1. Erste Group Research – Trade between China and the West: three historical highlights Page 1
Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Trade between China and the West: three
historical highlights
We examine three historical periods in human history when China and Western
nations have engaged in significant expansion of trade.
Maryan Zablotskyy
maryan.zablotskyy@erstebank.ua
Foreword
Growing trade between Western nations and China has been one of the key
factors to shape the world in the past decade. This is the third time in history
that there has been an explosion of trade volume between East and West.
Quite remarkably, two previous periods of trade expansion (206 BCE – 220
CE and 1757-1860) bear similarities in how this trade developed.
Episode 1: Han and Roman Empires, 206
BCE – 220 CE
The earliest boom in international trade came with the dynamic economic
growth of both East and West. The Roman Empire had had its first experience
with modern democracy. China was ruled by the Han Dynasty, which had
absolute power. Romans had the highest income per capita in the world,
especially in the Italian peninsula. At the beginning of the first millennium, the
Roman Empire a population of around 44mn, 8mn of which lived in the
territory of modern Italy. According to the tax census from 2AD, China had a
population of around 57mn. The empires had economies which were roughly
the same size and which each represented a quarter of the world’s GDP.
Inhabitants of Italian peninsula were then wealthiest people on Earth
GDP levels in Roman Empire, 0 AD, international dollar of the 1990s
Source: Angus Maddison: Contours of the World Economy 1-2030 AD, Essays in Macro-
Economic History (2007)
Han and Roman Empires each
had quarter of world GDP at
beginning of new era
2. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 2
Citizens of modern Italy were twice as rich as the Chinese, while many parts
of the Roman Empire also had higher income levels compared to those in
Asia. What also distinguished Romans was their overwhelming military power.
The infrastructure of the Romans was more focused on commerce (paved
roads, bridges). The Chinese, in turn, focused on building large-scale
fortifications and canals. The famous Great Wall of China was started during
the Han dynasty.
Roman citizens were richer that those of Asia
GDP per capita, international dollar of 1990s
450 450
550
600
810
China India Greece Egypt Italy
Source: Angus Maddison
Romans had overwhelming military power and
infrastructure
House prices to disposable income ratio, 2004=100
Around 0 AD Roman Empire Han Empire
Metal production
Iron 82 500 5 000
Copper 15 000 Negligable
Lead 80 000 Negligable
Silver 200 1
Inftrastructure
Road network, km 400 000 22 000
of which paved 50 000 Negligable
Brigdes 931 3
Source: wikiversity.org
The first international trade appeared between the Roman Empire and China
in the beginning of the 2
nd
century BCE. The main exchange: Roman gold for
Chinese silk. This gave the name to the famous trade route called the ‘Silk
Road’.
Many countries prospered because of Chinese-Roman trade, giving rise
to world’s first global foreign trade market
‘Silk route’, 206 BCE – 220 CE
Source: Wikipedia
Besides silk, China also traded teas and porcelain; while India traded spices,
ivory, textiles, precious stones, and pepper. The Roman Empire primarily
exported gold, silver, but also some goods, such as fine glassware, wine,
carpets, and jewels.
First global trade emerged from
Roman exchange of gold and
silver for China’s silk
3. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 3
Silk clothing was in great demand by Roman women, although it was
considered to be decadent and immoral.
“I can see clothes of silk, if materials that do not hide the body, nor even one's
decency, can be called clothes. ... Wretched flocks of maids labor so that the
adulteress may be visible through her thin dress, so that her husband has no
more acquaintance than any outsider or foreigner with his wife's body”
— Seneca the Younger, 4 BC – 65 AD
The Roman Senate issued, in vain, several edicts to prohibit the wearing of
silk, both on economic and moral grounds: the importation of silk caused a
huge outflow of gold.
"By the lowest reckoning, India, Seres and the Arabian peninsula take from
our Empire 100 millions of sesterces every year: that is how much our luxuries
and women cost us."
