c.Shigeru Akita NOT TO BE QUOTED WITHOUT AUTHOR’S PERMISSION.

British Economic Interests and International Order of Asia in the 1930s

Shigeru Akita (Osaka University of Foreign Studies and LSE)

I Structural Power and the History of Economic Relations

II British Perceptions of Japanese Economic Development in the 1930s

III British Perceptions on Chinese Industrialization in the 1930s

IV British Perceptions on Indian Economy in the 1930s

V Conclusion

I Structural Power and the History of Economic Relations

The purpose of this paper is to reconsider the nature and the formation of the ‘International Order of Asia’ in the 1930s in the light of new historiographical revisions in Great Britain as well as in Japan, and to present frameworks for the reconsideration of the ‘International Order of Asia’ in the 1950s from comparative perspective. The main focus of the arguments is to evaluate the roles played by the United Kingdom for the formation of the ‘International Order of Asia’ in the 1930s.

In reconsidering the roles of the UK, I have the following three assumptions; (1) The UK had played the role of ‘structural power’ in the ‘International Order of Asia’ in the 1930s ; (2) The core or essential factors of British presence in Asia consisted of military power and economic interests. To be more specifically, they were the military presence of Indian Armies with the Royal Navy, and the influence of financial and service sector of the City of London ; (3) The British presence as a structural power accelerated industrialization not only of East Asia but also of South Asia (British India) in the 1930s.

Recently, in an attempt to take the debate on British imperialism beyond the confines of formal/informal debate, Tony Hopkins has distinguished between two forms of power in the international system and made use of the concepts of ‘structural power’ and ‘relational power’, as a means of interpreting the British presence in Latin America, especially in Argentina in the nineteenth century. ‘Structural power’ allows its possessors to determine, or at least exert, a predominant influence, and to lay down the general rules of the game governing international relations and it was fundamentally a manifestation of the core values and policy priorities of the British liberal state, with its preference for free trade, low taxation and sound money. On the other hand, ‘relational power’ deals with the negotiations, pressures and conflicts that determine the outcome of particular contests within this broad framework. These concepts of ‘structural power’ and ‘relational power’ originate with Susan Strange, an eminent specialist in international political economy. She identified four aspects of structural power: control over credit, control over production, control over security, and control of knowledge, beliefs and ideas. I will try to apply these concepts to the broader context of global history by incorporating separate regions.

British imperial history can now be seen as a bridge to global history. Cain and Hopkins suggests that imperialism and empires can be viewed as globalizing forces at the last chapter of their second edition of British Imperialism, 1688-2000. Tony Hopkins classifies the history of globalization and emphasizes an importance of ‘imperial’ or ‘modern’ globalization as a driving force of world order. In this paper, I will analyze the British economic relationship with three Asian countries in the 1930s, that is, with Japan, China and British India, and try to connect these countries each other as well as with Great Britain. In the context of British imperial history, British India was usually recognized as a core colony in ‘formal empire’, and China used to be regarded as a typical example of informal empire in the nineteenth and the early twentieth centuries. On the other hand, after the conclusion of the Anglo-Japanese Alliance in 1902, Japan was treated as an ally with Great Britain rather than as part of the British informal empire. The debates continue about validity of applying the concept of informal empire to China in the twentieth century. For example, Jurgen Osterhammel favours analyzing the dynamic interactions between British government, the Nationalist Government of China and her ‘bureaucratic capitalism’ as well as the evolution of a Japanese informal empire in East Asia. Perhaps the best way to consider these interactions is to use the new concepts of ‘structural power’ and ‘relational power’, which incorporates these kinds of autonomous activities by the non-European countries, and allows us to understand the extent to which the United Kingdom exerted her influence upon the international relations.

In the analyses of economic relationships in the 1930s, I will mainly refer to three series of data sets, published by the Department of Overseas Trade. They are the Reports on Economic and Commercial Conditions in Japan, China and British India. To foster British overseas trade, the Department of Overseas Trade maintained the following commercial representation abroad. In the British Empire, they had the Trade Commissioner and Imperial Trade Correspondent Services. In the 1930s, there were 16 Trade Commissioners’ offices, including British India (Calcutta and Bombay----to cover also Ceylon). The Department was represented in India by Sir Thomas M. Ainscough (Senior Trade Commissioner). In foreign countries, there were 38 Commercial Diplomatic posts, situated in all the more important foreign markets of the world. They consisted of "Commercial Counsellors" and "Commercial Secretaries", and both were members of the staff of the British Embassy or Legation in which they serve. In certain countries where no Commercial Diplomatic Officer was stationed the senior Consular Officer undertook duties of a similar character. In China, the Department was represented by Mr. H.J. Brett and Mr. L.B.G.S. Beale (Commercial Counsellor), and in Japan by Sir George Sansom (Commercial Counsellor). I also refer to the related materials for the Foreign Office and the Bank of England, concerned with financial and fiscal matters.

II British Perceptions of Japanese Economic Development in the 1930s

(1) The changing perspective of complementarity

In an article, I have emphasized the existence of a complementary relationship between the United Kingdom and Japanese industrialization at the turn of the last century. The British Consular Reports expressed high expectations of growth in the Japanese capital goods market, and encouraged the formation of a highly developed ‘commercial nation’ which would lead the rapid growth of intra-Asian trade in the early 1910s. Their more favourable attitude to the expansion of the Japanese export trade coincided with the financial interest of the City of London.

However, during the inter-war years, this complementarity tended to diminish, especially in the case of British exports of machinery. Just after World War I, ‘American competition is being keenly felt and threatens to become a permanent danger.’ ‘The pre-war positions of Great Britain and America have been reversed and a recapture of the market will be a matter of the greatest difficulty,’ and ‘a great advance was made in local [Japanese] manufacture.’ This situation continued and the rapid growth of the Japanese manufacturing industry was accelerated in the 1920s and the early 1930s ‘under the stimulus of a vigorous campaign for the encouragement of home products’. This reflects ‘the increasing ability of Japan to supply her own machinery requirements’, and Japan started to export her machinery and machine tools to Manchuria in the 1930s (1934). Therefore, the competitiveness of British machinery was lost in the Japanese import-market and led to the weakening of a recognized sense of complementarity, keeping pace with the higher development of Japanese industrialization.

