The following review appeared in the Times Literary Supplement on 6th January, 2021.
Trade Wars are Class Wars presents an eagle-eyed perspective on the global economy, underpinned by close analysis and a remarkable clarity of exposition. The book is a terrific survey of the forces behind today’s global trade tensions and imbalances – even if the authors ultimately fall short of defining an alternative system.
Matthew C. Klein and Michael Pettis contend that trade wars – such as currently being conducted between China and the US, or Germany and Spain – are caused by inequality within states, leading to tension between states. The argument runs thus: international conflicts are triggered when, domestically, massive transfers of income are made to the rich, and to the companies they control, while the incomes of working people are either cut or remain stagnant. The way in which these transfers lead to trade deficits begins with the tendency of the rich to then spend far less than they earn on goods and services, while the poor spend far more of their proportional income, and save less. If the incomes of a nation’s purchasers fall collectively and in relative terms, the consequence is that the population as a whole buys and uses fewer of the products manufactured by its economy. This under-consumption of production leads to the build up of surpluses or gluts of, for example, washing machines, clothing, steel, or gas.
What to do with these surpluses? In the open, largely unregulated global economy the only outlet is for China, say, to export, or dump, its surpluses abroad. This allows the home economy to keep working at full capacity even while it victimizes the countries on which its products are dumped – a process known as “beggaring thy neighbour”. Take steel, for example. If a country were to dump excess supplies of cheap steel on another, that would undermine the production of steel in the targeted country.
In making their case the authors draw on the work of J. A. Hobson, whose economic theories in Imperialism: A study arose from his direct experience of Britain’s role in the Boer War of 1899–1902. After covering the conflict for the Manchester Guardian, Hobson argued that it had been instigated by mine-owners such as Cecil Rhodes, who, while neglecting investment and living standards back home, strongly influenced British foreign policy as part of “the struggle for profitable markets of investment” abroad. The expansion of the British empire ensured that Britain’s “surplus” products, mainly manufactured goods, were dumped on colonies like India and South Africa – often to the detriment of those economies. “Britain”, Hobson argued in 1902, is “a nation living upon tribute from abroad, and the classes who enjoy this tribute have an ever-increasing incentive to employ the public policy, the public purse, and the public force to extend the field of their private investments, and to safeguard and improve their existing investments.”
Klein and Pettis echo Hobson, arguing that the taproot of today’s global trade conflict is under-consumption at home. Hobson would have added that this is coupled with the distortion of taxpayer-backed subsidies for exporters, embodied in organizations such as UK Export Finance, which subsidises exporters and investors in foreign markets, protecting them from losses associated with market failure. Public subsidies are generally not available to domestic producers and investors.
Along with China, Germany is a classic example of the economic model of under-consumption. With the fall of the Berlin Wall, poverty and insecurity in Germany rose, largely due to cuts in social welfare benefits and stagnating real wages brought on by the Hartz IV “reforms” introduced by Chancellor Gerhard Schröder in 2003. Tax cuts for high earners and the government’s “fanatical opposition to borrowing” (in the words of Klein and Pettis) for public investment shifted Germany’s purchasing power away from the majority and towards wealthy elites and their firms, which then spent far less than they earned. More than a quarter of the value generated by German workers and capital was sent abroad before 2008, mostly to Germany’s European neighbours. “German firms were able to avoid the stagnation in their home market by selling to customers in other countries. Profits rose dramatically as costs (wages) held steady and export revenues rose in line with global growth.” Countries like Spain absorbed German exports but, because of inequality and stagnant incomes at home, Germany did not reciprocate by importing and consuming Spanish imports in sufficient quantities. Hence the rise of tension in an increasingly divergent Europe.
