NEW YORK – It seems like forever we’ve been hearing about the decline of the Rust Belt, and people migrating to the West Coast. But why? Why did manufacturing decline in the Midwest? Why are rents so high in California, and house prices surging in the Pacific Northwest? Why does the U.S. population continue to move slowly from East to West? Part of the answer might lie in the shifting patterns of international trade.
There are many forces at work here, all at once. There’s the invention of air conditioning, which made the Sun Belt a more attractive place to live. Mass car ownership and the Interstate Highway System facilitated the sprawling cities of the West and South. Automation and competition from China combined to reduce U.S. manufacturing employment. Immigration from Mexico and Asia began to pour into the West and Southwest.
But there might be another force at work here.
Economies are about trade, and trade costs money. The farther away two place are, the more it costs companies to ship goods and to send people over to meet with subsidiaries, suppliers and customers. Those costs are one of the basic reasons why economic activity tends to cluster together in cities and industrialized regions. It also means that one city or region can get rich by trading with big concentrations of economic activity that are close by — the wealthier France is, the more it benefits Germany, which can ship cars to France easily since it’s close by.
This dynamic can give rise to very complex far-flung patterns of economic activity. Economists Paul Krugman, Masahisa Fujita and Anthony Venables modeled this in a number of ways back in the 1990s, with a theory that came to be known as the new economic geography. It’s fascinating reading.
One basic fact emerged from their research: it’s good to be near an important trading partner. This is true in all good models of trade, but the theory of Krugman et al. emphasizes how important proximity can be over the long term. Looking at the relative decline of the U.S. Midwest and Northeast, and the rise of the West Coast, one can’t help wondering if part of the story is the shift of the world’s economic center of gravity from Europe to Asia.
Economists sometimes draw the world’s economic center of gravity on a map. An example by Danny Quah of the London School of Economics shows a steady shift from a trans-Atlantic economy in 1980 to an Asian one by the middle of this century.
That’s just a projection, of course — the current center is somewhere around Iran. But already the move has been huge. Japan boomed from the 1960s through the 1980s, Taiwan, South Korea, and Southeast Asia somewhat later, and China more recently. The rise of East Asia in general has been the biggest economic change in the past century. Meanwhile, Europe, with its stagnating, small population and slow growth, is still important, just less and less so.
For years, U.S. exports to Europe kept pace with exports to Asia. But since the 2008 crisis, the latter has risen much more quickly, so that Asia is now the bigger market. On the import side, things are even starker, since the U.S. runs large trade deficits with much of East Asia.
What looks like an eastward shift on Quah’s map is actually a westward adjustment for the U.S., since America is on the opposite side of the world. The East Coast is well-positioned to forge economic ties with Europe, while California and the Pacific Northwest are about equidistant between Europe and Asia. A flight from Los Angeles to Tokyo takes about 11 hours, but almost 14 starting from New York. Meanwhile, the time needed to travel by sea — how most manufactured goods are shipped — from Tokyo to New York is about 6 days more than to Los Angeles.
So it stands to reason that increasing economic ties with Asia, relative to Europe, would translate into a shift in population, investment and wealth from the East Coast and Midwest to the West. How far that process goes depends on whether current trends in Europe and East Asia continue. But with political paralysis in the European Union, and with China and Southeast Asia still having lots of catch-up growth to do, it seems like a good bet that California, Oregon and Washington will enjoy healthy economic tailwinds for years to come. The East Coast, meanwhile, will probably be nudged by geographic transitions to focus on industries less sensitive to trade — health care, for example. In some Rust Belt towns, that shift is already happening.
So the U.S. is in the process of transforming from a trans-Atlantic economy to a trans-Pacific one. Policy makers should do all they can to help manage this shift, including boosting infrastructure and urban density in the increasingly important west.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University. He blogs at Noahpinion.
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