On the other hand, the British financial interests also witnessed a diminishing share in Japan. Japan reopened her foreign-bond issues in 1923, especially for the reconstruction projects following the Great Earthquake. She raised 536,000,000 ( 57,000,000) from foreign capital markets up to 1931, when she was forced to re-adopt an embargo on sales of gold following the abolition of the gold standard by the British government. This period in the 1920s was referred to as the second introductory period of foreign capitals. However, the proportion of British capital was reduced owning to the heavy inflow of American money in the 1920s. In these processes, the financial presence and influence of the City of London also declined to a great extent. Moreover, the Japanese government adopted new monetary and financial policies from 1932.

(2) Changes in the character of Japanese import-trade

On the eve of the Great Depression of 1929, Japanese economic development was described as ‘remarkable and well-sustained’ even despite the Financial Crisis of 1927. Over half of her imports were raw materials, and it was noted that ‘Japan s position is not unlike that of Great Britain. . . . She must purchase abroad the raw materials of industry, and with her profits buy such finished goods as she requires‘. This changing character in Japan’s import-trade gradually increased the value of imports from British India [raw cotton and pig-iron], Malaya [iron-ore and rubber], Australia [wool] and the Dutch East Indies [sugar]. ‘As her manufacturing capacity advances, she buys more raw materials and less finished products, to the advantage of those countries which supply such commodities as raw cotton, wool, wheat, iron, oil and timber.’ The importance of the British Empire, especially that of British India, increased greatly, whereas the imports of manufactured goods from the United Kingdom to Japan dropped drastically in those days.

Sansom observed that ‘this appears to be an inevitable tendency in world trade . . . the scale of vast quantities of raw materials by these regions increases in the long run their purchasing power and their consumption of manufactured goods’. He also pointed out that ‘disturbed conditions, or any other causes which reduce purchasing power in China or British India, affect seriously the total volume of her [Japanese] exports and, indirectly, her purchasing power in foreign markets in general . . . The defeat of a customer in one market may mean the loss of a customer in another’. His remarks revealed the so-called "final demand linkage effect", which comes from the consumer goods demand of producers of primary products for export, according to the definition of Kaoru Sugihara. Through the process of rapid recovery from the Great Depression, Japan became an ‘important buyer in the world s markets for raw materials‘ and ‘one of the most important consumers of raw materials’. Therefore, Japanese demands and imports of raw materials contributed, to a great extent, to the economies of the primary-producing countries. In this sense, Japanese economic development had a vital link with and influence upon the recovery of the world economy in the early 1930s.

(3) The strong competitiveness of Japanese exports

As mentioned before, achieving rapid economic development in 1928, ‘Japan has already . . . developed from an importer, through an intermediate stage of production for domestic needs, into an exporter.’ She was ‘not only . . .an importer of manufactured products but also . . . a potential competitor in other markets.’ This trend continued in spite of the Great Depression, and in 1932 ‘Japan offers less and less prospect as a market for the manufactured goods of other countries. . . . She is now established as one of the most serious competitors of those countries, and is at the same time one of the most important consumers of raw materials.’

The Japanese export market changed drastically in the early 1930s. On the 11th of January 1930, the Japanese government lifted the gold-embargo under deflationary policies and her economy fell into unusual difficulties. Sansom pointed out at the time that ‘her main economic interests are in two regions, the USA and Asia . . . which must have an important bearing upon her foreign policy.’ However, owing to the financial depression in the USA and political unrest in China, combined with the development of the Chinese manufacturing industry, by 1934 Sansom was forced to observe that ‘the two leading markets have lost their relative importance’ and that ‘it is somewhat surprising to find 1934 exports to British India valued at 238 million yen, whereas exports to what is described as China in the Japanese trade returns were only 117 million yen.’ British India became the largest trade-partner of Japan in 1933 and this development led to the trade dispute with India. Sansom already insisted in 1930 that ‘Japan must turn more and more to the production of finished goods to supply not only her present markets, but also to attempt to push far afield into Africa, Near Eastern, and South American areas hitherto supplied mainly by Lancashire.’ The Economist also pointed out that ‘under pressure of boycott in China and restrictions in India, Japan has been forced to seek new markets for her goods, and has been successful in opening new connections in Central and South America, Africa and Eastern Europe.’ 

In the early 1930s, many Japanese commercial missions were dispatched to these latter regions in order to open new export-markets, which took about one-fourth of total Japanese exports in 1934. Through the rapid recovery from the Great Depression, the export trade of Japan diversified. New exports such as rayon (artificial silk), woolen tissues and steel ingots increased, and ‘tinned and bottled foodstuffs, chemicals, instruments and machinery, lamps, iron manufactures and glass ware’ were added. Sansom observed that this trend ‘has reduced Japan s dependence upon the sale of a single preponderant commodity [silk]‘ and ‘important progress in heavy industry, hitherto perhaps the weakest point in Japan s industrial economy in a fair way of becoming a major industry.‘ The qualities of Japanese exports greatly improved and the competition for better quality of goods started, especially in the case of cotton textiles. Sansom highly valued these kinds of transformation.

(4) The positive estimate for Japanese economic nationalism

Sansom put much emphasis and high estimation upon the Japanese economic and financial policies introduced from 1932 by the Finance Minister, Korekiyo Takahashi. His economic policy was characterized as ‘a policy of State expenditure financed by State borrowing’, reflation and liberal spending. ‘The loan-financed expenditure of the Government has set in motion economic factors which were awaiting release and has thus produced those favorable conditions.’ ‘It is at least true that a country which is rapidly increasing its production can more safely depart from financial orthodoxy than one where production is stationary.’ ‘It may be regarded as an experiment in recovery from depression by an un-orthodox programme of public works financed by public loans.’ The Japanese government issued domestic bonds of 2oo,ooo,ooo [about 3 billion Yen]. According to Sansom‘s judgment, these bonds were ‘not an excessive price to pay.’ Takahashi‘s financial policies might be called Keynesian, even in the first-half of the 1930s. Of course, Sansom also mentioned that the loan-financed expenditures mainly poured into military spending, leading to the poverty of Japanese farmers, and that ‘the capital resources of Japan do not suffice for the economic development of Manchuria at the pace which it has hitherto maintained.’ ‘A Japan-Manchuria economic bloc has not yet been constituted.’

