History of Western Trade Imbalance with China

China is the world’s factory. Everything is made in China. Every country buys from China. And therefore, pretty much every country has a trade deficit (total value of exports minus total value of imports) with China. While more and more countries rightly worry that China can lock them out of more and more critical items (rare earths being the most recent example), the US under Trump in particular is also worried about the trade deficit with China.

 

It was in this context that I was struck by Tomas Pueyo’s post.

“What happens when the West owes China so much they can’t repay the debt? How should we understand the current trade war between the US and China? What we don’t realize is that this isn’t the first time this has happened.”

Huh? Pueyo elaborates.

 

Go back around 2,000 years, when Rome ruled Europe. Pliny the Elder lamented even back then:

“India, China and the Arabian peninsula take one hundred million sesterces from our empire per annum at a conservative estimate: that is what our luxuries and women cost us.”

From China, the largest bill was for silk. So much so that in 14 AD, the Roman Senate banned men from wearing silk! (It is not a coincidence that the routes were called the Silk Road). There wasn’t much the West made that interested China – so it was money (gold and silver) that kept flowing to China. Eventually, the West managed to smuggle and steal silkworms out of China and thus silk production started in the Eastern Roman Empire.

 

The next item that created a trade imbalance with China was porcelain. (Again, not a coincidence it is called “china” in English). While Europe did make porcelain, the Chinese variety was thinner, whiter and more translucent. All of which made Chinese porcelain a status symbol. The old problem repeated itself – China didn’t need anything the West produced, so more and more silver kept flowing out. For a while, Europe found a “solution” by mining and stealing silver from South America, most of which went to China. Eventually, Europe learnt to make better porcelain themselves and the outflow stopped.

 

The next item from China was tea, which became a craze in Britain and America in particular. While more demand caused a drop in tea prices, the overall consumption kept growing as a result of which overall money flow still kept rising. (Over time, American patriots resented the taxes on tea that were shipped by the British from China, leading to the famous Boston Tea Party incident). How was this British imbalance with China resolved? (1) By stealing tea out of China and trying to grow it in colonized India; (2) Producing opium (again in colonized India) and selling it in China.

 

Initially, those opium sales were based on genuine Chinese demand for a pain-killer, but then it became an addiction. It brought in so much revenue for Britain that when the Chinese emperor decided to crack down on the addiction epidemic, Britain had too much money to lose. So they fought the Opium Wars, and extracted forced market access to China and yes, Hong Kong.

 

This is what the Chinese, to this day, call the “century of humiliation”, when China “went from the richest and most advanced nation of the world to a dirt poor backwater”. It is why China is so anti-West today, that bitterness is very deep rooted (apart from the fact that they are now richer and powerful).

 

History repeats itself. Today we find ourselves in the same situation:

“Once again, China produces more than it consumes, which means it’s more interested in foreign money than goods. Once again, Western governments freak out about this deficit, which can’t continue forever.”

How will it be “solved” this time? By smuggling and stealing things out of China, a la silk and tea? By progressively moving manufacturing to other countries, like porcelain? Or by war with China, like the Opium Wars?