Trade Wars Are Class Wars (with Matthew C. Klein)

Summary

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Pitchfork Economics with Nick Hanauer

Episode: Trade Wars Are Class Wars (with Matthew C. Klein)

Original Release: October 7, 2025
Guest: Matthew C. Klein, co-author of Trade Wars Are Class Wars

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Episode Overview

This episode explores the critical thesis from Matthew C. Klein’s book Trade Wars Are Class Wars. Rather than viewing global trade imbalances through the lens of competition between countries, Klein argues these conflicts are best understood as struggles between different classes—capital owners and workers—both within and across borders. The conversation traces how rising inequality drives global economic dysfunction and instability, and how the policy responses of nations like China and the US spill over to affect workers worldwide. Throughout, the hosts challenge traditional economic narratives, interrogate current US trade policies, and seek better frameworks for addressing inequality and international friction.

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Key Discussion Points & Insights

1. Rethinking the Narrative of Trade Wars

• Traditional view challenged: Klein rebuts both the populist idea that foreign nations deliberately undermine American prosperity and the “Pollyanna-ish” view that the global economic order pre-2017 was functioning fine.
• Interconnected economies: “Everyone in the global economy and financial system are connected one way or another... Anything that happens anywhere in the world... is necessarily going to have some impact on everyone else.” (Matt Klein, [04:28])

2. Class Conflict at the Heart of Trade Imbalances

• Not just between countries: Trade imbalances originate in how income and power are distributed within nations, not just between them.

• Example – China: The Chinese government’s suppression of domestic consumption, enforcement of regressive policies (like the hukou system), and weak social safety nets limit workers’ purchasing power. This leads to excess savings and export-driven surpluses.

  • “Chinese elites took advantage of Chinese workers and American workers got hosed as a consequence.” (Matt Klein, [09:53])
  • The effect is not only American jobs lost to imports, but also Chinese workers not benefiting from their own labor.

• Example – US & Europe: Similar dynamics operate when Western trade treaties and policies favor capital over labor.

3. Mechanics of Inequality and Its Global Effects

• Rich households & corporations: Extremely wealthy individuals and corporations now save far more than they can spend, requiring ever-growing investments and forcing the rest of the economy (including governments and households) to take on increasing amounts of debt.
• Shifts since 1990s: Corporate reluctance to invest in real assets (preferring financial asset accumulation) and government austerity elsewhere has perpetuated stagnation, imbalances, and crisis vulnerability.

4. Trade Surpluses, Suppressed Consumption, and Economic Policy

• Self-insurance drive: Especially since the Asian Financial Crisis (1997-98), many countries run persistent surpluses to protect themselves from external shocks, building up reserves to avoid IMF interventions identified with “painful” structural adjustment.

  • “Every country that experienced [the crisis], every country that was nearby... said we don’t want this to happen to us.” (Matt Klein, [16:38])

• Cost of this policy: Global underconsumption, weakened global demand, and the burden shifted to nations (like the US) willing to run deficits.

5. Why Tariffs and Traditional Trade Policies Don’t Work

• Tariffs don’t solve root issues: Imposing tariffs to “correct” trade deficits raises costs for consumers without advancing domestic employment or fixing the causes of imbalances.
  • “Using tariffs to address trade deficits can not work or even have the opposite effect of what you want.” (Matt Klein, [25:13])
• Focus should be on macroeconomic, not just trade, policy: Most “trade” problems are symptoms of domestic inequality and macro policy, not failures of trade agreements per se.

6. Comparative Advantage: A Limited Lens

• Ricardian model is oversimplified: In a world with high capital mobility and policy-driven distortions, “comparative advantage” cannot fully explain persistent imbalances or surpluses.
  • “Comparative advantage doesn’t say that you have trade surpluses. It tells you what you make and what you trade.” (Matt Klein, [32:35])

7. Prescriptions and Policy Alternatives

• What should the US do?

  • Don’t rely on tariffs; instead, ensure domestic full employment and robust financial/fiscal policy as offsets.
  • Recognize the global problem of underconsumption, and use public spending/debt strategically to balance out excess savings abroad.
  • Address the international system (e.g., reform the IMF) to reduce the global race for reserves.

• The Biden Administration: Klein suggests some current policies are, unintentionally or not, moving in this direction.

• National security and industrial policy: Some degree of domestic manufacturing protection may be justified—for innovation, security, or to prevent sudden deindustrialization.

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Notable Quotes & Memorable Moments

• “It’s not like, oh, Chinese workers took advantage of American workers. It’s that Chinese elites took advantage of Chinese workers and American workers got hosed as a consequence.”
  — Matt Klein [09:53]

• “The only way you’re able to generate a surplus like that is to suppress domestic consumption... That all makes sense to me, but it also feels like when you’re not having a trade war, there’s a class war. The trade treaties that the US negotiated over the past 40 years feel like class wars on the American worker.”
  — Co-host [21:12]

• “A lot of what we think of as trade policy should not be the starting point for thinking about trade imbalances. Trade is fundamentally a consequence of these bigger macro forces... China’s hukou system is not a trade policy. Right. But it’s clearly very important for the outcome.”
  — Matt Klein [24:48]

• “Using tariffs to address trade deficits can not work or even have sort of the opposite effect of what you want. It doesn’t address global imbalances.”
  — Matt Klein [25:13]

• “Comparative advantage doesn’t say that you have trade surpluses... The story of economic development is that comparative advantage can change.”
  — Matt Klein [32:35]

• “Why do you do this work, Matt?”
  “...It was fascinating. I realized this is really important stuff... and to the extent that I can provide a better understanding, that can be very helpful to people because maybe we can avoid having these kinds of catastrophes happen again. So that’s why I do what I do.”
  — Matt Klein [38:04]

