book which essentially lead to slow wage growth despite increases in worker productivity).
This often leads to a savings "glut" where investment capital becomes available for cheap.
This can work if this capital can find productive investment opportunities (win-win situations) but can also lead to lose-lose situations when it is used to finance unproductive investments or unsustainable consumption as creditors get poor returns and debtors impoverish themselves due to servicing the debts.
The issue is that when you suppress consumption, there is limited domestic demand and hence limited domestic productive investment opportunities.
This leads to two scenarios.
Scenario one, this leads to the "high savings" entities (usually businesses but can be governments or rich individuals as well) "pushing" their investments on other countries despite unattractive debt yields or investment returns.
As mentioned above this can work if this results in productive investments. But often it flows to unproductive investments e.g. sovereign bonds but the proceeds are used for unproductive projects or to finance unsustainable spending or to high risk startups forming speculative bubbles.
Scenario two, this leads to investments in domestic export oriented industries which flood foreign countries with cheap goods reducing the domestic productive investment opportunities in the foreign countries.
Basically, the foreign consumers make up for the suppressed local demand and this comes at the expense of their domestic industries as they go from productive to unproductive because consumption is not suppressed with slow wage growth.
The book goes through some historical examples and the contemporary examples of present-day China (vis-a-vis Western world, primarily US) and present-day Germany (vis-a-vis the Eurozone, primarily Spain).
It also makes a case for why the US persistent current account deficit is not due to huge US budget deficits but due to the US dollar's status as a the world reserve currency.
The book thesis and ideas have a lot of potential. Sadly, it fails significantly on the execution part - it isn't detailed enough and even its organization is a bit all over the place.
At the end of the day, I am not fully convinced of the thesis. It makes intuitive sense.
But I'd like to see copious data and references to tons of relevant studies supporting the premise whereas the author mostly only presents his reasoning rather than any of the former.
The silver lining is this book has some secondary thesis and a bucketload of macroeconomic stats that are quite fun to wade through.
The ideas in the book really had the potential to be something like a Piketty's Capital in the 21st Century but it seems like the authors were not interested in/did not have the resources to write a similar epic tome.
(Sorry, I promise no more assaults on your eyeballs by terribly edited overused memes)
Therefore, it is with great interest I ordered this book, hoping it would tell me a bit more about how to think about this whole trade war thingy from an economists POV.
The primary thesis of this book is that wealth inequalities in one country can cause distortions in another country or countries.
The idea is that this inequality suppresses consumption at the expense of savings because richer people spend a lower proportion of their income and save a higher proportion relative to a poorer person.
(How do you suppress consumption? There are many interesting examples in the book which essentially lead to slow wage growth despite increases in worker productivity).
This often leads to a savings "glut" where investment capital becomes available for cheap.
This can work if this capital can find productive investment opportunities (win-win situations) but can also lead to lose-lose situations when it is used to finance unproductive investments or unsustainable consumption as creditors get poor returns and debtors impoverish themselves due to servicing the debts.
The issue is that when you suppress consumption, there is limited domestic demand and hence limited domestic productive investment opportunities.
This leads to two scenarios.
Scenario one, this leads to the "high savings" entities (usually businesses but can be governments or rich individuals as well) "pushing" their investments on other countries despite unattractive debt yields or investment returns.
As mentioned above this can work if this results in productive investments. But often it flows to unproductive investments e.g. sovereign bonds but the proceeds are used for unproductive projects or to finance unsustainable spending or to high risk startups forming speculative bubbles.
Scenario two, this leads to investments in domestic export oriented industries which flood foreign countries with cheap goods reducing the domestic productive investment opportunities in the foreign countries.
Basically, the foreign consumers make up for the suppressed local demand and this comes at the expense of their domestic industries as they go from productive to unproductive because consumption is not suppressed with slow wage growth.
The book goes through some historical examples and the contemporary examples of present-day China (vis-a-vis Western world, primarily US) and present-day Germany (vis-a-vis the Eurozone, primarily Spain).
It also makes a case for why the US persistent current account deficit is not due to huge US budget deficits but due to the US dollar's status as a the world reserve currency.
The book thesis and ideas have a lot of potential. Sadly, it fails significantly on the execution part - it isn't detailed enough and even its organization is a bit all over the place.
At the end of the day, I am not fully convinced of the thesis. It makes intuitive sense.
But I'd like to see copious data and references to tons of relevant studies supporting the premise whereas the author mostly only presents his reasoning rather than any of the former.
The silver lining is this book has some secondary thesis and a bucketload of macroeconomic stats that are quite fun to wade through.
The ideas in the book really had the potential to be something like a Piketty's Capital in the 21st Century but it seems like the authors were not interested in/did not have the resources to write a similar epic tome.
April 29, 2025
Świetna książka, szczególnie dzisiaj. Warto po nią sięgnąć, żeby dowiedzieć się, jaka szkoła myślenia stoi za tym, co robi teraz Donald Trump (i dlaczego jej diagnozy są nietrafione). Jedna z ważniejszych książek o globalizacji ostatnich lat.
January 13, 2025
My main motivation for reading this book (in the early days of 2025) was to become more informed on matters of trade, of which I knew very little (yet, I try). As we know, a new administration is set to take office in the U.S., with promises to rebalance trade relations through tariffs and the re-negotiation of various agreements. Well, you’ll be happy to know that in Pettis and Klein’s Trade Wars are Class Wars, I’ve found an important, fascinating, and quite timely study of the state of global trade in the 21st century, along with a masterful historical account of how we ended up here.
In "Trade Wars are Class Wars", Pettis and Klein drive home the key argument that global trade wars aren’t just country-versus-country battles—they’re the result of class conflicts within countries. When wealth (and, therefore, purchasing power) is concentrated among a small elite who save far more than they spend, entire economies can churn out more goods than local people can buy. That surplus output doesn’t vanish; it’s pushed onto the rest of the world, fueling trade imbalances and leaving one set of countries (the “surplus” economies) dependent on exports while others (the “deficit” economies) end up absorbing those extra goods and capital flows, often at great cost to their own workers and industries. These inflows and outflows must always net out.
