A Book Peek: Trade Wars Are Class Wars.

Many would agree that there is a growing number of global conflicts among countries, mostly driven by economic competition. As a result, countries are forming blocks and associations to protect themselves, especially from what they consider to be unfair trade and financial arrangements.

When this topic is explored, the general premise is almost always that some countries are taking advantage of others, and that needs to be fixed.

However, in the book Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace, Matthew Clein and Michael Pettis argue that this is a huge mischaracterization of what is actually the issue. And they believe the mischaracterization starts with identifying the wrong actors (nations) in international trade as the antagonists.

The book, originally published in May 2020 by Yale University Press, has received wide praise from many quarters, particularly for pointing out a new perspective on the ongoing debate about international trade, its conflicts, and possible solutions that can lead to a more tranquil world.

The book was a winner of the 2021 Lionel Gelber Prize.

Who are the authors?

Matthew C. Klein is an economic commentator who has written for major publications, including the Economist, Financial Times, and Bloomberg. He has also served as a research assistant at the Council on Foreign Relations and is an investment associate at Bridgewater. He is also the founder of The Overshoot, a research firm focused on financial markets, public policy, and the global economy.

On his part, Michael Pettis is an American academic who has spent over a decade in China. He is a finance professor at Guanghua School of Management, part of Peking University in Beijing. He is also a nonresident senior fellow at the Carnegie Endowment for International Peace.

The backdrop

A big chunk of the book explains how the current trading and financial system was designed in a different era, thus outliving its usefulness. For example, they outline that when it was designed, goods and capital didn’t move as fast as today, especially thanks to technologies like the internet and logistic innovations like the shipping container.

Indeed, to make the reader appreciate the challenges of the modern trade and financial system, the authors take us through a history class regarding where the world has come from.

The focus is particularly on the transformation of the global trade and financial system over time, beginning in the 18th century. Part of that history explores imperialism and colonialism’s role in shaping the current international trade and financial system.

The core of the argument in the book

In their book, Matthew C. Klein and Michael Pettis point out that the actual antagonists in the global economic conflicts are ordinary workers and the elites in individual countries. They argue that governments worldwide tend to promote elites’ interests at the expense of workers. Meanwhile, elites around the world tend to act in concert to advance their interests.

Part of the foundation of the book’s arguments is that everyone is connected through the global trade and financial system. And also that our economic actions, and even those that seem mundane, affect the lives of others on the other side of the globe, often without our knowledge.

According to the authors, these economic linkages are both beneficial and harmful. They are beneficial because they create opportunities, especially as the different countries and regions get to specialize in producing what they have the most capacity for. They also allow capital to move to where it is needed most.

On the other hand, however, they argue that these linkages contribute significantly to the rising inequalities within countries, resulting in conflicts that are wrongly thought to be between countries.

For example, they argue that China has policies that incentivize high worker output while leaving them very little purchasing power. That translates to an industrial glut that must be consumed elsewhere. They illustrate that Chinese workers do not have the purchasing power to consume the amount of goods they produce.

Meanwhile, they argue, the US has become the destination of the industrial glut from China and elsewhere, affecting the ordinary US worker by taking away their job prospects. They explain that the same scenario has played out in Europe, especially between Germany and Greece, leading to the financial crisis that peaked in 2015.

The authors explain how the purchasing power not left in the hands (or bank accounts) of the workers in countries like China is taken by elites as profits. Unfortunately, with all the money, the elites can only consume the industrial production to a certain level, often not much when everything is considered within a country’s overall output. What they often have to do with the excess money is to save it or move and invest it in another country.

In the book, Matthew Clein and Michael Pettis also explain how saving is not the ultimate economic good. According to them, too much saving leads to lower consumption, low production, and job cuts. That is especially true when the elites purchase non-industrial assets such as gold and financial instruments.

Another aspect of the international trade and financial system the book covers is the role of tax regimes in the movement of capital and purchasing power around the globe. Indeed, they focus on the intricate systems accounting firms use to help major corporations pay the least taxes possible. They argue and illustrate how these accounting practices distort the understanding of international trade and finance.

As a critical component of global trade and finance, the authors touch on the issue of currencies. In particular, they talk about the use of currencies and how they impact global trade and the financial system. They provide a detailed history of the transformation of money and its relationship with global trade. They, for example, describe how policies on gold holding by countries, particularly the US and UK, led to global economic stresses.

They explain how the US dollar became the global reserve currency after the signing of the Bretton Wood Treaties in 1944 and how it failed in that capacity, leading to the official end of the gold standard in 1971. While the dollar gave the US an advantage, they explain that the currency is becoming a burden to the country over time. And part of that is the US government debt that has become a trusted global asset.

Indeed, the authors describe the missed opportunity of the world getting a neutral currency known as the Bancor. They explained how Bancor could have worked if the US had not vetoed it.

The ideal situation

The authors suggest that for economies to perform optimally and to reduce economic conflicts, the working class needs to keep a significant part of their output as purchasing power. They also suggest a rethinking of the global reserve currency.

“If we want to end the trade wars before they further damage the global economy and undermine international peace,” they write, “we must therefore address the twin problems of income inequality and the world’s unhealthy dependence on the US financial system.”

If there is one thing that cannot be disputed about this book, it is that the authors did a good job of making their arguments easy to follow. They employed everything they needed, including charts and tables.

Whether you end up agreeing with their arguments is a conclusion you can make after reading the book. Nevertheless, few will disagree that this is a great addition to the knowledge one must have about how the global trade and financial system work.