State, Virtual

Small and Large States

Initially, small-island or littoral countries such as Hong Kong, Taiwan, Singapore, and Holland produce goods at home. Then, they discover that these goods may be produced more economically on the Chinese mainland, Indonesia, Malaysia, Vietnam, or Bangladesh. Shares of gross domestic product (GDP) in the various virtual states shift increasingly toward services, with Hong Kong ultimately having little or no home production at all. Foreign direct investment rises as a consequence, and production takes place in areas that the home country does not control. Guaranteed economic access to that region then becomes the necessary substitute for imperial governance.

The process is not confined, however, to small or island nations. Even major and large states experience “virtuality” as they shift away from home manufacturing to technical services such as research and development. Japan still retains 30% of its GDP in manufacturing, but in the United States, the figure is less than 20%. European countries are moving in the same direction, and India, a developing country, has grown particularly because of the value of its service industries. It follows, of course, that some nations must do the manufacturing that is outsourced to them from overseas. Brazil, China, Mexico, Poland, Hungary, and the East European states have benefited from this shift. In this sense, there is a distinction between “head nations”—countries that decide what shall be produced and do the design, financing, and marketing—and “body nations,” which perform the manufacturing tasks. This is not a hard-and-fast distinction; however, many erstwhile body nations such as South Korea and China are now in the process of becoming head nations. Nor do head nations fail to do manufacturing for others. Taiwan has devolved many manufacturing functions on China, but it also acts as a “foundry” to produce goods to order for client head countries. In this way, even the United States has acted as a body nation for Japanese, German, French, and even Chinese production located within its borders. Countries that produce abroad may seek to have their production sold in those markets, and they thereby escape the tariff walls between them and their market. As Robert Mundell has shown, the movement of factors of production abroad can compensate for limits on export trade. In the 1930s, however, this process did not occur, and nations seeking raw materials and markets believed that they had to conquer territory to retain access to both. The military conflict that followed was in part the result of economic restrictions.

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