Now, one of the more scandalous and thought-provoking claims the authors make, is that in a shocking turn of events, modern deficit countries such as the U.S. and the UK have become defacto "colonies" for the modern surplus countries, such as China and Germany. As some of you might recall, one of the main draws of colonialist expansion during the 19th century was the search for emerging economies that would provide a market for the glut of surplus production from the colonial powers, who would ensure willing buyers by facilitating cheap credit. As Michael Scott would say, "well, how the turntables"...
To drive the point closer to home, the authors point out that the U.S. has long served as the main “dumping ground” for surplus production and savings. This has been exacerbated by the dynamics that emerged after countries dropped the Gold Standard and the U.S. Dollar became the defacto reserve currency of the world's economy. Essentially, with the dollar as the linchpin of the global financial system, foreign capital routinely flows in, driving up asset values (like stocks and real estate) while suppressing interest rates. That, in turn, can mask problems—like deindustrialization and growing inequality—behind bubbles and debt, until a crisis exposes the underlying fragility.
Now, this book largely answered the lingering questions I had regarding the incoming administration's plans. Per Klein and Pettis, tariffs are a superficial and often counterproductive tool for handling trade deficits. Sure, they may temporarily reduce imports from a particular country, but they don't increase household income or alter structural features (like financial repression, investment patterns, labor-market policies, or tax systems) that cause the imbalance in the first place. What is more likely is that they will cause a re-routing of imports or incite retaliation. More importantly though, these will only serve as a bandaid and will not stem the disproportionate inflow of foreign capital to the public and private sector that are the root of much of the evil.
Ending these imbalances, the authors argue, requires two big shifts:
1. In Deficit Countries (like the U.S.):
- In the short term, the federal government should increase borrowing as much as needed (i.e. through bonds and other treasuries) to curtail the inflow of foreign capital to the private market where it can drive up assets prices such as real estate, or lead to malinvestment in the face of cheap credit.
- The federal government should absorb these foreign capital inflows in a productive way, such as major infrastructure investments or improving the social safety net.
- By lowering payroll taxes and improving household finances, the U.S. could spread income more evenly and reduce reliance on easy credit that leads to bubbles.
2. In Surplus Countries (like Germany and China):
- Elites must allow more of the national income to reach workers and retirees—e.g., by improving social welfare, reforming regressive taxation, and encouraging higher wages.
- A better balance of purchasing power at home means fewer forced exports and less pressure on foreign markets.
Pettis and Klein conclude by noting that if we fail to address deep class inequalities, the tensions that feed trade wars will persist or worsen. Globalization, in principle, could lift everyone, but in practice it’s been hijacked by policies that push wages and social protections downward. The remedy is rebalancing income distribution—helping ordinary consumers in both surplus and deficit countries regain the purchasing power needed for a more stable, equitable world economy.
Highest possible recommendation!
Scarcity stopped being a serious problem in the rich world sometime near the last quarter of the twentieth century. Making things has become easier and cheaper than ever before. Shortages have been replaced with gluts. The age-old tradeoff between consuming more today and producing more tomorrow is gone. Investment is now constrained by insufficient consumption, rather than by the old competition for resources. The modern condition is therefore defined by the perverse coincidence of abundant idle resources and unmet material needs. This has had profound consequences for the relations among savings, investment, and trade.
In "Trade Wars are Class Wars", Pettis and Klein drive home the key argument that global trade wars aren’t just country-versus-country battles—they’re the result of class conflicts within countries. When wealth (and, therefore, purchasing power) is concentrated among a small elite who save far more than they spend, entire economies can churn out more goods than local people can buy. That surplus output doesn’t vanish; it’s pushed onto the rest of the world, fueling trade imbalances and leaving one set of countries (the “surplus” economies) dependent on exports while others (the “deficit” economies) end up absorbing those extra goods and capital flows, often at great cost to their own workers and industries. These inflows and outflows must always net out.
Now, one of the more scandalous and thought-provoking claims the authors make, is that in a shocking turn of events, modern deficit countries such as the U.S. and the UK have become defacto "colonies" for the modern surplus countries, such as China and Germany. As some of you might recall, one of the main draws of colonialist expansion during the 19th century was the search for emerging economies that would provide a market for the glut of surplus production from the colonial powers, who would ensure willing buyers by facilitating cheap credit. As Michael Scott would say, "well, how the turntables"...
To drive the point closer to home, the authors point out that the U.S. has long served as the main “dumping ground” for surplus production and savings. This has been exacerbated by the dynamics that emerged after countries dropped the Gold Standard and the U.S. Dollar became the defacto reserve currency of the world's economy. Essentially, with the dollar as the linchpin of the global financial system, foreign capital routinely flows in, driving up asset values (like stocks and real estate) while suppressing interest rates. That, in turn, can mask problems—like deindustrialization and growing inequality—behind bubbles and debt, until a crisis exposes the underlying fragility.
The persistence of the American current account deficit can only be explained by excessive saving abroad and the U.S. role in absorbing these excess savings. Calls for Americans to behave more prudently miss the point: it is not Americans who have decided to borrow too much. As long as there are Americans who want to borrow—and in every country, there are always people who are willing to borrow under the appropriate conditions—the U.S. financial sector will find them and lower interest rates and lending standards until loan targets are met. The financial system will continue to force adjustments in the real economy until savings decline. Either borrowing will rise or income will fall.
Now, this book largely answered the lingering questions I had regarding the incoming administration's plans. Per Klein and Pettis, tariffs are a superficial and often counterproductive tool for handling trade deficits. Sure, they may temporarily reduce imports from a particular country, but they don't increase household income or alter structural features (like financial repression, investment patterns, labor-market policies, or tax systems) that cause the imbalance in the first place. What is more likely is that they will cause a re-routing of imports or incite retaliation. More importantly though, these will only serve as a bandaid and will not stem the disproportionate inflow of foreign capital to the public and private sector that are the root of much of the evil.
