Odd Lots - The Coronavirus Crisis Could Lead To The Mother Of All Trade Imbalances

Episode Date: May 14, 2020

With the acute phase of the health crisis having faded in China, factory activity has ramped up again. One big problem though: With the economy so depressed everywhere else, demand for the goods made in those factories has fallen off a cliff. This is just one way in which the virus is massively exacerbating trade imbalances that existed prior to this crisis, and which are now shaking the global economic order. On this episode, we speak with Matt Klein, an economics columnist at Barron’s, and the co-author of the new book Trade Wars Are Class Wars about the interplay of the crisis, world trade, geopolitics, and domestic political tensions.See omnystudio.com/listener for privacy information.

Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. So Tracy, something that you've been writing about lately and of course we're still in the middle of this extraordinary global crisis. The story has taken on a new dimension. And I feel like you being positioned in Hong Kong covering the story from Asia is going to really an area that you can appreciate. Oh, what's that? Well, I mean, in the last few days, and we're recording this on May 4th, 2020, so important to note, the idea of the trade war, terror of China, U.S. trade tensions has really sort of reemerged as one of the subplots,

so to speak, within this crisis. Oh, yeah. So after a relatively long hiatus, we have Donald Trump once again, threatening tariffs on China. And of course, there are political dimensions to what he's doing. China is sort of an easy distraction or an easy scapegoat for the coronavirus chaos. But, yeah, it's definitely interesting to see the trade war pop up again in the midst of what is arguably the biggest global recession that we have had for a long time. Yeah, and it's interesting, too, because obviously the trade war, trade tensions dominated really the second half of last year. And you would have expected that sort of perhaps very early on in this crisis, due to the origin of the virus, that Trump would have taken an extremely hard line against China.

But so far, at least rhetorically, he's been fairly conciliatory. I guess that's true. But it does feel like it's something. something that's probably going to come. The other thing that I find really weird about the whole past few months in the market reaction was back in January in February when we saw large chunks of the Chinese economy shutting down because of the coronavirus efforts. It took a really long time for the market to react. And it was so odd. I think we've had this conversation before, but it was so odd because we spent all of 2019 worrying about a trade war. And then effectively we had something

that amounted to a similar thing in the form of the Chinese economy shutting down, and the market didn't seem to care anymore. Right. Here we have, like, the biggest supply shock, so to speak, imaginable, this total shutdown of manufacturing. And I remember, like, the first real coronavirus episode we did, and it was before U.S. markets really started crashing, was with Dan Wang of Gavkal, talking about, I think it was just a... after or it was the week that Apple warned about the disruptions? And that was the first time, like, U.S. markets really started getting very anxious about this. But the beginning of the story was really about sort of like the supply side disruptions out of China. Because, of course,

at that point, I think it was, you know, mid or late February, there wasn't an appreciation yet in the markets of what it would do to the economies of the U.S. and Europe, which, you know, de facto total shutdown. Yeah, but that was another weird thing because people were very focused on the supply shock side of it. And there were just a handful of people who were really talking about the hit to demand. And now two months later, it's pretty clear it's both a demand and a supply shock. And the really interesting thing over here in Asia as we sort of emerge from lockdown and start to recover is that even though manufacturing is getting back up and running, a lot of people start. still aren't in the shop. So in China, for instance, you know, the authorities there are trying

to give out vouchers in order to get people to go shopping. Right. So that's the problem. I mean, we've seen perhaps surprisingly the speed with which manufacturing can come back online in China, various factories starting up, but that doesn't help much if they have known what to sell. Yeah, exactly. Supply and demand shop isn't a great thing for the global economy. Indeed. So now anyway that the trade war is perhaps starting to reemerge as a dimension of this story. I thought it would be a good idea to talk about that. And we have the perfect guest. I think we've never had him on, but he's someone who we're both friends with and someone who are perfectly positioned to speak to the tensions that are here and which may be emerging in the months ahead. Great. I can't wait. All right. So today we are going to be speaking with Matt Klein. He is a columnist, an economic columnist, at Barron's magazine. And he is the author of a new book called Trade Wars Our Class Wars,