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Timestamps for Key Segments

• 00:42–03:33 | Setting up the topic, introduction to Matt Klein and his book’s thesis
• 03:47–09:53 | Klein details the “class war” framing of global trade imbalances using China as a case study
• 09:55–14:25 | Discussion of specific policies (hukou system, social safety nets) driving inequality in China
• 15:20–19:48 | The policy motivation behind trade surpluses and the drive for national “self-insurance”
• 22:05–25:13 | Critique of US trade treaties as class war; why fixing trade begins at home
• 25:13–26:13 | Why tariffs don’t resolve global imbalances
• 32:05–34:57 | Comparative advantage, capital mobility, and why traditional theory falls short
• 35:13–38:04 | Critique of present US trade policy: why current approaches remain inadequate
• 38:04–39:00 | Matt Klein’s motivations and why understanding global economics matters
• 41:02–47:02 | Post-interview: hosts reflect on China, Amazon analogy, historical precedents for suppression of labor
• 47:05–48:37 | Summing up: Modern mercantilism, the global “race” for dollars, and impacts on workers everywhere

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Closing Thoughts

The episode reframes global trade disputes as the outward expressions of deep, class-driven inequalities. Suppressing workers' incomes, whether in China, the US, or elsewhere, generates both domestic and international distortions. Addressing these problems, Klein compellingly argues, requires a focus not on tariffs or blaming other nations, but on rebalancing income and power at home and managing the global system according to its real—rather than imagined—mechanics.

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Transcript

[A]

The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.

[B]

The last five decades of trickle down economics haven't worked. But what's the alternative?

[A]

Middle out economics is the answer because.

[B]

The middle class is the source of growth, not its consequence.

[A]

That's right.

[C]

This is Pitchfork Economics with Nick Hanauer.

[B]

A podcast about how to build the.

[C]

Economy from the middle out. Welcome to the show.

[B]

I'm not sure when this episode will be airing, Nick, but at a time when Trump is playing Russian roulette with India, essentially loading 50% tariffs into his pistol in response to who even knows. Who. Who even knows? Cuz I thought he's buddies with Putin.

[A]

Who knows?

[B]

God, it's crazy. We're in the middle of more very well thought out Trump trade policy. It really raises the issue of tariffs when people think about. That's what he's doing. Tariffs. It's a tax on imported goods. And allegedly, allegedly, Nick, a lot of this India side is aimed at countries who have been treating us unfairly according to Trump.

[A]

Correct. Correct. Today on the show we have somebody who takes a more nuanced view of all this.

[B]

There's a more nuanced view of trade than the Trump administrations. How is that possible?

[A]

Yeah, he's a seven year old who.

[B]

Yeah, we'll be talking to a toddler.

[A]

Yeah. Who has an idea about trade, which.

[B]

Happens to be more nuanced than Donald Trump. No, not really.

[A]

Not really. Matt Klein is not a seven year old. He writes about macroeconomic policy and trade and he has a book out, it's a few years old, called Trade wars or Class Wars. And his larger argument is that we think of trade happening between countries and between borders. And his point, I think, which is certainly mostly true, is that trade has a lot more to do with the relationship between owners of capital and workers in countries. And obviously, yeah.

[B]

In economics, that somehow it comes down to a relationship between labor and capital. Yeah, if only somebody had written about that.

[A]

Yeah, exactly. So anyway, I mean, it's just, it's an interesting way to look at the problem and it raises the possibility of different kinds of answers or different kinds of politics that may address the challenges arising from trade imbalances or whatever it is.

[B]

But also importantly, how what we think of as trade treaties, trade wars, or trade itself is a lot more complicated than that idiot in the White House makes it out to be. And really than most of us, I guess, most normal people would ever understand it.

[A]

Yeah.

[B]

So why don't we talk to Matt.

[C]

My Name is Matt Klein. I write about the economy and financial markets. I have a publication called the Overshoot and I am the co author of the book Trade wars are Class How Rising Inequality Distorts the Global Economy and Threatens International Peace.

[A]

Awesome. So why don't you frame up your contrarian argument?

[B]

Contrarian? Maybe to you, Nick, I don't know.

[A]

No, it's a contrarian argument.

[B]

Okay. Your thesis.

[A]

Yeah.

[C]

