Trade, Specialisation and Coronavirus

The biggest issue in the current economic crisis is globalisation. Internet communication and container shipping have allowed the business world to massively increase specialisation in production.

In a traditional society, people often lived by subsistence. They did not depend on any other people for survival, because they grew or produced everything that they consumed. If they could not grow or make it themselves, they did not have it. Living on subsistence allowed the people to be self-sufficient, but this was quite limiting, because they spent so much of their lives producing food and shelter, they did not have time to develop and make other products that they may want.

The development of trade changes everything, because it allows people to specialise. Each one does what they are most skilled in doing. By focusing on one task, each person could increase their skills and find ways to do a task more efficiently. The person who specialises can produce more than they need to survive. They can trade their surplus production with others to get all the things they want. Trade improves the situation of almost everyone.

The industrial revolution gave the world new technology, but many of its benefits came from specialisation that made the production of goods and services more efficient. Over the last fifty years, a massive increase in specialisation and trade has occurred. This trade and specialisation makes most people better off, it has linked different parts of the world much closer together.

The production of goods has been split up into its different tasks and shifted to countries that can do them most efficiently. Engineering design for a product might be done by a services company in the United States. The marketing might be organised from France. Manufacturing tasks have been shifted to countries in Asia, where labour is much cheaper. This specialisation often produces greater efficiency, which results in cheaper good.

The components that are used in a product will be manufactured by different companies in different countries. By specialising in one type of component and supplying them to numerous producers for various similar products, they can become more efficient in what they do. The companies that assemble products have specialised in developing efficient production lines.

This division of labour enhances life in cities. Without the benefits of specialisation and trade and specialisation, life in a modern city would be impossible, even for those who live simply. No modern city or country has the capital equipment and the range of skills needed to manufacture the full range of products that people need and want. The only way that it can maintain modern lifestyles is to specialise in a limited range of activities, sell the surplus produced, and use the income to pay for the other goods and services that are needed. These will often be imported from other countries, so some of the surplus production will have to be exported to pay for it.

Risk
The risk of specialisation is that it makes people and business dependent on other people and businesses. That is a good thing.

With the highly globalised specialisation of the modern economy, this dependency extends across the world to many other nations. The supply chains of many large producers extend to businesses in countries all over the world. This specialisation has allowed increased efficiency and reduced costs, but the risk of dependency has also been vastly increased.

The risk has been exposed by the emergence of coronavirus in China and Europe and government actions to slow its spread. The quarantining and closure of businesses in China has disrupted the supply chains of businesses all over the world, contributing to the current economic downturn. Quarantines in other countries will exacerbate this situation.

This risk of depending on producers on producers on other sides of the world was always obvious, but it was probably downplayed for the sake of profits.

Many businesses are now saying that they want to pull back from globalisation and rely only on local suppliers. People are saying that they want to be self-sufficient. Reducing the risks of globalisation may be sensible, but we need to be careful how far we take this.

A significant reduction in specialisation and trade will reduce the efficiency of production, which will contribute to a sharp increase in costs and the prices that consumers have to pay. No business or nation has the capacity to produce everything needed to sustain the modern lifestyle. This makes full specialisation impossible. If a phone manufacturer tried to make all the components needed, the cost of production would be much greater. Most businesses would not be capable of efficiently producing all the components need.

Even the United States does not have sufficient capital and skills to produce the full range of goods and services needed to sustain life in an American city. If America attempted to be self-sufficient, living standards would suffer as the benefits of the division of labour and specialisation disappeared.

Moving all production back to the United States is probably not practical. The much smaller market would not support the level of specialisation that has produced the cheap consumer goods that we now take for granted. If businesses had to produce all components of their products internally, they would be much less efficient. Skilled people will have to engage in a broader range of activities, so they will become less efficient at doing some of them.

The other problem is that the skills needed for making some components of consumer goods no longer exist in the United States. Even if people could be trained up to do them, US employees will not do these for the wage rates for which they are done in Asia and Africa.

Global specialisation is beneficial, but it is also risky, because it is vulnerable to epidemic diseases, wars and political interference. However, full self-sufficiency is not practical either, because it would be too costly. We need a balance between the risks and benefits.

