Trade wars are not people’s wars

Understanding the processes and causal mechanisms that determine our world is the first step towards making good policy. Matthew C. Klein and Michael Pettis’s book, ‘Trade wars are class wars’, is an important contribution to current debates about trade and globalisation. The main argument of the book is that “rising inequality within countries heightens trade conflicts between them”. While trade conflict is often portrayed as a clash between countries, in reality it is rather “a conflict mainly between bankers and owners of financial assets on one side and ordinary households on the other – between the very rich and everyone else”. The book challenges the dominant understanding of trade policy, arguing that “the distribution of purchasing power within a society affects its economic relations with the rest of the world”. Trade conflicts between countries cannot be understood without an analysis of the internal dynamics of these countries.

Following a Hobsonian and Keynesian perspective, Klein and Pettis argue that as the wealthy do not spend similar proportions of what they earn compared to lower and middle-income groups, countries with high degrees of inequality suffer from underconsumption and underinvestment domestically, and therefore need to find consumers abroad. The rise of globalisation in the last 30 years has exponentially increased the interconnection between countries. Global value chains are now the norm, as finished mass products are made with components from different countries. Money travels the world at the speed of light. The profits of exports that take place in higher tax countries are shifted towards subsidiaries in tax havens, that earn unreasonably large profits. In this globalised context, the measurement of trade in goods and services has to be accounted by savings, investment and capital flows across countries, not only by imports and exports. The book’s comprehensive analysis points to the huge interconnectedness between countries, and how their fate is inextricably linked.

These ideas are developed at length in the first three chapters. The next three chapters focus specifically on the evolution of China, Germany, and the US during the last 30 years. While these three countries have different histories, the ideational framework laid out by Klein and Pettis works well to explain their economic trajectories. Capitalism needs consumers to continue functioning and absorb the production. Without a demand that meets the supply, either the supply will have to decrease or be exported abroad. China’s rise as a global trade leader has taken place at the expense of its own citizens, as their “high savings” model means that Chinese households consume a lower percentage of the Chinese output than any other major economy in the world. The US is in a similar situation, but for different reasons. Their unsustainable financial system attracts (too much) financial capital, destabilising capital flows across the world, while refusing to redistribute wealth within the US through a strong safety net and higher taxes on the rich. Therefore, the US is becoming dependent on consumers abroad rather than on its internal demand.

For the EU, Germany’s case is particularly relevant. The German government was the main actor behind the budget limits agreed in the Maastricht Treaty (1992), the subsequent Stability and Growth Pact (1997), and more recently the austerity that followed the Eurozone crisis. The German Minister of Finance during the latter episode, Wolfgang Schäuble, was so focused on the ‘black zero’ rule, by which the budget is balanced and the government does not need to borrow, “that staffers in the finance ministry dressed in black and posed in a big circle to wish him farewell when he retired after the 2017 federal elections”. This political stance led Germany to an excess of savings, as wealth concentrated in the hands of the few at the expense of the many. Far from benefitting the average German, the obsession of the German government with ‘balanced budgets’ has only increased inequality within Germany (and the EU as a whole) and dramatically reduced the average purchasing power of its own citizens. This has also limited the EU’s trade policy: as the purchasing power of middle and lower-income groups is reduced, production has to be either reduced or allocated elsewhere.

The policy implications of ‘Trade Wars are Class Wars’

The conclusion of Klein and Pettis’s book is relatively simple: “To end the trade wars, end the class wars”. As the inequality between and within countries is connected, the deepening of unregulated globalisation reinforces it. Rather than cooperating in building global labour and environmental standards, the increasing inequality within countries gives them incentives to instead compete with each other and push for lower wages, weaker environmental and labour regulations and lower taxes in order to attract investment and fight for consumer markets.

Paradoxically, in spite of the skilful structural analysis of trade and global capitalism from a political economy perspective, the book does not offer structural solutions, and leaves the reader wondering how class wars can end. Klein and Pettis suggest to address the “twin problems of income inequality and the world’s unhealthy dependence on the US financial system” through a new Bretton Woods agreement that would reform the global financial system, increase taxes on high earners and on inheritance, introduce higher minimum wages and stronger social safety nets, which ought to result in a redistribution of wealth.

While these policy proposals go in the good direction, the structural problems of global capitalism described in the book, and its inherent tendency towards accumulation of wealth remain unaddressed. Individual governments’ actions and a new Bretton Woods agreement are unlikely to mitigate class wars across a globalised world. As Dani Rodrik argues in The Trilemma , in an already globalised economy it is no longer possible to have both democracy and national sovereignty. One ought to choose. A renewed Bretton Woods agreement seems to be an attempt to reconcile deep economic integration, democracy and national sovereignty, instead of imagining new or reformed global institutions that are able to enforce measures such as a global wealth tax or the elimination of tax havens. Additionally, if trade wars are indeed class wars, what are the social forces and transnational coalitions that can put pressure on governments to effectively address the increasing inequality between classes?

Understanding trade wars as class wars requires thinking differently about trade. ‘Trade Wars are Class Wars’ makes an excellent case for it.