No, this book came out in 2020, which means we came up with the idea in 2017 and wrote it in 2018, 2019, it's become relevant again, I think for obvious reasons. The view that we were trying to lean against, there were two views we were trying to lean against. One view was other countries are screwing over Americans and benefiting themselves in the process. That was one view we were leaning against. That's a view that's again become relatively prominent in policy making circles. Now. The other view we were also trying to lean against was this sort of Pollyannish view that there's nothing that was wrong with the global economy, financial system, trading system up until say 2017, 2018. That view was also wrong for different reasons. And we were trying to provide a synthesis of what we think made sense. And the starting point, the starting point is actually very, I think, very uncontroversial. Just kind of how you add things up. But the starting point is that everyone in the global economy and financial system are connected one way or another. Whether you think about it or not, every time you work, you spend, you save, you do anything, you're interacting with lots of other people. Everything you buy is made in a lot of different places. The things you do transmits across the global economy all sorts of different ways and ways that we don't think about. And it's okay, we don't think about. That's just the nature of the global economy. Maybe if you're a hunter gatherer deep in the Amazon, you're not connected to anyone else, but otherwise we are. And so what that means is that anything that happens anywhere in the world is necessarily going to have some impact on everyone else, whether or not it's deliberate or what they expect the consequences to be. The other point we make, and again this is not controversial by itself, is that different groups, different economic entities have different characteristics in terms of how they save and spend their income. So most people, individuals over the course of their lives will spend basically everything they earn at points in time. That's not true, right? A kid, obviously you earn nothing, but you're still a source of spending you get older, you save in various ways, you pay for others. And then when you get older still, you're drawing down your savings. But over the course of your life, basically you spend what you earn. Very, very rich people are different. And again, it's not a question of it's being their fault or anything. It's just mechanically becomes very challenging. If you're someone like Steve Ballmer, Steve Schwarzman drawing billion dollar dividend check a year, you cannot spend that on goods and services, even after taxes every year. And so you have to do something with it. And a lot of times what you do is you reinvest it. You buy financial assets. Assets. And that has implications for, you know, someone has to be issuing those assets, right. If you're buying a claim, it could be a bond or a stock or something, someone is selling that, that means they're raising money, they're trying to spend more than they earn at a point in time. Governments generally spend more than they earn. That's okay. Generally. I mean, obviously the specifics depend. Companies also depends, right? Historically, it was the case that companies drew on the savings of households in order to finance investments they couldn't make in the aggregate. Right. Some companies didn't, but you know, on the aggregate, that's how it happened. And there's been a shift globally. It started, started in Japan around 1990 and then a lot of other countries after the tech bust in 2000, including the United States, where companies actually stopped doing the thing they normally did, which was they invested more than they took in retained earnings, and it went the other way. That's been a meaningful shift. And of course, companies, they can be publicly traded, they can be privately held, but the beneficiaries of that, who's affected by that, that's generally speaking, also the very rich. You have a shift in the distribution of income, a shift from, to companies, a shift from most people to a few very rich people. That changes the balance between saving and spending and then that has to be offset somehow. So if it's possible for say a rich person to be able to buy financial assets, someone's selling it now. Maybe governments are borrowing more to provide welfare benefits to people who don't have as much income as they used to. That sustains spending to keep the economy going, whatever. There's basically an increase on both sides of assets and liabilities. This might all sound very uncontroversial or might just sound kind of boring. But the, the key point is here that all of this can spill out over the global economy. It doesn't have to be contained within one country. And so you can have a shift in a particular country for whatever reason. We highlighted a few in the book. We focus on the US And China and Germany as models, and that can then spill over into trade issues. So it looks like from the outside, like, oh, these people over there are screwing us and we are hurting because of them, when actually what's happening is essentially they're screwing themselves and that's creating side effects for people elsewhere. So in China, for example, after 1989, for a whole host of reasons, internal reasons mostly, the government did a lot of things that, on a relative basis, hurt most ordinary Chinese relative to elites, whether they were provincial officials, the Communist Party or whomever, or for that matter, foreign investors in China. And that ended up Chinese workers were relatively worse off, Chinese consumers relatively worse off. Obviously, they've been better off in absolute terms over time, but relatively worse off. And then that redounded to workers and consumers in a lot of China's trading partners because suddenly those people who are getting paid less than they should have been for the work they were doing don't have the money to buy as much as they should. And so people elsewhere who need money from selling things they earn from selling things they can't because they're. The market doesn't exist in the size it should be. So you have, you know, you say, like, oh, cheap Chinese goods destroyed American jobs. And it's like, well, there's nothing wrong with importing things from other countries. Right. The problem in this case was that Chinese exports came in and instead of generating income for people in China to buy more stuff, which is what should have happened, it didn't. It was just recycled into either profits that went back to shareholders in the west or in Japan, or it went into other things. The Chinese government basically just held onto it. And then you can see this in other places as well. You can see we talk a lot about how the dynamics played out in Europe, but that's essentially the point. So it's not like, oh, Chinese workers took advantage of American workers. It's that Chinese elites took advantage of Chinese workers and American workers got hosed.

[B]

As a consequence, I guess was a surprising point, given the title of the book. I read Trade wars or Class Wars. And of course, I'm thinking about the US and the rise of inequality here and how there's clearly class warfare going on. We can talk a bit about how that is being supported by. But you make the point that there's class war in China, that they could not Maintain this enormous trade surplus if not for the class war within China, keeping savings high and consumption low.

[C]

That's right. And it takes a lot of dynamics. And by the way, you can look at Chinese economists, people in China, and they make a lot of these points. They don't use the same kinds of language, mostly for the most part. But I mean, that's not, I wouldn't say it's quite the consensus, but among a lot of academic economists, public facing economists in China, not necessarily key decision makers, but a lot of people in China who are free to speak their views. This is actually a pretty mainstream view at this point. So you have a lot of things that suppress consumption. So for one of the most notorious is the hukou system or household registration. A lot of people in China who work in the big factories in the cities and the coasts migrated there from rural areas. And a legacy of the Maoist system was that everyone, they have a, they're sort of, they're tied to where they were born. It was supposed to prevent large scale population movements within the country because that was viewed as a precursor to revolution. This was loosened up in the 70s and 80s to allow people to move. Late 70s. But the thing is, even though they were allowed to move and work and do things, they still are sort of quasi illegal immigrants where they are. They are not able to access a lot of government benefits, even though they pay taxes for those benefits. So you have, and there's always the option of leaders in provinces or big cities that have a lot of these immigrants, these migrants, to kick them out. So one of the things that was actually happening right before the pandemic, and we mentioned this in the book, was that Beijing and Shanghai, which are the richest, among the richest cities and most desirable places for migrant workers to move to, the leaders there are basically putting in population caps like literally like you cannot have more than this number of people in this province. And then they were slum clearing, which you could argue maybe that there were unsanitary conditions or whatever in housing, but the net effect was they're kicking out a bunch of these migrants. And this was like 2018, this was happening. 2019. The fact that this can happen and the fact that again, there's this very regressive tax system where you're paying for benefits like health care and unemployment insurance and education, but you don't get any of them. That obviously is a big problem. And this affects hundreds of millions of people. And this is a well known thing. And people keep talking about how they want to reform Hukou and it's like the official policy of the Chinese Communist Party to try to change this, but nobody really wants to. There's one province now that's looking into doing some changes within the province. I mean, the joke is that I've heard from others is it's the places nobody wants to move to are making it easier to come. Right. But that's not. So that's like a big one. Right. But there are other things, too. The social safety net in China has expanded over time. It's not as if nothing has changed over time, but it's still the case. That's relatively threadbare. In particular, unemployment insurance is, like, a really obvious one. You saw this during the pandemic where something on the order of like 50 to 70 million people in early 2020 lost jobs, and then they moved to the countryside. You saw this again in 2022 with lockdowns and. Because there was no alternative. And, you know, there's issues with health care and other retirement savings benefits. Right. So all of this, that has an effect of saying, well, you have to say, if you can't trust the government to be there as an insurance, there's sort of these outside risks. You have to do it yourself. And that's very expensive. That means you're spending less, you're living below your means. Then the fact that adversarial unions are illegal in China. This is a known thing. It's a known. There was a. I don't know if it was at this point, 10 years ago, whatever. There was a bunch of very earnest students in Chinese universities who went back when Xi Jinping was trying to bring Marxist thought back into the curriculum, were thinking, yes, we're gonna go do this. We're gonna go organize workers, because that's what it says. Then they literally disappeared. We don't know what happened. So there are lots of things like this that kind of add up.