In the short term, government efforts to slow the spread of coronavirus will cause a massive contraction of the globalised activities, causing shortages of components needed for production and some consumer goods. Efforts to short circuit specialisation and globalisation will push up the cost of production.

In the longer term, following the coronavirus experience, that balance might shift toward more self-sufficiency, but some degree of specialisation and dependence on global trade will always be unavoidable.

Trade with China (2) Boxer Rebellion

Chinese opposition to the foreign intrusion in their country continued, just as American settlers got tired of British interference in the colonies. In 1900, the Boxer Rebellion broke out. Peasants who felt betrayed went on rampages against the foreigners who were taking advantage of them. Westerners only know about the Boxer Rebellion from the movie 55 Days in Peking, which gives a rather slanted view of the events.

The first clash was with the Germans, but the crisis quickly escalated and the largest international force that the world has seen was despatched to put down the rebellion. In June 1900, the Boxers laid foreign legations in the Chinese capital, including the embassies of Russia, France, Japan, the United States. By early August, a multinational coalition of nineteen thousand soldiers, including British, French, Japanese, Russian, German, Austrian, Italian, and American troops, was mobilized from Tianjin, which had been occupied in late July. The force reached Beijing on August and prepared immediately to attack the city gates. It entered the city on August 14 and by opening the way for British units to relieve the legation compound, quickly lifted the siege of the legation quarter and the Northern Cathedral.

The Europeans followed up by sending an even larger force to extract revenge. Vessels carrying roughly ninety thousand European, soldiers, among them twenty-two thousand Germans, arrived in Tianjin. Although the Chinese armies had been defeated, the allied army carried out seventy-five “punitive expeditions” around Beijing and Tianjin. These were directed against the general population.

Almost immediately after their arrival in China, members of the eight armies turned to looting. It began with the occupation of Tianjin in late July and stretched well into October 1900 in Beijing. Later, diplomats and missionaries joined the soldiers in looting. The sack of Beijing was similar to what had occurred at the Summer Palace forty years earlier, as “loot fever” took hold among the foreigners The ensuing phase of uncontrolled plunder affected not only Beijing and the new Summer Palace on its western outskirts, but many other cities and towns in the province of Zhili. The German commander Waldersee admitted quite frankly in a November 1900 diary entry the extent of damage and destruction inflicted by looters on Beijing and other wealthy, centuries-old cities.

By the permitted plundering for three days after the occupation, which was followed by private plundering the population of Beijing suffered great, not even quantifiable material damage. Each nationality assigns to another the palm in the art of looting; but the fact remains that they have plundered thoroughly... There is now a rich trade going on with the objects acquired in the plundering. Already traders, namely from America, arrived making fortunes... If one is so naïve at home to believe that all this was done for Christian culture and propaganda, he will be disappointed.

From 1900 to 1902, Beijing and Tianjin were placed under foreign occupation. Barracks were built in Tianjin to house thousands of foreign troops, and a provisional government was set up there by the allied forces. (185)

The Boxer Protocol was forced on the Chinese a year later.

The Chinese government also had to prohibit by law the founding of anti-foreign societies. The nations that had against the uprising gained the right to post permanent garrisons in North China. The most devastating clause, however, concerned the huge indemnity of 450 million tael, excluding interest, which far exceeded the Qing government’s annual budget of 250 million tael. This sum represented the sum submitted by other countries for military expedition costs, damages to property, and lives lost. There was, however, no process by which the validity of the claims and their amounts was assessed requirement to make this large annual payment mortgaged the budgets of Chinese governments tor decades to come, with significant consequences. (185)

The Chinese government was forced to pay all the expenses of the nations that had invaded them and looted their wealth. The collapse of the government a few years later led to the nation being split up and ruled by cruel warlords for a couple of decades.

The people of the United States and Europe have forgotten these events, although they enjoy seeing Chinese artefacts in their museums and antique shows. But the Chinese have not forgotten. So when they rip off Western companies, they are just doing what was done to them by Christian nations a century earlier.

Trade with China (1) Opium Wars

The efforts to negotiate a trade deal between the US and China seems to be failing. Many Americans are angry because they believe that the Chinese are cheating and ripping off their businesses.

Before judging, we should read a bit of history. The early Chinese experience in dealing with the nations of the West was not that great. (The quotes come from Making China Modern by Klaus Muhlhahn).

