Saturday, January 23, 2021

REVIEW ESSAY Trade Wars Are Class Wars by Matthew C. Klein and Michael Pettis

 From American Affairs Journal:

Trade Wars Are Strategic Sector Wars

Trade Wars Are Class Wars: How Rising Inequality
Distorts the Global Economy and Threatens International Peace
by Matthew C. Klein and Michael Pettis
Yale University Press, 2020, 269 pages

Are globalization, rising inequality, and populist backlashes against trade linked? According to the dominant narrative in transatlantic media and academic circles, the transfer of manufacturing and some services from First World countries to developing nations like China benefits all of humanity in the long run. In the short run, however, the winners include everyone in developing countries together with those in secure “knowledge economy” jobs in the First World. Unfortunately, there are also a few losers, the “left behind” in former First World manufacturing regions like the U.S. Midwest and similar rust belts in Europe. To prevent them from wrecking the global economy by supporting populism and protectionism, the losers of globalization must be retrained for well-paying postindustrial jobs (“learn to code”). If that is not possible, their pain should be anesthetized by more redistributive welfare spending.

In Trade Wars Are Class Wars, Matthew C. Klein—an economics commentator at Barron’s—and Michael Pettis—a senior fellow at the Carnegie Endowment for International Peace, a professor of finance at Peking University, and one of the world’s most respected experts on the Chinese economy—persuasively dismantle this conventional wisdom about globalization. Klein and Pettis focus on trade imbalances—in particular, the interaction of the chronic trade surpluses of China and Germany with the chronic trade deficits of the United States:

This has been the defining problem of the past few decades: people in certain countries [like China and Germany] are spending too little and saving too much. This is not because their households are especially thrifty or because their governments are unusually prudent. It is not even because their businesses are rationally responding to the dearth of attractive opportunities. Rather, it is because of choices made by elites within those countries that transfer wealth and income away from people who would spend more on goods and services, such as workers and pensioners, to those, such as the rich, who would instead use extra income to accumulate additional financial assets. This imposes an untenable choice on the rest of the world: absorb the glut through additional spending (saving less) or endure a slump caused by insufficient global demand.

Winners and Losers of Globalization

Since the beginning of the Industrial Revolution in eighteenth-century Britain, successful countries have transitioned from agrarian to industrial economies by means of state-sponsored economic strategies. The most common has been import substitution industrialization, the use of tariffs or other barriers to imports to force national consumers to buy the products of favored domestic manufacturers rather than those made abroad. This protectionist strategy is how Britain before the 1840s, the United States and Germany in the late nineteenth and early twentieth centuries, and many Latin American countries after World War II initially built up their manufacturing bases. Other countries, like Japan, South Korea, Taiwan, China, and contemporary Germany to a degree, have combined formal or informal protection of their home markets with aggressive export promotion strategies.

In addition, Klein and Pettis argue that industrializing nations have had a choice between high-wage and high-savings approaches to development. The northern states in the industrializing United States exemplified the high-wage model. American wage earners and family farmers in the Northeast and Midwest had high incomes, by global standards. They, along with much poorer white and black southerners, provided the home market for U.S. infant industries which were protected from foreign competition by a wall of tariffs until after World War II.

More common has been the high-savings model, in which the incomes of workers and farmers are deliberately suppressed by the modernizing state in order to free resources for state-sponsored industrial and infrastructure development. The most brutal versions of this strategy were the crash programs of collectivization and industrialization undertaken by the Soviet Union, which succeeded in building up manufacturing at the price of horrifying repression and the starvation of millions.

“Japan developed a more humane variant of the high-savings model after World War II,” Klein and Pettis write. The Little Tigers (South Korea, Taiwan, and Singapore) and post-Maoist China have adopted variants of the same modernization strategy, biased toward investment in manufacturing or infrastructure rather than higher consumption for the wage-earning majority of the kind that would be made possible by higher wages or more spending on public goods like social insurance. With the Hartz IV reforms that moderated benefits and unemployment insurance in 2003, Germany, a developed country, has followed a similar strategy of suppressing worker incomes and consumption to maintain the competitiveness of its industries.

As in Goethe’s poem “The Sorcerer’s Apprentice,” an initially successful process can get out of control. Long after the strategy has succeeded and the country has caught up with other industrialized nations, the favored industries may have the political clout to keep the system going, cranking out gluts of manufactured goods while other social needs go unmet. If a country tries to export more than it imports, the result will inevitably be a painful adjustment of excess supply to insufficient demand.

This outcome can be postponed, however, as long as some trading partners of the export-promoting states are content to absorb their exports, at the expense of running chronic trade deficits and losing much of their own industry to import competition. Klein and Pettis document in detail how the United States in particular, since the late twentieth century, has been an enabler of surplus countries like China and Germany.

In essence, the surplus countries have engaged in a form of vendor finance by taking advantage of the status of the dollar as the world’s reserve currency. Rather than lend money directly to American consumers to buy imports, the exporters—China, in particular—recycled their surplus profits by investing in dollar-denominated assets like Treasury bonds and Wall Street financial products. This enabled lower U.S. interest rates, which in turn enabled American consumers to borrow more money from the U.S. financial sector to supplement their stagnant incomes and purchase imports or, in some cases, houses they could not otherwise afford. At the same time, the growing indebtedness of American consumers to American lenders ballooned the income and political power of the U.S. financial industry, while the import-battered American manufacturing industry dwindled in economic and political importance.

This explains the “class war” in the book’s title, Trade Wars Are Class Wars. Contrary to the neoliberal conventional wisdom, the winners of globalization are not Chinese manufacturing workers and American knowledge workers. Rather, the winners are elites—the managers and capitalists of hyper-industrial China, and the rentiers of the swollen U.S. financial sector. The losers are the underpaid factory workers of China, Germany, and other countries with chronic trade surpluses, along with former American industrial workers forced out of well-paid, unionized manufacturing jobs into low-wage service jobs or permanent unemployment....