— Pliny the Elder, 23 AD – 79 AD
Romans had to pay in gold and silver as there was little demand for the goods
they produced. This was due to protectionist policies from China, which
emerged from its views on being a self-sufficient state. Historian Charles
Hucker, in his book on China’s imperial history, writes:
“In keeping with their domestic policies, the Chinese dynasties of the early
imperial age did not generally encourage foreign trade. It was not considered
either proper or safe for Chinese to have private intercourse with uncivilized
people, indeed unofficial travel beyond the frontiers was often deemed
treasonable”.
Still, high demand for Chinese products and the significant military power of its
neighbors made the Chinese government think that it was safer to allow
restricted forms of trade under government supervision. To maintain the self-
sufficiency of the state and still allow foreign trade, China officially traded only
with states it considered to be its vassals. Roman merchants claiming to be
diplomats from often nonexistent states visited Chinese government officials
in order to get permission to trade. Charles Hucker says:
“Tributary missions from vassal states were commonly allowed to include
traders, who thus gained opportunities to do business in the capital markets.
No doubt a large proportion of what the Chinese court chose to call tributary
missions were in fact shrewdly organized commercial ventures by foreign
merchants with no diplomatic status at all.”
What was supposed to be a protectionist policy against foreign goods turned
into a corruption scheme. Chinese government officials benefited from using
their control over foreign trade by allowing deals with western merchants
disguised as ‘diplomats’. As a result, China did experience a huge boom in
trade, but with most of the proceeds, in the form of gold and silver, going to
bureaucratic elite and little import of goods into the country. Since the elite
was afraid of losing their position and of criminal prosecution, they opted to
hoard gold and silver within their estates. There was so much inflow of
precious metal that it was used for making statues. Meanwhile, peasants were
banned from merchant activity. Additionally, peasants suffered pressure from
large landowners; in the following years, many peasants lost their land and
were forced into the service of the elite.
Demand for Chinese silk caused
huge outflows of gold and silver
from Roman Empire
Chinese governments tried to
control foreign trade
China’s state control on foreign
trade caused corruption among
officials and positive trade
balance with Western world
4. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 4
Gold and silver drained from the Roman Empire due to the negative trade
balance between the two empires. Soon Rome was finding it hard to pay its
soldiers. In addition to gold outflows, Romans were facing increasing pressure
from the tribes populating its northern borders. The debasement of currency
was one of the key ways that Rome found to pay its soldiers. As even that
was not enough, soon Rome began to rely more on barbarian mercenaries
and started giving out rights to collect taxes on its territory. That turned into a
cycle which eventually destroyed the state.
Romans debased currency to increase soldiers pay
Source: http://www.zerohedge.com/
Inflation soared due to currency debasement
Source: http://www.zerohedge.com/
The resulting fall of Rome was nothing less than a catastrophe. Both output
and population declined markedly. It was not until the 17
th
century that the
Mediterranean region saw levels of economic activity comparable to those
during the first two centuries of the first millennium. This statement is based
on levels of world lead production (a side product of silver mining) and the
number of shipwrecks found at the bottom of the Mediterranean.
After currency debasement, economy collapsed
Urban population, shipwrecks,
0
100
200
300
400
500
600
700
800
5
BCE
4
BCE
3
BCE
2
BCE
1
BCE
1
CE
2
CE
3
CE
4
CE
5
CE
shipwrecks,
city
size
0
2
4
6
8
10
12
14
total
urban
population
shipwrecks size of biggest city, tsd total urban population, mn
Source: http://www.historum.com/
World lead production recovered 1500 years later
World lead production
0
10
20
30
40
50
60
70
80
90
100
750
BCE
650
BCE
550
BCE
450
BCE
350
BCE
250
BCE
150
BCE
50
BCE
50
CE
150
CE
250
CE
350
CE
450
CE
550
CE
650
CE
750
CE
850
CE
950
CE
1050
CE
1150
CE
1250
CE
1350
CE
1450
CE
1550
CE
1650
CE
1750
CE
Source: http://www.historum.com/
Exactly at a time when the Roman Empire began the strong debasement of its
currency, China faced the start of the Yellow Turban Rebellion (184-205 CE).