In the nineteenth century, British merchants were importing exporting opium from India and selling it in China. The Chinese government was concerned about their impact that opium was having on their people, so they closed the border to British merchants. The British were upset by this action, so they sent gunboats.

In June 1840, with the arrival of a British fleet at the mouth of the Guangzhou River, the first Opium War began- The war lasted almost two years and was a complete disaster for the Qing empire. By the summer of 1842, the British fleet celebrated victory as it reached the Yangzi, and prepared to shell the old capital, Nanjing, in central China. The Qing court capitulated shortly thereafter. Negotiations with the British were held onboard a British ship and in a small temple just outside of the city walk of Nanjing. (94)

The Treaty of Nanjing (August 1841), the first of the so-called unequal treaties, opened China to the West and marked the beginning of a growing western dominance in the nation. According to its terms, the Qing had to open Guangzhou and tour other ports for direct trade between foreigners and Chinese. The island of Hong Kong was ceded to Britain in perpetuity and China agreed to pay twenty-one million silver dollars in reparations British merchants who had been driven out of Guangzhou. Twenty-one million silver dollars represented a considerable burden for the already strained Qing treasury. A supplementary treaty signed the following year gave Britain extraterritoriality—that is, full exemption from local laws for all its subjects in China. In 1843, France and the United States, and in 1858, Russia, negotiated treaties similar to England’s Nanjing Treaty, including provisions for extraterritoriality (94).

A second Opium War was fought between 1856 and 1860.

After the first Opium War, the city of Guangzhou became a center of anti-European agitation. The literati of the city’s great academies protested against “barbarians” entering the city. A movement emerged in Guangdong province, promoting the fortification and militarization of villages and small towns for self-defense.., Local society rose up against the European presence, to protect their economic interests and their homeland. (95)

When a British ship was captured, the government did not hesitate to start planning a reprisal.

What happened next was unprecedented. France and Great Britain formed an armada the likes of which the world had not yet seen. The fleet that departed for North China in the summer of 1860 numbered 41 war vessels and 143 transporters, carrying 24,000 Indian, British, and French troops artillery, and engineers; thousands of horses and mules; and thousands of support personnel. (98)

The Chinese lost all the ensuing battles.

The empire had to watch helplessly as even the capital Beijing was occupied in mid-October 1860, driving the Xianfeng emperor out of the city to his summer palace at Chengde. The Qing army lost over five thousand men...

After occupying Beijing, the troops set out for a palace complex on the outskirts of Beijing called Yuanmingyuan (the Garden of Perfect Brightness) built by the Qianlong emperor at the height of the Qing empire. In revenge for the Qing military’s violence against the thirty-nine English and French prisoners it had captured, Lord Elgin ordered the British army to destroy and burn Yuanmingyuan to the ground. It took two full days of burning and demolition to destroy the hundreds of exquisite palaces and buildings in Yuanmingyuan. Ironically, this had been a palace complex, perhaps the only one in the Qing empire, that featured a section of European-style buildings, fountains, and formal gardens. Called “Western Mansions” (Xiyang Lou), it was modelled on Italian baroque architecture, which the Chinese had become acquainted with from drawings and descriptions by Italian and French missionaries At the center of Western Mansions was a Mediterranean-style landscape of fountains, basins, and waterworks surrounded by a palace, pavilions, aviaries, and a maze. This section of the palace reflected Qing China’s curiosity about foreign objects and interest in foreign civilizations. The gardens also had hundreds of Chinese-style palace buildings—art pavilions, pagodas, temples, and libraries—as well as Tibetan and Mongolian-style buildings.

Before burning the rich and lavishly appointed palaces, British and French soldiers and officers carried away as much loot as they could. A French soldier wrote: “I was dumbfounded, stunned, bewildered by what I had seen, suddenly Thousand and One Nights seem perfectly believable to me. I have walked for more than two days over more than 50 million worth of silks, jewels, porcelain, bronzes, sculptures and treasures! I do not think we have anything like it since the sack of Rome by the barbarians.” (99)

Imagine if the Chinese had sailed up the Thames and looted Windsor Castle of all its treasures. Would that ever be forgotten?