It makes no difference how many American airplanes or tons of American soybeans China promises to buy or indeed how much the American bilateral deficit with China is reduced. It does not even matter how many U.S. companies that had earlier relocated to China return to the United States. As long as ordinary Chinese retain so little of what they produce, which necessarily depresses their spending on goods and services, China must run a trade surplus and it must export huge amounts of savings."
Ending these imbalances, the authors argue, requires two big shifts:
1. In Deficit Countries (like the U.S.):
- In the short term, the federal government should increase borrowing as much as needed (i.e. through bonds and other treasuries) to curtail the inflow of foreign capital to the private market where it can drive up assets prices such as real estate, or lead to malinvestment in the face of cheap credit.
- The federal government should absorb these foreign capital inflows in a productive way, such as major infrastructure investments or improving the social safety net.
- By lowering payroll taxes and improving household finances, the U.S. could spread income more evenly and reduce reliance on easy credit that leads to bubbles.
2. In Surplus Countries (like Germany and China):
- Elites must allow more of the national income to reach workers and retirees—e.g., by improving social welfare, reforming regressive taxation, and encouraging higher wages.
- A better balance of purchasing power at home means fewer forced exports and less pressure on foreign markets.
Pettis and Klein conclude by noting that if we fail to address deep class inequalities, the tensions that feed trade wars will persist or worsen. Globalization, in principle, could lift everyone, but in practice it’s been hijacked by policies that push wages and social protections downward. The remedy is rebalancing income distribution—helping ordinary consumers in both surplus and deficit countries regain the purchasing power needed for a more stable, equitable world economy.
If the United States were not such an open economy, surplus countries would be forced either to divert their excess production to other countries, none of which have ever been as willing as the United States to absorb it, or to watch unwanted inventory pile up until factories were closed and workers were fired. The costs of rising income inequality in one country would be internalized, and there would be limited impact on others. Instead, by preventing political and industrial elites in the surplus countries from facing the consequences of their actions, the open system has enabled destructive behavior in the rest of the world."
Highest possible recommendation!
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.
February 28, 2025
Matthew Klein and Michael Pettis’ Trade Wars Are Class Wars delivers a compelling, sharp, and accessible analysis of the fundamental forces driving global economic imbalances. It challenges conventional wisdom by reframing international trade tensions not as disputes between nations but as internal struggles between economic elites and the working class. The book’s central thesis is that inequality within countries, rather than competition between them, fuels the persistent surpluses and deficits in the world economy.
Klein (an expert on US trade) and Pettis (expert on Chinese trade) argue that the major macroeconomic imbalances of the past two decades—Europe’s and East Asia’s persistent trade surpluses, America’s chronic deficits—can be traced to patterns of national savings driven by inequality. The rich, they argue, save more of their income than the working class, and when elites accumulate too much wealth at the expense of ordinary people, national economies end up with excess savings that must go somewhere. This results in trade surpluses in countries like China and Germany, whose economic models suppress domestic consumption, while deficit countries like the United States absorb these excess savings through capital inflows, creating financial instability.
This insight turns a lot of common narratives about trade disputes on their head. For instance the theory of comparative advantage omits the possibility of capital flows, The authors convincingly dismantle the idea that America’s trade deficits are simply the result of bad trade deals or foreign mercantilism. Instead, they show how domestic economic policies—particularly those that prioritize the interests of financial elites—make the U.S. the world’s natural dumping ground for excess savings from surplus countries.
Interestingly, this core argument is in many ways similar to what Yanis Varoufakis lays out in The Global Minotaur. Varoufakis, however, uses more colourful language and a much broader historical canvas—complete with Greek myths—to make the same essential point about the role of the U.S. capital account surplus. Just as Klein and Pettis argue that U.S. deficits serve the interests of financial elites at the expense of workers, Varoufakis describes the post-Bretton Woods economic order as one in which the U.S. functions as a financial black hole, absorbing global excess savings while its working class bears the cost. The difference lies in style—Varoufakis leans on dramatic narrative, while Klein and Pettis take a more rigorous, data-driven approach.
By framing global imbalances as a consequence of economic inequality, Trade Wars Are Class Wars forces readers to reconsider who benefits and who loses from the global economic order. In surplus economies like China and Germany, workers are underpaid relative to the value they create, while elites and corporations hoard savings rather than redistribute income through higher wages or domestic investment. In deficit economies like the U.S., the financial sector thrives on capital inflows, even as the broader middle class suffers from deindustrialization and financial instability.
There is a lot of interesting historical analysis, like that the disruption of free trade during napoleonic wars served as a de facto trariff, helping the US develop its domestic manufacturing, or that changes in trade patterns correspond to changes in financial technology (amounts of liquid capital), not the underlying technology or possible chances for returns in periphery markets (for instance trade patterns in the 19th century were more about Bank of England’s willingness to allow gold outflows than anything else). interesting is also the argument that the first finance boom of 1920s was created by regulatory chances in Britain that allowed local banks to create new money or that the first loan to Columbia was done in 1822, two years before it’s definitive independence from Spain and most of it was spent in finance transaction. This historical overview is quite fascinating, as are later chapters on the economic development of Chinese and German economies.
This class-based framing makes the book stand out in this day and age within the economics discipline. It highlights how, despite nationalistic rhetoric about trade wars, there is often a convergence of interests between financial elites in the US and industrial elites in surplus economies. The authors argue that Wall Street financiers and Chinese or German exporters benefit from this system, while the average worker—whether in Ohio, Guangzhou, or Bavaria—is left behind.
The book is impressive in its scope and clarity. It is written for a general audience, making complex macroeconomic concepts like balance of payments, capital flows, and trade deficits remarkably accessible. The historical context is rich, with discussions ranging from Adam Smith and David Ricardo to the economic policies of 19th-century Europe and modern-day China. Klein and Pettis even draw unexpected but illuminating connections—such as linking China’s state-driven economic model to England’s 18th-century enclosures.
One of the book’s greatest strengths is its ability to debunk common economic myths. It takes aim at simplistic arguments, such as Peter Navarro’s view that bilateral trade deficits are a sign of economic weakness, and instead provides a nuanced understanding of why surpluses and deficits emerge in the first place.
