I recently came across two interesting articles that got me thinking about trade balances. The first was written by Christopher Caldwell and discusses France’s rustbelt:

A process that Guilluy calls métropolisation has cut French society in two. In 16 dynamic urban areas (Paris, Lyon, Marseille, Aix-en-Provence, Toulouse, Lille, Bordeaux, Nice, Nantes, Strasbourg, Grenoble, Rennes, Rouen, Toulon, Douai-Lens, and Montpellier), the world’s resources have proved a profitable complement to those found in France. These urban areas are home to all the country’s educational and financial institutions, as well as almost all its corporations and the many well-paying jobs that go with them. Here, too, are the individuals—the entrepreneurs and engineers and CEOs, the fashion designers and models, the film directors and chefs and other “symbolic analysts,” as Robert Reich once called them—who shape the country’s tastes, form its opinions, and renew its prestige. Cheap labor, tariff-free consumer goods, and new markets of billions of people have made globalization a windfall for such prosperous places. But globalization has had no such galvanizing effect on the rest of France. Cities that were lively for hundreds of years—Tarbes, Agen, Albi, Béziers—are now, to use Guilluy’s word, “desertified,” haunted by the empty storefronts and blighted downtowns that Rust Belt Americans know well.

Guilluy doubts that anyplace exists in France’s new economy for working people as we’ve traditionally understood them. Paris offers the most striking case. As it has prospered, the City of Light has stratified, resembling, in this regard, London or American cities such as New York and San Francisco. It’s a place for millionaires, immigrants, tourists, and the young, with no room for the median Frenchman. Paris now drives out the people once thought of as synonymous with the city.

So Europe suffers from many of the same problems that concern America’s populist right.  But do you know what Europe doesn’t have?  A big trade deficit.  Indeed, the EU runs a large trade surplus.  France itself runs a tiny trade deficit, but it’s far too small to be of any economic significance. (Currently estimated by The Economist at 0.1% of GDP.) So, if Europe’s rust belt is not caused by international trade, then what exactly is the problem?

Think of a simple model where, over a period of decades, the share of workers in manufacturing falls from 20% to 10% of the workforce.  You might wonder how this could happen without a significant trade deficit.  The answer is simple—automation.

That sort of process does not necessarily lead to a high overall rate of unemployment, as new jobs are created in service industries.  But the process will not be uniform.  Regions that focused on manufacturing may become depressed, while cities that feature an innovative service sector are likely to thrive.

The French rustbelt suggests that international trade is not the primary issue, something that perceptive observers knew this all along.  Here’s JD Vance in Hillbilly Elegy:

“We talk about the value of hard work but tell ourselves that the reason we’re not working is some perceived unfairness: Obama shut down the coal mines, or all the jobs went to the Chinese. These are the lies we tell ourselves to solve the cognitive dissonance—the broken connection between the world we see and the values we preach.”

Vance is correct; we need to stop telling lies that China is to blame for our rustbelt.

The second story was published in the Financial Times, and discusses Switzerland’s persistent trade surplus:

The world’s richest major economy has both a strong currency and a strong manufacturing base. The Swiss franc has been the top-performing currency over the past 50 years, 25 years, 10 years and five years. It is near the top even over the past year when some of the more beleaguered currencies have staged a comeback against the dollar. Nothing can compare for durable strength. 

Yet Switzerland also defies the assumption that a strong currency will undermine a nation’s trading prowess by making its exports uncompetitive. Its exports have risen and are near historic highs both as a share of Swiss GDP (75 per cent), and as a share of global exports (near 2 per cent).

Protectionists occasionally claim that trade surpluses are achieved though unfair methods.  They argue that some countries achieve surpluses by engaging in “mercantilist” policies such as depressing wages with a weak currency.  In contrast, most economists believe that trade surpluses reflect the fact that high-saving countries run capital account deficits, buying more foreign assets than they sell.  They see the capital account as the dog and the current account as the tail.

Consider Germany and Switzerland.  It’s hard to think of two more similar countries.  Both countries focus on producing high-quality manufactured goods such as precision machinery.  Both have high-saving cultures.  Most Swiss people even speak German.  And both countries tend to run persistent trade surpluses. 

Protectionists occasionally accuse the Germans of achieving this surplus by artificially depressing their currency (the euro).  But Switzerland achieves a similar result with the strongest currency in the world and exceedingly high wages.  When you look at these two cases side by side, it seems far more plausible that high savings rates in Germany and Switzerland are leading to a trade surplus.  Only Germany has anything remotely close to a weak currency (and even the euro is not all that weak).