which he co-authored with Michael Pettus, who we have had on the show. And we are going to talk about the sort of trade dimensions of this crisis and its aftermath, both in terms of the current sort of saber-rattling and what it might mean as countries really start to attempt to revive their economy. So, Matt, thank you very much for joining us. Thank you very much for having me. So, Matt, before we get started sort of like with this crisis specifically, and we've talked about this a little bit with your co-author on a previous episode, Michael Pettus, but what is the core premise of your new book when you say trade wars are class wars? What is the sort of basic idea The basic idea is that even though it's very easy to perceive trade conflicts as being between

countries, because governments are usually actually agents that are engaging trade conflicts with each other. And so we therefore conclude that it's about national interests and geopolitics and things like that, that actually the drivers of trade conflicts are internal class conflicts and that if you have high or rising inequality, income inequality, within a certain. society, that's going to end up creating various economic distortions that will spill over into the rest of the world and end up harming people outside of their own national borders. So when you think about, for example, the trade conflict between China and the United States,

it's not so much that Chinese workers and American workers aren't some zero-sum gains of jobs and incomes. It's actually the opposite, that American workers have been farmed by policy in China that also harm and will primarily end up farming Chinese workers. So it makes more sense to think about this as a class conflict rather than a national conflict. So talk to us a bit about how you mentioned distortions, but I guess another word for those would be imbalances in the global economy. Talk to us about how those build up and which ones are sort of most at play in the current climate. Sure. So imbalances are not necessarily a bad thing, but basically it's the society produces goods and services and also consume goods and services.

And in a closed economy where there's no trade between societies, the amount of value of those goods and services that are produced and consumed have to be the same. If you have trade, though, you can actually have situations where one society produces more than it consumes and uses as investment inputs domestically, while other, and therefore has a surplus that it can support elsewhere. And you have other societies that are going to end up consuming and investing more than that people are producing. And this can be very beneficial. So we talked a fair amount in the book about how historically development in terms of industrialization has often depended upon countries relying on the sort of surplus resources of others in order to develop without starving themselves. So this happened in the United States.

This happened in Korea, it's happened in Korea, ever since South Korea ever since independence. It happened in Norway, and it's not a super well-known example, but the development of the Norwegian oil and gas industry depended on massive amounts of foreign investment, because it was a full country and countries. do it themselves. But it can also be really problematic if you have a situation where instead of imports supplementing domestic production, you have imports displacing domestic production. And instead of facilitating something valuable, like the development of offshore oil and gas that provide income for generations, you have instead people losing their jobs and then forced to borrow to maintain some semblance of their living, which is what actually happened in many parts of the world,

particularly the United States over the past several decades. So before we get to the current crisis, just to sort of make it very clear what the mechanism that we've been talking about is, talk to us about the link between Chinese industrial policy, the repression of Chinese workers and Chinese household and Chinese household savings, and how that creates spillovers, specifically that end up harming American workers. The basic thing to understand is that you can sort of vastly oversimplify the world. There are two types of entities. One is people who, if you give them a bit of extra income, it's going to get spent, or most of it's going to get spent relatively quickly.

And then there are entities where if you give them extra income, it will not get spent or a large proportion of it will not get spent. And what's generally happened in China and other countries as well, But what's happened is that we've had effectively shift in the distribution of income from people who would spend most of their money, particularly, you know, Chinese workers and ordinary savorate, towards entities that do not, whether it's provincial governments or the rich in China or certain kinds of enterprises within China. And that's essentially led to a condition where there's a lot of what, you know, use the technical term, excess saving. So if you think of production minus your immediate consumption as saving, then there's a lot more saving than otherwise would be. But the flip side of that is simply that regular people aren't able to be sued. The share of income paid Chinese workers is exceptionally low.

