Trade Wars Are Class Wars

Klein, a financial journalist, and Pettis, an academic and former emerging market debt practitioner, argue that international trade imbalances are produced by the distribution of income within countries rather than by competition between them.

The mechanism is accounting before it is theory. A country's current account surplus equals its excess of saving over investment. If a country's households receive a falling share of national output, they consume less, so national saving rises. If domestic investment does not rise to match, the surplus must be exported. The surplus country is therefore exporting the consequences of its own income distribution, and some other country must absorb it by running a deficit, which it does either by borrowing or by allowing its own production to be displaced.

The country cases carry the argument. In China, they document the transfers from households to firms and to local governments through suppressed deposit rates, the household registration system limiting migrant workers' access to services, land expropriation, and weak social insurance that forces precautionary saving. In Germany, they document wage restraint under the Hartz reforms, the resulting corporate saving, and the suppression of domestic investment. In both cases the surplus follows from policies that reduce the household share of income.

The United States absorbs the resulting savings because its financial markets are open and deep, which they argue produces either higher debt or lower employment rather than an inflow of productive investment.

Their conclusion is that tariffs address the symptom. The remedy is to raise the household income share in surplus countries and to restrict the ability of surplus countries to export savings into open financial markets.

The accounting identity is not disputed. The causal direction is: many economists argue that saving behaviour reflects demographics, development stage and precaution rather than deliberate suppression, and that the authors treat an identity as a mechanism. The policy proposals on capital account management are outside the mainstream.