The Swiss trade balance misses one essential component: wages for cross-border commuters. When this figure is included, the trade surplus shrinks by two thirds already. This ought to make Swiss politicians less content and hopefully alleviate som of the finger-pointing by foreign trade negotiators.

Why should these wages be included in the trade balance? Salaries paid to incoming cross-border commuters are an input cost of the Swiss production just like software license fees paid to Microsoft and professional service fees paid to a call center in Ireland. They are services bought from foreign entities.

The phenomenon has grown to massive proportions in recent years: 320’000 FTEs or 8% of the Swiss workforce commute from abroad daily, representing aggregate salaries of about 2bn CHF per month or 24bn CHF per year. Subtracting this from the trade surplus brings the latter down from 3bn to 1bn per month. At the same time, the net income part of the current account increases by the same amount, from maybe 0.5 to 2.5bn CHF per month, bringing it to a much more reasonable level for a country with a NIIP far in excess of 100% of GDP.

Why then does the IMF treat salaries of cross-border commuters in the same way as investment income? The IMF seems to regard these salaries in text-book fashion as “factor income” just like income from capital. I argue that this is incorrect.

As a tought experiment, let us first look at a capital good, for example a German-owned factory building in Switzerland. Rent is paid to a German entity for the use of the building which is reflected in the income part of the current account and not in the trade part. This is entirely correct since the German financing of either the construction or the purchase of the factory was previously booked in the capital account.

For cross-border commuter, there is no such counter entry in the capital account. Slavery has been abolished, after all. In the age of the Internet, how is a cross-border commuter different from purchasing a service? Why would a programmer in Lörrach working for a Basel pharma giant be treated differently depending on whether he was employed directly or through a German subcontractor? He might be telecommuting most of the time in both cases.

In conclusion, the Swiss trade balance is certainly overstated due to not including the massive expense for foreign labor. This exposes the country to harsh criticism from foreign trade diplomats and needs to be countered firmly. Including foreign labor in trade will not change the size of the current account surplus which is considerable – as it should be due to the income stream generated by a century and maybe more of continuous capital exports.

Other countries similarly affected by this bias are Luxemburg and Liechtenstein, who are natural partners for making the argument.