Trade Wars Are Class Wars

The usual story of trade wars pits nations against each other. Klein and Pettis start instead from the balance of payments. When a country's policies shift income from households to businesses, governments and the rich, its people cannot buy what they produce, and the surplus savings flow abroad as capital. On this view, Chinese and German surpluses are the result of domestic class politics, and the American deficit is partly the cost of being the place where the world's excess savings land.

The pairing gives the book its range. Pettis, a finance professor at Peking University's Guanghua School and senior fellow at the Carnegie Endowment, worked on sovereign debt at Manufacturers Hanover and Bear Stearns and wrote The Great Rebalancing. Klein was the economics commentator at Barron's. The book won the 2021 Lionel Gelber Prize for international affairs, and Martin Wolf of the FT called it very important.

Noah Smith called it an important treatment of an under-covered subject but said it tries to cover too much in too few pages and that its accounting-based theory chapter is too compressed. He also doubted that domestic redistribution would end the rivalries.

Macro investors, currency and rates strategists, and anyone who wants to look past bilateral trade figures to the savings and capital flows behind them should read it.

1. Bilateral deficits are a poor guide. Value added in global supply chains and profit shifting distort country-to-country trade figures, so the current account says more than the US-China deficit.
2. Surpluses start at home. Countries that hold down household income through wage, tax and financial policies save more than they invest and export the difference.
3. Capital flows drive trade, not just the reverse. Foreign savings seeking safe assets push up the dollar and US borrowing, and the trade deficit adjusts to match.
4. Reserve status is a burden as well as a privilege. The dollar's role lowers US borrowing costs but leaves American manufacturing and workers absorbing the world's excess savings.
5. Distribution is a macro variable. For investors, changes in how income is split between workers, firms and governments in China and Germany matter for global rates, currencies and trade policy.

The book moves from how trade is measured, to the theory behind imbalances, to case studies and a proposed remedy.

1. Trade and its statistics. The authors review the history of globalization and show why headline figures such as the US-China deficit mislead, citing supply chains like the iPhone's and multinationals' profit shifting, and why the current account is a better guide.
2. The accounting of imbalances. A theory chapter uses the identities linking savings, investment and the current account to explain how domestic income distribution drives surpluses and deficits.
3. China. They trace how policies that suppressed household income and consumption produced huge savings, heavy reserve accumulation and, after 2008, a debt-fueled investment boom.
4. Germany and Europe. Wage restraint and fiscal austerity turned Germany and later the eurozone into large exporters of capital.
5. America's exorbitant burden. The dollar's reserve role draws in foreign savings, which pushed the US toward borrowing and housing bubbles, a strong dollar and job losses in manufacturing.
6. Ending the class war. The authors argue that redistributing income toward workers in surplus countries and reforming the reserve system would reduce imbalances and ease trade tensions.

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.