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.

IT’S THE LAW 2.1 MONEY LAUNDERING

Like other businesspeople, criminals and terrorists need financing. As such, money laundering is their lifeblood. According to the IMF, poorly supervised financial institutions channel $590 billion in illicit cash a year.

Money laundering is a process to transform pro- ceeds of crime into a usable form and disguise their illegal origins. The illegal profits may be derived from drug or arms trafficking, political corruption, prosti- tution, and so on. To clean or launder them, criminals move the proceeds through a variety of transactions and financial vehicles before investing them in finan- cial and related assets.

A recent case of money laundering was revealed when three financial institutions reported similar sus- picious transactions. It turned out that drug traffick- ers were using go-betweens who would deliver the cash proceeds of crime to professionals in travel agencies and import/export businesses.The professionals would place the funds in their bank accounts and, for a fee, transfer them on the basis of fake invoices to bank accounts abroad. An estimated $30 million was laun- dered in this way. However, the coordinated analysis of suspicious transaction reports led to prosecutions in two countries. This case displays many of the common features of money laundering: cash is intro- duced into the banking system by people far removed

from the predicate criminal activity; layering is

achieved by splitting the funds among many small, seemingly innocuous agents (known as “smurfs”); creating a misleading paper trail; and getting funds abroad as soon as possible.

Money laundering is global. If one country’s regulations are tightened, criminals will simply shift their laundering activities to a more hospitable environment. The IMF calls for more effective infor- mation sharing among authorities. Governments are urged “to create mechanisms to enable collection and sharing, including cross-border sharing of relevant financial information with appropriate supervisory and law enforcement activities.”

The USA, in response to terrorist acts, has passed the 2001 USA PATRIOT Act. The US Treasury Department has required banks, credit card com- panies, and financial institutions to adopt compre- hensive programs to combat money laundering. These firms may have to verify the identity of customers. Car dealers and travel agencies may be required to do the same.

Sources: Eduardo Aninat, Daniel Hardy, and R. Barry Johnston, “Combating Money Laundering and the Financing of Terrorism,” Finance & Development, September 2002,

44–7; “Manila Pushes to Adopt Money-Laundering Law,” Asian Wall Street Journal, June 26, 2001; “Car, Travel Trades Sought in Fight,” San José Mercury News, February

27, 2003; “Money Laundering and Terrorist Financing,”

IMF Survey, November 26, 2001, 359.

While immigration laws often restrict labor movement across countries, business laws tend to welcome capital movement to employ labor in a foreign country. When wages in South Korea esca- lated, Goldstar Co. minimized the labor problem by importing goods from its overseas facilities back into South Korea. It may be said that, in the pro- duction of tradable goods, unskilled labor markets in the developed countries have been effectively joined with international markets. As in the case of apparel assembly and footwear which do not lend themselves as yet to technology-intensive methods, a large share of output has already been transferred

to poor countries. Even in Thailand where labor was once plentiful and cheap but where labor cost has moved up, some Thai apparel firms are transferring parts of their production operations to Cambodia and Vietnam. Likewise, Taiwanese shoe companies are establishing new operations on the mainland.

Because workers cannot easily emigrate to another country which has better wages and bene- fits, wages have not been equalized across countries. Conceivably, computer workstations and communi- cations technology could lessen this problem by allowing a portion of the workforce to work for any company in any part of the world. As mentioned by

MARKETING STRATEGY 2.1 HOW TO MOVE MONEY

It is anticipated that some $177 billion in funds will be transferred globally by 2006. In the case of Mexico, the central bank reported that the amount that Mexicans in the USA sent home ($6.3 billion) exceeded the amounts brought in by tourism ($4.9 billion) and foreign direct investment ($5.2 billion).

In the old days, immigrants used a courier or family member to send money home. Now banks and wire transfer companies fill the void – for a hefty fee. The fees are usually 10 to 15 percent of the amounts sent home. There is a reason why banks account for only 9 percent of the money sent home and why wire transfer companies take 83 percent. Illegal aliens in the USA do not use banks because they need to show US documents. Some are afraid that opening bank accounts may lead to detention or deportation. Interestingly, the nations with the highest number of money-transfer recipients often have the lowest number of people with bank accounts and debit cards.

