China’s Great Trade Surplus: Part I

Few nations in history have enjoyed such extreme trade surpluses as China has over the past two decades. But one historic precedent stands out.

Like today’s China, this nation was large and populous, with an ancient and proud culture. Like today’s China, this nation was also governed by a strong central authority that was nevertheless hampered by corruption and questions of legitimacy.

And, this nation was unquestionably a global power, and yet tentative and untested militarily on the global stage. That nation, so similar to the China we know, was… China.

In the 18th and early 19th centuries, under the Qing dynasty (1644-1912), China produced tea, silk, porcelain and other goods for European consumption on an unprecedented scale. Although Europe had always had an appetite for Eastern luxuries, two main factors facilitated the explosion of trade at this time.

First, Europe was suddenly flush with silver, thanks to Spanish conquests in the New World. Second, Europe now had merchant fleets that could take deliveries from China at a fraction of the cost and peril of the overland route.

European products, on the other hand, had trouble gaining a foothold in China. European traders blamed this in the Chinese Imperial government’s restrictive trade system. Only one city, Canton, was open to foreign merchants — and those merchants could only do business with a small group of authorized Chinese dealers, in meeting space provided by the government.

But in truth, the slow trade in Chinese imports was mostly due to the fact that the European merchants simply weren’t carrying anything the Chinese public really wanted.

Affordable grades of British woolens, for example, though heavily promoted by the East India Company, were just not right for the Chinese climate. Subsequent events were to demonstrate that if the European traders brought something the Chinese people wanted, no amount of Imperial restriction could stop it.

For the time being, China drained silver out of the European economy. Of all the silver extracted from the Potosi and other mines in the Spanish New World by slave labor, 50% or more is thought to have found its way to China.

The Chinese were especially fond of Mexican and Spanish pesos. They gave nicknames like “Fat Buddha” to the Spanish monarchs depicted.

Different from today’s practices, China didn’t invest its foreign earnings overseas. It absorbed the silver and wallowed in it. Silver imports were popularly believed to increase the nation’s yuan-ch’i — vitality, strength, mojo. And in an important sense, that belief was correct.

Silver greased the Middle Kingdom’s economy. There was enough of it that even the remotest peasants had access to it and could join the money economy. Contracts specified prices in European silver coins, and taxes were paid in European silver coins.

In today’s recession, China’s economy is threatened by faltering foreign demand for Chinese exports. In contrast, in the early 19th century, the Chinese economy was undone by a spectacular growth of imports, and by the imported product itself — opium.

European traders discovered the demand for the drug, and they fed it. As Chinese of all social classes became addicted to the stuff, illicit trade boomed. The British East India Company put larger and larger acreages on the subcontinent under opium cultivation in the 1820s and 1830s, and the silver funneled out of China by this trade went to finance British colonial rule in India. In Bengal alone, opium accounted for up to 20% of colonial government revenue.

Opium destroyed lives and families, and it corrupted the Chinese empire’s administrative caste. It also drained the empire of currency, causing the economy to grind to a halt. Debts owed in silver became unpayable. Taxes payable in silver went uncollected. Merchants went bankrupt.

Further, as silver became dear, copper coins depreciated, sinking in value from 1/1000 of a silver tael to 1/2500 or less. Government employees paid in copper were impoverished, and morale was decimated.

In 1833, a Canton-based scholar published Mi hai p’ien, an “Essay on Eradicating the Disaster.” Wu Shih-hua accepted the opium trade as an unfortunate fact of life, and focused his attention on the depletion of silver.

“What the opium addicts needed,” he argued, in the paraphrase of a modern historian, “was opium, and what the country treasured was silver. So, let there be a legal exchange between tea and opium. Only the export of silver should be prohibited.” (One is reminded, perhaps, of Warren Buffet’s well-publicized 2003 proposal to prevent the loss of U.S. wealth oversees by requiring U.S. imports to be balanced dollar-for-dollar by U.S. exports.)

Wu’s proposal was never implemented. The imperial government fixed its sights first and foremost on eradicating opium. Efforts to enforce anti-smuggling laws brought China into conflict with Britain.

Badly routed by a small British naval force, in 1842 at Nanking the Chinese were forced to accept peace terms that gave the British new trading rights, effectively curtailing China’s sovereignty.

Trade increased in pace. Jaws locked open, gorging on opium and vomiting silver, China slid into a century-long coma of colonial exploitation and foreign occupation.

It seems plausible that the trauma of this episode, living on in China’s collective memory, is to some extent responsible for the tenacity with which China in the twentieth century has resisted foreign imports, pursuing self-sufficiency under Mao and a trade surplus today.