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Before the Wall - Trump and the Opium War

In the first of a series of blog posts, Before the Wall writer Chris Ruffle examines the similarities between the Opium War of 1860 and the current trade war with China.

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It is impossible to pick up a newspaper these days without reading of “trade war”. Typically this involves President Trump inveighing against the unfair practices of foreign countries, taking advantage of the U.S.A. The usual suspect is China, with some justification; of the $55.5bn U.S. deficit in May, China accounted for $30.1bn. Of course, the origins of this deficit are more nuanced than fit into a tweet. China’s national savings rate stands at 47%, compared to 19% in the U.S., but “Consume less, save more!”or “Make America Save Again!” are unlikely to become election-winning slogans. Unless the basic issues are addressed, the tactic of slapping on tariffs tends, through re-labelling and re-direction, simply to direct the surplus elsewhere: whilst exports to the U.S. from China in Q1 fell 13.9% y.o.y., exports from Vietnam rose by 40.2% (compare squeezing a balloon). The other tactic of blacklisting China’s telecom giant, Huawei, stops the U.S. playing to its strength of exporting the high-tech components China really needs, substituting commodities such as soy beans and shale gas which, as important as they are to Trump supporters in the Mid-West, China can easily buy elsewhere. There is also an irony in the fact that the only thing China can find to place this huge surplus of US dollars is into US government bonds. China is now the largest foreign holder of US bonds (about $1.1trn) and owns about 5.6% of the U.S. national debt. Still, as ineffective and circular as these tactics are, at least the “war” remains in the realm of economics.

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There are strong parallels between Trump’s recent struggles with China and the origins of the 2nd Opium War in 1860. In the 19th century, Britain’s rapid economic growth saw huge demand for Chinese products such as tea, silk and porcelain. The problem is that Britain could not find anything that China wanted, and so ran a worrying deficit, which in those days meant an unsustainable outflow of silver. In 1859 Britain ran a £9m deficit with China. The problem had been clear ever since Britain’s first ever envoy to China, George Macartney, genuflected (not kow-towed, you understand) to the Qianlong emperor, who was on his annual hunting tour North of the Great Wall in Jehol at the time. In his subsequent edict to George III, the Qianlong emperor summarized his position: “Our Celestial Empire possesses all things in prolific abundance and lacks no product within its borders. There is therefore no need to import the manufactures of outside barbarians in exchange for our own products.” So the British turned to opium from their Indian territories. There was considerable domestic opposition, led by the Liberal Party leader William Gladstone; the substance was not illegal at the time in the U.K., but the Chinese proved to have a sad susceptibility to its allure, and the need to balance trade won out. There is a strange modern day echo, in that the opioid crisis in the U.S. is largely fuelled by fentanyl produced in China.

The ostensible casus belli was China’s failure to honour the Treaty of Tianjin, whereby Britain could lodge an ambassador in Beijing. Indeed, China’s forts fired on the convoy carrying the ambassador, sinking several ships. This humiliation was sufficient for a nationalistic Prime Minister such as Palmerston to be able to whip up support for an invasion. The real reasons, however, were economic, as the British traders looked to expand inland from the toe-holds of Hong Kong and Shanghai won in the 1st Opium War. This is shown by the result of the war, which was the opening of several more “treaty ports” to foreign trade and investment, and a big increase in Chinese foreign trade and customs revenue. The humiliation of the burning of the emperor’s palace, and huge loss of cultural items entailed, remains firmly lodged in the modern Chinese psyche. The real tragedy of the 2nd Opium War, however, is probably the failure of the Chinese government to react to this wake-up call by modernizing, unlike the similarly isolated Japanese after the Meiji Restoration of 1868. This led to the far more damaging defeat of the Sino-Japanese War in 1895, the loss of Taiwan and the crippling reparations charged (200m taels of silver, which was four times Japan’s national income at that time, and compares with 8m taels extracted by the Anglo-French army in 1860). This delayed attempts by the government to make China great again by perhaps a century.

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Posted on:Wednesday 17th July, 2019