Gunboats and China: Opium Wars and Trade.

Richard Baldwin, 瑞士洛桑国际管理发展学院 (IMD) - 商学院 8 November 2024, Factful Friday.

Introduction.

East Asia was not a big fan of globalization until modern times. It wasn’t a lack of ability. It was a lack of interest.

Chinese ships in the early 1400s dwarfed European ships as demonstrated by the voyages of Admiral Zheng He. (Boy are you in for a treat if you’re a trade nerd and haven’t read about these; try this book, “When China ruled the seas: The treasure fleet of the Dragon Throne, 1405–1433” Levathes 1994).

After the great admiral’s voyages, the Ming Dynasty closed China to maritime trade to shut out external influences and concentrate on internal stability. This was around the time that the Ottomans took Constantinople and closed off the western end of the ‘road’ part of the Silk Road. The sea part had been under the control of Islamic states since the Golden Age of Islam (8th to 14th centuries).

Japan followed China into autarky during the 17th century, again motivated by a desire to maintain social order and limit western influences, including Christianity. Ditto for Korea, which was known as the Hermit Kingdom at the time.

Why autarky? Obviously, I’m not an historian, so take all that follows for what it’s worth (do you know how much what free advice is worth?). If you want to read a real historian on why East Asia turned inward after the Silk Road shut down, have a look at Brook (1998).

But I have a very small DRAM in my head, so I always have to “Simplify to Clarify” (TM). To fit this autarkic movement into my mind-map of world history, I imagine the thinking of the rulers and their advisors back then. Maybe they thought: “Since the core of human civilization is in East Asia, and has been for thousands of years, why bother? Foreigners have dangerous ideas and religions. Besides, most of them have nothing to trade that we need “.

China considered itself the Middle Kingdom where Middle meant center of the world. Chinese civilization, in their view, was the fulcrum of culture, knowledge, and moral values. A high civilization surrounded barbarians. It helped that the country was naturally protected by mountains, oceans, and the Arctic Steppes. Emperors had a divine right to govern China, and by extension, the barbarians as well. China, like the US and USSR in the post-WWII years, and Britain in the 19th century, saw itself as the legitimate leader of human civilization.

By the way, since we live on a globe, every location is, technically speaking, the middle of the world (leave aside the planet’s slight pear-shaped-ness). My favorite flat map has Antarctica at the top and Australia at the center. Reflect upon the map you had in your schoolrooms and why “we” think of the Middle Kingdom as part of the Far East.

Big, closed economies provide tempting “gains from trade”.

Today, China, India, Japan, and Korea constitute a birthday-boy-sized slice of world GDP, so when we think about globalization’s evolution, we can’t leave off the gunboats that opened of these important economies. And back in the early 19th century, they were even bigger in relative terms since the Great Divergence hadn’t yet happened. Have a look at this chart and you’ll see that India and China accounted for about half of world outputs and spending.

Opium as UK’s fix for its 19th century bilateral trade deficit with China.

When it comes to China, the key gunboat action was called the Opium Wars. Britain, which had outsourced its imperialism to the East India Company, led the charge. The Company’s goals were to firstly, open Chinese markets for trade with Britain, and secondly, to force China to grant the Company the right to sell opium in China. The opium was a way for the Company to pay for Chinese goods without having to fork over silver. To think about how horrible that was, imagine if China used military force to get the US to accept Fentanyl as payment for the Boeing jets.

Background for the charts.

The reason Britain and other Western powers started the Opium wars was, fundamentally, a Trump-like concern for bilateral trade deficits.

Vast trade imbalances between China and the West.

By the early 19th century, European nations, particularly Britain, had developed a voracious appetite for Chinese goods, especially tea, silk, and porcelain. However, China, held strict mercantilist views whereby a bigger pile of gold and silver was the key to the Wealth of Nations (to coin a phrase). China accepted only payment in silver. To counter this deficit, the British East India Company began smuggling opium from India to China, selling it for silver, and using the silver to buy Chinese manufactured goods. This lucrative-but-illegal trade created an addiction crisis. In reaction, the Qing Dynasty tightened its existing ban on the opium trade.