[B]

Matt, this is so strange because Trump rails against China, and yet this sounds like exactly the sort of country he's trying to build.

[C]

Yeah. I mean, you can also look at a lot of other things, too. Like the. You know, the sort of companies will say, okay, you can export this, but you have to give me a cut. That's also.

[B]

Yeah.

[C]

Or the attacks on, you know, museums and universities. Yes, there are lots of things. Yes.

[A]

Yeah.

[B]

My God, people accuse him of being orange, but it turns out he's red.

[A]

Yeah. So, Matt, there's a level at which you cannot be wrong. Right. It's tautological. You know, the more people get paid, the more they can consume. But one of the features of your argument that seems implicit is that there has been sort of this deliberate effort to create excess capacity which then you. Because if you don't, if you don't have the consumption in your own place, you'll export that capacity elsewhere. I guess my own view is certainly in the modern economy is that there is no such thing really as a circumstance where there either isn't or shortly will be excess capacity. If there's demand, the demand for more demand is infinite. Is it true that countries suppress domestic consumption in order to run surpluses?

[C]

I don't know if it's that.

[A]

I think it's more because I don't think that's true.

[B]

You don't? Why?

[A]

Because I guarantee you it's not true. Because as a matter of policy, if you were to visit every United States senator and ask them that question, they wouldn't even know what you were talking about.

[B]

But this is a blueprint, Nick. This is what developing countries do.

[C]

Well, there are a couple different things happening, right? So one thing I think that's important, and it's an important part of the narrative of our book, is the Asian financial crisis. 97, 98, I think had a really big impact. I mean, it wasn't the first thing that had an impact in this regard, but essentially a lot of countries saw that if they didn't insure themselves against a balance of payments crisis. And essentially what that means is if you were in a situation where you regularly borrow money from foreigners to make investments in your own country, which is normally fine, but if something happens, for whatever reason, foreigners stop doing that and then you have a big crisis. The International Monetary Fund, the IMF exists to smooth that out, to make it less painful. And what happened in 97, 98 was that they did the opposite. And there's a whole bunch of retrospectives on why that happened or whatever, like leave that aside, the point is it made it a lot worse. And every country that experienced it, every country that was nearby that like saw it from a distance, said we don't want this to happen to us.

[A]

Yeah.

[C]

And you can see that very clearly as a turning point in a lot of behavior of governments. And I don't blame them for that, but the net effect, it was like a really was a negative sum outcome. So it's basically if they say we can't depend on these international institutions to help in a crisis, we need to provide self insurance that becomes very expensive over time. At any point in time may not look that Bad. But essentially that is the problem you're talking about of suppressing consumption for the sake of a surplus. And it's not because the surplus is valuable in and of itself. It's because you're trying to build up this net position of, and hopefully a sense of sort of financial safety where you don't owe more to the rest of the world than than you have in assets, where you have a big stockpile of reserve assets. And you can see that starting after 98, you see it happening, by the way, also after the euro crisis within European countries where again a lot of places didn't occur to them this could happen. And then it did happen. And then you see this huge swing in behavior which was not voluntary, then it became voluntary. Right. Like you see it throughout central Eastern Europe, throughout Southern Europe. And that had big impact too. And in fact in terms of the magnitudes comparable to like the Asian surpluses. So I think in that sense it is. They may not frame it the way you were saying. I don't think people target export surpluses for the sake of export surpluses per se, but I think that self insurance argument is a real one. Separately though, it's also true that if you have a situation, a political economy that for whatever reason is suppressing domestic demand and your businesses want to sell things, you're going to have some kind of a trade surplus. That trade surplus might not be because your exports are doing phenomenally well. It might just be that your imports are very weak. But it is what's going to happen. And you see that by the way, in places.

[A]

Well, only if your products are good enough so others will buy them.

[C]

Well, not even that. It just has to be someone somewhere else has to be willing to buy. It doesn't have to be products are good enough. Right. And then this is why, you know, we talk about this in the book. There have been some places in general in the world, the US is among them, basically the rich English speaking democracies which for a variety of reasons have been willing to be the sort of consumers of last resort to prop up global demand. But only up to a point, right. Even after the global financial crisis, the US was still the source hinge player, but not as much as before. And that's why the whole global economy was so much weaker after 2008 than before. And so you're seeing this again by the way, Europe is having a very live debate about what they can do in the face of the turn in US policy over the past eight months. And one of the arguments that's been made. People are making this argument before, by the way, but it's become more compelling is, well, we have this big trade surplus, which basically means we're not spending as much as we could be at home. Maybe we should do that because we have plenty of things we need that we haven't been buying and building. And so that's sort of a positive take. It's like there is an opportunity to fix things. It's just historically it's been more of a hurdle to increase spending in places that have this sort of political economy problems than, you know, to do anything else.

[A]

Yeah, but I mean. But that doesn't have anything to do with trade surpluses. That has to do with a desire to maximize profits for capital owners. Those two things turn out to be the same.

[C]

Well, that's the point.

[A]

But the motivation.