However, the depreciation of the Yen and a fall in the exchange rate gave a great advantage to Japanese exports. ‘Most exporting industries benefited’ and a ‘spectacular revival in foreign trade’ was achieved within a short period. Sansom also tried to analyze other secrets of Japanese competitiveness. He referred to the ‘rationalization’ of industries, the bid for increased efficiency and the beneficial role of government assistance, especially subsidies for shipping. These kinds of economic policies of the Japanese government and the positive roles played by the state were highly appreciated as they were in sharp contrast with the poor performance of the British government.

III British Perceptions on Chinese Industrialization in the 1930s

(1) The growth of Chinese Cotton industries and the export of British Capital goods

Next, I‘ll reveal British perceptions on Chinese industrialization, which started by the middle of the 1920s around Shanghai.

In September 1929, Commercial Counsellor, H. H. Fox reported the aftermath of political troubles as follows: ‘during the recent troubled times in China the foreign-controlled settlements of Shanghai have been the one area within which life and property have been, comparatively speaking, safe and where confidence could be felt in the investment of capital, an immunity of which the Chinese themselves have taken full advantage. There has been in consequence a great concentration of wealth in the port, a rapid increase of population, and every incentive for establishing industries……Shanghai has now became, what at one time it was predicted Hankow would be, the industrial centre par excellence of China.’

Chinese cotton industries developed rapidly in the Inter-War Years. First, Chinese cotton-yarn production had acquired a dominant position in the early 1920s, and from the middle of the 1920s, the competition for Chinese cotton-piece goods markets intensified between European, Japanese and local Chinese pieces as a triangular struggle. The share of British cotton piece goods declined heavily, and Japanese cloths increased their sales, although their turnover had been exceeded by local products by 1927. Therefore, Chinese cotton goods markets were ruled by the keen price competition. The Report of 1928 mentioned the rivalry between British goods and Japanese goods for the middle ranges of quality goods and the rapid increase of Chinese production for the coarser quality goods. It also pointed out that ‘the lot of the British piece-goods importer has been and still is further embarrassed by the greatly incresed competition from local and Japanese mills, --------- and it is quite impossible for Lancashire to successfully compete with the eastern mills in some lines’

On the other hand, the development of cotton and woolen industries led to the growth of the imports of machinery and industrial plants in China. The Report of 1929 pointed out the vast potential of Chinese market for the export of capital goods: ‘This country may within the next decade go far towards making herself independent of foreign supplies in the matter of clothing and foodstuffs, but it will be many years before she can attempt to make herself the various forms of delicate and complicated machinery which her industries will require. I can see no reason why Great Britain, if she can quote competitive prices and reasonably prompt deliveries, should not hold her own in the Chinese machinery market.’ The same expectations continued to grow in the 1930s. The Report of 1931-33 pointed out that ‘the greatest market in China from now forward will undoubtedly consist mainly of capital goods, and the loss to our trade in consumable goods will, or can be, much more than offset by the volume of machinery and equipment we supply.’ ‘On the principle that the best markets of the United Kingdom are the most developed countries, progress in China should lead to increased imports of higher class goods, materials, machinery and equipment from the United Kingdom. It must therefore be in the ultimate interest of Great Britain to co-operate with the Chinese in the establishment of industries calculated to meet the needs of the masses’. In this sense, there existed a complimentary relationship between British exports of Capital goods, especially machinery, and Chinese rapid industrialization. This kind of economic relationship had first appeared at the turn of the century between Japan and the U.K. as mentioned in the former section. Now in the early 1930s, China started to follow the path of industrialization after Japan, and there appeared two dynamic economic centers in East Asia. In the 1930s, new exporters participated in Chinese capital goods market from Italy, Belgium and Czechoslovakia. The competition for capital goods export to China became intensive, and China became one of the most price-oriented export market in the world. The Report of 1930 pointed out that ‘The days of large profits in old-established lines of trade are gone, and only the closest co-operation between the manufacturer and the agent or merchant here can help British trade to regain its former preeminence.’

(2)The Development of Chinese export

At this initial stage of industrialization, China began to export her home-produced consumer goods (cotton piece goods and matches) to the Straight Settlements, Dutch East Indies, Egypt, Arabia and Morocco. In 1927, the Chinese export drastically increased and the Chinese trade deficit with the United Kingdom decreased to a great extent. In the early 1930s, this trend of the increase of Chinese export trade was hindered by the Great Depression and by the newly erected tariff barriers. However, even under such an unfavourable situation, Chinese export to British India increased in the items of cotton yarns, piece-goods and raw silk, from 1.8 to 5.19 percent of the country share of Chinese exports. These home-produced consumer goods were also exported to Southeast Asian such as French Indo-China, Siam, the Strait Settlements, Dutch East Indies and Philippines. In this period, even to a limited extent, China became an exporter of light consumer goods, including hosiery, match, soap, lumps and glasses, and their export amounted to 6 million pounds in 1930. In 1931, the import value of raw cotton exceeded that of manufactured cotton goods for the first time in China. The British Report highly estimated this change of trend as a phenomenon of rapid development of Chinese cotton industries. These increases of Chinese export trade contributed to the development of Intra-Asian trade in the 1930s.

In the Inter-war Years, the United Kingdom occupied the third in the share of Chinese external trade, compared with the dominant position before World War I. Japan and the United States had a fierce competition for the biggest position in trade. However, the share of the British Empire as a whole, including Hong Kong, British India, Australia and Canada, averaged about 35 percent, and occupied the top in Chinese external trade in the 1930s, though its share tended to decrease. The Report of 1931-33 analyzed the reasons of competitiveness of Japan and the US and pointed out a linkage effects of export trade and import: ‘They are by far the greatest importers of Chinese produce. Thus the trade between China and Japan, and China and the United States is a two-way trade. Together Japan and the United States of America normally take 40 percent of Chinese exports.’ The increase of imports from China led to more export to China, and there was a correlation between import and export. In this sense, the expansion of Chinese export and increased absorption of Chinese goods provided foreign exchange with China, and they contributed to the payments of debt services of China. That report suggested the possibility of the acceleration of Chinese economic development, and the catch-up to Japanese economic development. (3)Tariff Autonomy and the policies of the Chinese Nationalist Government

