The Rise of the Virtual State Today,for the wealthiest industrial countries such as Germany,the United States,and Japan,investment in land no longer pays the same dividends.Since mid-century,commodity prices have fallen nearly 40 percent relative to prices of manufactured goods.1 The returns from the manufacturing trade greatly exceed those from agricultural exports.As a result,the terms of trade for many developing nations have been deteriorating,and in recent years the rise in prices of in- ternational services has outpaced that for manufactured products. Land prices have been steeply discounted. Amid this decline,the 197os and 198os Before downsizing,the brought a new political prototype:the trading state.Rather than territorial ex- typical American firm pansion,the trading state held trade to be had headquarters, its fundamental purpose.This shift in na- tional strategy was driven by the declining factories,and land. value of fixed productive assets.Smaller states-those for which,initially at any rate,a military-territorial strategy was not feasible-also adopted trade-oriented strategies. Along with small European and East Asian states,Japan and West Germany moved strongly in a trading direction after World War II. Countries tend to imitate those that are most powerful.Many states followed in the wake of Great Britain in the nineteenth century; in recent decades,numerous states seeking to improve their lot in the world have emulated Japan.Under Mikhail Gorbachev in the 198os, even the Soviet Union sought to move away from its emphasis on mil- itary spending and territorial expansion. In recent years,however,a further stimulus has hastened this change.Faced with enhanced international competition in the late 198os and early 199os,corporations have opted for pervasive downsiz- ing.They have trimmed the ratio of production workers to output, saving on costs.In some cases productivity increases resulted from prun- ing of the work force;in others output increased.These improvements have been highly effective;according to economist Stephen Roach in a See,for example,Enzo R.Grilliand Maw Cheng Yang,"Primary Commodity Prices, Manufactured Goods Prices,and the Terms of Trade of Developing Countries:What the Long Run Shows,"The World Bank Economic Review,1988,Vol.2,No.1,pp.1-47. FOREIGN AFFAIRS July/August 1996 [49] Copyright 2001.All Rights Reseved