March 13, 2013

News reports often make dubious claims about trade and international commerce.

Here’s one example from the Associated Press: “A narrower trade gap boosts growth because it means U.S. companies are earning more from overseas sales while U.S. consumers and businesses are spending less on foreign products.”

This widely reported explanation is easy to disprove. “In recent years, our economy has performed better when the trade gap increases than when it narrows,” Heritage Foundation expert Bryan Riley explains.

In fact, he continues:

During the past 10 years, whenever the trade deficit increased, real GDP always increased—on average by 2.7 percent. But when the trade deficit decreased, real GDP did not boom—in fact, it increased on average by less than one-tenth of 1 percent.

The reason many experts believe a narrow trade deficit is good for the economy is because of the baffling way GDP is calculated: exports add to GDP and imports subtract, which causes the confusion.

Ultimately, countries with low barriers to trade and commerce are much more prosperous than those that restrict imports. The new 2013 Index of Economic Freedom, published by The Heritage Foundation and the Wall Street Journal, shows that. Reporters should focus on this fact when reporting about trade.

Do you think fewer government restrictions on commerce are beneficial for our economy?