Tariffs won't solve the problem, ending the class war will end the trade war

In 2018, then-U.S. President Donald Trump wielded tariffs on China, and a far-reaching trade war began.

With Biden taking office, the trade conflict between China and the United States has not been eased, and the two countries' wrestling has expanded from economic conflict to political and military aspects.

In this situation, it is inevitable to understand the trade war as a conflict between countries, but Klein (Matthew C. Klein and Michael Pettis) believe that the so-called trade war is actually a "bank The conflict between families and those with financial assets and ordinary families, the super-rich and everyone else,” and they wrote a thin little book about it, titled simply, “Trade Wars Are Class Wars.” (Trade Wars Are Class Wars).

The book continues many of Pettis's arguments in 2013's The Great Rebalancing, the most basic of which is that "the savings rate of different countries is linked to their trade account. If a country If you want to take measures to change the difference between its total domestic saving and total investment, then these measures must also change its trade balance. Because changes in one country's trade balance must lead to corresponding changes in other countries' trade accounts, and the rest of the world There will also be an equal and opposite change in the difference between the country's total saving and total investment."

It contains several important accounting identities and is the starting point for the authors' analysis of international trade imbalances in this new book.

GDP = consumption + investment + (exports - imports)

domestic saving - domestic investment = net exports (current account surplus or deficit)

current account + capital account = 0

The distortions in the global economy brought about by trade imbalances have become increasingly apparent in recent years, and trade protectionism within deficit countries has been on the rise.

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Unequal income distribution leads to imbalanced savings

Overall, the authors argue that the persistent global trade imbalances over the past few decades stem primarily from savings imbalances within some countries, which in turn result from distorted income distribution caused by government policies and institutions.

Taking China as an example, in the early days of reform and opening up, the society was in vain. In order to promote economic growth, the Chinese government learned from the development model of East Asia. Household income has long been used to subsidize the production and investment of the government and enterprises. With the presence and absence of trade unions, wages have also grown at a much slower rate than worker productivity growth; coupled with inadequate social safety nets, China's consumption as a share of gross domestic product (GDP) has grown from 54% in the 1980s. It fell to 39% in 2010, which is lower than that of all major economies in the world for a long time.

In other words, China's high saving is due to insufficient consumption, which in turn is due to distortions in income distribution.

The author pointed out that this high-saving development model is indeed reasonable in the case of insufficient investment, and it can also promote rapid economic growth and improve people's quality of life. However, once the development reaches a certain critical point, the investment efficiency begins to decline, When the proportion of consumption is too low to drive growth, it begins to enter a stage of overproduction, which is not a good thing for the economy.

In fact, as early as 2007, the then Chinese Premier Wen Jiabao said frankly: "The Chinese economy has huge problems, which are still unstable, unbalanced, uncoordinated and unsustainable structural problems. The so-called instability is investment. The growth rate is too high, the credit is too much, the currency liquidity is too large, the foreign trade and the balance of payments are not balanced.” That year, China’s current account surplus reached a historical peak of about 10% of GDP.

Of course, it's not just China that has this problem.

Another example the author mentions in the book is Germany.

In the 1990s, reunified Germany faced high unemployment.

At the time, unions, businesses and the government entered into a series of agreements on wages, consumption and expanding production in an attempt to regain competitiveness and create jobs.

Since then, Germany has gradually cut social benefits and protection of the labor market, workers' wage growth has stagnated, high savings have been used to subsidize production, the share of capital in income distribution has continued to increase, domestic consumption has been insufficient, and exports have remained in surplus for a long time.

In 2016, Germany's current account surplus as a percentage of GDP was still as high as 8.601%, more than three times that of China (2.637%).

The persistent large-scale trade surplus between China and Germany is the inevitable result of a highly skewed income distribution towards corporations and the wealthy.

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The role of the United States in the balance of payments

The story develops thus far, and finally comes to the most exciting part of the book.

After introducing the reasons for the imbalance of saving in China and Germany, the author shows the other side of the imbalance: the low saving rate and the huge long-term trade deficit in the United States.

The author points out that although Germany and the United States are both advanced economies, the internal environment and experience of the two countries in the past few decades are also similar, such as the reduction of social welfare, the transfer of income distribution from labor to capital, and the increase of class inequality. However, the former has a rising savings rate and has become the world's largest trade surplus country, while the latter has a declining savings rate and become the largest trade deficit country.

The reason for this, the author believes, lies in the US financial system.

The flexibility, scale and protection of foreign investors' rights and interests in the U.S. financial market have made it a highly sought-after investment destination for financial assets around the world.

Moreover, the United States provides the world's highest level of safe assets, and its Treasury bonds are second to none in terms of liquidity and quantity.

Most importantly, the U.S. dollar is an international reserve currency, freely convertible, and the most recognized currency in the global economic and trade network.

Based on these characteristics, the United States is the preferred destination for excess global savings.

In fact, open economies with the same characteristics, such as the United Kingdom, Canada, Australia, and New Zealand, also played a similar role, but the absorption scale was much smaller than that of the United States.

“If the U.S. were not such an open economy, surplus countries would be forced to spread excess capacity to other countries (but other countries would not be as willing to take it as the U.S.), or watch as unwanted inventory piled up until Factories close and workers are fired. In that case, the cost of income inequality in one country would be internalized, with no significant impact on other countries. But because of the existence of an open economy like the United States, the politics of surplus countries and industry elites do not have to face this situation, and their destructive behavior continues," the authors wrote.

The United States has digested excess global savings, and is generally regarded as other surplus countries providing it with cheap commodities, and also "borrowing money" to the United States for excessive consumption, so the United States is the beneficiary; but the author believes that this understanding is not correct, foreign countries The transfer of excess savings to the United States by accumulating dollar assets will only lead to a sharp increase in the latter's domestic investment, otherwise its savings rate is bound to decline, and this decline "is either accompanied by a rise in unemployment or a rise in consumption, and no other possible".

It is worth mentioning that in most advanced economies today, capital is not too little but too abundant, and domestic investment does not need foreign capital to finance it at all, so there is only one result - a decline in the savings rate.

In the author's view, the United States continues to be the recipient of excess global savings due to its "important commitment to open markets," leaving it unable to control the savings rate and current account.

Therefore, although many people regard the U.S. dollar and the developed financial markets of the United States as "Exorbitant Privileges", at the same time, the author points out that these "privileges" also bring "heavy burdens" to the United States: " The rest of the world is reluctant to spend because of class warfare within the major surplus economies and the need for self-insurance after the Asian financial crisis, which is the root cause of the U.S. debt bubble and deindustrialization.” On the other side, Wall Street banks , and financial institutions are earning a lot of money, and they are in tacit agreement with the political and industrial elites of the surplus countries.

In the process of globalization over the past three decades, who has benefited and who has suffered?

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If a slap doesn't ring, the bell has to be tied

However, as mentioned at the beginning, the distortions in the global economy brought about by trade imbalances have become increasingly apparent in recent years. Trade protectionism and populism within deficit countries have risen, and gradually turned into international conflicts.

Therefore, the author also throws out suggestions for solving the current dilemma in the last chapter...

"Trade Wars Are Class Wars" (Taiwan translation: "Trade War is Class War")

Author: Matthew C. Klein, Michael Pettis

Press: Yale University Press

Publication date: May 2020

For details, please read the 320th issue of "Hong Kong 01" e-Weekly Newsletter (June 6, 2022) "