Trade Wars

  Trade and GDP Growth after WWII 
 1945 - 1982

US became more open since 1980.

Since 1945 and before 1982, the US experienced 7 recessions in 35 years, about once every five years.

 1982 -

Since 1982, the US had three recessions, about once a decade. US economy was much more volatile before 1982, but has since been growing at a much more stable rate. But the growth rate has declined probably due to trade deficits.



In 1982 US unemployment peaked at about 11%, and has since declined especially after NAFTA (1994).


Trade Wars 1. Trojan War

 Trojan war

Trojan war was probably a trade war. It was supposedly waged by the Greeks over one woman, Helen, according to Homer, around 1200 BC, about the time of Moses' exodus from Egypt. (Queen Helen of Sparta was kidnaped by Trojan prince Paris, or they eloped together. Helen's husband Menelaus convince his brother Agamemnon to lead a fleet of more than 1000 ships from the Hellenic world.)

It is a romantic story, but it is difficult to believe that a King would mobilize a thousand ships just to bring back one beautiful woman. There may have been an economic motive; Apparently, Troy was a trading port. There were some trade between Mycenaeans and Trojans, and Troy was a major trading post as the people of Troas controlled the trade routes to the Black Sea.

The real motive of the Greeks to destroy Troy may have been to control the maritime trade in the Aegean Sea. That is, Trojan War was probably a trade war.

Agamemnon's death mask, Archeological Museum of Athens

© Ancient columns off the coast of Troy, Turkey

Homer noted that Trojans were polyglots, i.e., they were maritime traders and Troy was a state of Dardania in Anatolia (Turkey Today).

Greek helmet, British Museum


Achilles and Patroclus, Altes Museum, Berlin

© Ruins of a theater in Troy, Turkey. Theaters and amphitheaters were common among the Greeks.

A grinding stone used by Trojan women.

Alabaster figurines from Troy (Anatolia)

Punic Wars and the alphabet (264 - 146 BC)

The Phoenician script emerged around 1050 BC. They were building palaces in Crete in 1600 BC. Greeks adopted the Phoenician alphabet in the 9th century BC.

Roman expansion in the Mediterranean Sea made it necessary for Romans to compete for hegemony. History shows this conflict ended with a compromises. The Romans prevailed politically, but adopted the Phoenician alphabet.

The Romans spread its Latin scripts throughout the Empire, which were a derivatie of the Phoenician script.

Likewise, the Greek peninsula was conquered by the Romans. Athens and other Greek cities were crushed by the Roman general Sulla (88 BC), but the Romans have since borrowed Greek's attitude toward science and philosophy.



  2. The Fourth Crusade (1202-1204) was a Trade War
The first three crusades

Kingdom of Heaven (2005) is a fictionalized account of the Battle of Hattin and the siege of Jerusalem in 1187 before the third crusade. Hattin was located between Sephoris and Tiberias.

ruins of Sephoris

(i) First crusade (1095-1099): Out of about 100,000 individuals, 12,000 crusaders reached and captured Jerusalem. Knights Hospitaller had been founded in 1070 to aid injured pilgrims. After the crusade, it was turned into a military order. Subsequently, Knights Templar was created in 1119 (Subsequently, many Knights were arrested on Oct 13 (Friday), 1307, and dissolved by Pope Clement V in 1312).

Second crusade (1145-1149): It was necessary to recapture Edessa to keep Muslims away from Jerusalem. The French and German armies were defeated separately by Nur ad-Din (sunni) in 1146.

Afterwards, Nur ad-Din took Antioch (1149), Damascus (1154), and Egypt (1168). After the death of his uncle Shirkuh, Saladin (a sunni Muslim) became the visier of Egypt, but abolished Fatimid Caliphate and changed Egypt's allegiance to the Sunnis. After defeating the Zangid army at the Battle of Hama (1075), Saladin became the Sultan (political head) of Egypt and Syria. He abolished the Fatimid Caliphate in 1171, and changed his alliance to sunnis.

© Saladin Citadel of Cairo. Saladin became the calif of Egypt in 1174.

