Michael Pettis and the Battle Over Global Trade Imbalances
How an obscure finance thinker’s argument on export subsidies, tariffs, and capital controls are gaining traction in Washington—and why they may miss the mark.
Introduction
Global trade policy is at a crossroads. From rising tariffs to talk of capital controls, U.S. leaders are reconsidering decades of open-market orthodoxy. At the center of this shift is Michael Pettis, a finance professor whose simple theory—imbalances at home fuel distortions abroad—has captured the attention of both Republican and Democratic circles. Pettis argues that export subsidies create chronic surpluses in China and deficits in the United States, justifying aggressive trade barriers and financial restrictions. Yet his critics say he overlooks key realities of consumption, investment, and price adjustments. Understanding Pettis’s ideas matters because they could shape policies that affect us all.
Who Is Michael Pettis?
Michael Pettis is not your typical economist. Trained in finance and international relations, he built a career on Wall Street before joining Peking University’s finance faculty. His book, Trade Wars Are Class Wars, argues that domestic income gaps drive global trade tensions more than cross-border rivalry. Pettis claims Chinese elites squeeze workers, suppress wages, and channel excess savings into exports. Those exports then swamp foreign industries, especially in the U.S. Though virtually unknown to the public, his message now resonates with top advisers in both political parties.
The Theory of Export Subsidies
At its core, Pettis’s model is straightforward. When a country pays workers less than they produce, it forces factories to export the surplus. In China’s case, lower wages and targeted credit inflate manufacturing output. Unable to consume at home, firms flood global markets. By Pettis’s logic, this acts like a hidden subsidy—one paid not by China’s government but by foreign consumers and producers. Americans may welcome cheaper goods, but every import is also a lost sale for a local business, eroding jobs and wages.
The U.S.–China Vicious Cycle
Pettis sees a feedback loop between the world’s largest economies. Cheap Chinese imports depress U.S. manufacturing. Job losses follow, so government and households borrow more to maintain living standards. That borrowing requires foreign capital, especially from surplus countries like China. The cycle intensifies. A stronger dollar attracts more savings, making U.S. exports costlier and Chinese goods still cheaper. In Pettis’s view, only tariffs and capital controls can break this loop, forcing China to boost domestic consumption and the U.S. to rebuild its industrial base.
Questioning the Evidence
Pettis’s critics challenge both his facts and logic. First, they note U.S. manufacturing output, adjusted for automation, has held steady even as China’s share grew—suggesting technology, not just trade, drives job shifts. Second, Chinese workers’ share of GDP has climbed to levels similar to Europe’s, undercutting claims of extreme domestic imbalance. Third, global financial imbalances predate China’s rise; the U.S. deficit grew mainly because of its own housing bubble and tax cuts in the early 2000s. In short, distortions exist, but they reflect a mix of policy choices, technological change, and genuine competitive strengths.
Alternative Explanations
Economists like Paul Krugman argue persistent trade imbalances are normal, not pathological. Countries invest where returns appear highest, and consumers buy where prices are lowest. Comparative advantage and cultural factors shape trade flows as much as policy distortions. The U.S. attracts foreign capital because of its innovation in software, biotechnology, and other sectors. Those investments drive productivity growth. Critics also stress price adjustment: over time, currency values and wages shift to rebalance trade, reducing the need for heavy-handed controls.
Why Pettis’s Ideas Appeal in Washington
Despite these criticisms, Pettis’s narrative has political pull. It offers clear villains—foreign elites—and simple remedies—tariffs and capital controls—that appeal to both populist and progressive voters. It absolves U.S. policymakers of blame, blaming external distortions instead of domestic tax and spending decisions. And it promises a win–win: stronger Chinese consumption alongside a revitalized American industrial core. In a polarized policy environment, Pettis’s concise story easily outshines more nuanced economic arguments.
Conclusion
Michael Pettis has tapped into a deep hunger for straightforward explanations of complex global problems. His framework spotlights real issues: wage stagnation, debt-fueled consumption, and the social costs of deindustrialization. Yet his account leans heavily on accounting identities and oversimplifies the forces that shape trade. He downplays how innovation, cultural preferences, and market-driven price adjustments influence outcomes. He underestimates how automation has replaced many factory jobs independently of trade. And he overstates the scope and impact of China’s subsidies, ignoring reforms that have boosted household incomes and curtailed inequality.
If U.S. trade policy veers toward Pettis’s prescriptions, the risks are clear. Tariffs can ignite retaliatory measures, driving up prices for consumers and straining global supply chains. Capital controls would shake investor confidence and raise borrowing costs for American businesses. These measures threaten to undermine the very goals Pettis aims to achieve: higher wages and stronger domestic industries.
Rather than borrowing a one-size-fits-all model, policymakers would do better to address root causes at home. That means reforming the tax code to encourage investment in new technologies, rebuilding infrastructure, and equipping displaced workers with skills for emerging sectors. It also means engaging China and other partners to improve labor standards and transparency, rather than erecting barriers.
Global trade will remain a battleground of ideas and interests. Michael Pettis has helped shift the debate by highlighting how internal imbalances can ripple outward. But if we want lasting solutions, we need policies grounded in a fuller understanding of economic dynamics. Simple theories may rally crowds, but solving real problems demands more nuance, cooperation, and a willingness to tackle our own structural challenges.
Takeaways
Trade imbalances often reflect domestic choices—wage trends, borrowing, and investment—not just foreign subsidies.
Automation and innovation drive manufacturing shifts as much as competition from imports.
Simple narratives and quick fixes can mislead; effective policy needs deeper, evidence-based solutions.
Tariffs and capital controls carry significant risks: higher consumer costs, retaliatory actions, and shaken investor confidence.
Strengthening the economy requires investing in infrastructure, skills, and technology—at home and in cooperation with trading partners.
Source
@visualeconomiken | This Man is Secretly Sinking the World Economy