From the 1st of February 1929, the Chinese Nationalist Government recovered its tariff autonomy and raised the level of import tariffs for revenue purposes. The tone of British Commercial Reports was sympathetic towards Chinese tariff policies. Import duties of 1931 were regarded as revenue tariffs, because the raising for capital goods was gradual and the rates for railway materials and machinery were reduced for industrial development. In 1932-33, it became clear that the Chinese Government further raised the level of tariffs in order to protect domestic industries, although the rates for machinery and vehicles remained unchanged. This introduction of the so called "protection tariff" gave strong impetus to domestic production of consumer goods and accelerated, to some extent, the import substitution. The Report commented that ‘there is nothing to retard this development except China’s internal political situation, and it is reasonable to expect that with the growing national consciousness, the efforts already being made towards a settled economic policy will now be greatly accelerated.’ As far as the exports of British capital goods were guaranteed, they gave positive support to the policies of Chinese Nationalist Government. China was an emerging market where high rate of economic growth was widely expected. Therefore, they worried about the intensive competition between the United States, Germany and the U.K. for capital goods export, and became more sensitive to the declining share of British export of capital goods.

Once the high expectations to Chinese market sometimes turned out to be disappointment with the record of export, it easily led to the criticism to economic policies of the Chinese Nationalist Government. For example, the hasty import-substitution policies and the discriminative treatment of foreign capitals were regarded as inopportune and too early at a time when it was essential for China‘s development to get economic cooperation of foreign countries, mainly from the United Kingdom. And the state-oriented industrialization by the Nationalist Government was criticized as the detriment to the free access of Chinese entrepreneurs to the markets. The Report of 1931-33 expressed wariness of excessive economic nationalism of the Nationalist Government. The barter trade of machinery between Germany and China was also criticized as a deviation from multi-lateral trade.

However, British economic interests in China covered more broader service sectors as well as trade interests. The British Commercial Secretary in Shanghai, H.J. Brett, sent an insightful letter to the Commercial Counsellor in Beijing on the 10th of May 1927; ‘I take it that from the home point of view, China is chiefly important (a) as a market for British goods, and (b) as a field for the profitable investment of British capital, . . . My own opinion is that the real importance of China to us is potential rather than actual, for she is undoubtedly the largest undeveloped market in the world, and the main reason (apart from any political considerations) for trying to keep our end up out here is that we may be in a position to get our fair share of the enormous trade that is bound to come sooner or later. From this point of view, the British firms, shipping companies, & c., which have developed trade in China appear to me to constitute valuable assets which it is worth our while to protect not only for their own sakes but also with an eye to the future’. This opinion was supported entirely by Sir M. Lampson. He also insisted as follows; ‘British companies in China engaged in the business of local shipping, banking, insurance, shipbuilding, mining, and the big distributing companies who have built up-country wide organizations for the manufacture and sale of oil, tobacco, sugar and other commodities.…These important but largely intangible financial interests which we have in China are apt to be overlooked.……The real importance of maintaining and protecting British interests, as Mr. Brett points out, lies rather in the fact that China is, beyond question, the largest undeveloped market for British goods in the world, and that the existence of old-established and well-organized British trading communities in various parts of the country is an asset which, when normal conditions are restored, cannot fail to be of the greatest value to British merchants and manufacturers both in the United Kingdom and other parts of the British Empire.’ From these long quotations, we may identify the intimate connections between British economic interests in China, the network of British expatriate business and the British Empire.

(4)Chinese Currency Reform in 1935 and British financial interests

China escaped from the impacts of the Great Depression in 1929 due to her silver currency standard. However, since September 1931, the Sterling, Indian Rupee and Japanese Yen seceded from the International Gold Standard one after another, and the value of Chinese currency relatively appreciated in terms of these currencies. The process was accentuated when the U.S. dollar followed the same course in April 1933. ‘From October 1931 to May 1934, prices fell, trade was further handicapped by drought, famine, war and the loss of the Manchurian provinces, exports were reduced,… the adverse balance of trade increased, and in 1932 for the first time for many years there was a net export of silver, reflecting the adverse balance of payments’. The Silver Purchase Act of the U.S. in June 1934 promoted the drain of silver from China, and the Chinese economy fell into a period of severe deflation. This monetary crisis had a very serious effect on imports. The Report of 1933-35 worried about these situations, because the U.K. had the paramount interests in China in every field of foreign economic activity, especially in U.K. investments in China, which reflected the position of the U.K. as a structural power in East Asia.

The Currency Reform by the Nationalist Government on the 3rd of November 1935 overcame these difficulties and paved the way to further development of the Chinese economy. As for the roles played by the United Kingdom for the Currency Reform, there are academic discussions on : (1) the initiative of Chinese Government or the leading roles of the Leith-Ross Mission in 1935, and (2) the implications of rivalry of Great Powers for the Currency Reform. Here, I try to reveal briefly the original British intentions for the Currency Reform in China. In April 1935, the British trading and financial interests in China had requested their Home Government to take an initiative in a crisis of China as follows : ‘The present crisis in Chinese currency and finance offers H.M.G. an opportunity of offering constructive assistance in a manner which will both alleviate the financial difficulties of China and bring Great Britain more actively in to the field. A British initiative taken today will appear, not as a protest against encroachment on British interests and, therefore, not as a hostile move against either party in the Far East, but as a realistic measure designed for practical ends.’

The British Government decided the despatch of Sir F. Leith-Ross to China in June 1935. Before his departure to China, Leith-Ross exchanged several notes with Montague Norman, the Governor of the Bank of England. Through their exchange of opinions, we can guess the original aims of British Government. For several important ‘Question on China’ by Leith-Ross, the Governor carefully replied as follows;

[Question] (1) If the Chinese Government decided to abandon silver, should her

currency be linked with gold, sterling or yen?;

[Answer] Linking to sterling would be best, and the Sterling Exchange Standard

would be the best solution with a rate not above 1s/2d.----------It seems most

probable that they (Japan and the United States) would refuse financial

assistance to inaugurate a sterling scheme, whereas China would probably

regard a loan as a necessary condition;

[Question] (2) Is it indispensable for China to raise a foreign loan or credit before

attempting to place the dollar on a foreign currency basis?;

[Answer] It may be necessary to provide China by means of a loan with (a)the

substantial external cushion, and (b)the means of effectively regulating their

exchange.