Opium Wars: First (1839-1842) and Second (1856-1860).

The First Opium War commenced when Chinese officials destroyed opium stocks in Canton. Think of it as a government-sponsored Boston Tea Party, or an early version of the War on Drugs. Britain countered with gunboats.

Although gunpower and cannons had been invented in China centuries before, incessant intra-European fighting had sharpened Western military technology and tactics. China’s isolationist policy, by contrast, mostly kept the peace, but produced a severe military imbalance with the West. The British gunboats worked their way up to Nanking before the Chinese emperor was forced to agree to their demands.

The Treaty of Nanking, signed in 1842, concluded the war, imposed humiliating terms on China. Britain got Hong Kong; five treaty ports were opened to foreign trade and residence; foreigners were exempt from Chinese laws; and, to add injury to the insult, China had to pay compensation for the destroyed opium and to cover Britain’s war costs. These unequal treaties launched what is still know in China as the “century of humiliation.” One way to think of what the CCP is doing today is carrying out a “Make China Great Again” campaign, where ‘again’ meant before the unequal treaties.

Following the First Opium War, tensions persisted, culminating in the Second Opium War. Triggered by the boarding of a British-flagged ship, Britain restarted hostilities, this time in an alliance with France. The Treaty of Tientsin (1858) and the Convention of Peking (1860) further consolidated Western rights, including the legalization of the opium trade, additional treaty ports, and rights for missionary to convert Chinese.

The Boxer Rebellion (1899–1901).

Around the turn of the century, a nationalist, anti-foreign, and anti-Christian movement arose and targeted westerners and their institutions. Churches, missionary schools, and Western hospitals were destroyed, and foreigners and Chinese Christians were killed. Infrastructures that were viewed as symbols of foreign influence were also targeted. It was something like a precursor to the Cultural Revolution launched by Mao in the 1960s.

In 1900, an alliance of imperial powers—ranging from Britain and Japan to the US and Austria-Hungary—invaded China. The troops left a trail of destruction, looting, and theft from Tianjin to Beijing. The war ended in 1901 with the Boxer Protocol that expanded foreigners’ privileges.

You must admit that globalization in those days was a lot rougher than it is today. Even Trump wouldn’t think about invading China to improve access for US companies, or to extract promises of special treatment for US investors in China. These days, such outcomes are achieved by other means.

Fall of Qing Dynasty, rise of the Republic of China, and WWI.

The good old days of the Middle Kingdom, which weren’t good for everyone, ended quite definitely with the Fall of the last dynasty, the Qing Dynasty (which, BTW, had been in power since before Marie Antonette was beheaded in France). Imperial rule was replaced by the Republic of China, which eventually was run by Chiang Kai-shek, who defeat the regional warlords and unified the country. The China Communist Party, which had been battling nationalists and foreign occupiers alike for decades, won power in 1949. Chiang Kai-shek retreated to Taiwan, leaving Mao Zedong to lead the mainland until his death in the late 1970s.

Impact on Trade Flows

As the chart below shows, the Opium Wars led to a huge increase in the value of China’s imports and exports. In about a decade, China’s share of world trade doubled. The share jumped to near 3%, but then fell back under 2% as the rest of the world hopped on the 19th century export bandwagon. The end of the Qing Dynasty was also accompanied by a boost, as was WWI (as we saw in Japan as well). Mao was very bad for China’s world trade share but as soon as he left the stage, China started doing what we are all used to now—becoming an export powerhouse.

Bilateral trade flows: Dominance of colonists in imports and exports.

The motive behind gunboat diplomacy was to grab the gains from trade, and to create a market for the colonists’ industries. To sell what is now called “overproduction”.

The left chart below shows how the successive colonists dominated China’s imports. It starts with the British, but the Chinese market soon gets shared with French, American, Russian, and Japanese. Just before WWII, imports from the Japanese empire become particularly dominant. The end of WWII shifts sourcing to the US a bit, but once the Communists take power, China mostly sources its imports from the USSR.