If inequality leads to surpluses, then why doesn’t the U.S.—one of the most unequal advanced economies—run large surpluses itself? The authors attribute this to the global role of the dollar as the reserve currency (arguing that rather than the 'exorbitant privilege', dollar is an 'exorbitant burden' for the working classes), which compels the U.S. to run deficits to supply the world with a stable reserve currency.
Written before the COVID-19 pandemic, the book’s recommendations focus on policies that would rebalance the global economy—such as encouraging surplus countries to expand government spending and urging the U.S. to invest in infrastructure rather than relying on financial inflows. The post-pandemic world, with rising government debt and increasing geopolitical competition, complicates some of these solutions, but the book’s core analysis remains deeply relevant.
The book is dense, but a clear, well-argued, and provocative book that challenges dominant narratives about globalization and economic conflict. By shifting the focus from trade wars between nations to class struggles within them, Klein and Pettis provide a powerful new lens for understanding the global economy—one that, like Varoufakis' Global Minotaur, makes it clear that these conflicts are not about countries battling each other, but about elites shaping the system to their own benefit at the expense of the majority.
Klein (an expert on US trade) and Pettis (expert on Chinese trade) argue that the major macroeconomic imbalances of the past two decades—Europe’s and East Asia’s persistent trade surpluses, America’s chronic deficits—can be traced to patterns of national savings driven by inequality. The rich, they argue, save more of their income than the working class, and when elites accumulate too much wealth at the expense of ordinary people, national economies end up with excess savings that must go somewhere. This results in trade surpluses in countries like China and Germany, whose economic models suppress domestic consumption, while deficit countries like the United States absorb these excess savings through capital inflows, creating financial instability.
This insight turns a lot of common narratives about trade disputes on their head. For instance the theory of comparative advantage omits the possibility of capital flows, The authors convincingly dismantle the idea that America’s trade deficits are simply the result of bad trade deals or foreign mercantilism. Instead, they show how domestic economic policies—particularly those that prioritize the interests of financial elites—make the U.S. the world’s natural dumping ground for excess savings from surplus countries.
Interestingly, this core argument is in many ways similar to what Yanis Varoufakis lays out in The Global Minotaur. Varoufakis, however, uses more colourful language and a much broader historical canvas—complete with Greek myths—to make the same essential point about the role of the U.S. capital account surplus. Just as Klein and Pettis argue that U.S. deficits serve the interests of financial elites at the expense of workers, Varoufakis describes the post-Bretton Woods economic order as one in which the U.S. functions as a financial black hole, absorbing global excess savings while its working class bears the cost. The difference lies in style—Varoufakis leans on dramatic narrative, while Klein and Pettis take a more rigorous, data-driven approach.
By framing global imbalances as a consequence of economic inequality, Trade Wars Are Class Wars forces readers to reconsider who benefits and who loses from the global economic order. In surplus economies like China and Germany, workers are underpaid relative to the value they create, while elites and corporations hoard savings rather than redistribute income through higher wages or domestic investment. In deficit economies like the U.S., the financial sector thrives on capital inflows, even as the broader middle class suffers from deindustrialization and financial instability.
There is a lot of interesting historical analysis, like that the disruption of free trade during napoleonic wars served as a de facto trariff, helping the US develop its domestic manufacturing, or that changes in trade patterns correspond to changes in financial technology (amounts of liquid capital), not the underlying technology or possible chances for returns in periphery markets (for instance trade patterns in the 19th century were more about Bank of England’s willingness to allow gold outflows than anything else). interesting is also the argument that the first finance boom of 1920s was created by regulatory chances in Britain that allowed local banks to create new money or that the first loan to Columbia was done in 1822, two years before it’s definitive independence from Spain and most of it was spent in finance transaction. This historical overview is quite fascinating, as are later chapters on the economic development of Chinese and German economies.
This class-based framing makes the book stand out in this day and age within the economics discipline. It highlights how, despite nationalistic rhetoric about trade wars, there is often a convergence of interests between financial elites in the US and industrial elites in surplus economies. The authors argue that Wall Street financiers and Chinese or German exporters benefit from this system, while the average worker—whether in Ohio, Guangzhou, or Bavaria—is left behind.
The book is impressive in its scope and clarity. It is written for a general audience, making complex macroeconomic concepts like balance of payments, capital flows, and trade deficits remarkably accessible. The historical context is rich, with discussions ranging from Adam Smith and David Ricardo to the economic policies of 19th-century Europe and modern-day China. Klein and Pettis even draw unexpected but illuminating connections—such as linking China’s state-driven economic model to England’s 18th-century enclosures.
One of the book’s greatest strengths is its ability to debunk common economic myths. It takes aim at simplistic arguments, such as Peter Navarro’s view that bilateral trade deficits are a sign of economic weakness, and instead provides a nuanced understanding of why surpluses and deficits emerge in the first place.
If inequality leads to surpluses, then why doesn’t the U.S.—one of the most unequal advanced economies—run large surpluses itself? The authors attribute this to the global role of the dollar as the reserve currency (arguing that rather than the 'exorbitant privilege', dollar is an 'exorbitant burden' for the working classes), which compels the U.S. to run deficits to supply the world with a stable reserve currency.
Written before the COVID-19 pandemic, the book’s recommendations focus on policies that would rebalance the global economy—such as encouraging surplus countries to expand government spending and urging the U.S. to invest in infrastructure rather than relying on financial inflows. The post-pandemic world, with rising government debt and increasing geopolitical competition, complicates some of these solutions, but the book’s core analysis remains deeply relevant.
The book is dense, but a clear, well-argued, and provocative book that challenges dominant narratives about globalization and economic conflict. By shifting the focus from trade wars between nations to class struggles within them, Klein and Pettis provide a powerful new lens for understanding the global economy—one that, like Varoufakis' Global Minotaur, makes it clear that these conflicts are not about countries battling each other, but about elites shaping the system to their own benefit at the expense of the majority.
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 11, 2020
Probably the most cogent short economics book to come out in the last couple of years. Leans a bit technical for mass appeal -- the analysis is couched very much in the standard economese of current account surpluses and deficits-- but the conclusions are nothing if not radical. Think of it as the international complement to Piketty's Capital.
