This is part 1 of 3 parts.

The Americans, who now dominate global trade, economics, and finance, took over from the British-Dutch, who took over from Spanish-Portuguese domination.

What is behind the crisis between China and America? There is the present face: the clash of interests and visions and fears between the two countries, chronicled in the press every day. But there is also a longer, almost existential aspect in all this – China’s difficulty escaping its own history in dealing with the rest of the world. This spelled disasters in the past. But to see this we have to go back some 450 years.

On June 24, 1571, the conquistador Miguel Lopes de Legazpi arrived in Manila in the Philippines and declared it a territory of New Spain, belonging to the kingdom of Spain. He then pushed back the influence of the sultan of Brunei, who was the local power; and also displaced the local Chinese traders, who had established themselves without government support in Manila[1].

At the same time, just a couple of months later, on October 7 of the same year, the Holy League led by Spain managed to check the Turkish advance in the Mediterranean in the battle of Lepanto. It was the first time the Turkish advance against Christianity had been stopped since 1453, when the Turks had taken over Constantinople and blocked European access to the trade with India and China. The conquest of Constantinople had prompted the search for an alternative route to East Asia that eventually led to Columbus’s discovery of America.

After the half victory in Lepanto, with the Turks partly subdued, Spain had enough resources to concentrate elsewhere. Although the Turks continued to be a threat in the Mediterranean, they were no longer advancing, and Italy was no longer in danger of a Muslim invasion.

Spain took advantage of the relaxed atmosphere to develop Manila as a large port trading gems from India, spices from what is now Indonesia and, most importantly, silk and porcelain from China. Chinese silk was the most important luxury good in Europe at that time. It was used to manufacture the best dresses, gowns and robes for the aristocracy. Spain paid for it in silver mined from Mexico.

The Ming

It was the beginning of the first real global trading system, in which Spain distributed goods from all over the world and bought them with American silver. The Spanish silver at that time saved the Ming economy. Industrial output of silk and porcelain boosted production and the economy at a time when China was approaching a fiscal crisis because taxes were not enough to pay for state expenditures. Silver soon replaced paper notes, the value of which had collapsed in the previous years. China’s economy changed structure: it exported and imported more from abroad.

As Timothy Brook writes in his 1998 book The Confusions of Pleasure: Commerce and Culture in Ming China, “Silver had been flowing into the Chinese economy from Japan during the middle decades of the sixteenth century, when it was augmented by bullion from South America. The lifting of the ban on maritime trade in 1567 to all but Japan (in response to the petition of Fujian governor Tu Zemin to legalize the large foreign trade coming in and out of Moon Harbor on the south Fujian coast) coincided with the Spanish conquest of the Philippines in the late 1560s and the opening of the huge silver mines in Potosí (in present-day Bolivia) in the 1570s.”

This situation possibly inclined the Chinese court to listen to Matteo Ricci and his Jesuits, who came from that world and would help the Ming emperor to understand what was going on in that world.

In fact, silver from Spain buoyed the Chinese economy for some 60 years. However, from around 1620 and most consequentially after the 1630s, Spain was drained of resources. Now involved in the long 30 Years’ War (1618-1648), it had been bled almost dry in the long conflict against England and Holland.

Therefore, Madrid halted the “smuggling” of silver. This meant in fact that Spain was no longer buying silk from China. At the same time, Japan also stopped trading with China in silver. Still China carried on buying from outside. Then, China’s silver supply dwindled. People started hoarding it to save their assets and this made silver even scarcer.

In a short decade, almost all Chinese silver was drained out of the country, and the value of silver quadrupled compared with the value of copper. At the time, China had a two-metal system. Internal trade was paid in copper, but taxes and foreign trade were paid in silver. In ten years the peasants who constituted the largest tax base for the country became four times poorer than before.

There were peasant uprisings. Li Zicheng raided Beijing, the last Ming Emperor hanged himself in the Beihai Park and the Manchu were called in to support the Ming and crack down on the rebels. They did put down the rebels, but didn’t relinquish the power and established themselves as the new Qing empire.

The Qing

Some 200 years later, in the 1830s, China was by far the richest country in the world. At the time, the then rising power England was thirsty for Chinese tea. In London and other English cities, water was foul because of pollution – it had to be boiled first to be drinkable. But even boiled it had a foul taste. Adding tea leaves to the boiling water made it pleasantly drinkable for the first time. Tea leaves were then a must for England and rapidly developing countries in Europe.

Yet China, mindful of the memory of the Ming Dynasty, was exporting tea leaves but not importing anything from Europe. The result was that in the 1830s, China held about 70% of all global silver, and its economy was about one-third to one-half of the global GDP. This situation was untenable for England and other European countries because basically all their wealth was being drained to China, which was not giving back anything.

The Qing had expelled the Jesuits about a century before and had little or no interests in hearing from foreigners another version of what was happening around them.

This led famously to the First and Second Opium Wars. China was forced to trade opium and open its markets. Moreover, foreign influence inspired the notorious Taiping uprising which killed possibly up to 20% of the Chinese population of the time, some 60-70 million people, more than during the Second World War.

Within a few decades, the Chinese economy was shaken by the Rebellion and opium consumption. But most importantly the country once again had failed to properly deal with the outside world, which had come knocking at its door. By the end of the century what had been the world’s richest country became poor, and the Qing dynasty fell.

In a way, the Qing tried to learn the lesson of the Ming. The lesson of the Ming was that you cannot trade freely with the outside world or else all your wealth will be drawn out. However, the Qing solution didn’t work either: You cannot simply be an exporter without being an importer because it puts you on the margins of global trade and engenders military hostility from the rest of the world. Neither solution worked.

Lessons for now

What is the solution that China now tries to propose to the world? China is a net exporter, and it holds the world’s largest share of foreign reserves, although not nearly on the scale of the silver reserves of the Qing dynasty.

Its economy is growing very fast and is already quite sizable, although it is still a fraction of what it was in 1840. It is trying to establish its own trading system with its own rules, using, for instance, the Belt and Road Initiative. The reaction from abroad is mixed. Different countries are trying to cut different deals with China, and America is spearheading a more pugnacious approach, demanding the opening of the Chinese market.

All three historical examples seem to have one thing in common: China is not trying to integrate itself into the global trading system; it’s trying to establish its own system against an existing system.

This is the first installment in the 3-part serialization of an article first published Dec. 13 in Settimana News. Asia Times is grateful for permission to republish it. Next in part 2: An alternate Chinese system of trade