So the extent that we have comparable data for this, and it's, you know, a couple of years out of date from the Chinese updated. And the last time I saw it in 2016, the one thing to change dramatically increase in between them. about 40% of the value of Chinese non-financial corporations is paid out to workroom. Now, for comparison sake, in the U.S. and Europe, and it's between 60 to 70%, so there's a real big difference between the norm and China and the rest of the world. And there are a lot of factors that you point to that enable us. For example, labor organizing is illegal. There was a big way, a couple of years ago, there's a situation. where a lot of very earnest Chinese college fees at the top universities were taking seriously

the guidance of their leaders to study Marxist classics, and they realized that they should be making like there's some ideological forbearers and going out to factories and trying to organize workers, and they all got arrested. And then they had to, you know, forced to apologize. It's actually kind of interesting in recording this on May 4th, because that's, you know, 1001 years ago. May 4th was when, you know, the Chinese Communist Party were traces of intellectual anti-seeing is that. It was where you had university students who were politically active in calling for changes in reform. So, you know, the government is very aware of what's going on in the campuses and they want to make sure that they aren't threatening. They even alliances workers and students

is very frightening them. And so that's something you saw. There's the household registration of Hukko system, which, I mean, other people have written about the Chinese government says that they know that the system is a problem, but they don't do anything about it. Essentially, it's a form of internal population movement controls. It was set up by now and his, you know, in that period. And basically it was supposed to keep people in the village where they were born and that way to maintain a supply of agricultural labor or things like that and also presumably discourage revolutionary activity.

It's been maintained. It's been loosened since then. So you have hundreds of millions of internal migrants going from the countryside and cities before providing a very large share of the urban workforce. But technically speaking, they're not. new legal residents of the places they're living. And they don't have access to a lot of the benefits that legal residents have in education and healthcare. They do have to pay taxes as part of their social security contributions, but they don't get the benefits. And they're always at risk,

in theory, of being deported. And you saw this again, I think this was around the 2018-19, where large sections of Beijing, where a lot of migrant workers live, where basically cleared out because you're supposed to unsanagan. But we put this in the context but the local government in places, such as Beijing and Shanghai, saying they want to have population caps, but they think they're overprous and they're not in the benefits to the locals. And essentially seeing inside China, you know, immigration restrictionism showing up along different areas of country.

And so that's, you know, a new thing, and that's something that would watch. But the fact that that's always a possibility or something being deported like that, obviously is going to undermine whatever negotiation, how workers would have. Yeah, and it goes the other way, too, which is that the extent that which you lived in the city,

you bought you had some benefit, that you can always import someone from an extremely poor village in the western part of the country. So when you consider all these sort of restrictions or communism with Chinese characteristics that ends up creating this kind of inequality in China, and then you look also at the imbalances in the U.S. and inequality there, I guess my question is, which one of those is a bigger problem, or which one is the greater contributor to the trade tension? that we're currently seeing between the two countries? That's a great question, and it's something that we've spent a fair amount of time in the book

trying to address in the chapter that we have on the United States, because it's absolutely right, the United States, not as necessarily unequal as China. It hasn't gone to the same level, same amount of change, but it's definitely significant. So on the one hand,

you do have a lot of developments in the U.S. that resemble, actually, many ways, resemble to have their journey. So we made that point explicitly in the book in terms of, you know, the shifts that happens from post-2000s. But that is partly offset by the fact that the United States, I do think, one is that the United States financial system is very open and accommodating of events or desires in the rest of the world. And relatedly, that the consumer market also adapts to sort of accommodate how the financial system decides in response. So, and the rest of the world, you know, whether they know this or they're just, you know, their preferences.

But essentially, if you have excess savings and you're in China, a bunch of that's going to end up somehow in the United States. And that's true globally. It will end up being the case that the United States serves as a sink for the rest of the world. And I think the way to see this is these counterfeiting forces is the fact that if you look at some of the European countries that have massive blooms and costs in the 2000s and essentially driven by trade, essentially what you consider a sort of trade conflict type scenario that is similar to the U.S., they're actually in the first. they're actually much larger. And those were places where the inequality was much more restrained. So somewhere like Spain or Italy, you didn't see, or Greece for that matter, you didn't see the same kind of shift in the income distribution before the crisis

in those places that you did in the United States. And yet, you saw, or not yet, perhaps, I can think we can sort of point to some of causal length that that's why there was a conventionally bigger shift in their international imbalances because they're domestic balances. Because they were less domestically balanced, they absorbed that in the greater foreign balance. And so I think that the U.S., we sort of ended up with the worst vote for many ways, because we had so much weakness domestically the kind of thing that would have led to trade surplus losses in terms of domestic investment, government infrastructure investment, week wage growth. And yet, that didn't even

translate into trade surpluses that led to financials in value. That was just compounded by the increase in following from the rest of the world that the end of state. So, Matt, just to sort of like sort of square the circle here, for people who haven't thought about it in this respect, if you say, oh, the U.S. ends up as a sink for everybody's savings, a lot of people listen to that and they're like, oh, that sounds like a good thing. People want to recycle their extra money in the U.S. They want to buy our debt. They want to invest in assets.

