Slavery vs. Santa Claus

A pretty textbook Econ 101 defense of free trade appears in this week's Foreign Policy magazine (usually a forum for more original, subtle thinking). The article makes the same old points:

Suppose we only export and import nothing. The ultimate trade surplus. So we work and use raw materials and effort and creativity to produce stuff for others without getting anything in return. There’s another name for that. It’s called slavery. How can a country get rich working for others?

[Now suppose we] import from abroad, but foreigners buy nothing from us. What would the world be like if every morning you woke up and found a Japanese car in your driveway, Chinese clothing in your closet, and French wine in your cellar? All at no cost. Does that sound like heaven or hell? The only analogy I can think of is Santa Claus. How can a country get poor from free stuff? Or cheap stuff? How do imports hurt us?

This sounds like good old solid common-sense thinking, which is what it's meant to sound like. Who would choose export slavery over import Santa? Of course, there's a little problem with this little ah-it's-so-simple line of reasoning.

Take a good hard look at the Santa scenario, where we import everything "free." Of course, in real life, Japan, China, and France would NOT give us free stuff. They might, however, give us stuff in exchange for I.O.U.'s. So a couple decades down the line, we get a whopping huge bill from Santa for all those "free" toys.

And what if one day Santa decides to suddenly stop giving us free stuff? Suddenly we'll have to make it ourselves, only we don't know how to, since we only have experience sitting around and getting handouts from Santa.

Now look at the first scenario. Suppose we toil in "slavery" providing exports to foreign countries without getting any imports in return. But those countries must be paying us in I.O.U.'s. Our children will be able to say "Hey France, remember all that stuff we gave you? Now you need to give us some stuff back...plus interest."

And in the meantime, while we're producing stuff in exchange for foreign I.O.U.'s, we're learning how to make stuff more effectively. So we can make more and better stuff for ourselves at the same time (this is the central idea of the New Trade Theory, which Paul Krugman helped create).

This is why the idea of cheap imports as "free stuff" is ludicrous. Someday you or your children will have to pay for all that stuff. Now I hope that we Americans, and our government, are rational beings, and would not mortgage our children's futures to buy plasma TVs. I hope that all the I.O.U.'s we've been writing to China over the last decade (now over $1 trillion) won't be more than we can easily pay back.

In any case, there are lots of good arguments for free trade, but this article isn't one of them. China is not Santa Claus.