Tea-conomics

by Carl Tannenbaum, Chief Economist, Northern Trust

The tea trade has lessons for today’s global commerce.

My father expressed his distaste for unpleasant tasks by saying: “I wouldn’t do that for all of the tea in China.” Tea has historically been one of the world’s most valuable commodities, and China has long been the world’s foremost producer.

I learned quite a bit about the story of tea, and other beverages, in “A History of the World in 6 Glasses” by Tom Standage.  My summer reading list is designed to take my mind away from business, but there were some important economic insights hidden within this book about the drinking habits of human beings.

Consumption of tea apparently began by accident nearly 5,000 years ago.  Legend has it that a Chinese emperor was about to drink some boiled water when leaves fell into his cup. The taste was to his liking, and the beverage produced a heightened sense of well-being (which we now understand to be the result of caffeine).  Tea was ascribed medicinal properties long before biologists established its ability to kill a range of bacteria and promote healthy digestion.

Those of us in developed markets think little about the quality and supply of drinking water, but we haven’t always been able to take them for granted.  Waste management is a significant challenge for densely-populated areas; insufficient sewage treatment can allow diseases like typhoid and cholera to flourish.  This remains an issue for many emerging markets to this day.

Tea consumption produces a noticeable reduction in water-borne afflictions.  This allowed populations to live and work in close quarters, which supported the Industrial Revolution.  Reduced levels of illness increased both productivity and the quality of life for early factory workers.

Thanks to its sensory and prophylactic qualities, tea-drinking became widespread. Britain got bitten by the bug in the middle of the seventeenth century, and its thirst grew rapidly.  That led it to China, which grew more tea than any other nation.  China was a formidable world power at that time; its industries were world leaders that provided for almost all of the country’s needs.  The British, having little in trade that the Chinese valued, were forced to pay for their tea in silver.

The British were anxious to find an export to China that would allow them to preserve their hard currency.  And they found one: opium.  The British East India Company handled trading in both tea and the narcotic, which was causing unwanted addiction in China.  When the ruling emperor banned its import, the British intervened militarily to keep Chinese ports open to drug imports.  At that time, Hong Kong became a British colony.

The “Opium Wars” were one of several unfortunate experiences that emerged from China’s dealings with foreign traders in the 19^th century.  It bred a suspicion of the West that continues to this day.  It also weakened the economic fabric of the nation and paved the way for the political upheavals that China endured during the last century.  All of this for want of a cup of tea.

Many readers will also be familiar with the role that tea played in the American revolution. The colonies had established a network of smuggling routes to avoid paying taxes to the crown on imported tea; when these avenues were abolished, a group of Bostonians (dressed as native Americans) dumped an entire shipment of the stuff into the harbor in protest. Less than two years later, the War for Independence had begun.  More than two centuries later, the “Tea Party” movement coalesced to inveigh against government interference in markets.

The story of tea is instructive for the present day.  The use of tariffs, rebellion against taxes and the potential for military intervention to preserve access to critical materials are all features of the current environment.

When I selected Standage’s book, I was hoping to enjoy a celebration of imbibements free from commercial considerations.  Instead, I got a history lesson.  Liquidity is, indeed, critical to economic development.

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