Trade Wars Are Class Wars
I chose to read How Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Michael Pettis and Matthew C. Klein to better understand why tariffs often fail to resolve trade imbalances. Pettis and Klein offer a compelling argument that modern trade conflicts are rooted less in national competition and more in domestic inequality. Their central thesis is that income inequality within countries, especially surplus nations, leads to global trade tensions. The authors revisit historical trade ideas and policies, from the Dallas Tariff of 1816 and the Smoot-Hawley Tariff Act to the Open Door Policy and the Marshall Plan. They use these examples to show how imbalances in global trade and capital flows stem more from domestic policy distortions than from bilateral disagreements.
How Trade Wars Are Class Wars explains that the U.S. runs a current account deficit because foreign savers invest more in the U.S. than Americans invest abroad, while China runs a surplus for the opposite reason. A major critique in the book discusses how global trade statistics are compiled. Pettis and Klein argue that traditional customs data misrepresent actual trade flows due to the complexity of global supply chains. They highlight how U.S. imports are overstated by around 16%, exports by 20%, and Chinese trade figures by approximately 30%, due to transnational manufacturing and tax avoidance strategies. Crucially, the book explains how trade imbalances are driven by financial flows, not just goods and services.
The distribution of income within countries influences national savings rates, which in turn shape trade surpluses or deficits. Surplus countries tend to suppress domestic consumption, whether by holding down wages or curbing government spending, thus exporting excess production and capital. Deficit countries like the U.S. absorb these surpluses, often at the cost of jobs and industrial decline. The authors explore this through several country case studies. China’s export-heavy, high-savings model resulted in one of the largest global surpluses by the 2000s, exacerbating global imbalances. Germany's transformation—through policies such as Agenda 2010 and the 2009 "Debt Brake", similarly boosted its surplus, contributing to the Eurozone crisis. In contrast, the U.S. functions as the world’s "consumer of last resort," not because of its fiscal choices, but because it absorbs capital inflows, leading to persistent deficits and deindustrialization.
Pettis and Klein argue that sustainable global trade requires more than tariffs or industrial policy. It demands addressing domestic inequality within surplus countries and rebalancing capital flows. The United States, they argue, bears an “exorbitant burden”—not privilege—in propping up the world economy at the expense of its working class. Reform must be global in nature, but led by deficit countries forcing surplus nations to correct domestic imbalances.
In conclusion, How Trade Wars Are Class Wars is a timely analysis that challenges standard trade narratives. It provides a clear explanation of how inequality fuels global imbalances and encourages readers to rethink the structures underpinning globalization. Pettis and Klein offer not just a diagnosis of trade tensions, but a call for systemic reform—one grounded in equity and sustainability rather than protectionism. The book is essential reading for anyone interested in global economics, inequality, or international political economy.