The Governor seemed to suggest the three related but ‘opposing’ targets to Leith-Ross: (1) the search for the possibility of the Sterling Exchange Standard, (2) the effective cooperation of the four Powers of the International Consortium, and (3) the control and exercise of strong influences to Chinese Government. In trying to create " the rule of the game" in China, they have to much attention to the reactions of Japan, and especially the United States, whose silver purchasing policy greatly influenced the Currency Reform. The Governor also agreed that ‘trading interests were very important and he thought it quite likely that the trading interests of this country desired H.M.G. to follow a much stronger policy than hitherto’. These original intentions of British Government reflected the status of the UK as Structural Power.

The Currency Reform led to not only the stability of Chinese currency and the exchange rate, but also the enlargement of the Central Government’s authority. It was enabled to consolidate external debts and to solve the defaults on Chinese railway loans. The rating of the Chinese Government in international money market was improved to a great extent. The Report of 1935-37 appreciated the success of financial reform and commented in an optimistic view: ‘The outstanding feature is the increasing and justified confidence which the Chinese themselves, as well as the world at large, have in the future of this country, . . . the magnitude of China’s needs in her economic development-----communications, industries, and technical skill------provide an opportunity for the United Kingdom to contribute to the building up of a modern China on sound foundations, a task of the greatest importance and value to China and to the rest of the world. It is for us to grasp the opportunity by assisting China in the fields of planning and creating her public utilities, communications and basic industries’. These remarks mirrored the economic positions of the U.K. and the British Empire, which dominated Chinese external trade and foreign investments in China.

IV British Perceptions on Indian Economy in the 1930s

I have analyzed British perceptions on Japan and China in the 1930s, mainly by referring to commercial reports and related materials. Next, I try to present British perceptions on Indian economic development at the same period, and compare the case of British India with those of East Asia. In those days, British India had been incorporated into the so called "Ottawa System", that is, the Imperial Preferences and the Sterling Area.

(1) The Impact of East Asian Industrialization: Development of "Intra-Asian competition"

The economic development of Japan and China in the 1930s were mirrored in Reports on economic and Commercial Conditions in India. Especially, the Japanese export drive in the early 1930s became a major threat to British manufactured exports. The Report of 1930-31 clearly analyzed "Japanese competition" in cotton piece-goods as follows: ‘Japan has been able to turn the boycott of UK goods to her own advantage and has increased her share of the total trade to 36 per cent.--------Japanese competition is based simply and solely on the price factor.-------the leaders in control of the highly-centralized and closely-knit cotton industry of Japan have realized the need throughout the East for standardised cloth at rates which are within the limit of the restricted purchasing power of the impoverished masses of India, China and Africa.-------Even the Indian mills are suffering most severely from Japanese competition in plain goods.’ ‘For the first time in the history of the trade, imports of Japanese piecegoods [Grey Goods] have exceeded, both in quantity and value, the imports from the UK.’ British Reports pointed out that the depreciation of the yen exchange and the drastic decrease of the purchasing power of India were the main causes of Japanese penetration into Indian market, which led to the cotton trade negotiations between Japan and the Government of India in 1933, and to the signing of the Indo-Japanese cotton trade agreement in April 1934.

The cheap consumer goods from Japan could penetrate into Indian market beyond the tariff barriers of the Government of India. The Report of 1933-34 pointed out as follows : ‘The results last year would have been much more striking had it not been for the onset of Japanese competition, which had a dual effect. In the first place, Japanese exporters secured a certain amount of trade formerly enjoyed by the UK and, secondly they succeeded in capturing a much greater volume of trade from Continental exporters, much of which would otherwise have been diverted to suppliers in the UK. The disparity between the respective price levels of the UK and Japan is too great to be bridged by a 10% preference.-----------The additional alternative minimum specific duties imposed on a limited range of foreign imports under the provisions of the Indian Tariff (Amendment) Act, 1934, have checked, to some extent, the flood of Japanese imports in those items, but it is to be expected that Japanese competition will increase in intensity and will cover a constantly widening range of goods.’ These remarks seemed to reflect the limit of tariff policies to restrict the inflow of cheap consumer goods, which was a part of the development of intra-Asian trade.

At the same time, Chinese cotton goods, especially yarns, were exported to India in the early 1930s: ‘It will be noted that the weight of yarn imported from China actually increased, but there was a drop in values due to lower prices.’ ‘The incursion of mills in China into trade in counts of 40’s [yarns]and upwards is a recent significant development.’ The Japanese and Chinese cotton goods competed in Indian market: ‘in 11’s to 20‘s [cotton yarns], the increase was almost entirely secured by Japanese yarns at the expense of China. -----------In two-fold spinning, the Chinese mills were out of the market in the earlier part of the year, but re-entered it after October, when Japanese arrivals tended to fall off.’ ‘Japan has almost completely ousted the product of the Chinese mills from the market [of Grey Goods] as a result of the depreciated yen’. These were only one aspect of "intra-Asian competition" for cotton goods in the 1930s. However, as I will mention later, the imports of cotton yarns in India were negligible when compared with the large and rapidly growing production of the Indian mills. By involving Indian manufacturers, the intra-Asian competition evolved on a more larger scale.

The growth of Japanese exports to India was not confined to cotton goods. British Reports referred to the increase of another consumer goods, such as Porcelain, Glass and Glassware, and Boots and Shoes : ‘So widespread is the sale of Japanese rubber footwear that even the Indian shoemakers of Cawnpore, Agra and Delhi are finding it difficult to compete’. In addition to these miscellaneous light industry goods, the export of capital goods from Japan started steadily from the middle of the 1930s: ‘Imports from Japan have shown steady expansion during the past few years and include such items as cotton textile machinery, sewing and knitting machines, and cheap industrial equipment for the lesser industries.-------Intensified competition must be expected in the future and greater efforts will be required to secure business.’ ‘Japanese competition is now severe in galvanised sheets and wire nails and is also increasing in tubes.’ These miscellaneous goods were important items of intra-Asian trade.

The sources of supply of yarns to India and Indian Mills Production (lbs.)