what are the real economy ramifications of a world that wants to recycle its extra dollars into the United States? So I think the easiest way to look at it is the corresponding entry to those financial inflows coming to the U.S. is that there's also a lot of goods and services coming into the U.S. that are effectively also excess. So if you take away sort of, I mean, it's very useful to look at it from the perspective of financial markets. I know this is financial markets podcast. But if you look at sort of abstract away from that in a sense of in China and other countries, there are more goods and services being produced than absorbed domestically.

That creates a glut of stuff. In practice, it's stuff. The services trade is not really a big thing. So it's stuff. Like a lot of stuff. They're not buying it at home because someone has to buy it. So they're selling it somewhere else. Now, if we want more stuff, then we are capable of producing, then that's great.

for us because then we end up with more stuff than we could have had and our living standards are higher. But if in extent what actually happens is we couldn't produce that stuff ourselves, but we don't because we're getting it from someone else at a, you know, heavily subsidized discount, then we're worse off. So, which is, in fact, is what we've seen in the United States in particular, where the capacity utilization of the manufacturing sector, which is essentially telling you how much are the factory is actually running. We look at the employment data.

All these things, what they show is that. we were capable of producing a lot more than we were, but we ended up just using a lot of jobs instead because we got it from somewhere else. That was only tenable because there was a lot of finance, money coming in to allow people to borrow and spend the difference. But that, of course, is not a sustainable strategy, right? I mean, if you lose your job, but then you're able to sort of keep on a certain amount of spending because while your house has gone up in value and you can get out of a second mortgage or

you have some disability benefits temporarily, I mean, that's not really going to be a long-term, you know, sustainable economic solution for anyone. And that's why it's so harmful. And when people say, oh, the United States benefits from this, if you're very careful, who is actually benefit? Right. So basically, that's why Trump one. I think it's a contributing factor.

I mean, you know, we're not like political science people and I don't want to get too much into the weeds on that. But, I mean, there have been people who sort of studied at the margin of where places are negatively affected in places such as Wisconsin and Michigan, Pennsylvania, and it looks as if there's a high correlation between the change and the vote share of those people, you know, from Democratic Republic and over time in presidential elections and the impact of competition from, or displacing essentially from Chinese imports. So I don't think it's unreasonable to say that. So you just described your framework for thinking about the global economy and how these imbalances are giving rise to trade tensions between countries. Talk to us about how that framework actually fits into the current crisis when it comes to coronavirus. Joe and I were discussing in the intro about how this is probably going to end up being a supply and a demand shock. How do you see that playing out in your particular framework? I think you brought up really well earlier, Tracy, when you're talking about that manufacturing capacity has been brought back online much more quickly than consumption.

And this is something that you can see in all the data in the Asian countries that have had the virus first and also brought in the control more quickly. And I think that that's really just going to heighten the trade tensions that were existing before. So I remember shortly before I went on, you know, presently the sort of stopped paying as close attention to the news. There was this whole idea of the phase one trade deal from the U.S. and China that was going to fix everything I thought was what wouldn't.

in fact, we wrote in the book that just because China agreed to buy more soybeans or airplanes, whatever, is it not going to change this underlying dynamics here that are creating a trade friction. The thing that's going to make it a lot worse is if Chinese consumers, such as they are, permanently reduce their spending, at least for the same period of time, while Chinese manufacturing keeps on going at full pill because the Chinese government wants to make sure people have jobs, and that's going to dramatically increase any frictions that you have, not just China and the U.S., from China and Europe, China, Japan, everyone. But it's not just going to be China.

