Want to Understand the US-China Trade War? Turn Back the Clock to 1784
What you need to know
Trade tensions between the US and China have roots in 18th century tea tariffs and opium clippers.
When it comes to China-U.S. trade, the more things change, the more they stay the same.
That was the view of the U.S. Consul General to Hong Kong and Macau, Kurt Tong, which he shared with an invited audience at a seminar on the past, present and future of China-U.S. trade, held at the Hong Kong Maritime Museum on Dec. 13, 2018.
There are a surprising number of parallels between the present China-U.S. trade relationship and its formative days when, in 1784, the Empress of China became the first American ship to sail for China to engage in trade. Some of the more obvious ones might offer some insight for Jeffrey Gerrish and the U.S. delegation to China as they hash out trade negotiations in Beijing this week.
Hong Kong has more to lose than most from the spillover of a China-U.S. trade war. This truth was nestled in the backs of minds at the seminar, organized by the Hinrich Foundation, which marked the opening of a new exhibition at the museum called “The Dragon and the Eagle: American Traders in China.”
While the exhibition carefully steers clear of the choppy waters of current China-U.S. trade tensions, its portrayal of the origins of China-U.S. trade suggests Consul General Tong knows his history.
The historical roots of trade friction
In the late 18th century, similar to the present day, it was an acute trade imbalance that led to tensions. Put simply, China was largely self-sufficient and needed very few commodities.
However, as exhibition curator Libby Chan explains, pioneering American merchants opted for innovation over belligerence and threats. Desperate to establish trading networks and to find an independent source of Chinese tea – already a staple drink in 18th century America – they undertook extensive market research and sourced products which China would come to demand.
“If we look at those early cargoes of fur, ginseng and silver, the early China-U.S. traders knew their market well,” she says.
There is nothing new about U.S. tariffs on Chinese goods – they were first introduced in 1789. But America’s first generation of global capitalists preferred a less confrontational approach to trade than the current administration. It proved highly effective: Their less formal and more collaborative style differentiated them from their European counterparts and made them highly regarded in Guangzhou.
However, modern day trade friction is rooted in something deeper than style.
“The problems today are about two fundamentally different economic systems: the free market USA and the state directed capitalism in China. But there is still a way to find accommodation between these two systems. We should make this work,” says Stephen Olson, trade expert and Research Fellow at the Hinrich Foundation.
Historical misunderstandings
This was also the case in 1784, when the two economic and political systems were arguably even more disparate. The United States was an ambitious young republic built on the notions of equity, democracy and free trade. China was an introverted ancient empire built on a foundation of Confucianism, which attached minimal significance to commerce.
There was also an enormous amount of cultural misunderstanding between these two nations at the turn of the 19th century – just as there is today.
Prior to 1784, only a handful of Americans had visited China, widely regarded as the romantic and exotic “orient.” Chinese tea, silk and ceramics represented the apotheosis of luxury. President George Washington was proud to commission a dinner service from China (on display at the Hong Kong Maritime Museum). Today, although China says some 1.3 million Americans visit the country every year, it is hard to envisage President Donald Trump being photographed driving a Chinese electric car or sporting a Huawei mobile phone (although China would like him to).
There is also a growing consensus within the U.S. political elite that China’s entry into the World Trade Organization (WTO) in December 2001 heralded every American economic ill from mass unemployment to the devastation of its manufacturing base. There is doubt about Chinese motives and an underlying fear of China as a dangerous geopolitical rival set on world domination.
“Such doubts come partly from the shortage of knowledge of China, and partly from some countries advancing their own interests,” said Xie Fuzhan, president of the Chinese Academy of Social Sciences, speaking in Hong Kong in November 2018.
At the turn of the 19th century, personal relationships were essential to overcoming profound differences and misconceptions – and today, they can still bridge the cultural and ideological gaps. Perhaps the reported personal chemistry between Presidents Trump and Xi might rival that between early American traders like John Murray Forbes and the Hong merchant, Howqua. Howqua, thought to be the richest man in the world in the early 19th century, was persuaded by Forbes to invest in the early days of the American railway boom. He became the first example of successful Chinese foreign direct investment (FDI) in American infrastructure.
“The current global trade architecture is built around a Western model which cannot manage a large country like China using a different set of rules,” says Olson. Like many others, Olson believes the WTO and other trading guidelines are in urgent need of modification. Much the same was said in the early 19th century when most of the loans, credit and other commercial arrangements between Chinese and American merchants were illegal under Chinese law.
It was alleged rule breaking that eventually caused the breakdown of the early China-U.S. trade relationship. The U.S. followed the British lead and resorted to trading in illegal opium from 1805 to bridge the balance of the trade gap. Although on a smaller scale to the British, it was this illicit narcotics smuggling which soured the relationship between the U.S. and China.
On September 23, 1823, Francis Terranova, serving on the Baltimore opium ship Emily anchored in Chinese waters, was accused by the Chinese authorities of murdering a local woman. The Americans fiercely rejected the charge, but following the imposition of a trade embargo by China, handed over the sailor, who was promptly strangled. Most Americans withdrew from the opium trade after this incident and a few withdrew from the China grade completely.
The incident brings to mind the arrest in Canada on Dec. 1, 2018 of Huawei chief financial officer Meng Wanzhou. This outraged Beijing, which called the arrest a “wrongdoing.”
It also highlights the repeated accusations by U.S. trade officials and political figures that China is not playing by the rules.
“China is basically trying to steal the future of Japan, the U.S. and Europe by going after our technology,” U.S. trade advisor Peter Navarro said in an interview with Nikkei Asian Review on Dec. 20, 2018.
Non-compliance with rules remains a source of friction now, just as it did in the early 19th century. But one important difference from those early days is that it was Britain, not the U.S., that enjoyed the economic and military hegemony of the era.
The British ridiculed the U.S. soft approach and preferred a more Trump-style bellicose rhetoric and an uncompromising and arrogant approach, all while prosecuting the illegal trade in opium, despite repeated Chinese objections. It ultimately led to military conflict and the first Opium War (1839-42) at a time when there was far less anti-China rhetoric in British political circles than there is in the U.S. today.
If war is to be excluded as a potential outcome of the current China-U.S. trade friction, history suggests that personal relationships will be key to overcoming misunderstandings and that rules need to be agreed and stuck to by both sides.
Jeffrey Gerrish and the U.S. trade delegation are now tasked with understanding this... lest history, as it is wont to do, repeat itself.
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Editor: Nick Aspinwall (@Nick1Aspinwall)
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