Trade Imbalances & Great Power Competition from the 18th Century
History Does Not Repeat Itself, But It Often Rhymes
18th-century Britain had a problem. The British loved their tea, shipped from China and sipped in vast amounts by both the aristocrats and the less-washed masses. But, they were running a large trade deficit with China and paying in silver and gold, the coin of commerce at that time. At one time, they were paying more gold for tea than the East India Company was making in India.1 China had become their largest trading partner in the 18th century, trading tea/porcelain/silks for gold and silver. In an attempt to address the bilateral trade imbalance, they decided to send a mission to the Middle Kingdom. China at that time was closed to the rest of the world, except a small yard with high fences in Canton (Guangzhou), where traders from 13 trading firms (also called factors by the East India Company) were confined.2
The British sent a mission for trade talks, the Macartney Mission of 1792-1794, led by Lord George Macartney. They aimed to dazzle the Chinese with advances in British technology and induce them to open additional Chinese ports (beyond Macao) to British trade, establish a permanent diplomat in Beijing, and ease the tight Canton trading rules. The Qing dynasty ruled China at that time and was at the peak of its power. However, since the time of the Xuande Emperor (Emperor Xuanzong of the Ming Dynasty), China had become increasingly isolationist, driven by a belief in the virtues of self-sufficiency and a fear of internal instability.
The Industrial Revolution was well underway in Britain, and technological advances had nearly propelled it to the position of global hegemon. The Macartney Mission carried a hot air balloon, a diving bell, and an entire planetarium to showcase their mastery of air, sea, and the very universe. They did have one potentially fatal problem. No one spoke Mandarin. Luckily, part of the delegation was George Staunton, son of George Staunton, and who had an 11-year-old boy, called what else but George Staunton. Now, George Junior has taken a few lessons in Chinese from Jesuit priests. Like all fathers, George Senior thinks his kid is a genius and believes he is fluent in Chinese. Only in China does the delegation realize that rumors of George Junior’s fluency are greatly exaggerated.
When they reach Beijing, they discover that the Qianlong Emperor has retired to Jehol (Chengde) for the summer. So they saunter off on a side trip to the Great Wall, where George Junior pockets some stones as a souvenir. The party marvels that the Wall has deterred marauders. They miss the inconvenient fact that it failed to keep out the Manchus, now sitting on the throne as the Qing dynasty. When they get to Jehol, their most dazzling gifts are either languishing in Beijing or still packed on ships near Canton. They arrive bearing the diplomatic equivalent of tourist tat and discounted M&S socks as a Christmas present.
What Macartney has managed to carry is a spotted mulberry velvet suit, with peacock feathers crafted to make the Qing Emperor swoon with envy. After interminable haggling over how much and how far Macartney should kowtow to the Emperor, they are finally granted an audience. Spot the suit and linguistic legend George Junior.3
Originally, they planned to have Macartney fly over Beijing in a mulberry suit on a hot air balloon. Picture that for a moment. They do have a letter from King George III saying that the supreme emperor of China is worthy to live tens of thousands and tens of thousands of years (so 20,000?) and that the British mission was a means to better their own civilization.
Our ardent wish has been to become acquainted with those celebrated institutions of your majesty's populace and extensive empire which have carried its prosperity to such a height as to be the admiration of all surrounding nations.
China was the largest unified empire in the world, undefeated in all of the wars it had fought with its neighbors since the seventeenth century. Each year, tribute emissaries from Burma, Korea, Vietnam, Japan, and other territories trekked to Beijing to pay their respects to the Chinese throne. In return for obeisance and tribute, the Qing government condescended to allow these far-flung “vassal states” to enjoy trade with China and extended protection to their monarchies.
The Chinese see the British as barbarians and Macartney as a self-important tributary emissary and reject all their requests without discussion or debate.
As your Ambassador can see for himself we possess all things. I set no value on objects strange or ingenious, and have no use for your country's manufacturers….Should your vessels touch shore, your merchants will assuredly never be permitted to land or to reside there, but will be subject to instant expulsion. Do not say that you were not warned in due time! Tremblingly obey and show no negligence!
