Michael Pettis: The Trade Reckoning Has Barely Begun | Global Macro | Ep.102

Summary

Michael Pettis argues that trade imbalances are not about competitiveness but about domestic income imbalances. He explains why China's growth model makes rebalancing extremely difficult, how Germany's Hartz reforms caused Europe's imbalances, and why a US reindustrialization will force a painful reckoning for European manufacturing. He warns that the global trading system is moving toward protectionism and that the real adjustment has barely begun.

• Trade imbalances are ultimately driven by income inequality, not just industrial policy.
• Germany's 2003 Hartz reforms repressed wages, boosting savings and forcing southern Europe into debt and unemployment.
• China's high savings and low consumption are locked in by an investment-driven growth model that suppresses wages.
• If the US closes its trade deficit, Europe will have to absorb Chinese surpluses, threatening its manufacturing base.
• Europe will likely turn to trade intervention and protectionism as the only way to defend its industry.
• The US dollar remains dominant because no other country is willing to bear the cost of reserve currency status.
• China's debt is accelerating to dangerous levels, making a future economic crisis likely.
• The global system needs reform along Keynes's Bretton Woods proposals to prevent persistent imbalances.