[C]

No, yeah, I agree. I mean, the point of the book is that those are turn out to be the same. Right. That's why we say trade wars are class wars. Like, I don't think people really look at the trade thing by itself necessarily. It's when trades are residual. Right. I mean, we essentially, if we zoom out a little. Right. Economists and staticians and everyone, like, we draw these lines on the world to divide the global economy up into units that are intelligible, and we generally draw those as countries. And that's where the statistics come from, our national authorities. But, like, you don't have to do it that way. It can be misleading to do it that way. I mean, that's just how the data are collected and presented. So it's easier to think about it that way. But if you think about the global economy as a whole, then the trade stuff, as I said, it just happens to be where things end up at the end of the day. But the bigger story is the inequality picture leads to the imbalances of indebtedness and then underproduction or under consumption, whatever, and that's how it all adds up. And then some of it spills over national borders and that leads to trade. And then it leads to situations where Americans can say the Chinese are screwing us when the story is more complex.

[A]

Yeah, again, both things can be true. Yes, the Chinese may be very deliberately screwing American workers, which they very much are and meant to, but they're also doing that by screwing their own workers.

[B]

Right. So they're capitalists is what you're telling me. It's just all about screwing the workers.

[A]

Yeah, yeah, yeah.

[B]

I buy your argument in the book about. And like I said, it Was I hadn't thought about it that way before, that there's a class war in China and that is the only way you're able to generate a surplus like that is to suppress domestic consumption. Because if you're not suppressing domestic consumption, then people will buy stuff there, it'll drive up prices, it won't be as cheap. You won't export it as much. That all makes sense to me. But it also feels like when you're not having a trade war, there's a class war. The trade treaties that the US negotiated over the past 40 years feel like class wars on the American worker. So if trade wars are class wars and trade treaties are class wars, it looks to a lot of people like trade is a class war.

[C]

Sure. I mean, look, part of it is what makes for a good snappy title for a book, right? Part of it is like, what is a trade war anyway? Like, yeah, you could argue, I think, and I mean, this is sort of our perspective in writing, it is that really you just have, like, contentions about trade, even if they don't lead to tariffs or whatever or big imbalances in trade that then lead to, you know, some people losing their jobs or whatever that. That is trade war. I mean, you know, again, like, I don't want to get too in the semantics here of the definition, but I mean, our point was that to make a less compelling book title, right? Imbalances in trade and financial flows are related to changes in the distribution of INC across countries and within countries.

[B]

See, now you're speaking to a wonk like me.

[A]

We're, of course, in violent agreement with the general proposition that radical inequality is not helpful to societies, that the less of it there is, generally the better things go for everybody. Short of that generalization, what should we do? How should we think about things differently? And as a matter of policy or politics, what path should we be on?

[C]

So I think from the American perspective, and Michael and I, who lives in Beijing, but he's also American, I mean, one way of looking at this is a lot of people in the rest of the world, for their own reasons, are doing things that are bad for them, and that creates spillovers that hurt us. And so the question is, what could we do to minimize the harms of those spillovers contingent on the assumption we can't change their behavior? It would be nice, obviously, if that changed. But you don't know. There's no perfect outcome. Because the best thing is other people change what they're doing, but if they don't, you can say, okay, well the number one thing to worry about is if they are not spending enough, that should not lead to.

[A]

Okay, can I stop you there? That's an interesting argument because it implies that what you might distinguish between two countries that you're trading with both countries might have cheap goods, but one country may be generating a massive surplus that could be redistributed to people to absorb some of that capacity and the other country could just be frigging poor. And that you might change your trade relationship with those countries based on that does that.

[C]

I'm actually going to zoom out because I realize there's even a bigger takeaway from the book which is that a lot of we think of as trade policy should not be the starting point for thinking about trade imbalances. That because trade is just is fundamentally a consequence of these bigger macro forces. A lot of things that matter the most. I mean like China's hukou system is not a trade policy. Right. But it's clearly very important for the outcome. I mean it's not the only thing, right? There are lots of things and you can point to other countries as well.

[A]

The wages they pay their workers and the degree to which they.

[C]