The 1858 and 1860 treaties extended the foreign privileges granted in the first Opium War and confirmed or legalized the developments in the treaty-port system. Great Britain, France, Russia, and the United States would die right to establish embassies in Beijing, marking the first opening of and France of eight million taels of silver each, and compensation to British merchants of three million taels of silver. Eleven additional ports were opened to foreign residence and trade, including Niuzhuang, Tamsui (Taiwan), Hankou, Nanjing, and Tianjin. The lease of the Kowloon peninsula was ceded to Great Britain. Foreigners, especially merchants and missionaries, were allowed free movement throughout the interior. Hardest to swallow for Qing authorities were not necessarily the economic rights given to western governments, such as trade and the opening of treaty ports, but the non-economic political privileges that affected the stability of social order. Chief among them was the legalization of opium, which would all but guarantee a deepening of the social and economic problems caused by opium addiction. (101)

The British and French used military power to get the monopoly over drug dealing in China.

Economic Life (9) Honest Trade

All buying and selling must be done honestly.

Do not have two differing weights in your bag—one heavy, one light. Do not have two differing measures in your house—one large, one small. You must have accurate and honest weights and measures, so that you may live long in the land the LORD your God is giving you. For the LORD your God detests anyone who does these things, anyone who deals dishonestly (Deut 25:13-16).

This command was given in a context where coins were not available for trade. Payments for purchases and sales were made by weighing out gold or silver. A clever way to defraud people was to use scales that weighed light when making payments and a different set of scales that weighed heavy when getting paid.

The command applies to everyone who is selling goods or services. They must represent the stuff that they are selling. Selling flawed goods as if they are good quality is wrong, because “God detests anyone who deals dishonestly”. There should be no “rip-offs” among God’s people. They should be known as honest traders giving "value for money".

We are not entitled to take whatever price we can get, even if it is greater than we think that the goods are worth. Nor are we entitled to pay the lowest price possible, if less than we thing the good is worth. We cannot buy goods from China and just ignore the fact that the people who made them were paid a pittance.

Two comments are common in business:

1. 1. Let the buyer beware.
2. 2. What the market will bear.

They have no place amongst God’s people.

This command has a broader application. It means that bank policies that inflate the currency are immoral. In biblical times, kings devalued their coins by mixing silver into gold coins and other cheaper metals into silver coins. The coin appears to have the same value, so people still use it, but the king has stolen some of their gold or silver. This is immoral. In modern times, currencies are deflated by central bank policy, but the consequences are the same. People holding the currency are robbed of some of their wealth. Inflation is always immoral, regardless of means used.

The person with the scales has the power. Most people dealing with them would have to trust their honesty, because they would not be able to afford their own scales. God gets really upset when people with power use it dishonestly.

Kings and central banks have power. God detests counterfeiting coins and he detests central bank money creation because they are the same economic transaction in different form.

Trade

From an individual point of view, every trading transaction has two parts. In the first part I sell something, which I no longer want, in exchange for money. However, I really don’t want money. I want something else that I can use. I use the money to buy the thing that I really want. The full transaction is not complete, until I have bought it. Buying is the second part of the transaction.

A transaction consists of two parts: selling and buying. After the transaction is complete, I am better off because I have replaced something that I did not want with something that I wanted more. Both the buyer and the seller are better off, because they end up with something they value more than what they gave up.

A link with the first part of the transaction that allows the second part of the transaction is essential. In the example above, money provides the link between the two parts. When I sell my goods, I accept money in return, because I expect that I can use the money to get what I want to complete the transaction.

I only hold the money for a short time. I start with something I did not want. I end up with something that I wanted more. The money is my security for the short time between the first part of the transaction and the second part. Money allows exchanges to to happen.

Holding money is quite risky. Once I have handed over my thing to the buyer, I cannot get it back, but I cannot be certain that I will be able to buy the thing that I want with the money. If no one will accept the money in exchange for what I want, I will be left with nothing useful (I did not want money). Once I have made my purchase, the risk is gone, because I have the thing I wanted. The risk has passed to the person who takes the money from me.

The possession of money is a sign to other people in the society that a seller has completed half a transaction, by giving up something. It allows him to buy something from someone else to complete his transaction. Money is a record of a half-completed transaction.

More at Trade.