As modern times evolve, China and USSR parted ways, and then Mao passed away leading to a sea change in Chinese trade policy. Japan and the US take over much of the shares formerly held by the USSR. It is remarkable that throughout all these tumults, the British empire (which eventually, more or less, became the Commonwealth), held about a third of China’s import shares. Of course, much of that is Hong Kong which reverted to mainland China in the late 1990s.

The chart on the right shows holds the same for export destinations. Here the impact of empires shows even more starkly. At first, exports mostly went to the British empire, then to the Japanese empire, and then to the USSR. More recently, Japan’s export share rose up. Again, it is important to note that the definition of British empire in the chart is that of the 19th century.

Summary and Concluding Remarks.

Only a few factful facts in today’s Factful Friday:

? The Opium Wars opened China to modern trade leading to sharp increases in the country’s shares of world imports and exports.

? China's trade share grew from the Opium Wars of the mid-1800s to the end of the Qing Dynasty in 1911, and then saw a big boosts during World War I.

? Mao’s policies greatly reduced China’s share in world trade, but the share rebounded quickly after his passing.

? Colonial powers dominated China’s import and export markets throughout the period of "gunboat diplomacy"—hardly surprising since that was the whole point of the gunboats.

? The colonial dominance started with Britain and her colonies in Asia, then this switched to the Japanese empire in the run up to WWI, and then the sourcing and selling shifted to the USSR once the Chinese Communist Party took charge.

Do you think I should have titled this one, Gunboat-Gains from Trade?

Concluding remarks.

The Opium Wars mattered. They should be studied by every trade nerd in the world. They were not regional wars to be consigned to footnotes in the history of globalization. They were pivotal events that reshaped globalization. They were emblematic of how modern globalization spread to China, India, and Korea.

More pertinent today, with Donald Trump about to take over as US President, the Opium Wars are a reminder of just how bad things could get if they spun out of control. Remember that the US spends more on its military than the next ten or so countries combined. The US military may be more dominant today than the British military was just after the Napoleonic Wars ended in the early 1800s. They could be seen as the solution to a lot of America’s problems if that sort of thing were normalized.

The Opium Wars are also a reminder of how bad and how brutal trade policy was before the US and its allies set up a rules-based multilateral system where it was not OK to strong arm your trade partners by force of arms. It was not OK to send tanks across borders in an effort to change national boundaries.

I hope Trump will avoid the worse, but now you know that humans are perfectly capable of failing into a state where military force is the ultimate solution to every question. Where it is not crazy-talk to suggest that sending troops into American streets and into Mexico might be a good way to solve America’s drugs problem and immigration problem. And while the troops were in Mexico, surely no one in Washington would think that it was a good idea to use them to help solve America’s bilateral deficit with Mexico? No way. Surely not. That’s crazy talk.

The world is getting crazy, but it is hard to image crazy unless you’ve studied eras where crazy was really crazy, and—to use a modern term—where crazy had been mainstreamed. These were times where it was normal to force China to accept opium as a way of fixing Britain’s bilateral trade deficit. Let’s be sure to stay away from that level of craziness.

References.

Brook, T. (1998). The confusions of pleasure: Commerce and culture in Ming China. University of California Press.

Fairbank, J. K. (2006). China: A New History. Harvard University Press.

Gelber, H. G. (2004). Opium, Soldiers and Evangelicals: Britain's 1840-42 War with China and Its Aftermath. Palgrave Macmillan.

Hevia, J. L. (2003). English Lessons: The Pedagogy of Imperialism in Nineteenth-Century China. Duke University Press.

Levathes, L. (1994). When China ruled the seas: The treasure fleet of the Dragon Throne, 1405–1433. Oxford University Press.

Lovell, J. (2011). The Opium War: Drugs, Dreams and the Making of China. Picador.

Pequin, B. (2001). "Opium and empire: The Lives and Careers of William Jardine and James Matheson." Modern Asian Studies, 35(4), 975-1000.

Platt, S. R. (2018). Imperial Twilight: The Opium War and the End of China's Last Golden Age. Knopf.

Wong, J. Y. (1998). Deadly Dreams: Opium and the Arrow War (1856-1860) in China. Cambridge University Press.