This rebellion was caused by the corruption of government officials, peasants
losing their land, high taxes, and forced labor on grand state construction
projects. While the rebellion was eventually defeated, the military leaders and
local administrators gained self-governing powers in the process. This
hastened the collapse of the Han Dynasty in 220. In the aftermath of the revolt
and the fall of the ruling dynasty, China suffered economic collapse. The
population decreased from 50mn in the late 2
nd
century CE to 7.5mn in 280
CE.
5. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 5
It should be noted that there are at least four recognized theories about the
demise of Rome. The negative trade balance with China and resulting outflow
of precious metals from Rome was one of the contributing factors. The one
thing that is clear is that Romans could not keep up with rising military
expenses, while the Han Empire collapsed due to civil unrest. The next period
when trade between Western World and China resumed on large levels, was
not until the 18
th
century.
Episode 2: China, Europe and Opium Wars,
1757-1860
With the development of shipbuilding technologies, Western nations greatly
expanded trade across the globe. China again came into focus, especially for
Britain, which saw high demand for Chinese products. The first trade that
existed with China was for silks, porcelain ("fine china") and, most lucratively,
tea. China continued to restrict trade with Western Nations based on the age-
old view of China being prosperous and self-sufficient. The ruling Qing
Dynasty viewed foreign trade with suspicion.
“Our land is so wealthy and prosperous, that we possess all things. Therefore
there is no need to exchange the produce of foreign barbarians for our
own…China is the centre of the world and has everything we could ever need
and that all Chinese products were to be bought with Silver.”
Chinese Emperor Qianlong (1711-1799 CE)
China implemented the so-called Canton System in 1757. The Canton System
limited the ports in which European traders could do business with China. It
also forbade any direct trade between European merchants and Chinese
civilians. Instead, the Europeans, generally employees of major trading
companies (most importantly the British East India Company) had to trade
with an association of Chinese merchants known as the Cohong. The Cohong
was a Guild of thirteen merchants authorized by the Chinese Central
Government to handle trade, particularly rights to trade tea and silk, with the
West. They were the only group at the time authorized to do this, making them
the main controllers of all foreign trade in the nation.
The Canton System limited trade to only one port and exclusively with
the government appointed guild of merchants
The canton system ports, 1757-1842
Source: Wikipedia
China’s official policy was to
allow only payments with silver
and gold for exported products
Chine restricted trade to only
one ports of Macau and Hong
Kong
6. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 6
Britain had been on the gold standard since the 18
th
century, so it had to
purchase silver from continental Europe and Mexico to supply the Chinese
appetite for silver. The British East India Company faced a trade imbalance in
favor of China and invested heavily in opium production to redress the
balance. British and US merchants brought opium from the British East India
Company's factories in Patna and Benares, in the Bengal Presidency of
British India, to the coast of China, where they sold it to Chinese smugglers
who distributed the drug in defiance of Chinese laws. Aware both of the drain
of silver and the growing numbers of addicts, the Daoguang Emperor
demanded action. Officials who advocated legalization of the trade in order to
tax it were defeated by those who advocated suppression. In 1838, the
Emperor officials came to Guangzhou where they arrested Chinese opium
dealers and summarily demanded that foreign firms turn over their stocks.
When they refused, China stopped trade altogether and placed the foreign
residents under virtual siege, eventually forcing the merchants to surrender
their opium to be destroyed. In response, the British government sent
expeditionary forces from India, which ravaged the Chinese coast and
dictated the terms of settlement.