On the other hand, when workers cash their checks

at check-cashing and cash-transfer companies, they lose as much as 3 percent of a check’s value. Western Union and MoneyGram dominate international money-transfer business due in part to their live agent

relationships. Western Union has 120,000 agent loca- tions, whereas MoneyGram has 50,000. Western Union and MoneyGram handle 40 percent of money transfers to Mexico, and they charge $25 for such a transaction.

Some banks have become innovative and compet- itive. Citigroup’s Grupo Financiero Banamex unit has launched binational accounts for Mexicans working in the USA, where they can deposit into their accounts a specific amount that their relatives in Mexico can withdraw using a Banamex ATM card. These bina- tional savings, checking, or debit accounts will be cheaper than wire transfers or other remittance ser- vices. In the case of Bank of America’s SafeSend, it allows Mexicans to send $500 home for a $10 fee. SafeSend recipients receive an ATM card that is used to withdraw money for free from an ATM in Mexico.

Sources: “Remittances to Mexico Top Tourism, Other Investment,” San José Mercury News, September 2, 2003; “Bank Offers Binational Accounts,” San José Mercury News, April 20, 2002; “More Bankers Are Saying ‘Hola,’” Business Week, May 13, 2002, 12; “ATMs Make a Play for Money Transfers,” Credit Card Management (November

2002): 45–6; “Repatriating Money Carries High Fees, Risks,” San José Mercury News, November 23, 2002.

Andrew Grove, Intel Corp.’s chief executive officer, “capital and work – your work and your counter- part’s work – can go anywhere on earth and do a job. . . . If the world operates as one big market, every employee will compete with every person anywhere in the world who is capable of doing the same job.”15 Theoretically, if developments con- tinue along these lines, a worldwide labor market is possible.

In the 1970s and 1980s, workers in the Western world learned a painful lesson: manufacturing could be moved virtually anywhere. History may repeat itself, since it is becoming easier for firms to shift knowledge-based labor as well. This develop- ment can be attributed to the worldwide shift to market economies, improved education, and decades of overseas training by multinationals. As a

result, a global workforce is emerging, and it is capable of doing the kind of work once reserved for white-collar workers in the West. Advances in telecommunications are making these workers more accessible than ever. In electronics, Taipei, Edinburgh, Singapore, and Malaysia, although far away from the end-user and technological break- throughs, have emerged as global product-develop- ment centers. Therefore, conventional notions of comparative advantage are rapidly changing.

Production factors are now considered more mobile than previously assumed. However, because of government efforts to restrict the mobility of fac- tors of production, production costs and product prices are never completely equalized across coun- tries. Yet the amount of mobility that does exist serves to narrow the price/cost differentials. In

MARKETING ETHICS 2.1 HUMAN TRAFFICKING: THE WORST KIND OF FACTOR MOBILITY

Criminals make money in the worst way – even at the expense of exploiting their fellow human beings. Women and children are particularly vulnerable. In some societies, parents sell their children. In Asia and Eastern Europe, women have been abducted and forced into prostitution. At the Mexican–American border, Mexican police still have not solved the murders of many women who worked in the area or who tried to go across the border into the USA.

In Taiwan, most of its nearly 300,000 foreign con- tract laborers are from Thailand and the Philippines. Licensed job brokers in Taiwan charge each worker as much as $6000, about the minimum wage for a year’s work. A worker on a three-year contract needs two years to pay this fee, leaving only one year for the actual pay.

In the case of Thailand, it is interesting to note

that laborers pay brokers to try to secure jobs in

Singapore, Taiwan, and wealthy Arab nations. At the same time, labor costs in Thailand have gone up, and many employers have now turned to illegal Burmese aliens instead. While some 200,000 women and chil- dren from neighboring countries have been smuggled into Thailand for the sex trade, Thai prostitutes have been sent by gangsters to other Asian and European countries.

The US Trafficking Act ranks countries in terms of their efforts to stamp out human trafficking. Thailand is a Tier 2 country, meaning that it has not met the minimum standards in fighting human trafficking. If it is demoted to Tier 3, Thailand could face economic measures taken by the USA.

Sources: “Taiwan’s Invisible Workforce,” San José Mercury News, September 6, 2000; “US Says Thais Doing Too Little to Stamp Out Human Trafficking,” Bangkok Post, March

17, 2003.

theory, as a country exports its abundant factor, that factor becomes more scarce at home and its price rises. In contrast, as a country imports a scarce fac- tor, it increases the abundance of that factor and its price declines. Therefore, a nation is usually inter- ested in attracting what it lacks, and this practice will affect the distribution of production factors.

