The Spring & Autumn of Tariffs & Monopolies

Chinese Tariffs & Monopolies

Huan, the Duke of Qi 齐桓公 asked his prime minister Guan Zhong 管仲 (720-645 BC):

“The State of Qi is in shambles, ruined by Gongsun Wuzhi. Should we increase taxes to build up the imperial coffers?”

“My lord, the people have suffered a lot all these years. If we increase their taxes, they will certainly rebel.”

“What about plundering a neighbouring state?” Qi Huan Gong suggested.

“My lord, we have the weakest army in the neighbourhood.”

“Sell land?”

“The state of Qi is already small. Selling land will certainly make us more vulnerable.”

“What do you suggest then?”

The young duke was not always on such friendly terms with Guan Zhong. In fact, Guan Zhong nearly killed him. The state of Qi was in turmoil when Duke Xiang of Qi 齐襄公 was assassinated in 686 BC by his cousin Gongsun Wuzhi. The latter seized the leadership and hunted down the late Duke Xiang’s two younger brothers Prince Jiu and Prince Xiaobai. But Wuzhi would soon be assassinated as well. The seat was left vacant and the two princes fought over it. Guan Zhong was on the Prince Jiu’s side. While the two sides fought, he shot an arrow at Prince Xiaobai who managed to escape by feigning death. He managed to return to Qi and proclaimed himself as Duke Huan of Qi. Prince Jiu was executed and Guan Zhong was taken prisoner.

Back in Qi, Duke Huan or former Prince Xiaobai, ordered Guan Zhong to be executed, but his tutor Bao Shuya intervened and spared Guan Zhong’s life. He proved to be a talented administrator and Duke Huan promoted him to the position of prime minister.

I have written about how the state of Qin grew from strength to strength, eventually unifying China under the draconian Shang Yang Reforms. Long before that, during the Spring Autumn period, the small state of Qi also rose from ruins and riches under Guan Zhong Reforms.

“My lord,” Guan Zhong continued. “I’m sure you’re aware that our people have been harvesting salt from the sea and selling both domestically and to neighbouring states. I suggest that the state takes over all salt production and trading.”

From then on, everyone, including merchants who traded with neighbouring states, had to buy salt from the Qi government. Iron ore was added to the list. State monopoly became a form of taxation that the people inadvertently paid but at the same time, prices controls meant that there would be no profiteering. Of course, Qi was not the only state that produced salt. To protect state interests, he imposed tariffs on salt imported into Qi, making sure that there was no competition for the Qi government’s salt and iron ore. He discouraged bartering by introducing a coinage system. In this way, goods hoarding was discouraged and wealth could be accumulated.

Guan Zhong also abolished the Zhou Dynasty’s system of collective farming where a cluster of 8 private farms would be responsible for managing one public farm. Under Guan Zhong, all farms would be privately owned and taxed according to size and productivity. Farmers no longer had to argue over their contribution to the public farm. The state would also buy up all harvests and resell to the people at a rate fixed by the Qi government. When harvests were good, surpluses were stored by the state’s granary for distribution in times of crop failures. There were no famines in Qi during Guan Zhong’s term in office.

Around 680 BC, Guan Zhong set up the first government-managed brothels in China. Some 700 women were recruited as prostitutes and earnings also went to the state. The Duke once asked Guan Zhong if his indulgence in hunting and women would bring the state to its knees. Guan Zhong replied that he indulged only when the state was prosperous and never put his trust in the wrong people, the state of Qi would retain its position as a hegemon in spite of its small size.

One day, Duke Qi revealed his intentions to subjugate the state of Hengshan 衡山国. Guan Zhong came up with a non-military plan. Hengshan was well-known for weapons production. Many states bought their weapons from Heng Shan. Guan Zhong went to buy large quantities of weapons from Hengshan. Rubbing their hands in glee, weapons traders in Hengshan raised the prices of their weapons. Other states saw inflation on the horizon and rushed in to buy weapons. Soon, many families abandoned their farms to make weapons. The state’s economy became completely skewed towards weapons production.

Guan Zhong realised that the state of Zhao had very good harvests and proceeded to buy rice from them. Merchants in Zhao didn’t understand why Qi would need to buy rice from them, but they set the price at 5 times the market rate and Guan Zhong still paid for it. He then approached Hengshan and offered to buy their rice at rip-off prices. Stocks of food in Hengshan were already low but Hengshan merchants jumped on the deal without state control, depleting the state’s supply of food. When Guan Zhong sent his troops into Hengshan, the state had a lot of weapons, a lot of money but no food. Neighbouring states dared not sell them any for fear of getting into the same situation. That was how the state of Qi obliterated the state of Hengshan. It is perhaps history’s first example of economic warfare. The state of Qi was recognised as the first hegemon, most likely to unify China.

Confucius (551-429 BC) appeared on the Spring Autumn scene almost 200 years after the death of Guan Zhong. Going by Confucian philosophy, Guan Zhong was not a gentleman. He lacked frugality and led a somewhat decadent life full of improprieties. Later in life, Confucius recognised Guan Zhong’s contributions to his state and admitted that the people of Qi would have been worse off without him.