Knights Hospitaller was officially recognized as a religious order to take care of the pilgrims by Pope Paschal II in 1113 AD. Subsequently, it was turned into a military order in 1120.

© Casa dei Cavalieri di Rode (House of the Knights of Rhodes) built by Knights Hospitaler at the end of 13th century

Knights Templar was founded as a military order in 1119, and was soon recognized by the pape. Knights Templar was stationed at the Solomon's temple (now El Aksa mosque), consisting of poor knights. The poor knights were popular in Europe, and the Templar soon became the favorite charity organization in Europe. It became the the world's first multinational banker.

(iii) In 1187 the battle of Hattin took place near Tiberias. Raynald of Chatillon, together with all 200 of the Templar and Hospitaller Knights (except Guy of Lusignan) were executed on Saladin's orders. Saladin recaptured Jerusalem from the Christians. (see Kingdom of Heaven) He rebuilt the minbar (pulpit) of Al Aqsa mosque.

The third crusade (1189-1192) resulted in a truce between King Richard (the Lionheart) and Saladin, but Saladin died of typhus shortly thereafter, in 1193.

The 4th Crusade





Blue mosque in Istanbul (as shown in Skyfall)

During the Middle Ages, and thereafter, trade wars became more vicious. In the 13th century, there were two international trade centers in the West, Venice and Constantinople. (Italy then was not a nation state yet but was dominated by a few city states such as Venice, Rome, Milan and Florence).

Unlike the Romans, Christian kingdoms could not hold on to Jerusalem they conquered. From the previous two campaigns Crusaders realized that to conquer Jerusalem and establish a kingdom there it is necessary to conquer Cairo first. Six French envoys (knights) came to Venice and begged the doge to supply them with war galleys and transports.

After some negotiations, Venetians (The Great Council of Forty) agreed to build ships to move 4,500 knights and their horses, and 9,000 squires. They would supply provisions for 1 year. The total cost would be 85,000 silver marks. Venetians would also provide 50 armed galleys of their own and receive half of the loots.

In October 1202, 12,000 troops gathered in Venice (1/3 of the expected 35,000), but they could pay only 51,000 silver marks, not the full amount of 85,000 silver marks which they had agreed to pay for the voyage to Cairo. (The intent was to conquer the Moslem-controlled city of Jerusalem. Venetians constructed 50 war galleys and 200 ships for transportation.) While they stationed in Zara during the winter to wipe out local pirates, Alexius Angelos, a young Byzantine prince, offered 200,000 silver marks plus 10,000 Byzantine soldiers to divert the crusade to Constantinople and restore his father to the throne. (Pope Innocent III, John Moore)

Enrico Dandolo, the founder of Venetian colonial empire, supported Alexius IV, and diverted the fourth crusaders to Zara to wipe out the pirates, and then to Constantinople, a rival trading center. Constantinople fell on April 12, 1204, and the fourth crusade ended then and there. Most of the crusaders returned home with the loots. The total amount of loots was estimated to be about 900,000 silver marks. Venice got the first pick, and Venetians brought the booties from Constantinople to Venice, which were used to embellish Basilica di San Marco. See Virtual History of Venice. Venetians: 200,000 silver marks, Crusader knights kept 500,000 marks.

Basilica di San Marco, Venice.

Bronze horses looted from Constantinople, now in the Basilica.

Minneapolis Institute of Arts

What happened to Knights Templar?

Jacques de Molay, the grand master of the Knights Templar, was executed in March 1314. Instead of paying huge debts to the Knights, Philip IV sent troops to arrest and execute the Knights. Rumor has it that he cursed both Philip IV and pope Clement V. Within a year of his execution, both of them died, and in 14 years, Philip's 3 sons and his only grandson also died. The Carpetian dynasty perished with them.

© The well used for initiation ceremonies by Knights Templar

 Today Only in recent years (post-World War II era) traders have become much more civilized. Modern trade wars are waged when governments erect tariffs and nontariff barriers (e.g., import quotas and voluntary export restraints). Aggrieved nations often file a complaint with a dispute settlement body of the WTO, against the importing countries that raise trade barriers. Representatives of the trading countries argue in a civilized manner and submit evidence to the WTO.