I think we're going to see this a host of countries because the extent that I've been trying to understand this stuff like manufacturing jobs is relatively easier to make them work under conditions of trying to keep people safe as possible. You're already used to wearing protective beer in a lot of these situations. They're not usually having work as they're right next to each other. There are ways of adapting to make it, you know, work for the perspective of producing things. I would expect that that's going to come back to full workplace than many other sections of economy. We just can't do that. And if that's the case, then you're going to have a situation with you have manufacturing production production of normal, which is depressionary under normal circumstances. If consumption is 70% of normal, it's going to be real in balance.

And you see companies fighting for a larger piece of a smaller market share, a smaller market. And that's going to basically all the things that we talk about in the book, it's much more heightened. We were writing this book in the context of relatively good reciprocal environment with global economy. And there were problems in terms of debt sustainability. There were questions about what would happen if there were a downturn in China, what would happen under certain circumstances of Europe. Whenever we were talking about in the book, we were thinking of the downside scenario, this is much worse.

So that suggests that the kinds of things you're warning about would be just even more extreme. And I think that we're going to, I would not be surprised if we see a lot more extreme conflict without trade as countries try to preserve jobs. as they can in an environment with demand is just relax. And that's going to be, I think, it's going to be scary. So what does that look like specifically? So China tries to run its factories full tilt to keep people employed. Vietnam does the same thing.

Presumably Germany, they're doing a good job of keeping their companies together, keeping their manufacturing going. All these manufacturing powerhouses are going to continue to produce. Demand is collapsed, particularly in the U.S., the consumer of last resort, for much of the world. So then where does the rubber meet the road? What's what happens because of that? Where does it go next? That's the big question. I mean, you know, I don't know really how, you know, how to gauge with the U.S. response to me. This would be. It's historical. The U.S. has been pretty tolerant, actually, other countries using the United States sort of as a, you know, dumping ground or

sink or whatever word you want to use economically. I don't think this, I think this circumstance is quite different, not just because of who is in charge, but also just because of the magnitude shop. So I think is going to be very hard to say how that's going to play out. I mean, I think one would expect that sort of naively, countries that did a better job containing the virus domestically ought to have relatively more resilient consumer markets. And therefore, if there's full rebalancing, it should be such that the places that are doing well

should actually switch, you know, either of their surpluses were contracted and moving the deficit or something. So they would actually be absorbing some of the sort of global loss to the trade account. So I think this will keep producing things, but maybe they, you know, import more. I sort of don't think that's going to happen, but it doesn't happen. It could be quite pleasant. I mean, we're also seeing, you know, sort of in the emerging markets, there's an interesting situation there where, you know, how, like, it's hard to say it, but there's been a,

there was a real financing shot for a lot of emerging market countries. They're going to access funds to just maintain spending. And I guess that's partly, you know, it's been alleviated, but the extent that you have these real financial crunch and there are certain emerging countries that had been providing sort of boost to global demand in three places such as India or Brazil or Turkey or what have you then that also will have an attack elsewhere. It would be usually to see how that plays out and I don't think it'll be here for anyone really. Restoring global demand is obviously the thing that you should really try and focus on here. How you do that in the context of the

virus that really discourages a lot of people from engaging in commerce, I don't know. So I guess we're talking about these sort of big picture imbalances, and one of them, which comes up throughout your entire book, is that underconsumption notion. And it feels to me like the focus is always on trying to get people to spend less and save more or trying to solve those imbalances in saving and spending. Do people ever talk about just producing less? You know, that's an interesting question. I mean, in a certain sense of what we're sort of in that world a little bit right now, right? Well, if you go back in 1930s, that was something that was tried. I mean, FDR was dealing stuff in the agricultural sector,

but there were farmers basically just destroying crops and slaughtering their animals. And actually we're seeing this now there's a certain extent in the meat sector where you can't have hog farmers who can't sell hogs to meatpacking plants with plants are shut down so they just kill their breeding cells. So that's not really, I would say, from the optimal solution. But, yeah, in theory, producing less could be a way of your balance, you know, even though balance and saving. I think in general, though, I mean, I sort of would not say that we're in a world where literally everyone has everything they could need, and therefore we don't need to worry about producing more stuff.