Countries

1930-31

1931-32

1932-33

1933-34

1934-35

UK

10,314,913

11,912,546

13,357,065

9,952.435

9,792,311

Netherland

Swiss

Italy

15,015

73,600

64,435

----------

51,201

142,489

-----------

65,900

5,444

------------

13,500

18,090

 

--------

--------

--------

 

China(incl.Hong Kong)

11,743,238

 

13,215,238

 

13,325,400

 

10,229,275

 

12,767,925

 

Japan

6,894,903

6,206,197

18,148,809

11,683,936

11,339,411

Others

33,811

47,429

200,764

157,927

122,203

Total

29,139,915

31,575,100

45,103,382

32,055.163

34,021,850

Indian Mills

867,279,000

966,407,000

1,016,418,000

921,061,000

1,000,756,000

Sources: Department of Overseas Trade, Commercial Reports on India, 1930-35.

(2) The Ottawa Trade Agreement, Imperial Preferences and Indian Benefits

British India was an essential part of the "formal" British Empire. The Reports of 1932 -33 and 1933-34 appreciated the positive effects of the Ottawa Trade Agreement upon British trade relations, and allocated special sections to the analysis of Ottawa Agreement : ‘This momentous agreement gives effect, for the first time in the history of the trading relations of the two peoples, to the principle of Imperial Preference and thereby inaugurates a new era in Indo-British economic relations which, it is hoped, will strengthen the bonds of mutual interest and will contribute to the material welfare of the two nations’. ‘The outstanding advantage of the Ottawa Trade Agreement is the acceptance by India of the principle of Imperial Preference and her realisation that it is to her material interest to take her part in the economic bloc of the British Commonwealth of Nations’.’ At this times, from British point of view, the Ottawa Trade Agreement was recognized as an initial step to the formation of a kind of economic bloc with India and other Dominions. They further expected in 1933 that the British Commonwealth of Nations might be group of nations to preserve a favourable regime for mutual trading by this Agreement. It was a peculiar expectation from Indian point of view, because British India was not a formal member of the British Commonwealth and reluctant to accept the Imperial Preferences.  

The Report of 1932-33 recorded a detailed analysis of the working of the Ottawa Trade Agreement. According to its data, the total advantage to the UK was Rs.551 lakhs or 4,132,500. Of this total, no less than Rs.337 lakhs (2,527,500) was derived from differential duties, which were imposed prior to the Ottawa Agreement and in order to protect the Indian consumer from the effects of the policy of discriminating protection. Therefore, the total advantage to the UK which might be directly attributed to the preferences conceded by the Ottawa Trade Agreement amounted to Rs.214.5 lakhs or 1,608,750. This total sum was compared with the figure of Rs.802 lakhs or 6,015,000, which was the total advantage accruing to India from the preferences granted by the UK. As these statistics indicate, the introduction of preferences has been followed by a relative improvement in the competitive position of the UK. However, British India got more bigger benefits from the Ottawa Trade Agreement through the increase of Indian exports to the UK home market: ‘When the effects of the valuable preferences accorded to Indian products such as tea, linseed, rice, jute manufactures, pig iron and semi-manufactured steel are felt in a normal year, it may be presumed that the UK market will be a still more valuable outlet for India’s exportable surplus and that the percentage will probably advance still further. This will be a development of the greatest importance in binding the economic interests of the two countries still closer.’ In this sense, the Ottawa System produced quite one-sided benefits to British India. This tendency was confirmed by a contemporary publication of the Royal Institute of International Affairs, and Cain and Hopkins insist that the Ottawa Agreement was more beneficial to primary-producing colonies than to British industries. British home market became the largest open-market in the world, which enabled British colonies to earn sterling for servicing their debts to the City of London. In 1936-37, ‘on account of very heavy shipments of Indian produce,---------the favourable balance [to India] attained the record figure of Rs.16 crores.---------It is abundantly clear that India now enjoys a substantial and increasingly favourable balance of trade in merchandise with the United Kingdom’.

However, this is the only one aspect of the Ottawa Trade Agreement. The "openness" of the trade regime is more conspicuous for the international order of Asia in the 1930s, especially in the case of British India. The typical example of the openness is the huge export of Indian raw cotton to Japan in the 1930s. The fiscal year of 1932 was a ‘nadir of India’s economic history’ and the disastrous fall in prices continued unchecked. However, ‘shipments to Japan, remained constant at just under Rs.14 crores’ in 1932-33. The Indian raw cotton was vital to the rapid development of Japanese cotton industries and its huge import offered Japanese government an critical bargaining power in her economic diplomacy in the 1930s. In April 1933, the Government of India raised the import duties of Japanese cotton goods up to 75 %, and denounced the Indo-Japan Commercial Treaty. In retaliation for these measures, Japanese side boycotted the import of Indian raw cotton. In order to seek a solution of this trade friction, the Indo-Japan cotton trade negotiations were held in Simla from September 1933 to January 1934. Two experienced specialists in trade, who had been writing the Commercial Reports on Japan and British India, participated in these negotiations. Sir Thomas Ainscough, Senior Trade Commissioner in India, Burma and Ceylon, played a key role for matters of the British Empire and Great Britain, while Sir George Sansom, Commercial Counsellor in Japan, joined in the negotiations as an adviser to the Government of India and as an observer of British Government, ‘particularly as regards effect of negotiations on relations between Japan and the British Empire’. Ainscough and Sansom cooperated intimately for the benefits of British India by taking advantage of their well-informed positions. Especially, Sansom recognized that ‘the cotton boycott was Japan’s strongest, if not her only card; and she would wish to play it with the greatest effect’ and that the export of raw cotton to Japan was indispensable to Indian agriculturalists and the Government of India’. Therefore, he judged the importance of a linkage between the quotas of Japanese cotton goods and the Japan’s purchase of Indian raw cotton at the critical stage of negotiations in October 1933. Sir George Schuster, the Finance Member of the Government of India, also shared the same opinion and thought that ‘it was important to encourage the Japanese to buy large quantities of Indian cotton, by giving them a high "ceiling" for the textile quota, linked to a high figure for raw cotton.’ The negotiations reached an agreement in January 1934.

By virtue of the Ottawa Trade Agreement, India’s export trade recovered steadily, and in 1935-36, the revival of exports was distributed over practically the whole range of India’s export staples. India’s export trade to the UK increased by 35.2 % while her trade with other countries advanced by not more than 14.75 %. ‘Her exports to countries other than the UK were assisted by abnormal purchases of cotton by Japan to make up for the short purchases during the 1933 boycott.’ Japan remained the principal buyer of Indian raw cotton, and the UK occupied the second, in spite of the Lees-Mody Pact of 1933 and the efforts, made by the Lancashire Indian Cotton Committee, to encourage the use of Indian cotton. In these contexts, the Ottawa Trade Agreement was a open trade regime even for non-member countries.