  3. Opium Wars
First Opium War (1839-1842)

The war was inevitable because Britain wanted to import silk, porcelain and tea from China, but there was nothing Britain could export to China. As a result, silver flowed into China to pay for Britain's trade deficit. (Today, China holds about $3 trillion as foreign exchange reserve).

This is not a tenable situation. (Even if opium trade had been excluded, Britain would have found some other excuse to invade China.) As it happened, Britain grew opium in India, which was transported to the coast of China.

China's viceroy Lin Zexu confiscated 20,000 chests (1200 tons) of opium. In 1839, Britain occupied Hong Kong, and in 1842 the Treaty of Nanking was signed, ending the war. As a result, five cities were open to the British, including Shanghai. In 1898, Britain was granted an additional 99 years of rule over Hong Kong. In 1997, Hong Kong was returned to China.

Second Opium War

The British wanted the opening of all of China to British merchants, legalization of opium trade, and tariff exemption (i.e., free trade).

In October 1860, the British and French troops entered the Forbidden City, and Prince Gong signed Convention of Beijing, accepting the validity of the Treaties of Tianjin (1858), which allowed the US, Great Britain, France and Russia to establish legations in Beijing, and opening ten ports for trade. He agreed to open Tianjin as a trade port, allow religious freedom, and legalize the opium trade. (The Summer Palace, instead of the Forbidden Palace, was burned down).

Forbidden Palace, Beijing

A porcelain mural in Tianjin (天津), depicting the Second Oppium War.



  How Much China Loses from the Low Yuan Policy
Is CM a trade policy?

Currency manipulation is not yet treated as a protective instrument by WTO .

 US trade deficit: $366 billion with China, and $566 billion trade deficit overall in 2017.

In October 2011, the Senate passed the controversial currency bill, designed to punish the so-called "currency manipulators."

Low yuan policy of China has been viewed as an attempt "to take unfair advantage" over its trading partners.

 Suppose US-China bilateral trade is balanced at 3 yuan per dollar, and that China pegs the exchange rate at 6 yuan per dollar in order to maintain a trade surplus. Since yuan is undervalued, China's trade surplus rises to $3 trillion during the past 5 years. Suppose China continues this policy for another 5 years, and its trade surplus rises to $6 trillion during the next 5 years.

When is the best time for China to use surplus dollars?

(i) Never? This amounts to burning USD notes.
(ii) a decade or two later? The US economy would have reached full employment. China's spending of $6 trillion will only cause a huge inflation in the US. The purchasing power of $6 trillion then would be much less.
(iii) Now? yes.

Why China would lose?
(buy high, sell low policy)

At some point, China has to stop accumulating USD at high prices. When it does, RMB appreciates (and $ falls) to its equilibrium value (3 yuan per dollar). 

 China's International reserve asset


Suppose China continues the currency policy and buys its international reserve asset ($6 trillion). China may purchase real estates, land or financial assets in America, but the total value of China's assets in America would be $6 trillion.
Cost  China buys high (and sells low). China's cost of FX reserve = $6 trillion × 6 yuan/$ = 36 trillion yuan. 
Value of China's assets in America When China stops accumulating USD, the dollar depreciates and the yuan appreciates to 3 yuan/dollar. The total value of China's dollar assets is $6 trillion (Interest rate is close to zero in the US), but its yuan value now drops to $6 trillion  × 3 yuan/$ = 18 trillion yuan.
China's profit from Investment in America profit = Revenue (18 trillion yuan) - Cost (36 trillion yuan) = - 18 trillion yuan (or US profited $6 trillion).

Any more delay in using these surplus dollars will increase China's loss, as RMB can only rise further.

Investment is profitable only when the investors buy low and sell high.

China does just the opposite.

Also, China's public and private debt is $34 trillion (260% of GDP).

China's strategy

Use the trade surplus to invest or lend money to African countries. When they default, their ports then will be in the hands of China.

China invests in construction projects in Asia and Africa, but bring Chinese workers, instead of hiring local workers. There is little local employment effect.

China invests/buys a shoe factory in Florence, bring Chinese workers instead of hiring local Italian workers. There is no local employment effect.