I think it's the question of how do we get the stuff that we can produce. Is it possible that China responds to this crisis by doing things? like building out its safety net. I mean, they've just had millions of workers are going to lose their jobs at least on a temporary basis. Extraordinary shock. It's an extraordinary health shock. Is it possible? Or could you see China taking that path of essentially helping to build up the safety net for its domestic workers, which would, in theory, become at least a marginal source of demand and a form of rectifying some of these imbalances? That would be great if they did.

I'm not going to pretend that any deep insight into thinking of the Chinese leadership on this, but we actually did see in response to 2008 something along those lines to the expansion of health care provision in China. And it's not universal health care the way they said. But it's not crazy to imagine they would do something similar, especially because even if the official unemployment roles are not particularly high, those don't count all the migrant workers who have been forced to go home and don't have jobs better and live.

So the real unemployment rate in China is probably much higher. So, yeah, if they were to expand their safety in regards to greater income support, that would be fantastic. And that would help a lot. And I think that it definitely would be consistent with things in the past that said they want. The question is whether they'll actually do it. So, Matt, you worked with Michael Pettis on this book. I'm just wondering, it's always great having Michael on the Odd Lots podcast, and he always comes up with, you know, some interesting anecdotes about China in particular. Was there anything that you learned about China that sort of surprised you in your research?

Oh, man. Yeah, well, I actually got to spend about a week and a half at his house working on the book, which was quite interesting. Oh, nice. Yeah. That was interesting. I got a chance to tour some of the cuisine of Beijing. Did not get a chance to go here any of his bands live, which I know, kind of. I guess one thing, this wasn't, yeah, so this is a bit of an older thing.

But one thing that I found striking was they're kind of digging into the economic history of China in the 80s. And how in some ways that was really the shift from sort of the Mao era to the initials of late 70s, 1980s period, which is you had a really heavy-handed state direction. And then there was just to sort of generalize the liberalization of policy. And not just liberalization in the sense of just not letting people do anything, but specifically of trying to shift from heavy industry and big industrial products in the military to, well, let's see if, like, a small former can make a better, you know, life for himself or herself. And that effectively had a redistributional effect. One of the reasons it was so resisted by so big change was precisely because it undermined their power by diffusing power and income across the broader populace.

And then part of the reason that broke part was that if you liberalize the agricultural sector, which is the vast majority of the country at the time, and also considered less strategic compared to heavy industry, but you don't liberalize the same extent of the urban economy. You're going to have mismatches in prices or changes in relative prices, and one of those was a very sharp increase in food prices, well as to urban wage by the end of the old community, which led to some pretty widespread discontent. And I would not say that is what led to the pro-democracy protests in

1989, but it was definitely a contributing factor. And that's also what people in the government at the time thought, because that there was documents and since, you know, that's been published since then, which is partly why, for the Western mind, we generally think of Kenemans who are specifically, specifically, because that's a lot of news, cameras, where it was a really striking visual, but it was actually a national movement, the pro-democracy movement, and it wasn't just students. There were students, And it was also, you know, urban workers and so people who were disaffected about a variety of things, both political promises and economic problems tied up into that, which is partly why the government found is so threatened.

And one of the leaders of the Florida Mars movement who left the Hong Kong was a worker who now in one's called China and Labor Bolton. And, you know, not college educated at all. And that, I think, is why they found it as threatening if they did. That's a particular kind of alliance between, you know, workers and students of, you know, essentially their origin story. I think that probably that whole sort of narrative and then seeing how that sort of reversed over time to a degree of sort of new concentration of even though they didn't roll back to economic reform to me, just be the sense of, well, we want to make sure it weren't charged. We don't want to just sort of liberate the masses to be economically dependent. Probably the most interesting thing about China than I learned. Matt, before we go, I want to go back to the sort of existing crisis and possible policy responses.

what happens, you know, there's been a lot of talk, particularly because of the U.S.'s inability to quickly ramp up the production of personal protective equipment for doctors and nurses, the difficulty with rolling out tests rapidly, sort of a lot of awareness about the deficiencies of not having at least certain key things manufactured here. We don't know what the future holds, but what if the U.S. sort of takes a turn for like a very sort of like self-reliant movement where we really focus on increasing domestic manufacturing, throw up massive tariffs, and, you know, de facto with the rest of the world. Is this a plausible path? Is this something in your view that the U.S. could possibly do? And what kind of ramifications

could that have? Great question. I answer two immediate thoughts. One is that if anyone, any country in the world could do it, we would do the United States. Does the U.S. is like far, the most diversified economy in the world. It is large, it is relatively not that exposed to imports of exports compared to other major economies. So if anyone, and of course, the U.S. is the most technologically advanced economy in the world. The other thought I have is that in many ways it would be a return to form.