I would also point out like it's the surplus story is not just like poor countries screwing over workers in a certain way, right? I mean like Europe has an enormous surplus, Japan has enormous surpluses, Korea has enormous surplus, Taiwan. Right. So there are different reasons for all these places. But I mean it's not as if, you know, you look at say Denmark and wow, workers in Denmark are really underpaid, right? There's like other things happening here and yet you sort of have to look at the whole, the whole suite of things that are different. Again, we do sort of deep dives in a couple places in the book with saying like look, every place is different. But it's helpful to kind of get a sense here. But I mean stepping back and saying like, okay, like you don't necessarily want to do like changing our trade policy with the country is necessarily like a first order solution, I think to this one of the issues, right, Is like let's say you want to reduce imports from a place that has a big trade surplus. Aside from the fact that those goods might be nice to have. The other problem is what do you do? You're going to make them more expensive and then maybe we do buy fewer of those items. The people in that country, they're going to sell less, they're going to have even less money to buy stuff. And so that doesn't actually help you. It only helps you to the extent that that leads to a change in behavior somewhere else. But if you don't know that it will lead to a change in behavior, then all you've done is actually made things worse for people by increasing their taxes effectively. We say this in the book. Using tariffs to address trade deficits can not work or even have sort of the opposite effect of what you want. It doesn't address global imbalances. And the extent that it would address imbalances, it would do it by reducing consumer spending in the US because of the tax increase. And that just makes, that's a negative sum outcome. If the problem is globally, there's not enough spending outside the US and then you solve that by reducing spending in the US that's not the best outcome. The first thing is I said just making sure that whatever underspending outside the U.S. doesn't lead to underemployment in the U.S. the second thing is then making sure that when you do that, the financial arrangements you come up with are sustainable. So, for example, like the period before the global financial crisis, we weren't at full employment. I mean, we were like closer to it than we're after the global financial crisis. But you know, it was still, there's still room for improvement. But the way that we got there was essentially we had a huge housing debt bubble, right? People were borrowing a ton against home equity to finance consumption. And at the peak of that, where something like, you know, 10% of consumer spending was financed by mortgage equity withdrawal, which is insanely high, that's not sustainable, right? Because you know, it's one thing to take on debt to make an investment that will then lead to higher incomes over time, lower spending. Because like you own your house or whatever, you don't have to buy, you pay for rent. But like that's not what was happening there. And it blew up pretty catastrophically. So if you start from the presumption that there is this persistent underspending in the rest of the world that leads to persistent over accumulation by foreigners of US financial assets, which is an if. But if you take that as your starting point, then it makes sense that the federal government would be essentially taking the other side and issuing debt to foreigners and then using that to pay for things or give people money in the US as an offset. The cost obviously is that federal debt keeps rising relative to GDP or could keep rising to gdp. It would make deficits look unusually large, but it would be relatively preferable to the alternative and Then the last thing that I would say is like if this is happening, you don't want to have involuntary de. Industrialization where because of this weird thing that's going on in the rest of the world and the US government in this hypothetical doing what it's trying to do to kind of keep it from messing up the US domestic economy too much that like the manufacturing sector, the tradable sector just implodes. And so that might require protection, it might require some subsidies, I don't know. Right. Like that's, that's a sort of a trickier question to get into what the best approach is. But like that's the kind of thing you'd want to be thinking about as like a, as an aside. Like, and I think, you know, you could argue there's benefits from sort of a productivity perspective, like innovation. We live in the physical world and there's advantages to actually being near where you make things for learning about them. You could argue there's like a national security imperative or being able to make a certain amount of things in, in your country domestically. But I mean that's sort of what I would say is kind of like the zooming out, like what would you do unilaterally if you had our view of what the sort of world economy is like? And you could argue, by the way, this is like kind of what the Biden administration was actually doing. Yeah, I mean I would also say like one other thing would be, and I think the US would be sort of uniquely positioned to do this is given the known issues with how countries perceive the risk of going to the IMF and this sort of problem, the international monetary system of the self insurance. Like there has to be something done to address, or there should be something done to address that. But that's a lot more challenging I think, because essentially you basically have to be willing to lose money. You have to be willing to make loans to entities that might not pay it back or give grants for that matter. And I think long term the cost of that would be a lot lower than what we actually have happen, which is you don't lend them money and then they self insure and then they don't buy things the whole rest of time or they don't self insure and they blow up and then they really cut their spending. You know, good luck to the politicians trying to make this argument. But I think that's also an important thing. Yeah, but like there's sort of, we have like reverse moral hazard now, right? Like where you have this big flow of entities, you know, historically that, you know, trying to save. And so I don't think there's a perfect answer, but I think there's a better one than what we have.

[B]

Yeah, I was just surprised earlier when you said that the IMF exists in order to make these crises less painful. And that's just not the history that I know of the imf. So you're suggesting, if you look at.

[C]

The history of why it was created.

[B]

Right, why it was created, as opposed to how it's been used for 40 years. And so you're suggesting that if we actually use the IMF the way it was intended, then there would be less of an incentive to keep these large foreign reserves to avoid having to appeal to the imf. Then you don't have to have such large surpluses in order to keep these large currency reserves, et cetera. And that benefits to everybody and makes for a more stable system with less pain.

[C]

That's right. And there's a reason why they do it, by the way. It's not like it's a secret, which is they have a very clear mandate to not lose money. Now, they could do that by basically, anytime they come in, they just wipe out any private lenders who came before. But then who runs the imf? The people who. The countries. The prime.

[B]

Yes.

[C]

So it's kind of tough. They're very constrained. So we can say that they make everything worse. But, like, it's not like this is mystery of, like, how this happens. It's very clear why, why it works out this way.

[B]

I want to get to just a kind of basic economics question because we're doing a whole series on trade and this has come up in other episodes. David Ricardo's model of comparative advantage is so much simpler than what you're describing. I don't know. In your opinion, is it. Is it a thing like, did China have this huge trade surplus because it had a comparative advantage over the US or does. I mean, maybe it created one in the process.

[C]

Comparative advantage doesn't say that you have trade surpluses. It tells you you make and what you trade. And also, by the way, we mentioned this in the book, and it's funny to go back and actually read how we originally described it. I know, and yeah, you read the book. Right. I was surprised actually, because I don't know, I just thought I was going to say, like, oh, this is what people thought. And then he actually adds a lot of caveats to what he thinks are the necessary conditions for comparative advantage to hold. And one of the Big ones is that you don't have capital mobility, like he explicitly says. The canonical example is, you know, you make cloth in England and wine in Portugal and all this. Like, even if you can make it more cheaply in Portugal, but if you could move the capital to Portugal, which I hope they don't, by the way. It's what he says, like, basically, like, you shouldn't. It's a good thing they don't. Then you make everything in Portugal, nothing in England. Like, oh, okay.

[B]

And Adam Smith says you most likely won't because you want to. You won't move capital overseas because you want to keep it near you.

[C]

Right? And back then that made sense, right?

[A]

That turned out not to be true.

[B]

Pardo made his living actually trading capital. I mean, he, he didn't make things. He wasn't a manufacturer, he was a financial trader.

[C]

Right. What he meant in the story, I think, was like, moving the factory. But. Yes, that's right.

[B]

Yes.

[C]

And I mean, and, and to be fair, like 200 plus years ago, it. You can supervise a factory far away and there were active wars over the sea lanes, right? So it was a different time, but I think it's relevant. And also, I mean, there's the question of, like, is the comparative advantage fixed? I think it's pretty clear the answer is no, right? I mean, the story of economic development is that comparative advantage can change.

[B]

Right?

[C]

And so that's also important. I mean, I don't think Ricardo's theory, as he expressed it as wrong. I don't even know what that means, right. To say it's wrong. I mean, like, very logical way he puts it. But, like, is it useful for. Right. I mean, the question is, like, there are elements of it, I think are true and they're important, right?

[A]

Like in the idealized case of it.

[B]

Is two countries trading two, two products. Oh, the math works.

