Michael Pettis Misleading The American Zeitgeist On China

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He has unfortunately become the nexus of China economic thought in mainstream Western media, which, Han Feizi believes, has caused significant brain damage to China analysis and now threatens to cause irreparable economic damage to America as his acolytes formulate policy around his follies.

While a triumphant America looked to Fukuyama for flattery, an anxious America latches onto Pettis for affirmation. And it appears the favor was returned.

For two decades, Pettis has told the Western world that China was overinvesting and under-consuming and that growth will collapse to 2-4%. China grew two to three times as fast.

Unsurprisingly, his ideas are now more popular than ever, worming their way into the minds of Treasury Secretary Scott Bessent and Chair of the Council of Economic Advisors Stephen Miran.

In recent Twitter posts, Michael Pettis appears beside himself at the feckless design and implementation of Trump's“Liberation Day” tariffs, writing:

It is hard to see much systemic thinking in the new round of tariffs, and because trade can only be resolved on a systemic basis, and not on a bilateral basis, this means that they are unlikely to be very helpful.

Pettis seems aghast at what Trump has done, viewing it as a perversion of his belief that the global trading system needs to be systematically rebalanced:

The new tariffs don't really address the real US problem. One obvious reason is that the tariffs are largely bilateral, and while bilateral imbalances may impress those who don't understand trade and capital flows, they are, in fact, pretty useless.

Han Feizi has written extensively about China's economy in ways which challenge Michael Pettis's heterodox views (see here , here , here , here , here , here , here , here , here and here ).

Fundamentally, Pettis believes that America runs persistent trade deficits because Asia has implemented policies that incentivize production at the expense of consumption and is externalizing those imbalances onto the US, the“consumer of last resort.”

His preferred set of policies would involve taxing capital flows, targeted tariffs and industrial subsidies that even out the playing field.

Han Feizi believes this framing is erroneous and Pettis's policies, even correctly implemented, will result in years of suboptimal growth, impoverishing the US for decades. America runs persistent trade deficits because that's what happens when asset-rich economies trade with labor-rich economies.

Yes, China has implemented industrial policy to marshal its abundant labor but, at the same time, the US has implemented policies to better harness its abundant assets (e.g. mortgage market, agency bonds, derivative market etc.), allowing them to be financialized and traded.

Yes, China took advantage of the US's open market for growth and employment. At the same time, the US took advantage of its massive asset endowment and China's productivity also for growth and employment.

The concern that Pettis displays for China's put-upon consumers does not hold water. In the past few decades, under this system, China has increased household consumption faster than any other economy, all 194 of them.

And not by a little. China grew household consumption twice as fast as second-place South Korea. And the US has increased household consumption faster than all major developed economies.

Graphic: Asia Times

Disturbing this organic trade between an asset-rich economy and a labor-rich economy is not only economically inefficient, it is highly destructive in the short to medium term. America's labor force is set up for asset sales. It does not have the skills for manufacturing.

The two most dangerous ideas promulgated by Pettis are 1) China's economy is wasteful, inefficient and on the cusp of stagnation, and 2) consumption creates value.

Both of these ideas are not only wrong, they could not be further from the truth. It is highly likely that belief in these two ideas misled the brain trust (or lack thereof) surrounding President Trump, believing that the US had the upper hand in a trade war against China.

Han Feizi has written extensively about how erroneous the China collapse/stagnation view is (see links above).

If Bessent, Howard Lutnick and Stephen Miran were not stuck in the Western media echo chamber, they would figure out that the United States was about to start a trade war with an economy 2-3 times its size – not 36% smaller as reported nominal GDP would suggest. This is the Jaws,“We're going to need a bigger boat” moment.

But perhaps more pernicious is this economic fallacy that consumption creates value and that China's factory workers need American consumers more than American consumers need China's factory workers.

Pettis has been trafficking in this fallacy for decades – the idea that consumption, especially US consumption, is a public service of some kind. This fallacy has high purchase in America because it appeals to what Americans have become – shoppers.

It has also resulted in unfortunate economic formulations like“supply of demand.” As in the US economy is accomplishing great feats by supplying demand to needy Asian factory workers.

As if supply and demand were not useful enough economic concepts, we now have supply of demand. Which, of course, begs the question, what about demand of supply? Or supply of supply of demand? Or demand of supply of supply? Or supply of demand of supply of supply? Capiche?

This is all nonsense. There is no such thing as supply of demand. American consumers are not supplying their demand in exchange for Nikes from Vietnam. American demand has no value to the Vietnamese. American consumers are trading American assets for Nikes from Vietnam. That's what the Vietnamese want.

The liquid dollars which can be turned into Treasuries, Freddy Mac bonds, Apple stock or Malibu mansions. The wants and desires of American shoppers, as wonderful as they may be, are worthless to the Vietnamese. They, and everyone else, want New York City apartments overlooking Central Park.

Similarly, the Pettis MO is to take something conventional– efficiency gains drive wage growth – and flip it on its head in a way that soothes American anxiety. High wages drive efficiency!

The whole thing is then wrapped with a sprinkle of virtue signaling,“The stereotype of high-saving Asians is racist!” and fed to status-anxious Americans who then think that they've been granted some secret knowledge.