BEIJING—Tucked away in a hutong , a narrow alleyway that shuts out Beijing’s bustle, is a tranquil home set around a courtyard garlanded with grapes and pomegranates. This is where a former investment banker turned music impresario is quietly reshaping how Washington thinks about international trade.
Michael Pettis , a professor of finance at Peking University, has spent two decades in China observing its breakneck economic ascent and its impact around the world. Among his conclusions: He thinks former President Trump’s plan for across-the-board import tariffs isn’t a bad idea. He also says the U.S. should use capital controls to discourage China and other high-saving nations from snapping up treasuries, stocks and other American assets.
Those views make the 66-year-old Pettis perhaps the world’s foremost punk-rock economist, embodying in his theories the same counterculture, do-it-yourself and antiestablishment ethos that he cultivated as a music club and record-label owner in New York and Beijing.
His ideas are at odds with mainstream economists, who say such policies would push up inflation and interest rates and cripple the U.S. economy. He has a devoted following that includes some of the figures shaping recent U.S. economic policy, including people inside the Biden administration and advisers to Trump.
Free trade, Pettis argues, is a mirage. In books, articles and talks, Pettis has long made the case that domestic choices made by China and other major exporters impose corrosive costs on their trading partners and distort the global economy.
Pettis isn’t a trained economist. He describes himself as “a finance guy,” with a background in physics and math. Born in Spain to an American father and a French mother, he had an itinerant childhood in countries including Pakistan, Peru and Morocco thanks to his father’s job as a geologist and civil engineer.
A career on Wall Street gave him an up-close view of the destabilizing potential of unfettered flows of capital into and out of emerging economies, such as the Mexican currency crisis of 1994, when worries over a government debt default sparked a collapse in the peso. Pettis worked in the bond divisions of investment banks Bear Stearns and First Boston.
Pettis landed in China in 2002 to take up a teaching job, expecting to stay for a couple of years before returning to Wall Street. “But China just was too interesting and I never got around to leaving,” Pettis said.
A big reason was music. A rock fanatic, Pettis had run a punk club called SIN in New York’s East Village and became entranced by Beijing’s burgeoning underground scene. In Beijing, he set up a club called D-22 in the capital’s student district, which he said he fashioned after New York dives where the musicians were always the top of the pyramid.
“It just exploded,” he said.
D-22 became the crucible for a generation of edgy Chinese rock bands such as P. K. 14 and Joyside. The club hosted Western rock royalty who were passing through—Pettis recalls one night spent with Led Zeppelin’s Jimmy Page. On another, The New York Dolls lapped up performances by young Chinese acts before taking to the cramped stage themselves at 2 a.m. He founded a record label, Maybe Mars.
With old friends he has recently set up a new label called, Sally Bu Tiao, a rough approximation in Mandarin of Lou Reed’s “Sally Can’t Dance,” to focus on more experimental music, he said.
Watching the strains in the global economy from Wall Street and later from Beijing, Pettis was drawn to the work of economists including John Maynard Keynes , who argued that government spending could pull economies out of recession, and his Depression-era contemporary Joan Robinson, who described how efforts by one country to cure its economic problems could cause harm to others. He is also a fan of Dani Rodrik , a Harvard professor who has written about the tension between sovereignty, democracy and globalization.
Pettis saw China’s transformation into the world’s foremost manufacturing power and number two economy facilitated by policies that favored production and investment by encouraging saving and pinning down consumption. That generated huge trade surpluses that went toward purchasing foreign assets, especially U.S. Treasury debt.
“I grew up like everyone else thinking, ‘Lucky America, thank God. We don’t save enough, and foreigners are generous enough to give us their savings.’ But looking at it from the point of view of trade and the currency, it became very clear that’s not generosity,” he said.
Since trade and investment-income surpluses and deficits across the world must equal zero, Pettis argues the U.S. is forced to run trade deficits as long as it absorbs the savings of China and other surplus economies. As those savings flow into U.S. assets, they drive up the value of the dollar. That encourages America to import more, which benefits foreign manufacturers at the expense of jobs and earnings at their U.S. rivals.
And to offset the manufacturing sector’s weakness, the U.S. must borrow more to keep up the big spending, resulting in huge fiscal deficits and periodic financial bubbles.
It is the surplus countries like China, he says, not the deficit countries like the U.S. that are the real protectionists.
Most economists blame the U.S. trade deficit on low U.S. saving. That gets the “causation backwards. It’s not the saving rate driving the trade deficit, it’s the trade deficit driving the saving rate,” said Robert Lighthizer , Trump’s former trade ambassador and currently an adviser. “Michael gets a lot of credit for being the first to articulate this.” Pettis is one of the few people Lighthizer follows on X (formerly Twitter), and the two talk by phone from time to time.
Pettis is on the advisory board of American Compass, a think tank close to Trump allies, including vice-presidential running mate JD Vance, which seeks to shift conservative priorities away from free markets and low taxes to workers and reindustrialization.
“The central insight that I see him really bringing forward is…that the presumption that any country should simply embrace free trade, and it doesn’t matter what other countries do, is false,” said American Compass founder Oren Cass.
Some influential Democrats are also fans. “He is looking at things with a kind of objectivity that is unusual and incredibly valuable,” Katherine Tai , President Biden’s trade ambassador, said in a recent interview.
Both Republicans and Democrats have embraced tariffs as an important tool of economic policy to counter China. Pettis has another idea: He believes that taxing surplus countries’ purchases of U.S. assets would stop the inflow of their savings, weaken the dollar, aid U.S.-based manufacturers’ competitiveness, and reduce the trade deficit. For tariffs to have a similar effect, he thinks they’d need to be imposed on everyone, which Trump has proposed. Pettis said that would penalize allies and antagonists alike, whereas capital taxes target surplus countries directly.
Many mainstream economists say blaming the world’s economic stresses primarily on surplus countries like China instead of deficit countries such as the U.S. is seductive, but wrong, as it lets Washington and other governments off the hook for their own decisions. Taxing capital inflows would risk driving up interest rates and financial market panic, they say.
Andrew Batson, head of China research for Gavekal Dragonomics, said Pettis’s description of China as an economy “based on the repression of household consumption is a bizarre conceit that is impossible to take seriously.” China’s growth in household consumption since the 1980s is the biggest and fastest in human history, Batson said.
“The world is really complicated. For Michael Pettis, the world is really simple,” said Maury Obstfeld, a senior fellow at the Peterson Institute for International Economics, a think tank in Washington, D.C.
Pettis believes policy makers will come around to his way of thinking, just as tariffs and industrial policy are back in vogue after decades of free-market orthodoxy. “We are so far away from free trade,” he said.
Write to Jason Douglas at jason.douglas@wsj.com and Greg Ip at greg.ip@wsj.com
