Why are relations between China and the United States deteriorating? Why does the global outlook feel like it’s darkening? A few weeks ago, Brian Deese, President Biden’s former top economic aide, offered a theory on Shift Key, the podcast I cohost with Princeton engineering professor Jesse Jenkins.
We started by asking Deese whether the U.S. should import the cheap electric cars that Chinese companies are beginning to churn out by the millions.
He began by politely disputing the premise of our question. It was wrong to assume, he said, that China is a “market-based economy and a market-based actor.” It would even be wrong to assume we’re in “a balanced and sustainable global trading” system.
He continued:
In terms of the global trading system, we have this enormous imbalance because China has this enormous excess savings. And what they’re trying to do to try to solve the acute economic challenges that they face is to plow that into manufacturing with the explicit goal of trying to dominate — not just try to gain competitive edge, but dominate particular industries. And when they do that … they flood markets with cheap goods.
These “excess savings” impose their own burden on the United States, he said, so we can’t just accept the cheaper consumer goods and move on. “We, the recipient countries, end up paying a lot of the cost of those Chinese subsidies and those Chinese policies,” Deese said. “We end up paying by our own industries, our own capabilities being diminished and derogated in a way that they wouldn’t have that imbalance not existed.”
If these ideas seem to you to be coming out of nowhere, you are probably not alone. What could Chinese financial savings have to do with the success of its EV industry? But for people who have followed left-ish-wing arguments about trade and geopolitics over the past few years, what Deese is saying is immediately familiar. He is glossing a set of ideas argued most famously by the 2020 book Trade Wars Are Class Wars, by the finance professor Michael Pettis and the financial journalist Matthew C. Klein.
These ideas are widely understood in the world of heterodox economists who resist neoclassical approaches to the field but have received little airing in the broader press. Yet they are increasingly important to understanding how the Biden administration sees the world. As Dylan Matthews of Voxhas noted, the Biden administration can sometimes seem like a perplexing alliance of left-wing economic thinkers and China hawks. The Klein-Pettis book is the intellectual mortar fusing those two camps.
The book’s argument is nuanced and wide-ranging, but here is a brief summary. The global economy, Klein and Pettis argue, suffers from a destabilizing and dangerous imbalance, which, if left unchecked, could spiral into a global war. The cause of this imbalance is that since 1991, a handful of countries — notably China and Germany — have passed policies that depress their workers’ wages. These actions have included higher taxes, welfare cuts, lower environmental standards, and sometimes open graft, but they all achieve the same end: They impose great costs on the working class, artificially suppressing citizens’ income and reducing their quality of life, to the benefit of each country’s industrial leaders.
This, the “class war” of the book’s title, has rippled across the global economy in several ways. It has, first, allowed China and some European countries to build up a disproportionately large share of the world’s manufacturing industries. Since workers there are paid so much less than they would be elsewhere, companies are happy to relocate their factories to profit from cheap costs and (in China) low environmental standards. But because Chinese and German workers are systematically underpaid, they cannot afford what they are producing, thus forcing other countries to buy their artificially cheap finished goods. These are the titular “trade wars.”
This is not the end of the story. According to Klein and Pettis, China’s “class war” policies — such as its hukou system, which has created a roving migrant class within the country who lack access to welfare benefits — has artificially enriched its wealthy elite. These industrialists, executives, and officials cannot spend their money as fast as they earn it, meaning that they must save it. Specifically, they seek to save it in U.S. dollars, the world’s reserve currency, snapping up dollar-denominated bonds, stocks, and mortgages. This, in turn, drives up asset prices and generates artificial credit bubbles in the United States and its ally countries, as the world’s extra cash seeks a productive outlet somewhere in the American economy. And because global demand for U.S. financial products pushes up the cost of a U.S. dollar, it makes any goods produced in America more expensive, which further dings the competitiveness of American manufacturers versus their Chinese or German peers.
In short, over the past few decades, “the world’s rich were able to benefit at the expense of the world’s workers and retirees because the interests of American financiers were complementary to the interests of Chinese and German industrialists,” Klein and Pettis write. But note that there is a destabilizing cyclical mechanic to this story too: As China takes more global manufacturing, its excess savings build up further, which slosh around the global economy and generate larger and larger credit bubbles.
This is what Deese was referring to when he condemned China’s “enormous excess savings,” and this is why he identifies those savings as a key driver of China’s manufacturing boom. In the Klein-Pettis worldview, the underlying cause of the destructive tendency in the global economy is the way that its economy systematically steals from the poor and enriches the wealthy. As Deese told us:
China needs to decide if it loves this unsustainable, unbalanced, in many cases, illegal manufacturing strategy more than it hates the kind of domestic reforms it would actually need to take to boost domestic consumption, produce more balanced growth as it becomes a more mature economy.
This intellectual strain has long been present in the Biden administration’s thinking, but recently it has taken on a new prominence. On Wednesday, Treasury Secretary Janet Yellen warned China against flooding global markets with cheap green technology exports while speaking at a Georgia solar factory. “China’s overcapacity distorts global prices and production patterns and hurts American firms and workers, as well as firms and workers around the world,” she said.
Biden himself has even begun to sound this note. You can see the soft influence of Trade Wars thinking in his promise that Chinese electric vehicles will not overwhelm American automakers. “China is determined to dominate the future of the auto market, including by using unfair practices,” he said in a statement last month. “I’m not going to let that happen on my watch.”
For Klein and Pettis, and presumably for the Biden administration, these “unfair practices” can be relieved only by China allowing the consumption share of its economy to rise. They argue that China must stop plowing money into unsustainable investment projects and instead allow its economy to be piloted by consumers, not party officials.
That this would require revising the country’s political system, which concentrates power in the hands of the economic elite, is what makes it so unlikely. On the other hand, if China fails to reform its system, then the consequences could be even more painful: Klein and Pettis suggest that a similar dynamic among the late-19th century Great Powers led to World War I.
Ultimately, Trade Wars Are Class Wars does not predict what will happen. The authors are clear that America’s and China’s economic growth are not necessarily in conflict; only the current dynamic makes it seem so. But the book also suggests a few ideas that it does not fully articulate — presumably because Pettis, who is a professor at Peking University, lives in Beijing.
The biggest of these is that China’s political economy could metastasize into far more malign forms than it holds today. If you think about a country’s politics and economy as necessarily growing and changing together — its politics taking a form that its economics can tolerate, and vice versa — then China’s politics and economy are not necessarily destined to grow along a consumer-friendly path. Today, China produces more solar panels and electric cars than it can consume, and it must find a way to get rid of them. But there are other lines of business — and political styles — that have a demonically self-disposing tendency.
Thermasol