Like German workers, American citizens in the bottom half of the distribution have experienced essentially no income growth since the late 1970s after accounting for taxes, inflation and cash benefits from the government. Regressive payroll taxes hurt those on lower incomes and effectively replaced taxes once imposed on corporate profits, while the tax rate on capital gains (made by those rich enough to own assets) fell by more than 10 per cent. Yet, given the rise of inequality in the US, how to explain the conundrum of the country’s perennial trade deficits – the exception to Chinese and German surpluses? Klein and Pettis correctly explain that the US has become the dumping ground for world surpluses. This, they argue, is largely because of the world’s demand for US dollars (earned by selling stuff to the US), and due to the dollar’s status as the global reserve currency. The implication is that the US is a victim, rather than a voracious consumer of the world’s goods and services
But presenting the US as a victim seems to be a case of rather dubious logic. Klein and Pettis are correct that there are severe economic downsides for ordinary Americans as a result of dumping and as a consequence of the world’s demand for US dollars. But global dollar hegemony is what the US demanded at the 1945 Bretton Woods Conference – against J. M. Keynes’s strong advice for an independent Clearing Union for the world’s currencies. The Bretton Woods system sought to prevent the build up of surpluses and deficits. In 1971 President Nixon defied that system to dismantle Bretton Woods. That change, coupled with a rise in financial deregulation and capital mobility, deepened US domestic inequality, while enriching and empowering Wall Street.
Simultaneously, as with the banker in a game of monopoly, the power to issue the global reserve currency enabled American citizens and corporations to venture abroad on shopping expeditions – with China as the biggest and (until recently) cheapest shopping mall of all. To frame this great power as doing the rest of the world a favour, with America as the “consumer of last resort”, is the very reverse of the system’s logic – one intended to grant the US imperial power, cheap labour and plentiful consumption. Above all, Pettis and Klein’s logic plays down the way in which the US has used its geopolitical power as the issuer of the world’s currency to trample on the interests and human rights of states around the world – behaviour on display during the Covid-19 crisis, when the US president acted to veto emergency access to the IMF’s Special Drawing Rights for certain countries the administration regarded as unfriendly.
Because of post-Nixon US-led financial deregulation, there are few restraints on the mobility of capital owned by Wall Street investors, creditors and speculators. That lack of restraint, coupled with a strong dollar, empowers the US. As soon as the WHO called the epidemic in March 2020, international investors stampeded out of poor and emerging markets, such as South Africa, and steered their capital towards the safety of the US dollar. This outflow crushed the exchange rate of the SA Rand, lowered the country’s income from commodity exports, and strengthened the dollar. Thanks to an agreement between the US and Saudi Arabia, only US dollars can be used by countries such as South Africa to purchase vital imports like oil. Consequently, the shortage of dollars caused by the outward stampede made it harder to obtain oil, and the stronger dollar meant the cost of imports like pharmaceuticals rose. To address the global dollar shortage, Jerome Powell, the governor of the US Federal Reserve, quickly arranged “swap lines”, which enabled a few select countries to temporarily swap their own currency for US dollars. South Africa, however, like China, Iran and Venezuela, was denied access to this largesse. The US Federal Reserve had deployed its great power over the world’s reserve currency to serve the interests of just a select few.
Klein and Pettis rightly argue that to end trade wars we must begin by ending class wars. That requires both domestic and international regulation and reforms. While accepting that ending imbalances in the global trading and financial system requires domestic regulation and international co-operation, their proposed remedy seems to be weak and likely ineffective. They suggest the US should limit capital inflows to lower the financial account surplus, but make no mention of limiting capital outflows. This remedy dodges a fundamental cause of both global trade tensions and financial instability: the ability and power of creditors, investors and speculators to move capital at will; to distort trade and to game the international system. Challenging that elite power will be undertaken “in the face of substantial opposition”, write Klein and Pettis. But if societies are to face down the exorbitant privileges of “the 1 per cent” both at home and internationally, then economists need to formulate full, sound and comprehensive economic policies to form the basis of such a transformation – much as Keynes supplied the economic framework that, in 1945, led to the construction of the balanced and more stable Bretton Woods architecture.
Nonetheless, Matthew Klein and Michael Pettis pack a great deal into this book and provide a superb, rigorous analysis of both the domestic and worldwide forces shaping today’s trade wars. Their book opens up valuable intellectual space and lays the ground for a much wider debate. It is my hope that it is just a prelude to their next joint effort: a book that outlines a plan for the construction of a new, stable world economic order.