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  • Trade Deficit Doesn't Matter - Trade Freedom Does

    On February 8, the government will release data on imports and exports for 2012. This annual release often ignites a misguided debate about trade deficits.

    A recent news report perpetuated a popular misstatement about how international trade works:

    Net imports suck cash out of the economy, subtracting from gross domestic product.

    Because of reports like that, many Americans believe trade deficits harm our economy and destroy jobs.

    If that is true, there’s an easy way to reduce the trade deficit: Throw the U.S. economy into a recession. Since 1990, the United States has had three recessions, and every time the U.S. entered a recession, the trade deficit decreased.

    This correlation should not be shocking when we think about what occurs during a recession. With a weak economy, people have less money to spend on products, including imports. The reduction in spending tends to reduce the trade deficit.

    If legislators really feel the trade deficit is harming our economy and want to reverse it completely, they can go a step further and plunge the U.S. into a depression. As economist Donald Boudreaux pointed out, the U.S. ran a trade surplus for most of the 1930s.

    To really understand the health and viability of an economy, policymakers should focus on budget deficits and trade freedom rather than trade deficits.

    The 2013 Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal, shows that countries with higher trade freedom—meaning lower trade barriers—also have higher rates of prosperity, better health care, and greater access to education. These are goals that every American can agree on. There’s no evidence that trade deficits are bad for the U.S. economy, but plenty of evidence that trade barriers make Americans worse off.

    Ashlee Smith is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please visit http://www.heritage.org/about/departments/ylp.cfm.

    Posted in Economics [slideshow_deploy]

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