The Economic Consequences of the Opium War

Abstract

This paper studies the economic consequences of the West's foray into China after the Opium War (1840-42), when Western colonial institutions were introduced in dozens of so-called treaty ports. Among these institutions was the Maritime Customs Service, organizing trade and tariff collection, as well as consular courts that projected Western legal traditions into China. The paper finds, first, that Western countries had a positive impact on China's economy over the 19th century. Regions with Western influence exhibited a higher rate of growth of modern firms and more investment into advanced machinery; moreover, Western influence brought down local interest rates by almost a quarter, with much of this due to Western institutions providing enhanced security and lower risk as opposed to additional capital. Second, both legal and trade institutions contributed to the lowering of risk; firm growth, investment, and technology adoption were closely affected by trade institutions while legal institutions played a stronger role for capital market performance. We also assess individual elements of extraterritorialty in China such as the scope of jurisdiction, appeal process, court proceedings, and sentencing. Third, we demonstrate that the geographic scope of influence went far beyond the immediate vicinity of treaty ports, customs houses, and consulates. Western institutions affected Chinese areas up to 400 kilometers away, influencing a large part, perhaps even the majority, of China during this period.