By George Melloan
China's Communist Party gave up on running a communist economy 40 years ago, and the rest is history. But Matthew C. Klein and Michael Pettis argue that China faces big problems unless it alters the policies that have propelled it to great wealth and global prominence. Ironically, their argument in "Trade Wars Are Class Wars" -- that some Chinese have grown rich at the expense of Chinese workers and consumers -- has a Marxist flavor. China needs a redistribution of wealth, they say.
China gets prominent display in this book because the authors focus on the relationships among the three big trading nations, China, the United States and Germany. But the work is both global and historical in scope and has other interesting riffs, such as one on the success of the gold standard before it was scuttled by World War I. The authors weave a complex tapestry of monetary, fiscal and social policies through history and offer opinions about what went right and what went wrong.
Messrs. Klein and Pettis are mainly demand-side economists. They admire John Maynard Keynes but don't neglect such free-market stalwarts as Adam Smith. They aren't Marxists, of course, but redistributionists. The thesis of their book, they say, is that "rising inequality within countries heightens trade conflicts between them." In short, they believe that trade wars break out because elites in some countries exploit workers to promote exports and amass wealth. Income inequality rises not only in the exporting nations but also in the importing ones, where wages are driven down by cheap imports. These disparities, they assert, fuel political demands for trade barriers.
Thus for Messrs. Klein and Pettis, the international problems of recent decades have less to do with geopolitics than with "massive transfers of income to the rich and the companies they control. Regular people everywhere are being deprived of purchasing power -- and tricked by chauvinists and opportunists into believing that their interests are fundamentally at odds. . . . The escalating trade dispute between the governments of China and the United States is the most obvious demonstration of the risks."
That's a bit of a mouthful but an interesting take on the subject of globalization. It is of course true that global trade is managed by governments, some protectionist and some less so. It's also true that economic oppression by a ruling class is no stranger to the planet. Russian peasants endured serfdom for 300 years. Titled British land owners lorded it over their tenants. Karl Marx and Friedrich Engels identified a problem but weren't very good with answers.
Messrs. Klein and Pettis write: "Trade war is often presented as a conflict between countries. It is not: it is a conflict mainly between bankers and owners of financial assets on one side and ordinary households on the other." For the authors, a "trade war" is really an extension of the tension created by income inequality. "Rising inequality," they say, "has produced gluts of manufactured goods, job loss, and rising indebtedness. It is an economic and financial perversion of what global integration was supposed to achieve." They argue that the U.S. has been a particular "victim" of these forces: "Absorbing the rest of the world's excess output and savings -- at the cost of deindustrialization and financial crises -- has been America's exorbitant burden."
The inequality theme echoes Thomas Piketty, the French economist who made a big splash a few years ago. But how true is it when applied to trade? The U.S. and China have had a symbiotic relationship for decades: We buy their goods, and they buy our debt. Partly by welcoming foreign investment and know-how, China became super-productive and got rich, or at least some Chinese did. It also developed a sizable middle class. To say that the Chinese took advantage of the U.S. has a Trumpian tone but doesn't ring true. Americans willingly bought Chinese goods and the U.S. Congress willingly sold them our debt. Despite Chinese competition, America had full employment before the pandemic. Cheap imports may hold down wages, but wages buy more.
What does ring true is that China is in some trouble. Authoritarian regimes invariably misallocate resources, and, as the book details, the Communist Party has excelled at economic waste. Its state-owned enterprises have run up huge bank debts, many of which yield no interest and won't be repaid. Indeed, the country is swimming in debt. The authors say that "tightening credit" is needed but add that it could end up "strangling investment before complementary reforms have succeeded in lifting household incomes and boosting domestic consumption." If wage cuts and unemployment result, China's political system "might not survive."
Messrs. Klein and Pettis offer China some palliatives, such as allowing collective bargaining and expanding the social safety net. But although they allude to a key point, they fail to develop it. The Communist Party and its hangers-on have presided over an export-centered money machine that created a wealthy elite resistant to change. The authors are right in suggesting that the party should have paid more attention to its own workers and consumers. But the country's rigid power structure prevents it from responding to the needs of its people. Despite some successful adaptations, the Communist Party still must rely on police-state tactics to keep itself in power. One doubts whether redistribution is in the cards.
As for the U.S. and other Western democracies -- Germany gets a great deal of attention in "Trade Wars Are Class Wars" -- the authors' arguments are even less convincing. These countries are advanced welfare states and already practice massive income redistribution. Low barriers and the relative absence of trade wars have characterized their relationship for years.
Messrs. Klein and Pettis have written a much better book than their class-warfare themes might imply. It is worth reading for their insights into the history of trade and finance despite the frailty of its central thesis.
Mr. Melloan is a former deputy editor of The Wall Street Journal editorial page. His new book, "Bogus Science," will be published by Republic Books in January.