Pettis and Klein argue that domestic imbalances -- namely, the suppression of wages and social spending in favor of capital -- are the primary drivers of international trade and financial imbalances.
The two main culprits are China and Germany. Largely because of Michael Pettis's work, China's domestic problems -- from the cruelty of the Hukou to the overemphasis on investment -- are well known. What I did not fully grasp until reading this book was the extent to which Germany has suppressed worker wage growth and neglected social programs / infrastructure spending. (Median wealth is lower in Germany than in Greece!) Worse, Germany has exported its austerity obsession to the rest of the Eurozone, resulting in massive shortfalls in domestic consumption.
The main victim in all this (aside from Chinese and German workers) is ironically the United States, which in trying to meet foreign investors' insatiable demand for dollar assets has persistently run current account deficits and gutted its manufacturing sector. We are living with the political consequences of that today.
The "solutions" chapter which inevitably ends the book is a little disappointing. International imbalances, by their nature, require global cooperation to solve. Pettis and Klein issue a vague call for a new Bretton Woods-style arrangement, where countries will be obligated to limit their domestic imbalances. But it is hard to see how CCP elites and American bankers can be voluntarily made to agree, least of all if reform runs against their own interests.
Pettis and Klein argue that domestic imbalances -- namely, the suppression of wages and social spending in favor of capital -- are the primary drivers of international trade and financial imbalances.
The two main culprits are China and Germany. Largely because of Michael Pettis's work, China's domestic problems -- from the cruelty of the Hukou to the overemphasis on investment -- are well known. What I did not fully grasp until reading this book was the extent to which Germany has suppressed worker wage growth and neglected social programs / infrastructure spending. (Median wealth is lower in Germany than in Greece!) Worse, Germany has exported its austerity obsession to the rest of the Eurozone, resulting in massive shortfalls in domestic consumption.
The main victim in all this (aside from Chinese and German workers) is ironically the United States, which in trying to meet foreign investors' insatiable demand for dollar assets has persistently run current account deficits and gutted its manufacturing sector. We are living with the political consequences of that today.
The "solutions" chapter which inevitably ends the book is a little disappointing. International imbalances, by their nature, require global cooperation to solve. Pettis and Klein issue a vague call for a new Bretton Woods-style arrangement, where countries will be obligated to limit their domestic imbalances. But it is hard to see how CCP elites and American bankers can be voluntarily made to agree, least of all if reform runs against their own interests.
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.
January 14, 2025
Klein and Pettis present a comprehensive scheme of the world economy and its imbalances, which they liken to distortions. This captures the current crisis of overproduction and underconsumption quite well as it provides sometimes more sometimes less coherent historical case studies as to when these distortions came to be.
I say "when," not "how" with intent. As this work does not dissect capital to find where its logic will lead it. No. It ultimately derives the economic explanation from erroneous policy rather than the inherent contradictions of capitalism marxists like to point out.
This is not to say policy has no effect, but government tends to intertwine with its country's ruling class: it always already serves existing interests, economic movements taking place obstructed by certain policies, or countermovements aiming to become dominant. Policy limits the playingfield, thereby changing economic direction more or less successfully, but it rarely ever starts a movement. Even in China, the foreign capital finally embraced after Deng was already hungrily chasing profits. The relationship between base and superstructure is geared towards the base.
At the same time, as the title suggests, Klein and Pettis place the cause of these global distortions, in either deficit or surplus economies, in the domestic wealth distribution of these economies. In their class conflicts, as is sometimes mentioned but never elaborated much upon. This would suggest that wealth distributions are also ultimately derived from policy.
This seems very naive of necessary conditions of capitalism. Let's entertain for a moment the policy recommendations of pettis are implemented. Domestic consumption and investment increase to offset gluttonous foreign over-investement. Societies become more equal and focused on improving their own economy and standard of living. Foregoing the fact that the profit-motive investments always chase, granted that capital controls are leak-proof, where do investments end up after domestic economies are satisfied? We already burn food and clothes because we have too much wealth to consume even without trade balances. Trade in litteral trash(management) is big bussiness. Will Capital see that it has produced enough and agree to enter the next historical era of classless societies where we only produce what we need?
I'm afraid this is not a very likely scenario. Rather, the defense industries will receive a large chunk of the excess investment, in order to expand the domestic markets now closed in by capital controls. In other words, this would drive the world into another imperial conflict.
To be fair, this will happen regardless of policy choices, but that is exactly the point. Policy choices never fix systemic problems. Although this work is very well researched and provides a clear case within it's assumptions, in the end it will lead us nowwhere because it is incapable of providing a systemic critique.
We still have not outlived Marx, whose insights are still of the highest value.
I say "when," not "how" with intent. As this work does not dissect capital to find where its logic will lead it. No. It ultimately derives the economic explanation from erroneous policy rather than the inherent contradictions of capitalism marxists like to point out.
This is not to say policy has no effect, but government tends to intertwine with its country's ruling class: it always already serves existing interests, economic movements taking place obstructed by certain policies, or countermovements aiming to become dominant. Policy limits the playingfield, thereby changing economic direction more or less successfully, but it rarely ever starts a movement. Even in China, the foreign capital finally embraced after Deng was already hungrily chasing profits. The relationship between base and superstructure is geared towards the base.
At the same time, as the title suggests, Klein and Pettis place the cause of these global distortions, in either deficit or surplus economies, in the domestic wealth distribution of these economies. In their class conflicts, as is sometimes mentioned but never elaborated much upon. This would suggest that wealth distributions are also ultimately derived from policy.
This seems very naive of necessary conditions of capitalism. Let's entertain for a moment the policy recommendations of pettis are implemented. Domestic consumption and investment increase to offset gluttonous foreign over-investement. Societies become more equal and focused on improving their own economy and standard of living. Foregoing the fact that the profit-motive investments always chase, granted that capital controls are leak-proof, where do investments end up after domestic economies are satisfied? We already burn food and clothes because we have too much wealth to consume even without trade balances. Trade in litteral trash(management) is big bussiness. Will Capital see that it has produced enough and agree to enter the next historical era of classless societies where we only produce what we need?