Since a country’s factors of production can change owing to factor mobility, it is reasonable to expect a shift in the kinds of goods a country imports and exports. Japan, once a capital-poor country, has grown to become a major lender/sup- plier of money for international trade. Its trade pattern seems to reflect this change.

When considering the factors of production, another item that is very significant involves the level of quality of the production factors. It is import- ant to understand that the quality of each factor should not be assumed to be homogeneous world- wide. Some countries have relatively better-trained personnel, better equipment, better-quality land, and better climate.

Although a country should normally export products that use its abundant factors as the product’s major input, a country can substitute one production factor for another to a certain extent. Cut-up chicken fryers are a good example. Japan imports chicken fryers because a scarcity of land forces it to use valuable land for products of rela- tively greater economic opportunity. Both the USA and Thailand sell cut-up chicken fryers to Japan. The two countries’ production strategies, however, differ markedly. The USA, due to its high labor costs, depends more on automation (i.e., capital) to keep production costs down. Thailand, on the other hand, has plentiful and inexpensive labor and thus produces its fryers through a labor-intensive process. Therefore, the proportion of factor inputs for a particular product is not necessarily fixed, and the identical product may be produced with alter- native methods or factors.

Like Joseph Schumpeter before them, some economists argue that innovation (knowledge and its application to real business problems) counts for

more than capital and labor, the traditional factors of production. Entrepreneurs, industrial research, and knowledge are what matters.

The discussion so far has dealt with an emphasis of trade theories on the supply side, but demand is just as critical, and demand reversal (when it occurs) may serve to explain why the empirical evi- dence is mixed. Tastes should not be assumed to be the same among various countries. A country may have a scarcity of certain products, and yet its citizens may have no desire for those products. Frequently, less developed countries’ products may not be of sufficient quality to satisfy the tastes of industrial nations’ consumers. Yugo, for example, tried in vain to convince American consumers that its automobiles, despite their very low prices, were not bad value or of poor quality. Even Renault, in spite of being from a developed country (France), could not win over American consumers.

In some market situations, it is possible for product quality to be too high. Companies in devel- oped countries, for example, sometimes manufac- ture products with too many refinements, which make the products too costly for consumers elsewhere. German machinery, for instance, has a worldwide reputation for quality. Nonetheless, many less developed countries opt for less reliable machinery products from Taiwan because Taiwan’s products are less costly. Such circumstances explain why nations with similar levels of economic devel- opment tend to trade with one another, since they have similar tastes and incomes.

Perhaps the most serious shortcoming of classi- cal trade theories is that they ignore the marketing aspect of trade. These theories are concerned pri- marily with commodities rather than with manu- factured goods or value-added products. It is assumed that all suppliers have identical products with similar physical attributes and quality. This habit of assuming product homogeneity is not likely to occur among those familiar with marketing.

More often than not, products are endowed with psychological attributes. Brand-name products are often promoted as having additional value based on psychological nuance. Tobacco products of

Marlboro and Winston sell well worldwide because of the images of those brands. In addition, firms in two countries can produce virtually identical products in physical terms, but one product has dif- ferent symbolic meaning than the other. Less devel- oped countries are just as capable as the USA or France in making good cosmetic products, but many consumers are willing to pay significantly more for the prestige of using brands such as Estée Lauder and Dior. Trade analysis, therefore, is not complete without taking into consideration the reasons for product differentiation.

A further shortcoming of classical trade theories is that the trade patterns as described in the theories are in reality frequently affected by trade restrictions. The direction of the flow of trade, according to some critics of free trade, is no longer determined by a country’s natural comparative advantage. Rather, a country can create a relative advantage by relying on outsourcing and other trade barriers, such as tariffs and quotas. Protectionism can thus alter the trade patterns as described by trade theories.

The new trade theory states that trade is based on increasing returns to scale, historical accidents, and government policies. Japan’s targeted industry strat- egy, for example, does not adhere to free-market principles. Therefore, a moderate degree of protec- tion may promote domestic output and welfare. However, as pointed out by Jagdish Bhagwati, it is not easy to differentiate fair trade based on com- parative advantage from what may be considered unfair trade. Are trade practices based on work habits, on infrastructure, and on differential saving behavior to be considered unfair? If so, all trade could possible be considered unfair.16

Date: 2014-12-21; view: 983