Globalisation isn't dead
Part 1 of 'Re-Orientation'. Globalisation isn’t dead. It’s just being radically re-oriented, with Asia – the Orient – as its centre of gravity. That poses some crucial questions for investors.
15 Sept 2021
For well over a thousand years before Marco Polo wrote his ‘Travels’ in 1300, Europeans were aware that to their east – to their far east – lay lands of great wealth. From the time of the Han Dynasty, some 200 years before the birth of Christ, the Silk Road had conveyed to them much more than just the luxurious material by which the trade route later came to be known: the term ‘Silk Road’ was coined only in the nineteenth century. Jewellery, weapons, glassware, porcelain, spices, tea, rice and perfumes all arrived in Europe from the Orient, overwhelmingly from Imperial China.
Initially, China’s merchants had travelled westwards only as far as Eurasia, to exchange their wares for the sturdy horses of the steppes. But inevitably Chinese products went further, though they were not always welcomed by the authorities. In Nero’s Rome, in the first century AD, the Senate vainly tried to ban silk because they thought it encouraged decadence and immorality. (Mistrust could be mutual: centuries later, in 1799, China’s Emperor Yongyan vainly tried to prohibit the import of opium, branding it “a poison … undermining our good customs and morality”.)
What Rome exchanged for Chinese luxuries established a pattern that was to echo through the ages. Europe, followed by its American progeny, had nothing much of interest to offer the Chinese traders but gold and silver. For, throughout most of history, China’s continent-sized economy has usually been able to produce almost everything it needs, and more. Today, by combining low-cost labour with the economics of clustering and economies of scale, the city of Datang produces 40% of the world’s socks, Jiande Sandu produces 60% of the world’s quality umbrellas and Shengzhou produces 60% of the world’s ties.
Westerners have certainly tried to find something China wanted. As The Economist1 noted, “In 1784, the Empress of China sailed from New York on the US’s first trade mission to China. Carrying ginseng, lead and woollen cloth, the merchants dreamed of cracking open the Asian market”. However, the “real profit came on their return, when they brought Chinese teas and porcelain to America”. And thus it is today: the real profit from the China trade is made when the likes of Walmart and Apple bring Chinese-made products back to America. The world has always wanted more of what China produces than China wants from the world.
But as China gets richer and wages rise, its extraordinary self-sufficiency may be starting to change, especially at the low-added-value end of the manufacturing spectrum. South-East and South Asia are learning to produce such items more cost effectively. China may still be the world’s largest T-shirt producer (39%) but Bangladesh (12%), India (11%), Turkey (6%), Vietnam (3%) and Cambodia (3%) are rising competitors. Overall, China’s production of finished apparel goods fell from a dominant 71% of the global total in 2005 to just 29% in 2018.
Figure 1: Empress of China sailing route
Source: Luxuo. Passage of the Empress of China from New York to Canton, February 22-August 28, 1784.
The 1794 passage of the Empress of China, a journey that reconfirmed China generally had more valuable manufactured and other goods to offer the rest of the world than vice versa.
Historically, the main exception to China’s ‘make everything domestically’ rule was nation-sapping opium. ‘Chinese molasses’, as the narcotic is sometimes known, was first sold to China in the fifth century by Arab traders, but by the 1700s domestic demand was being met by India and Turkey. This Achilles Heel was to be primarily responsible for China’s post-1839 decline, ushering in its ‘Century of Humiliation’, as Deng Xiao Ping was to call it.
But generally, whenever China wanted something from foreigner traders, it had a cornucopia of products to offer in return. This meant that, before the opium trade took off, China’s structural trade surplus with the rest of the world was nearly always met with precious metals, rather than imported manufactured products. From 1565 to 1815, the world’s trade with China was typically financed with silver sourced from Spain’s colonies in the Americas, notably the Potosi Mine in Bolivia. That silver was carried on the legendary Manila Galleon to the Philippines capital from Callao in Peru, by way of Acapulco in Mexico, and then sold out of Spain’s colony to European and even, briefly, Yankee traders. Thus, these traders obtained the only acceptable specie to purchase Chinese luxuries from the emporiums of Canton. Between 1600 and 1800, an average of over 100 tons of the silver was sold into China ever year.
And so the two worlds that Columbus and da Gama connected to Europe via the Atlantic and Indian Oceans, the Americas and India and wider Asia beyond, were themselves connected by a sea-borne umbilical cord that spanned the Pacific Ocean. As Adam Smith noted in 1776 in The Wealth of Nations, “The silver of the new continent [the Americas] seems in this manner to be one of the principal commodities by which the commerce between the two extremities of the old one is carried on, and it is by means of it, in a great measure, that those distant parts of the world are connected with one another”. Hence, trade globalisation was born, with the Pacific mercantile channel facilitating much of the commerce that flowed through the Indian and Atlantic Oceans. And nearly all of this triangulated trade was centred on China.
Figure 2: Trade routes from Acapulco to Manila
Source: George Anson map from 1751. Image by Sergey Kamshylin.