I'm afraid this is not a very likely scenario. Rather, the defense industries will receive a large chunk of the excess investment, in order to expand the domestic markets now closed in by capital controls. In other words, this would drive the world into another imperial conflict.
To be fair, this will happen regardless of policy choices, but that is exactly the point. Policy choices never fix systemic problems. Although this work is very well researched and provides a clear case within it's assumptions, in the end it will lead us nowwhere because it is incapable of providing a systemic critique.
We still have not outlived Marx, whose insights are still of the highest value.
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.
January 6, 2025
Świetna, szczegolowa choc czasem dosyc wymagająca dla nowicjusza ksiazka, wyjaśniająca globalne przepływy kapitału i zależności w zglobalizowanym swiecie wolnego handlu. Proponuje ciekawą interpretacje globalnego kryzysu finansowego z 2008 jako wynik nierownowagi w swiatowym handlu. Kraje z nadwyżkami zamiast inwestowac i zwiększać popy twewnętrzny reinwestowaly zyski na amerykańskim rynku. W wyniku niemożliwej do zaabsorobowania nadwyżki kapitału powstała samonapedzajaca sie banka na rynku nieruchomości.
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).
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.
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.
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.
January 26, 2025
"There are enormous benefits to a world of open trade, but there are also costs, and these costs must be addressed if we wish to retain the benefits"
Recently became more of a globalist then I thought I would ever be, after reading Wolfe's "Why Globalization Works". Despite disagreeing on many aspects, I got to the point of realizing all the benefits I receive from a globalized world- this has, unfortunately, made me very anxious about that world changing or dissolving.
This book was a heavier read-
Recently read a quote that said you have to practice reading books you don't understand to get your brain used to working hard. This was one of those.
This book was so informative but DENSE on economics and economic policy. There were certainly a lot of parts that went over my head, and I almost feel like I need to re-read this book over again to really understand it. Or maybe I'm thinking too deeply!
I wouldn't recommend reading this without at least a basic understanding on international affairs, especially the economic portions.
Uhh yeah! 4/5, can't give it 5 until I really, fully understand it (maybe on my re-read)
Recently became more of a globalist then I thought I would ever be, after reading Wolfe's "Why Globalization Works". Despite disagreeing on many aspects, I got to the point of realizing all the benefits I receive from a globalized world- this has, unfortunately, made me very anxious about that world changing or dissolving.
This book was a heavier read-
Recently read a quote that said you have to practice reading books you don't understand to get your brain used to working hard. This was one of those.
This book was so informative but DENSE on economics and economic policy. There were certainly a lot of parts that went over my head, and I almost feel like I need to re-read this book over again to really understand it. Or maybe I'm thinking too deeply!
I wouldn't recommend reading this without at least a basic understanding on international affairs, especially the economic portions.
Uhh yeah! 4/5, can't give it 5 until I really, fully understand it (maybe on my re-read)
January 30, 2022
Inequality is bad you say? But isn't my second gold toilet more important than food for everyone?
Matthew Klein and Michael Pettis' Trade Wars Are Class Wars attempts to argue that inequality distorts the way money flows around the economy and thus undermines the efficient and rational capitalisation of the economy. He draws upon historical and contemporary examples from around the world to show how this is bad. For the USA..... (sigh)
I picked up a copy of this book after reading Mark Blyth's Austerity: History of a Dangerous Idea. The idea that many of the trade and economic issues are tied to inequality and class divides was an interesting one. And the central thesis is largely acknowledged as true by anyone who has seen how quickly economies tumble when the average person can't afford to buy stuff.
Unlike Blyth's excellent books, Klein and Pettis have a limited understanding and unwillingness to engage with broader socio-political issues in the discussion of their thesis. They continually place the political as removed from the economic as though that is a fair and unbiased thing to do.
But how can you engage in discussing economic history and outcomes without honestly engaging with all, or at least some of the major, other factors? It essentially makes any of their arguments and analysis useless as anything other than fodder for very serious nodding competitions at corporate retreats.
In summary, this book was garbage as it deliberately or unintentionally failed to engage with reality to argue something that most would accept as true.
Comments while reading:
Good quote on China:
"China's policies do not just hurt Americans (because fuck those other countries) - they also harm ordinary Chinese workers and retirees. Chinese workers are underpaid relative to the value of what they produce, and they are taxed too much. They are unable to access the goods and services they ought to be able to afford. They breathe dirty air and drink polluted water because many local government officials place the financial interests of politically connected business owners above the well-being of the public."
Trying to explain this idea to people is often a challenge.
In the "how we got here" section there is a misleading bit about Natural Advantage. While a bit later it implies how the idea is untrue, there is no direct refutation of the idea. Natural Advantage isn't a rational nor economic reality, but rather a political and exploitative one. People will often hold up the idea of (e.g.) gold producing nations being those with natural gold resources who will trade with the nations without gold for the thing they have a natural advantage in. Just don't tell that to the resource-rich nations of Africa, South America, etc, who are dirt poor despite their supposed wealth.
I'm a little unimpressed with the overall stance being taken in the presentation of economic history. The very liberal tone (i.e. capitalist apologism) is managing to gloss over things like imperialism, coups, and the fights for democracy. One example that made me almost throw the book away was with the statement "which caused the British financial sector to remove support from the country" glossing over a very bloody war of oppression the British waged on that country only to be overthrown and independence declared. It places the political as removed from the economic as though that is a fair and unbiased thing to do.
There is a strong "if only those stupid other countries did capitalism right" vibe to covering the issues with the economy. It's pretty much implied that the policy frameworks have been poorly done and if we just do it correctly then everything will be fine.
But this argument isn't just ahistorical nonsense, it is narrow, ignorant, and woefully naive. Does Klein-Pettis just assume that inequality is something that rich/powerful people did by accident? (The answer to that rhetorical question is, of course, yes).
