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China and the Global Politics of Trade, Then and Now: Part II

How were the foundations of modern trade policy created during the 1800s?

February 25, 2009

How were the foundations of modern trade policy created during the 1800s?

The business of trade is not very sexy. Every week thousands upon thousands of cargo containers are lifted onto docks, unloaded and loaded again.

It is hard to imagine work more monotonous. (Though one could not call it menial — considering that U.S. longshoremen today make six-figure salaries.)

Brent Ranalli:
Chinese Trade History

China’s Great Trade Surplus
Then and Now
Vulnerable China

Given that, one might expect trade policy, the domain of technocrats and lawyers, to be equally dull. But somehow trade policy arouses strong emotions. And it has done so for over two centuries.

Today’s “free trade” controversy has deep roots in the era of tea and opium. It was at this time that classical economists first formally demonstrated that reciprocal reductions in tariffs and other barriers to trade could, under the right conditions, increase the wealth of nations.

The same basic arguments have been refined and reformulated by economists and public policy analysts up to the present day.

For the independent British traders at Macau — consider them the equivalent of today’s chamber-of-commerce crowd — “free trade” was more than a good idea. It was a moral imperative.

The traders’ newspaper, the Canton Register, inveighed against both the East India Company’s monopoly on the British China trade (a monopoly that was rescinded in 1833) and China’s restrictive Canton system.

These businessmen resented interference by any officious mandarins, British or Chinese, with their God-given right (as they saw it) to conduct business and pursue profits wherever and however they saw fit.

Then as now, prevailing trade policies and practices were viewed with suspicion by progressives, also on moral grounds. Today, it is concern about the environment, a fair wage and local sovereignty that motivates opposition to “free trade” (or, as activists see it, the enforcement of trade rules by an unaccountable international bureaucracy).

In the early 19th century, opium was a central issue. Pamphleteers called the deliberate foisting of the cruel and addictive poison on another nation by British traders a “national sin.”

In parliament, William Gladstone railed against the “infamous contraband traffic” and against the hypocrisy of British traders demanding British naval protection when China attempted to enforce its own anti-smuggling laws.

Gladstone represented a minority view. The British navy did sail in to Cantonese waters, and events escalated into full-scale conflict, ending with a humiliating defeat for the Chinese.

The Treaty of Nanking, signed in 1842, expressly provided for British trade to proceed unimpeded. The formula hit upon in the treaty was “most-favored nation” status — any trade concession made by China to any other nation would automatically be extended to Britain as well.

The idea caught on. Before long, other European nations and the United States sent warships of their own to the prostrate empire and extracted similar MFN-like concessions.

Today, of course, MFN status is routinely granted by nations to each other as a friendly gesture. It is easy to forget that it once was a humiliating concession extracted at the point of a gun.

If academic economists, businessmen and citizen-activists each have a characteristic view of trade, so do states. To paraphrase Clausewitz’s famous quote about war, trade is politics by other means. For that matter, trade is war by other means.

In the 19th century clash of civilizations, war and trade were both instruments of policy, and they blended into each other.

In the early part of the century, both the British and the Chinese used the threat of trade embargo to extract concessions. The British government sought peace at all costs with China to ensure the continuity of trade. When that became politically inexpedient, it sought war with China to open up new ports and extract new trade concessions.

As a source of revenue, trade was inextricably linked to power. Tax on imported tea financed the British empire. Trade in opium financed British rule in India and the Qing empire rose and fell with the tide of silver.

The British government may not have intentionally fostered the opium epidemic in China, but it was certainly a deliberate act of policy to allow it to continue, to extract Chinese silver and cripple Chinese society. Even the independent traders, so disdainful of their home government, served it as geopolitical pawns, as they provided British hawks with a pretext for war.

One can hardly avoid the impression that the United States and China today are locked in a trade-related entente that is similarly explosive. But this time, the potential devastation requires no military confrontation.

It is mutually assured financial destruction — the eagle and the serpent locked in a death grip in mid-air, at risk of tumbling together on the rocks below.

Holding such a vast quantity of U.S. public and private debt, China would seem to have leverage of sorts over the United States. As Hillary Clinton (and others) noted during the 2008 presidential campaign, it’s hard to argue with your banker.

But because any attempt by China to inflict pain on the United States by dumping assets and devaluing the dollar would be disastrous for itself as well, most analysts think it unlikely that China would ever intentionally exercise that option.

It has also been suggested that the United States has compromised its national security by allowing so much of its industrial infrastructure to be relocated to China. One nation now has the power, the argument goes, to deprive the United States of all sorts of vital manufactured goods by simply shutting down factories or ports.

Two points need to be made in that context. First, such an action on China’s part would be self-damaging, and thus (as above) not very likely except in great extremity.

Second, industry vital to U.S. national security (e.g., defense-related) has not been outsourced at nearly the pace of the toy industry or the consumer electronics industry. That said, U.S. analysts have raised concerns that long supply chains in the defense industry reach deep into other nations, creating opportunities for China or other foreign powers to study or even (potentially) to sabotage U.S. military technology.


For the independent British traders at Macau, "free trade" was more than a good idea. It was a moral imperative.

It is easy to forget that most favored nation status once was a humiliating concession extracted at the point of a gun.

Today, it is concern about the environment, a fair wage and local sovereignty that motivates opposition to "free trade."