[C]

I mean, it's very useful for like your own life, right? It's like, you know, does it make sense for me to like, fix my toilet versus calling a plumber? Like, that's comparative advantage, right? Like, even if I could fix my own toilet, like, look at the YouTube videos. Like, is that worth my time and effort and stress or whatever? Like, versus like, that I think is like the real usefulness of the Ricardian theory. Now, but that's different from like, what it tells you about trade policy or global imbalance or anything. That's.

[B]

But, but this is true about many economic areas that things that make sense for a household don't make sense for an Economy, you know, if everybody saving, as we know.

[C]

Right.

[B]

You know, people have to spend. So, you know, one person's expense is another person's savings.

[C]

Yes.

[A]

So, Matt, let's turn for just a few moments to present times. Are you a big fan of our current trade policy?

[C]

No. No.

[A]

Can you provide us some commentary?

[C]

I mean, there's a whole lot of things. Right. So I mean out earlier what I thought would be the optimal or like close to optimal given constraints approach based on our framework. And I mean, you can just compare that to what we're doing now and it's totally different. Right. We spent a lot of time in the book talking about how tariffs are not helpful and that looking at bilateral trade balances are not helpful. There are a lot of reasons for why it's not. Doesn't make sense. Right. So the US Has a trade surplus with Australia. Australia has a trade surplus with China. China has a trade surplus with the U.S. clearly, the bilateral picture is confusing. It also works in the financial picture, by the way. Right. The U.S. if you look at where the direct financial flows, we basically borrow money from Europe and Japan based on Canada. We don't borrow money from China officially. Even the trade balance between the US and China directly is not that big. And yet if you look at the global picture, the US Is a big trade deficit, China is a big trade surplus. They basically add up to be the same. The rest of the world balances out to zero. That's basically the short term. Clearly you want to have a global perspective. That's not what they're thinking at all right now. And then would tariffs work again? They said that tariffs work. It's by reducing the income of like whatever happens, they're reducing either the income of the people in your own country, reducing the people in the income directly because you just pay higher prices and you buy less of it or you buy less other things that aren't tariff or reduces the income of people in foreign countries because they lower their prices or you just buy fewer of their items. But either way, like that's going to redound back to people in your country because if they make less money, foreigners pay the tariffs, then you still lose out. Right. Unless they change their behavior, which so far no one is really. You still lose out because they're buying fewer of your exports one way or another. Then it's like there's a whole separate thing of like, oh, we're going to loosen export controls that were put in place for national security reasons so that we get a cut. Like what does that even mean. Right. That's a, you know, it's both corrupt and totally ineffective. It's effective at being corrupt, I guess, but it completely undermines the whole point of having export controls in the first place. What else? Oh yeah, the investment pledges. Right. That doesn't make sense. If you're asking people make promise to buy more of your financial assets which is what the deals with Europe and Japan did. That is not going to reduce the, I mean aside the fact those pledges are not going to play out because the numbers are just completely out of scale of what makes sense. If they were to happen that would lead to a larger trade deficit and maybe you could say, oh well, they're going to buy fewer U.S. treasury bonds and make more green filled investments in U.S. factories. First of all, it's not what the memorandums from the US side even imply but even then we have the resources in our country to do these things and to the extent that we don't, we're going to import more goods to do it. So again, this is not very well thought through at all and it's I think negative sum.

[A]

That's a kind way to put it. Why do you do this work, Matt?

[C]

Well, that's an interesting question. I mean I started out being interested in this stuff in summer 2008. I got an internship at an investment firm that was, I was fortunate to get it.

[B]

Great timing.

[C]

Yeah. And it was fascinating. Like I didn't really know going. I mean it seemed like it'd be interesting and you know, I was introduced to, you know, global macro issues and I thought this stuff is really interesting. And then, you know, this was the summer of 2008. Right. And then the whole gullible economy blows up. You know, I still know very little, but I know a lot more than I did six months earlier and a lot more than a lot of other people who hadn't had the experience that I had. I thought this is really interesting. I went back to work there and I tried to soak up as much as I could from the people there who knew a lot about what was going on. And I realized this is really important stuff and people should know it and understand it. And to the extent that I can provide a better understanding, that can be very helpful to people because maybe we can avoid having these kinds of catastrophes happen again. So that's why I do what I do.

[A]

Yeah, that's great. What's your next project?

[C]

Well, I mean right now my day to day job is I write a research service. I write Research notes about what's going on in the global economy.

[B]

Mix of nothing much.

[C]

Yeah. So there's a lot. Right. You know, that. That keeps me pretty busy. So, you know, in theory, another book would be fun, but I'd have to figure I don't have a.

[A]

You don't have another one in the. In the.

[C]

No, no. It's just like, what's going on now is plenty.

[A]

It's pretty absorbing.

[C]

Yes.

[A]

Well, listen, thank you very much for being with us. Fascinating conversation.

[C]

Thank you very much for having me.

[B]

My main takeaway, Nick, was Matt reassuring you early on that it's not your fault just because you can't possibly spend all the money you have to make up for all that inequality in the US it's not your fault. I just want you to know that.

[A]

There you go.

[B]

It's not your fault. What was your takeaway?

[A]

Well, I mean, I think Matt makes really interesting points, but a question whether the shape of the economy, of the global economy is governed by a yearning for surpluses more than just a yearning for profits. And I think that the motivations, the power constructs that govern how the stuff fits together depend on motivations. And I very much think that that's super important to just keep in mind. That's the first thing. And the second thing is, is that.

[B]

You'Re saying that there's a. There's a yearning for surplus, which may not be entirely rational. People. People think like Trump wants a surplus. Right. He thinks it's a good thing to have a trade surplus.

[A]

Yeah, but.

[B]

Because that shows we're strong.

[A]

But economic policy in the United States is mostly about generating outside returns for shareholders. Right. Like we have not raise the minimum wage in this country. We're not trying to suppress consumption. That's not part of.

[B]

We just don't.

[A]

We're trying to suppress. We're. No, exactly. We're trying to suppress wages, and we're.

[B]

Doing that for the purpose of increasing profits.

[A]

Yes, exactly.