Exports of Indian Raw Cotton and Home Mills Consumption in the early 1930s

 

1929

1930

1931

1932

1933

 

 

 

 

 

 

 

 

 

 

Unit:

Thousand bales

(400 lbs.)

To the UK

233

286

274

125

242

Continent

(Europe)

1,429

1,505

1,003

424

862

China

456

555

626

243

169

Japan

1,722

1,409

1,753

757

1,426

Others

93

113

73

33

42

Total

3,933

3,868

3,729

1,582

2,741

Home Mills

1,992

2,373

2,271

2,346

2,360

Sources: Department of Overseas Trade, Commercial Reports on India, 1930-34

(3) Indian Industrialization, economic nationalism and Capital Goods Export

The most impressive phenomenon in the 1930s is the progress of industrialization in British India, especially her rapid development of cotton industries, and its severe competition with foreign imported goods. There appeared three-cornered competitions between British, East Asian and Indian cotton goods. The Ottawa Trade Agreement gave a preference to British products vis-à-vis foreign competing ones, but the growing competition from Indian industries became more severe than Japanese competition. Every Commercial Report on India in the 1930s emphasized the encroachment of Indian mills. Moreover, in 1936-38, when quotas were imposed on Japanese goods in foreign markets, ‘the Indian mills are now not only securing almost the whole of the domestic market but are competing keenly with U.K. and Japanese goods in the overseas markets of Burma, Ceylon, Nigeria, Egypt, Iraq, Iran, Straits Settlements, Tanganyika Territory and elsewhere’. Now with the progress of Indian industrialization, the new intra-Asian competition started for exports of cotton piece-goods to the Indian Ocean-rim countries.

There were several causes for the development of Indian cotton industries. Earlier in 1930, the Report had recognized the inevitability of Indian economic development as follows : ‘There is little doubt that a self-governing India will take full advantage of her fiscal autonomy in order to promote her industries.-----------[Lancashire’s] efforts to regain a footing in the Indian market may be frustrated by the fiscal policy of an autonomous India.’ Above all, the heavy surcharge in 1933 had a severely restrictive effect of imports. Moreover, they had a protective effect which was not intended, and they were stimulating a large number of nascent local industries. The Report in 1933-34 briefly summarized the outlook of Indian import trade as follows ; ‘The competition of Indian industries, stimulated by the protective and revenue duties, the "swadeshi" movement, which is one of the most potent manifestations of economic nationalism, and the preferences accorded by Indian Government Departments when making purchases of stores, cannot fail to restrict the Indian market for imported goods. ------------In the near future, UK industries will have to rely on the combined effects of preferential duties and industrial co-operation to enable them to secure, at the expense of other overseas competitors, a greater share of a limited market.’

Although facing a severe competition with Indian industries, British Reports on India were not so pessimistic about the future of British export. They expressed realistic and positive points of view on the assumptions that the industrialization of India is an inevitable process, promoted by economic nationalism and that the British might take advantage of this opportunity to cooperate with Indian counterpart. Even in the early 1930s, more advanced development of Indian industries were expected : ‘It is inevitable that the Indian mills will encroach to a rapidly increasing extent upon the finer types of plain fabrics as they use more and more American and Egyptian cotton for the spinning of finer yarns.’ ‘Although Indian mill competition is cutting into the market in an ever-widening range of fabrics, the Indian mills cannot as yet provide the variety of qualities, designs, colours and styles which consumers like to have if only they can afford to pay for them. In times of intense agricultural and industrial depression such as the past four years, the Indian consumer has been obliged to substitute the cheaper, coarser, less attractive fabric made in India for the finer imported article which has been in the habit of purchasing. It is not too much to expect that, as the prices of primary commodities rise thereby releasing purchasing power, we shall see a broadening of the demand for Lancashire staples of the finer qualities and for fancy styles.’ In this context, the several events of 1933 fostered a prospective situation for future cooperation between British and Indian cotton industries : ‘The visits of the delegations from the UK Textile and Iron and Steel Industries, and the Clare Lees-Mody Pact have permanently established the policy of industrial co-operation between the two countries ; such a policy is calculated to have such far-reaching effects not only in the economic sphere but also in the political arena by removing the sources of economic rivalry and ill-feeling and by promoting a spirit of community of interest between the two peoples.’ At this times, Indian nationalists and British Government were carrying on political negotiations for the revision of the Government of India Act of 1919, which led to the enactment of a new Act in 1935. It is worth mentioning that the pursuit of economic cooperation was closely connected with the relaxing of political tensions in constitutional reform and that both Indian and British sides recognized this linkage to take advantage of it.

Furthermore, the Report of 1935 proposed more far-sighted and long-term views on economic relations. It supported the rapid economic development of India, and expected the increase of British capital goods export, such as machinery, chemicals, and transport vehicles as follows : ‘A partial solution of the problem will be found in the rapid development of the country which is already resulting in a remarkable diversification of her economic requirements.--------------It is most encouraging to note that in the newer highly technical industries, UK manufactures are successfully meeting foreign competition and are reinforcing their efforts by adequate sales, technical and service organization on the spot. Fortunately, too, these classes of imports, which are capable of such great expansion, can be developed without competing with India’s own natural industrial developments. The friendly co-operation of British manufacturing organizations, with their technical experience and knowledge of world-wide conditions, and Indian industries, with their knowledge of local conditions, should be most valuable in research work with the object of stimulating the consumption of their products ---------- I am convinced that we must rely more and more in future on the supply of capital products and technical equipment to India, thus aiding her own development with our experience and technique.’ From this long quotation, we may identify a sign of the same kind of complementary relationship as East Asian industrialization. In reality, in 1937, the imports of machinery outstripped the long-established supremacy of cotton textiles and accounted for 10 %, the most important item in the list of imports into India of manufactured goods. With progressive Indian industrialization, ‘the demand for the most developed types of plant is likely to become even more insistent’.