Britain had huge trade balance deficit with China
British East India Trade company balance
0
1
2
3
4
5
6
1761
1766
1771
1776
1781
1786
1791
1796
1801
1806
1811
1816
1821
1826
1831
Exports Imports
mn. pounds
Source: Wikipedia
British and American merchants sold opium to
compensate for the outflow of gold and silver
Opium Exports per capita from India to China
(in number of chests)
Source: http://www.nber.org/
The Chinese emperor failed to see the wisdom of his ancestors back in the
times of Han Empire, who allowed trade with West because they feared its
military power. Because they had prohibited imports and were thus deprived
of modern military technologies developed in the West, China lost the war to
Britain. The Treaty of Nanking, which ended the war, opened the way for
further opium trade, but ceded territory, including Hong Kong. The treaty
abolished the monopoly of the Thirteen Factories on foreign trade and instead
five ports were opened for trade, where Britons were allowed to trade with
anyone they wished. However, Chinese officials continued to obstruct foreign
trade, which led to the Second Opium War (1856-1860). The final Treaty of
Tientsin was signed with the following key points:
•Eleven more Chinese ports would be opened for foreign trade
•Right of foreign vessels, including warships, to navigate freely on Yangtze
River
•Right of foreigners to enter internal regions of China for purpose of travel,
trade or missionary activities.
Due to ban on legal imports,
Western merchants started
selling opium to compensate
for outflow of gold
China banned all trade, which
led to war with Britain in 1839
Lacking modern military
technology, China lost two
consecutive wars to Britain
China gave up Hong Kong and
allowed trade with West
7. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 7
The loss of two consecutive wars, the widening technological gap with
Western nations and increasing number of drug addicts came to be known as
The Century of Humiliation. The Century of Humiliation was one of the main
themes in the propaganda of the nationalist and communist movements which
later toppled the Qing dynasty in the 1920s. China regained Hong Kong from
Britain in 1997 and Macau from Portugal in 1999. These are now the only two
Special Administrative Regions of China. With the return of key trading ports,
China immediately experienced a new trade boom with the West. Thus began
the third period of trade expansion of the Western World with China, a period
through which we are currently living.
Episode 3: China, EU and United States,
2000-now
Immediately after Hong Kong joined China, trade between Western nations
and China exploded. Chinese exports rose 2.5 fold from the 1990s to 2000s
(adjusted for US inflation). During the next decade, the exports growth rate
doubled compared to that of the ’90s.
Since 2000, China’s exports growth accelerated
China’s exports
0
100
200
300
400
500
600
700
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Source: IMF
Western nations ran into large trade deficits, Asian
economies went into big surpluses
Current account balance
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Advanced economies Developing Asia
USD bn, adjusted for US CPI
Source: IMF
Export growth has been largely stimulated by government intervention. The
Chinese government has implemented artificial obstacles for rural areas: bans
on loans to municipalities and small enterprises, social care only made
available for those living in cities. This gave great advantages to companies in
large cities, who could use cheap workforce to actively compete on foreign
markets. Additionally, the Chinese government has kept its currency
exchange rate artificially low to make sure that its exports are price
competitive, while few imports come into country and large savings are made.
With the surge in savings, China has been making vast investments in
infrastructure. These investments often include large-scale projects such as
dams, roads, bridges and vast amounts of social housing. The investment
share of the Chinese economy has rapidly expanded, while household income
growth has been lagging behind GDP. The model of favoring cheap exports
and trade balance surpluses has been copied by other Asian economies, but
typically not to such an extreme extent.
China regained Hong Kong
from Britain in 1997, new trade
boom with the West started
Chinese government artificially
stimulated exports while
limiting imports
8. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 8
Investments took greater share of GDP in China
Investments, % of GDP, China
25%
27%
29%
31%
33%
35%
37%
39%
41%
43%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: IMF
China became world leader in savings
China’s FX reserves
0
500
1000
1500
2000
2500
3000
3500
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
USD bn
Source: IMF
Money no longer means gold, as the USD has taken over this role. For the
third time in history, China has become the leader in global savings of the
main means of exchange. The country currently possesses the largest stock
of foreign exchange reserves, worth USD 3.2trn. Quite symbolically, in 2012,
China is likely to become a leader in global gold consumption for the first time
since the 19
th
century. The huge bulk of Chinese FX reserves are by their
nature either deposits in commercial banks or loans to governments in other
countries. Chinese savings made it much easier for banks and governments
to get cheap funding. Chinese savings may well have contributed to the
deteriorating asset quality and lower standards of credit in Western countries.