The section on China's growth is... problematic. I'll be kind and say that this is once again due to the very narrow economic scope Klein-Pettis uses for his discussion of very complex socio-political-economic interactions. If I were unkind I'd have to call it racist. But to suggest that China suddenly grew because they started doing capitalism and before that those silly commies just couldn't do anything right and were creating poverty, is wonderfully wrong. I mean, the issues for Mao's China can fill entire books, but the summary here doesn't even hint at that.
Odd to summarise the systemic defanging of unions worldwide by corporate, business, and oligarch interests via their flunkies in government, legal, and industry as "workers lost interest in unions". I mean, it's like saying that coastal flood insurance costs have gone up whilst ignoring that someone keeps dropping bombs offshore to send tsunamis.
The installation of a right-wing government with deeply racist, anti-semetic, authoritarian, and nationalist views as a move to democracy in Hungary is an interesting take on history and politics. https://www.washingtonpost.com/archiv...
Another example: South Korea and the statements about yay democracy and capitalism curing poverty there... Look, I'm not well versed in South Korean politics, what with its every shifting, amalgamating, and disbanding political parties, but I'm pretty sure that referring to a literal military dictatorship in the 1980s as democracy, and its brutal regime which included at least one massacre, as progress is a what us thinky types refer to as wrong.
I'd bet money the authors worked in finance and write for very serious industry publications now.
I checked, yep, Klein was at an investment firm and now writes for Barron's, a right-wing financial news page.
Matthew Klein and Michael Pettis' Trade Wars Are Class Wars attempts to argue that inequality distorts the way money flows around the economy and thus undermines the efficient and rational capitalisation of the economy. He draws upon historical and contemporary examples from around the world to show how this is bad. For the USA..... (sigh)
I picked up a copy of this book after reading Mark Blyth's Austerity: History of a Dangerous Idea. The idea that many of the trade and economic issues are tied to inequality and class divides was an interesting one. And the central thesis is largely acknowledged as true by anyone who has seen how quickly economies tumble when the average person can't afford to buy stuff.
Unlike Blyth's excellent books, Klein and Pettis have a limited understanding and unwillingness to engage with broader socio-political issues in the discussion of their thesis. They continually place the political as removed from the economic as though that is a fair and unbiased thing to do.
But how can you engage in discussing economic history and outcomes without honestly engaging with all, or at least some of the major, other factors? It essentially makes any of their arguments and analysis useless as anything other than fodder for very serious nodding competitions at corporate retreats.
In summary, this book was garbage as it deliberately or unintentionally failed to engage with reality to argue something that most would accept as true.
Comments while reading:
Good quote on China:
"China's policies do not just hurt Americans (because fuck those other countries) - they also harm ordinary Chinese workers and retirees. Chinese workers are underpaid relative to the value of what they produce, and they are taxed too much. They are unable to access the goods and services they ought to be able to afford. They breathe dirty air and drink polluted water because many local government officials place the financial interests of politically connected business owners above the well-being of the public."
Trying to explain this idea to people is often a challenge.
In the "how we got here" section there is a misleading bit about Natural Advantage. While a bit later it implies how the idea is untrue, there is no direct refutation of the idea. Natural Advantage isn't a rational nor economic reality, but rather a political and exploitative one. People will often hold up the idea of (e.g.) gold producing nations being those with natural gold resources who will trade with the nations without gold for the thing they have a natural advantage in. Just don't tell that to the resource-rich nations of Africa, South America, etc, who are dirt poor despite their supposed wealth.
I'm a little unimpressed with the overall stance being taken in the presentation of economic history. The very liberal tone (i.e. capitalist apologism) is managing to gloss over things like imperialism, coups, and the fights for democracy. One example that made me almost throw the book away was with the statement "which caused the British financial sector to remove support from the country" glossing over a very bloody war of oppression the British waged on that country only to be overthrown and independence declared. It places the political as removed from the economic as though that is a fair and unbiased thing to do.
There is a strong "if only those stupid other countries did capitalism right" vibe to covering the issues with the economy. It's pretty much implied that the policy frameworks have been poorly done and if we just do it correctly then everything will be fine.
But this argument isn't just ahistorical nonsense, it is narrow, ignorant, and woefully naive. Does Klein-Pettis just assume that inequality is something that rich/powerful people did by accident? (The answer to that rhetorical question is, of course, yes).
The section on China's growth is... problematic. I'll be kind and say that this is once again due to the very narrow economic scope Klein-Pettis uses for his discussion of very complex socio-political-economic interactions. If I were unkind I'd have to call it racist. But to suggest that China suddenly grew because they started doing capitalism and before that those silly commies just couldn't do anything right and were creating poverty, is wonderfully wrong. I mean, the issues for Mao's China can fill entire books, but the summary here doesn't even hint at that.
Odd to summarise the systemic defanging of unions worldwide by corporate, business, and oligarch interests via their flunkies in government, legal, and industry as "workers lost interest in unions". I mean, it's like saying that coastal flood insurance costs have gone up whilst ignoring that someone keeps dropping bombs offshore to send tsunamis.
The installation of a right-wing government with deeply racist, anti-semetic, authoritarian, and nationalist views as a move to democracy in Hungary is an interesting take on history and politics. https://www.washingtonpost.com/archiv...
Another example: South Korea and the statements about yay democracy and capitalism curing poverty there... Look, I'm not well versed in South Korean politics, what with its every shifting, amalgamating, and disbanding political parties, but I'm pretty sure that referring to a literal military dictatorship in the 1980s as democracy, and its brutal regime which included at least one massacre, as progress is a what us thinky types refer to as wrong.
I'd bet money the authors worked in finance and write for very serious industry publications now.
I checked, yep, Klein was at an investment firm and now writes for Barron's, a right-wing financial news page.
January 3, 2025
Really ambitious book, lots of interesting economic history. But the titular thesis, that trade wars are class wars, is argued in a kind of roundabout, unconvincing way.