[B]

Right. The people with power and wealth want to increase their power and wealth.

[A]

But the other thing I just wanted to raise is that I do think that trade policy, it isn't just about what happens between workers and capital owners in various countries. Because the truth is that China really was absolutely determined to build an economy which could employ all their people. Absolutely pulls out the stops to do that, irrespective of what international norms or rules are. And so trade policy has to acknowledge that reality. I mean, I may have said it on the pod before, but in, you know, in the olden times, when I was doing a ton of business in China. The degree to which the government supported industry in an effort to grow their domestic industry and shrink ours was just astonishing. And there was no way it was impossible for a private company to compete with that. That's just a fact.

[B]

I want to use an analogy, Nick, that I think you'll really get and appreciate. Amazon. Your old buddy Jeff, right. When he was building Amazon, he could have turned on the profit spigot at any time.

[A]

Right.

[B]

But he didn't for years.

[A]

Right.

[B]

It took him a lot because he just reinvested, he retained earnings, but mostly.

[A]

He wanted to keep prices low, to raise sales.

[B]

Right, raise sales. Right, Right. But he was investing in capturing markets. Yeah, capturing market share in reducing his own costs. He made a lot of capital investments in the shipping part of it and the AWS and all that other stuff, but he did not show a profit for a very long time. Even though he could have.

[C]

Have.

[A]

Yes, correct.

[B]

But eventually he showed a profit.

[A]

Yeah.

[B]

Okay. Now, historically, this is how countries develop. They. They suppress domestic consumption and they. They build their economies.

[A]

Okay, but Goldie, I don't. I don't think that sentence is true. People do not suppress domestic consumption. They suppress wages.

[B]

Right. Which suppresses. Which suppresses the best consumption. Okay, I skipped that step.

[A]

Okay, okay, but both. This is important, but if you look.

[B]

At the industrialization first of Great Britain, the U.S. yeah. Various European. It was. It was absolutely, you know, the satanic mills and all that. Yeah, it was absolutely.

[A]

All of it was on the back of exploiting workers. Right.

[B]

And after World War II, the US was very happy having these trade deficits eventually with Japan and Germany and the European Allies and South Korea in order to rebuild those countries so that they'd be strong partners. I mean, that was not just trade policy. That was foreign policy.

[A]

Correct. Right.

[B]

We created that, and we did that with China, too, under the idea that a developed China would become a democratic China, that eventually China would liberalize, that there was no thing as capitalism with Chinese characteristics, that that was a fantasy that the Communist Party had and that eventually it would fall. So the thing with China is it's developed. A lot of it is developed. And it's not turning on the consumption spigot. It is maintaining low wages. It's maintaining control, and it's maintaining this large trade surplus and these huge reserves of dollars, mostly foreign reserves, and that may be China and other countries because they're afraid of the imf. It could be, in Germany's case, because of a unique pathology of the German Psyche coming from the 1920s and 30s. They're terrified of inflation.

[A]

Okay, but just go back to China. I mean, but the reason that China is doing that is twofold. I mean, it's probably changed. In the beginning, it was the only strategy they had available. Right. They had whatever it was, 800 million or a billion poor people.

[B]

Right.

[A]

They put them to work at factories, at whatever the prevailing wage was, which is borderline zero. And.

[B]

And they lifted, you know, a couple hundred million people out of abject poverty.

[A]

Yeah, more than that, I'm sure. Right. There are very few desperately poor people in China today. I mean, it's not perfect, but it's a highly developed place. But they're not suppressing consumption today. They have two issues at play. Obviously, their strategy has worked extraordinarily well in the sense that it has substantially weakened all of their biggest global competitors. It's substantially weakened us. It's substantially weakened the European Union. And so that stands as powerful political motivation to continue that strategy. I would be amazed if they changed it. And the other thing, of course, is that now they also have to contend with the people who directly benefit. And so China now has the probably the same class of immensely wealthy factory owners and capitalists that we have. And those people are in positions of power, and they don't want to pay workers anymore now either. Right. So the chances that China is going to. One day, they're going to be like, okay, we don't need to do this anymore. We're going to triple everybody's wages.

[C]

That.

[A]

That's not going to happen.

[B]

You know, it's, it's. It's funny, Nick. I think that if you, in a way, if you think about what these countries are doing, everybody says they believe Adam Smith and David Ricardo, but the truth is the modern economy is very mercantilist. Instead of hoarding gold, they're hoarding dollars and, you know, and euros and, you know, you know, a handful of car. But mostly it's the global reserve currency. And everybody believes that whoever has the most dollars win. And Trump seems to think that as well. Right. So. And that's how the whole economy, global economy, seems to be working to the detriment, when we say to the detriment of people everywhere. Again, we understand that China has developed and its people are much better off now than in absolute terms than they were 40 years ago. The issue here is relative terms.

[A]

Yeah. And just like American workers, they have probably in many ways gone backwards relative to the people at the top.

[B]

Right, right. And. And they, they don't have a functional democracy.

[A]

Yeah.

[B]

Oh, wait.

[A]

Exactly. Oh, well. Well, Karl Marx would think all of this was hilarious. Probably. Don't you think?

[B]

Probably. No, I, I. He'd certainly. Let's put it this way, I think he'd use a German word, schadenfreude.

[A]

Yeah, maybe something like that.

[B]

Anyway, if you want to read more from Matthew Klein and his co author Michael Pettis, we will provide a link in the show notes to their book Trade Wars Are Class How Rising Inequality Distorts the Global Economy and Threatens International Peace.

[D]

Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate and review us. Wherever you get your podcasts, find us on other platforms like Twitter, Facebook, Instagram and Threads. Itchforceconomics Nick's on Twitter and Facebook as well. Ickhanhauer for more content from us, you can subscribe to our weekly newsletter, the Pitch over on Substack. And for links to everything we just mentioned, plus transcripts and more, visit our website, Pitchfork Economics.

[C]

Com.

[D]

As always from our team at Civic Ventures, thanks for listening. See you next week.