My main motivation for reading this book (in the early days of 2025) was to become more informed on matters of trade, of which I knew very little (yet, I try). As we know, a new administration is set to take office in the U.S., with promises to rebalance trade relations through tariffs and the re-negotiation of various agreements. Well, you’ll be happy to know that in Pettis and Klein’s Trade Wars are Class Wars, I’ve found an important, fascinating, and quite timely study of the state of global trade in the 21st century, along with a masterful historical account of how we ended up here.

Scarcity stopped being a serious problem in the rich world sometime near the last quarter of the twentieth century. Making things has become easier and cheaper than ever before. Shortages have been replaced with gluts. The age-old tradeoff between consuming more today and producing more tomorrow is gone. Investment is now constrained by insufficient consumption, rather than by the old competition for resources. The modern condition is therefore defined by the perverse coincidence of abundant idle resources and unmet material needs. This has had profound consequences for the relations among savings, investment, and trade.

In "Trade Wars are Class Wars", Pettis and Klein drive home the key argument that global trade wars aren’t just country-versus-country battles—they’re the result of class conflicts within countries. When wealth (and, therefore, purchasing power) is concentrated among a small elite who save far more than they spend, entire economies can churn out more goods than local people can buy. That surplus output doesn’t vanish; it’s pushed onto the rest of the world, fueling trade imbalances and leaving one set of countries (the “surplus” economies) dependent on exports while others (the “deficit” economies) end up absorbing those extra goods and capital flows, often at great cost to their own workers and industries. These inflows and outflows must always net out.

Now, one of the more scandalous and thought-provoking claims the authors make, is that in a shocking turn of events, modern deficit countries such as the U.S. and the UK have become defacto "colonies" for the modern surplus countries, such as China and Germany. As some of you might recall, one of the main draws of colonialist expansion during the 19th century was the search for emerging economies that would provide a market for the glut of surplus production from the colonial powers, who would ensure willing buyers by facilitating cheap credit. As Michael Scott would say, "well, how the turntables"...

To drive the point closer to home, the authors point out that the U.S. has long served as the main “dumping ground” for surplus production and savings. This has been exacerbated by the dynamics that emerged after countries dropped the Gold Standard and the U.S. Dollar became the defacto reserve currency of the world's economy. Essentially, with the dollar as the linchpin of the global financial system, foreign capital routinely flows in, driving up asset values (like stocks and real estate) while suppressing interest rates. That, in turn, can mask problems—like deindustrialization and growing inequality—behind bubbles and debt, until a crisis exposes the underlying fragility.

The persistence of the American current account deficit can only be explained by excessive saving abroad and the U.S. role in absorbing these excess savings. Calls for Americans to behave more prudently miss the point: it is not Americans who have decided to borrow too much. As long as there are Americans who want to borrow—and in every country, there are always people who are willing to borrow under the appropriate conditions—the U.S. financial sector will find them and lower interest rates and lending standards until loan targets are met. The financial system will continue to force adjustments in the real economy until savings decline. Either borrowing will rise or income will fall.

Now, this book largely answered the lingering questions I had regarding the incoming administration's plans. Per Klein and Pettis, tariffs are a superficial and often counterproductive tool for handling trade deficits. Sure, they may temporarily reduce imports from a particular country, but they don't increase household income or alter structural features (like financial repression, investment patterns, labor-market policies, or tax systems) that cause the imbalance in the first place. What is more likely is that they will cause a re-routing of imports or incite retaliation. More importantly though, these will only serve as a bandaid and will not stem the disproportionate inflow of foreign capital to the public and private sector that are the root of much of the evil.

It makes no difference how many American airplanes or tons of American soybeans China promises to buy or indeed how much the American bilateral deficit with China is reduced. It does not even matter how many U.S. companies that had earlier relocated to China return to the United States. As long as ordinary Chinese retain so little of what they produce, which necessarily depresses their spending on goods and services, China must run a trade surplus and it must export huge amounts of savings."

Ending these imbalances, the authors argue, requires two big shifts:
1. In Deficit Countries (like the U.S.):
- In the short term, the federal government should increase borrowing as much as needed (i.e. through bonds and other treasuries) to curtail the inflow of foreign capital to the private market where it can drive up assets prices such as real estate, or lead to malinvestment in the face of cheap credit.
- The federal government should absorb these foreign capital inflows in a productive way, such as major infrastructure investments or improving the social safety net.
- By lowering payroll taxes and improving household finances, the U.S. could spread income more evenly and reduce reliance on easy credit that leads to bubbles.
2. In Surplus Countries (like Germany and China):
- Elites must allow more of the national income to reach workers and retirees—e.g., by improving social welfare, reforming regressive taxation, and encouraging higher wages.
- A better balance of purchasing power at home means fewer forced exports and less pressure on foreign markets.

Pettis and Klein conclude by noting that if we fail to address deep class inequalities, the tensions that feed trade wars will persist or worsen. Globalization, in principle, could lift everyone, but in practice it’s been hijacked by policies that push wages and social protections downward. The remedy is rebalancing income distribution—helping ordinary consumers in both surplus and deficit countries regain the purchasing power needed for a more stable, equitable world economy.

If the United States were not such an open economy, surplus countries would be forced either to divert their excess production to other countries, none of which have ever been as willing as the United States to absorb it, or to watch unwanted inventory pile up until factories were closed and workers were fired. The costs of rising income inequality in one country would be internalized, and there would be limited impact on others. Instead, by preventing political and industrial elites in the surplus countries from facing the consequences of their actions, the open system has enabled destructive behavior in the rest of the world."

Highest possible recommendation!