Record France trade deficit in January has reinitiated the debate about the competitiveness of enterprises and remedies to adopt. This situation is rather paradoxical because the economic policy followed since 2013 has targeted, through tax cuts and social charges reductions, the improvement of their competitiveness. It is what was called the supply-side policy, in opposition to policies which stimulate demand through increase of purchasing power or public expenditures rise.
In January, exports fell by 9.2%, reaching only 37.2 billion euro when imports rose by 2.7%, reaching the unprecedented level of 45.2 billion. The deficit, equal to 7.9 billion, is the double of the 2016 average monthly deficit. The foreign trade contribution to growth for the beginning of the year will be again negative because the results of the next two months will not be enough to compensate January shock. Banque de France forecast for the 1st quarter growth rate is currently 0.4%. This figure will be difficult to reach especially since industrial production fall (-0.4%) in January is another indicator of the weakness of the activity, despite the strong rise of energy production due to the cold weather. The economic choice made to support business in thinking that it will permit to increase market shares and to support growth, shouldn’t give better results in 2017 than in the previous years. It remains to know if the next government, appointed after the elections, will confirm these economic choices.
January deficit includes an important bias, due to Airbus decision to make out a maximum of planes invoices before the end of the year. As a consequence, exports fell the following month. That huge deficit is not, fortunately, fully representative of French foreign trade trends. To offset this calendar effect, it is more appropriate to take into account the average of December and January numbers. Based on this correction, the monthly average deficit is 5.75 billion euro. But even after this correction, that level is the highest since 2014 summer. It shows the magnitude of the degradation of France foreign trade. Between 2012 and 2016, exports increased only by 11 billion, when imports fell by 8 billion. Deficit was reduced from 67 to 48 billion. But, during that period, the energy bill fell by 36 billion due to the oil price fall. So, the deterioration of France foreign trade of non-energy products reached 17 billion. The argument which determined the choice in favor of supply-side policies was based on the expectation that the improvement of the competitiveness will generate better results against their competitors on the world market. It has been invalidated by the facts and it laid to the opposite result.
Confronted to this failure, which had also heavy consequences on growth, which has stagnated, and employment, two arguments are put forward, the euro and the lack of any alternative policy, in particular, the stimulation of demand to sustain growth. The trial regarding euro is permanent, even ideological. It is coming from those who never have been in favor of the European project. During about fifteen years, marked by the successful enlargement following the fall of communism until the referendum about the project of a constitution, they were by far, a minority. The great 2007-2008 crisis and the incapacity of Brussels to find convincing answers to get out of it, when the origin of that crisis was on the other side of the Atlantic Ocean, have reinforced the Eurosceptic clan. The Euro liability, in French foreign trade deficit is an easy excuse but lacks of any founding, especially as the monetary Union has granted France with interest rates among the lowest in the world. The most important share of the deficit is coming from our exchanges inside the Eurozone, mainly with Germany. If this country, as its companies and its customers, did take advantage of the euro, why did France couldn’t do the same? The demonstration is even more convincing when we look at Italy situation, which enjoys also a comfortable trade surplus. It is difficult to pretend that this country has followed the liberal principles in reducing labor costs and employees rights, as it is frequently and wrongly pretended, considering Germany and Chancellor Schroder reforms. The case of the car industry is revealing. This sector alone is responsible for half of the degradation of French manufactured products foreign trade. A good illustration of its weaknesses is given by a comparison of our positions on the Swiss market. Every year France exports for an amount of 360 million and German industry for 3.8 billion. Our car manufacturers have relocated a large part of their assembly lines in Spain and in Central Europe., unlike their German competitors. Who could pretend that Wolfsburg or Munich employees are less paid and have less social benefits than those employed in Flins or in Sochaux ?
The other argument in favor of supply-side policies is that the other alternative, demand-side policies, would be inefficient because the increase of purchasing power would profit to imports since our companies would not be competitive enough to satisfy an increased demand. This reasoning is wrong for two reasons. It seems to ignore that companies, when they invest, turn also to imports, including machineries or electronic equipments. To increase their resources can also generate trade deficits. It ignores, at last, the fact that manufactured products, in households consumption, represent only 25% of the total. The largest part is constituted by services, as rents or healthcares, or even energy, about which it is difficult to bring the proof that if wages were increased, that would generate a significant rise of imported products. During a long period of time, the economic policy followed by the left in 1981 was made responsible of the aggravation of France trade deficit which was the cause of several devaluations of the franc. We know today that it is wrong. The increase of the trade deficit between 1980 and 1982 was, with a tiny gap of one billion francs, caused by the aggravation of the energy bill which resulted from the dramatic rise of the dollar during that period, and not from the measures adopted at that time by the government.
The choice to give priority to supply-side policies, in the current depressive climate has as only consequence to improve the financial situation of enterprises, which is not, by itself a fault if, as a condition, this amelioration is used to invest. But these investments will be decided if and only if, demand is there, which is not currently the case because, due to budget constraints, it is necessary to compensate the transfers in favor of enterprises by a increase of the charges weighting on households. The task of future governments will be, if they want to succeed, to get out of this dilemma. Until now, none of the programs proposed by the candidates has correctly identified the causes of the current situation and formulated credible proposals to get out of this economic dead end.