The 1815 Mexican War of Independence ended the Pacific silver trade, forcing foreign traders to fall back on the one foreign item China still wanted: opium. Though Emperor Jiaqing’s 1799 edict had made opium importation illegal, the East India Company easily circumvented the ban, as did Boston traders led by Perkins & Co, who smuggled Turkish ‘afyon’ into China.
While trade between China and Western nations has never been without friction, all parties have long recognised the benefits of maintaining commercial relations, often at great cost. The Great Wall of China extends so far west precisely because China’s Emperors were determined to protect the lucrative East-West trade route. It was not an easy artery to secure: Sogdians, Türkics, Abbasids and Mongols at various times seized control of the various caravanserais along it. Unsurprisingly, the Road’s fortunes fluctuated, as did the fortunes made from it. Around 1500, a sea route was established between Europe and China – and more broadly Asia, in particular the Spice Islands of modern day Indonesia – which challenged and before long disintermediated the Eurasian land route.
Figure 3: Trade routes in the Middle Ages
Source: Map made by Martin Jan Mansson
From the Western perspective, while travellers had written of the splendour and wealth of the East long before Marco Polo, none triggered the imagination of the Europeans quite like Il Milione did – that being Polo’s nickname, as he always insisted Emperor Kubla Khan’s wealth could be ‘counted in the millions’.
Figure 4: The world’s top five cities in 1271, the year Marco Polo first travelled East to China
Source: Ollie Bye, Top five largest cities throughout history, 2017. Please note that this map has been redrawn by Ninety One.
Figure 5: Today’s Kubla Khans: 50%+ of billionaires in the world’s top 10 cities are Chinese
Source: Forbes, 2021 (data is end 2020).
On his deathbed, Polo said: “I did not write half of what I saw, for I knew I would not be believed.” Still, what he included in his book was enough. Helen of Troy may have been the face that launched a thousand ships, but Polo’s reflections on China launched many more. Two vessels were of epochal importance: Christopher Columbus’s Santa Maria and Vasco da Gama’s São Gabriel. Both mariners were seeking the fabled sea-route to China, Columbus by sailing west in 1492 and da Gama by sailing east five years later. Hoping to get rich but motivated by other ambitions too, both were driven by a desire to find a maritime route to Asia that would circumvent the tariff-heavy, brigand-infested Silk Road.
Da Gama succeeded, rounding the Cape of Good Hope and landing in Calicut, India in 1498. Columbus – who took with him a well-thumbed copy of Polo’s Travels – failed but was more than compensated when he discovered a ‘New World’ instead. Ironically, having stoked the determination of Europeans to find a sea-route to China, Polo’s words ultimately contributed – once the round-Africa route was open – to the decline and fall of his home city, Venice.
Figure 6: 1492: Christopher Columbus “leaves the Old World, following the light of the sun”
Figure 7: 1497: Vasco da Gama heads east … to find a way to the East
Source: William Swinton, First lessons in Our Country's History. Please note that these maps have been redrawn by Ninety One.
In the reverse of the impetus that had driven Han China to build a land route from east to west, Columbus and da Gama began a long history of Western mariner- merchants seeking to establish commercial sea-roads from west to east.
In 1792, after many years trying, the British were finally given permission to send a trade embassy to Emperor Qianlong at his summer retreat at Chengde, near Beijing. It was an abject failure. As Qianlong wrote to George III after the embassy’s leader, Lord MacCartney, had departed empty-handed, “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 produce”.
Since Imperial Rome and increasingly since Deng Xiao Ping opened China’s doors again in 1979, the same basic dilemma has usually prevailed: China has more of what the West wants than China wants in return. Before 1815, the deficit was settled in silver; after 1815, it was settled in the ‘white gold’ of opium; today, China’s US$530 billion surplus – of which the US accounts for US$317 billion – is settled largely in US dollars.
Grappling with this imbalance has plagued the West’s commercial dealings with China for over two millenia. What does the West produce that China wants that is of sufficient worth to pay for all the items the West wants from China? Indeed, one might ask what the world produces of sufficient value to settle its trade account with China. As the chart below shows, aside from commodities (mostly oil from the Middle East and minerals from the Southern Hemisphere and Russia) and a few specialist items (microchips from South Korea and Taiwan, and robots from Japan – items China is determined to produce itself in the coming decade), China wants for very little.
China surpassed the US to become the largest value-added manufacturer in the world in 2010. By 2018, it accounted for 28% of all global production. Today, it produces about two-thirds of the world’s air conditioners, televisions and microwave ovens, and about half of its refrigerators and washing machines. China is again the workshop of the world.
Figure 8: China’s trade balance: China’s biggest trade deficits/surpluses by country & region
Source: IMF, 2018.
A point of clarification: a large percentage of Chinese goods enter the EU via a Dutch holding company. China’s resulting US$61 billion trade surplus with the Netherlands partly covers China’s deficits with other eurozone countries, especially Germany. In all, China’s surplus with the EU is about US$100 billion. Hong Kong creates a far bigger ‘Netherlands effect’, since a large amount of Chinese trade with the rest of the world is routed through the territory, and hence China’s vast surplus with Hong Kong partly disguises the scale of the deficits other countries have with China.