(4) British Financial interests and Indian Industrialization

As mentioned earlier, the Great Depression and its impact on India greatly reduced the purchasing power in India, due to the decline of the prices of primary products. The deterioration of the balance of trade of India became a serious question, and it could only be adjusted by the shipments of gold bullion. This is an abnormal phenomenon. The Indian Finance Member, Sir George Schuster, had pointed out at the Ottawa Conference that ‘India in order to maintain an even position requires a favourable trade of balance of at least Rs.50 crores (37.5 million) annually.’ The Report of 1932-33 also mentioned as follows : ‘there can be no lasting improvement in the import trade until India’s favourable balance of trade in merchandise is restored to a figure of at least Rs.50 crores, which she requires to meet her essential obligations in London.-------------until India can obtain a favourable balance of Rs. 50 crores in merchandise she cannot be considered to be on a sound foundation.--------------- The seriousness of the fall in the trade balance is accentuated in the case of India, which, as a debtor country, needs to maintain a large favourable balance of trade in merchandise’. The decrease of trade margin had a bad effect to debt services, which were connected with the interests of City of London.

In addition, a vicious circle arose between the decrease of imports and diminishing Customs revenue: ‘The decline in India’s imports in five years from Rs.253 crores to Rs. 115 crores----------had most serious repercussions on the revenue position.- ---------- As imports declined with corresponding shrinkage of revenue, fresh duties and surcharges were added to the revenue tariff to make good the deficiency. These, in turn, caused a further fall in imports until, in many cases, the law of diminishing returns began to operate. Moreover, the high tariff level resulted in the creation of new industries, which displaced imported goods and brought about a further restriction of imports and of Customs revenue.’ The emergency measures taken in 1932-33, in consequence, led to the revenue difficulty resulting from the shrinkage of imports, and they seemed to aggravate the fiscal situation of the Government of India.

In the latter half of the 1930s, the Indian exports to British home market increased due to the Ottawa Trade Agreement, whereas the level of Indian imports did not recover as to the same extent as its exports. The Report of 1937 recognized the contraction of the Indian market as an outlet for overseas manufactured goods on account of the rapid Indian industrialization. As the market for UK goods, British India has been surpassed by the Union of South Africa and Australia and ranked third. And it warned the excess of import-substituting industrialization in India as follows: ‘Indian public men, both politicians and industrialists, seem to be imbued with the conviction that the more domestic production is substituted for imports until the latter are gradually extinguished, the more prosperous the country will become.-------------------

The policy of maximum industrialization----------must inevitably lead, firstly, to a serious clash of interest with the agricultural element, which constitutes nearly 70 per cent of the population, secondly, to a crisis in India’s finances as the Government of India rely upon Customs receipts for some 60 per cent of their revenue, and, lastly, to the collapse of the financial and economic fabric of the Government of India which is dependent upon an excess balance of exports in order to meet India’s financial commitments in London (amounting to some Rs.50 to 60 crores per annum) and to maintain the exchange.’ This serious warning by Ainscough was primarily directed to the trade unbalance and deficit, caused by the decrease of Indian imports of manufactured goods. But it was not clear about the logic of his first point, that is, the clash of Indian agricultural and industrial interests. However, his second and third points revealed clearly the relationship between British financial interests and Indian industrialization. Contrary to his warnings, the rapid development of Indian industrialization was favourable to the City of London and British financial interests as far as it guaranteed the smooth servicing of Indian debt by using an excess balance of exports.

V Conclusion

Finally I would like to sum up my arguments as follows. First, during the inter-war years, especially in the first-half of the 1930s, the arguments of the British Commercial Reports on Japan tended to shift their focus from the British home economy to the markets of the British Empire. From the British point of view, Japanese economic development in the 1930s was a type of import-substituting industrialization. Although Japan emerged as the most formidable competitor in cotton goods markets, especially in China, the importance of British India greatly increased for Japanese export economy in the early 1930s, as an expanding market for the Japanese cotton industry and as a vital source of raw-cotton. Malaya and Australia also played important roles in the rapid recovery and further expansion of Japanese exports. Therefore, a kind of complementarity of economic interests emerged between the British Empire and Japan rather than between Great Britain and Japan.

On the other hand, China was a hopeful export market for the British capital goods, especially British-made cotton textile machinery. From the British point of view, the beginning of Chinese economic development was a type of export-induced industrialization for British exports, which had been the case for Japan at the turn of the last century. British Commercial Reports on China emphasized the potential of the vast Chinese market and the keen competitions for capital goods exports among the Great Powers as well as for consumer goods from Chinese domestic industries. This sensitive observation seemed to reflect the importance of Chinese exports market for British capital goods industries. In the 1930s, the economic development in China centered around Shanghai, especially the foreign controlled International Settlement, where the U.K. had paramount financial and service interests. The Chinese Currency Reform of 1935 was important not only for the Nationalist Government but also for the British economic interests to exert and maintain her financial influence as a structural power.

In addition to industrialization of East Asia, even in the case of British India, the rapid development of cotton industries occurred under the Great Depression and its aftermath from the early 1930s. The Government of India introduced emergency measures like surcharges and increased tariff rates to tackle the fiscal problems. These policies, in turn, unintentionally accelerated the growth of Indian cotton industries, and the same tendency could be found in the case of Indian iron and steel, and the development of the Tata Iron and Steel Works. In this sense, Indian economic nationalism and British economic interests also coexisted each other.

Therefore, we can identify in the 1930s a very unique complementary relationship between British economic interests and industrialization in Asia; that is, (1) complementarity between exports of British capital goods and Chinese and Indian industrialization, (2) complementarity between British financial interests (Gentlemanly Capitalism) and the financial needs of China and British India, and (3) mutual economic interdependence or Empire-scale ‘final linkage effect’ between Japan and the British Empire.

Of course, the progress of industrialization in Asia in the 1930s created the economic frictions or ‘intra-Asian competition’, and led to deployment of the economic diplomacy, like the Japan-Indo Trade Negotiation in 1933. However, such kind of economic frictions reflected one aspect of the development of intra-Asian trade, and economic mutual interdependence within Asia emerged in the 1930s. All three aspects, which indicated above, are closely connected with Britain’s economic presence as a structural power. In this sense, the presence of Great Britain in Asia was an important factor for the formation of the ‘ line 435. =3>International Order of Asia’ in the 1930s.