I’ll concede two points in favor of this thesis that the book argues well:
1. Trade liberalization with countries that suppress wages (i.e. China) is bad for domestic workers
2. Trade surpluses can be a symptom of inequality in the surplus countries (b/c the wealthy have a larger propensity to save, and aggregate trade surpluses are ultimately aggregate savings)
But the real meat of the book is devoted to a more complicated claim: that cheap foreign credit hurts the domestic borrower, and hurts the domestic working class in particular. For an econ 101 student, this claim should raise alarm bells - why should lower prices (of credit) hurt the consumer? The authors propose an answer by way of analogy to lottery ticket winners. It’s well documented (I think?) that lottery ticket winners often end up doing worse in life. A common explanation is that the winnings make them too “fat and happy” - they don’t learn how to make hard choices and prioritize, and this hurts them in the long run. In the macro literature, there’s a similar idea applied to whole economies dubbed the “resource curse”, used to explain the phenomenon that countries rich in natural resources (think Russia, Saudi Arabia) often end up with lower long term growth than otherwise comparable neighbors. While again the exact mechanism is unclear, the resource curse is often attributed to something like established elites consolidating economic and political power because they don’t need a robust democratic market economy to drive national (and their personal) wealth.
The book's central claim then (at least interpreted through Samuel Hammond https://www.secondbest.ca/p/jd-vance-...) is that cheap foreign credit can act much the same way as natural resources. Requiring relatively little in the way of (especially low skill) labor, financial elites (who manage investment) and tech elites (who gained enormously from the low interest regime) can reap most of the benefits while consolidating political power and helping to suppress efforts at more broad-based economic development (which might require these same elites to pay more in taxes and interest). This is a compelling economic narrative, one that seems to have an interesting underappreciated kernel of truth. But the book itself doesn’t fully spell this out. Sure, it provides historical examples of “foreign credit as aresource curse”, and makes allusions to wall street bankers profiting off Chinese inflows, but still, I’m mostly relying on Hammond to put these pieces together.
Setting aside the delivery of this thesis, it’s also highly contingent on domestic politics. Resources need not be curses. Take Norway as an example: rich in oil and natural gas, but also home to an extremely egalitarian culture. Similarly, while bank bailouts and payments to foreign investors meant average Americans experienced the brunt of the burden, a different politics may have led to different economics. It was in no sense pre-determined that banks would be bailed out and investors repaid. Perhaps I’m begging the question - the core claim is that economics drives the politics - the financial elites, as elites, ensured they would not pay the price. But in the long run, I’m more optimistic, and I think the very recent history of the last 4 years largely bears this optimism out. The American Recovery Act, IRA, and CHIPS are all efforts to invest in broad-based American development. And while they are mostly budget balancing, they still rely on the relatively low interest rates on our outstanding debts, made possible by foreign investment and the US dollar’s status as the reserve currency of the world. Trying to abandon this status, in fear of financial political corruption, is throwing the baby out with the bathwater. The exorbitant privilege of reserve currency status (which the book inverts to an exorbitant burden), can be a privilege yet.
(Note that while my argument spells hope for the US working class, if pessimistic for their counterparts in China - Americans across the class spectrum can stand to benefit from Chinese exploitation.)
I’ll concede two points in favor of this thesis that the book argues well:
1. Trade liberalization with countries that suppress wages (i.e. China) is bad for domestic workers
2. Trade surpluses can be a symptom of inequality in the surplus countries (b/c the wealthy have a larger propensity to save, and aggregate trade surpluses are ultimately aggregate savings)
But the real meat of the book is devoted to a more complicated claim: that cheap foreign credit hurts the domestic borrower, and hurts the domestic working class in particular. For an econ 101 student, this claim should raise alarm bells - why should lower prices (of credit) hurt the consumer? The authors propose an answer by way of analogy to lottery ticket winners. It’s well documented (I think?) that lottery ticket winners often end up doing worse in life. A common explanation is that the winnings make them too “fat and happy” - they don’t learn how to make hard choices and prioritize, and this hurts them in the long run. In the macro literature, there’s a similar idea applied to whole economies dubbed the “resource curse”, used to explain the phenomenon that countries rich in natural resources (think Russia, Saudi Arabia) often end up with lower long term growth than otherwise comparable neighbors. While again the exact mechanism is unclear, the resource curse is often attributed to something like established elites consolidating economic and political power because they don’t need a robust democratic market economy to drive national (and their personal) wealth.
The book's central claim then (at least interpreted through Samuel Hammond https://www.secondbest.ca/p/jd-vance-...) is that cheap foreign credit can act much the same way as natural resources. Requiring relatively little in the way of (especially low skill) labor, financial elites (who manage investment) and tech elites (who gained enormously from the low interest regime) can reap most of the benefits while consolidating political power and helping to suppress efforts at more broad-based economic development (which might require these same elites to pay more in taxes and interest). This is a compelling economic narrative, one that seems to have an interesting underappreciated kernel of truth. But the book itself doesn’t fully spell this out. Sure, it provides historical examples of “foreign credit as aresource curse”, and makes allusions to wall street bankers profiting off Chinese inflows, but still, I’m mostly relying on Hammond to put these pieces together.
Setting aside the delivery of this thesis, it’s also highly contingent on domestic politics. Resources need not be curses. Take Norway as an example: rich in oil and natural gas, but also home to an extremely egalitarian culture. Similarly, while bank bailouts and payments to foreign investors meant average Americans experienced the brunt of the burden, a different politics may have led to different economics. It was in no sense pre-determined that banks would be bailed out and investors repaid. Perhaps I’m begging the question - the core claim is that economics drives the politics - the financial elites, as elites, ensured they would not pay the price. But in the long run, I’m more optimistic, and I think the very recent history of the last 4 years largely bears this optimism out. The American Recovery Act, IRA, and CHIPS are all efforts to invest in broad-based American development. And while they are mostly budget balancing, they still rely on the relatively low interest rates on our outstanding debts, made possible by foreign investment and the US dollar’s status as the reserve currency of the world. Trying to abandon this status, in fear of financial political corruption, is throwing the baby out with the bathwater. The exorbitant privilege of reserve currency status (which the book inverts to an exorbitant burden), can be a privilege yet.
(Note that while my argument spells hope for the US working class, if pessimistic for their counterparts in China - Americans across the class spectrum can stand to benefit from Chinese exploitation.)
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