One of the things we talk about in the book is that the original development of the U.S. the manufacturing sector was something that was a state-led project because, George Washington explicitly said, you can't be a free country if you're dependent on other people for, you know, essential supplies. And if Europeans are going to be unreliable and, you know, with thousands of miles later from anyway, you know, we better build up our own in-packing base. And then the other thing, then what happened after that was sort of events took over, which was that you have decades of war between Revolutionary France and England and other European powers and so forth. and the U.S. is effectively cut off from Europe. Anyway, regardless of whether we want to, because we wanted to be neutral, and because of blockades and so forth, there really wasn't any ability to act in those markets

and sort of by necessity to have this whole U.S. manufacturing base developed. And it was so just significant that by the time the Napoleon of the war is finally end, there's real pressure to institute protective Paris for the first time, extremely high rates to make sure that the manufacturing sector that had been created doesn't go away. And that ends up being sustained for the next 100 years. So I'm not saying that's what you should do, but it would definitely be in character for an event like this if you just use access to supplies, force of change, especially. In some ways, by the way, you're seeing the Chinese haven't done that already. The Chinese government making sure they don't have to worry

about U.S. sanctions that prevent them from getting access to high-tech electronics. parts and so forth. So it's about being self-sufficient so they don't have to worry about using those kind of things. I think this is sort of a universally understood concept. How that goes out right now, I don't know, but it wouldn't be surprising. Matt Klein, it was so great to talk to you. I feel like we wanted to talk to you for a long time and this was the perfect time. So glad it worked out. Thanks for coming and congrats on the book. Thank you very much. Tracey, I love the way Matt and also his co-author.

Michael Pettis, who we talked to several months ago. I love their narrative and the way they sort of described the relationships between different entities, whether it's the Chinese worker or the Chinese elite, the Chinese elite, the U.S. worker. It's such a more interesting and compelling story than I feel like how most people talk about the trade war. Oh, totally. I think most people will just talk about it in sort of, you know, mercantilist terms, U.S. versus China, but the focus on the intra-country imbalances is a really, really interesting and also compelling framework. And the way Matt laid out the sort of peculiar characteristics of the Chinese socialist system, it's really interesting. And also the way he compared and contrasted those with the U.S., right?

I'm always sort of amused to be reminded of how unsocialist the Chinese socialist system is, that they don't have something that resembling is universal health care, that students had to apologize for actually studying Karl Marx and attempting to apply what some of the old literature said. But it's a good reminder of like, there really is a system that's designed to sort of push income up into, to the elite, who don't spend as much money as the poorer, and working class people would if they were getting all of their income. Yeah, absolutely.

And again, Matt and Michael have sort of published this at exactly the right time because you can see all those imbalances and social quirks are going to start playing out in the current crisis. And again, one of the big ones is, of course, the notion of the Chinese savings glut. And after the coronavirus, you can't really see that coming down very much. No, you can't. And also it raises questions. just from a market perspective too, because a lot of people are trying to figure out, okay, what is a return to normal look like? There's the health return to normal will people go out.

Then there's the question of how much demand will there be domestically for various services that have been forced to shut down restaurants and so forth. But what happens also if demand doesn't, you know, go back to 100%, which it probably won't. I mean, while you have this huge glut of supply of goods coming from a Chinese manufacturing sector that's trying to keep everyone employed. Like, it just feels like the sort of aftershocks of this crisis are going to be with us for a long time. Yeah. In other words, many Oddlots episodes to come on this topic, I think. I think you're right. All right. This has been another episode of the Odd Lots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on

Twitter at the stalwart. And you should follow our guest on Twitter, Matt Klein. He's the author of Trade Wars, our Class Wars. Check it out. His handle is at MC Klein. And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson, the Bloomberg head of a podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.