Limitations and suggested refinements

Trade theories provide logical explanations about why nations trade with one another, but such theo- ries are limited by their underlying assumptions.

Most of the world’s trade rules are based on a traditional model that assumes that (1) trade is bilateral, (2) trade involves products originating primarily in the exporting country, (3) the export- ing country has a comparative advantage, and (4) competition focuses primarily on the importing country’s market. However, today’s realities are quite different. First, trade is a multilateral process. Second, trade is often based on products assembled from components that are produced in various countries. Third, it is not easy to determine a country’s comparative advantage, as evidenced by the countries that often export and import the same product. Finally, competition usually extends beyond the importing country to include the exporting country and third countries.¹³

In fairness, virtually all theories require assump- tions in order to provide a focus for investigation while holding extraneous variables constant. But controlling the effect of extraneous variables acts to limit a theory’s practicality and generalization.

One limitation of classical trade theories is that the factors of production are assumed to remain con- stant for each country because of the assumed immo- bility of such resources between countries. This assumption is especially true in the case of land, since physical transfer and ownership of land can only be accomplished by war or purchase (e.g., the US seizure of California from Mexico and the US purchase of Alaska from Russia). At present, however, such means to gain land are less and less likely. As a matter of fact, many countries have laws that prohibit foreigners from owning real estate. Thus, Japan and many other countries remain land- poor. On the other hand, outsourcing and foreign direct investment are a means to gain or use foreign land. Thus, in this regard, one can argue that land is mobile – at least indirectly.

A significant difference exists in the degree of mobility between land and capital. In spite of the restrictions on the movement of capital imposed by most governments, it is possible for a country to attract foreign capital for investment or for a country to borrow money from foreign banks or international development agencies. Not surpris-

ingly, US banks, as financial institutions in a capital- rich country, provide huge loans to Latin American countries.Yet at the same time, a favorable US busi- ness climate makes it possible for the USA to attract capital from abroad to help finance its enormous federal deficits. Therefore, capital is far from being immobile.

The extent of money laundering clearly illus- trates the high degree of capital mobility (see It’s the Law 2.1 and Marketing Strategy 2.1). Even in the case of legal transactions, the so-called hot capital can move instantly in search of a better return. Malaysia has imposed capital controls so as to limit capital flights. It has adopted an exit tax, and investors are taxed according to how quick they withdraw the money. The tax gradually drops to zero for those who leave money in Malaysia for more than a year. The exchange controls continue to be enforced, and the ringgit cannot be traded outside the country. There is a limit on the amount of money one can take out of the country. In any case, an IMF study found that, once financial inte- gration crosses a certain threshold, the positive effects of international capital flows can outweigh the negative effects.¹⁴

^{Labor as a factor is relatively mobile because peo-}

ple will migrate – legally or not – in search of a bet- ter life (see Marketing Ethics 2.1). It is true that immigration laws in most countries severely limit the freedom of movement of labor between coun- tries. In China, people (i.e., labor) are not even able to select residence in a city of their choice. Still, labor can and does move across borders.Western European nations allow their citizens to pass across borders rather freely.The USA has a farm program that allows Mexican workers to work in the USA temporarily. For Asian nations, most are so well endowed with cheap and abundant labor that Thailand sends labor- ers to work abroad and the Philippines has a significant number of its citizens work as maids in Hong Kong. China, likewise, would like to export its labor because it is the most well-endowed nation in the world in terms of this resource. In the mid- nineteenth century, many Chinese peasants were brought to the USA for railroad building.