The edicts given to the mission ask them to leave. But because they cannot read the edict, they think the negotiations are going spectacularly well, and they continue to hang around. Eventually, the Chinese start packing their bags because the British are not doing it themselves.
The mission was a complete and utter diplomatic failure. Two of the biggest empires had met and spectacularly misunderstood each other. Macartney’s valet kept a diary which accurately noted “we entered as paupers, remained as prisoners, and quit as vagrants.” China misses opportunities in diplomacy, trade, and industrialization, choosing isolationism and technology pessimism. The British spectacularly misread the Chinese, having little knowledge of their culture, language, and values.
Under pressure to correct the trade deficit, the British eventually decide to sell opium grown in India4 in exchange for tea. A couple of roguish Scots, Jardine and Matheson, play a critical role in the rise of the opium trade and the subsequent opium wars. If you have stayed in Mandarin Oriental, shopped at 7-eleven, bought a Mercedes at Cycle and Carriage, scanned a QR code with the yuu app, that is them. After amassing a large fortune from the opium business, William Jardine uses his wealth and influence to sway the opinion of both the public and the government towards war. Through meetings and correspondence with Lord Palmerston, Jardine masterminds the military strategy and convinces the British to send the HMS Nemesis, the first iron warship, triggering the First Opium War.
From the first opium war to its eventual independence in 1945, this is the Century of Humiliation - military defeats, unequal treaties, the loss of Chinese territory to foreign colonizers, and eventual occupation by Japan.
The Rhythms of History
The parallels should be obvious by now. Again, we have a global power, the US, running a bilateral trade imbalance, seeking concessions on trade and foreign exchange, with threats of export controls. Unlike the British, the Americans are not as constrained with respect to fiat currency, as they can simply conjure up dollars almost magically. But at its core, there remains a fundamental misunderstanding of China’s resolve to mobilize “new quality productive forces” (新质生产力), to dominate the industries of the future, their willingness to “eat bitterness” and not be deterred from winning the game of chicken with the Trump administration.
They did not blink in the face of the Trump tariffs, and Trump furiously backpedaled, fearing empty shelves, heightened inflation, and rumbles in the bond market. Just last week, China used restrictions on rare earth to get the American delegation to roll back restrictions on visas and restrictions on chips. The agreement in London was comically vague, with Trump asking for a handshake deal. Trump’s willingness to announce big tariffs and then pause and walk them back without major concessions from trading partners is both a good thing5 and makes the administration seem deeply unserious. He has created uncertainty about uncertainty.
When China examines the current geopolitical landscape, it is through the lens of this century of humiliation, not the Thyucidides Trap6. The Made in China 2025 policy is about never being left behind by the industrialized West and dominating next-generation technologies. American naval operations in the South China Sea trigger memories of the rampage by the HMS Nemesis. Foreign criticism is perceived as international bullying. This is true in India as well. Colonization in both countries simmers in the background, evoking a deep sense of historical anger and injustice.
To paraphrase Voltaire, the present is saturated with the past and pregnant with the future. The salience of trade deficits, the moral outrage, the cultural misunderstandings, the use of technology to open up markets, the feelings of national pride, and the pursuit of self-sufficiency all feel stubbornly familiar.
There is a lot more to this story. The Caribbean slave trade was driven by the need to grow sugar in plantations that would be added to tea. The tea tax was also an important source of revenue. Recall demand is inelastic, so they merrily raise taxes to 100%. The American colonists rebelled against the Tea Act of 1773 - taxation without representation - leading to the Boston Tea Party and ultimately to the founding of America. Gavin Newsom this week said that California contributing more to the Federal tax coffers was taxation without representation.
By the way, this is the origin of the term factories.
George Junior later rose to become a pre-eminent China expert. He was also one of the few who opposed the First Opium War.
George Orwell, who wrote Animal Farm, was born on a poppy/opium farm in North East India.
Mao Zedong in October 1949 famously proclaimed, “Ours will no longer be a nation subject to insult and humiliation. We have stood up.”