In addition, competition with cheaper imports from Asia made life difficult for
many businesses in the developed world. Chinese demand for investments,
particularly in the construction sector, has pushed up commodity prices and
further widened the trade deficit in more advanced economies. China’s rising
savings and their likely contribution to the banking crisis of 2008/09 were
definitely not the sole reasons for the Great Recession. The economic crisis of
the recent years is a broad and complicated phenomenon. But the rising trade
deficit between West and East was one of the imbalances that likely facilitated
the economic downturn.
Lucrative lending soared in US since negative trade
balance with China expanded
US subprime mortgages, USD bn
Source: http://emlab.berkeley.edu/
Energy prices skyrocketed on growing demand
from China
Energy price index
0
50
100
150
200
250
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Source: IMF
China is again global leader in
savings
Rising trade deficit between
West and East was an
imbalance that likely facilitated
economic downturn
9. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 9
Summary
There are three known historical periods during which trade between Western
and Eastern worlds has gone though explosive growth (206 BCE-220, 1757-
1860, 2000-now). Each time the West has seen widening trade balance
deficits and China ran trade surpluses. During three historical periods of
expanding trade, China become the global leader in savings of the main
global medium of exchange (be it gold, silver or the reserve currency). China
sustained its positive trade balance via government intervention, which came
at a cost to people’s income. In each of the three episodes, China has used
its proceeds from foreign trade surplus for large-scale construction projects
inside the country. The Great Wall of China and the vast difference between
the prosperity of Hong Kong and Mainland China are remnants of two
previous failures of the West to create sustainable and balanced economic
relations with East. In previous history, no country received greater damage
from China’s restrictions on trade than China itself. The Chinese people were
dissatisfied with their incomes and the whole country lagged in technology
compared to the West. In the past, this has led to revolts in China. Since
2010, the Chinese government declared a change in its policy, promising to
change the economic structure more in favor of domestic consumption.
Should this actually be done, the negative trade balance may diminish and the
West will find much more demand for its products. The EU, United States and
developing Asia may find themselves on the path of great prosperity should
trade become free and thus break the two-thousand-year-old unsustainable
economic model.
During three historical periods
of expanding trade, China
became global leader in
savings of main global medium
of exchange (gold, silver or
reserve currency)
Both EU, United States and
developing Asia may put
themselves on path of great
prosperity should the trade
become free and thus break the
two thousand year old
unsustainable economic model
10. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 10
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Central Bank and International Sales
Head: Christoph Kampitsch +43 (0)50100 84979
Abdalla Bachu +44 207623 4159
Antony Brown +44 207623 4159
Sales CEE
Tomasz Karsznia +48 22 538 6281
Pawel Kielek +48 22 538 6223
Piotr Zagan +43 (0)50100 84256
Institutional Sales Slovakia
Head: Peter Kniz +421 2 4862 5624
Sarlota Sipulova +421 2 4862 5629
Institutional Sales Czech Republic
Head: Ondrej Cech +420 2 2499 5577
Milan Bartos +420 2 2499 5562
Radek Chupik +420 2 2499 5565
Pavel Zdichynec +420 2 2499 5590
Institutional Sales Croatia
Antun Buric +385 (0)6237 2439
Institutional Sales Hungary
Norbert Siklosi +36 1 235 584
Institutional Sales Romania
Head: Ciprian Mitu +40 213121199 6200
Ruxandra Carlan +40 21 310-4449 612
Institutional Solutions and PM
Head: Zachary Carvell +43 (0)50100 83308
Brigitte Mayr +43 (0)50100 84781
Mikhail Roshal +43 (0)50100 84787
11. Erste Group Research
CEE Special Report: Trade between China and the West
30 November 2012
Erste Group Research – Trade between China and the West: three historical highlights Page 11
Published by Erste Group Bank AG, Neutorgasse 17, 1010 Vienna, Austria.
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