Working Paper: NBER ID: w23937
Authors: T. Terry Cheung; Theodore Palivos; Ping Wang; Yinchi Wang; Chong K. Yip
Abstract: To explore the interplays between trade and institutions, we construct a staged development framework with multi-period discrete choices to study the colonization of Hong Kong, which served to facilitate the trade of several agricultural and manufactured products, including opium, between Britain and China. Based on the historical data and documents that we collected from limited sources, we design our dynamic trade model to capture several key features of the colonization process and use it to characterize the endogenous transition from the pre-Opium War era, to the post-Opium War era and then to the post-opium trade era, which span the period 1773-1933. We show that while the low opium trading cost and the high warfare cost initially postponed any military action, the high valuation of the total volume of bilateral trade, the rising opium trading cost and the anticipated increase in the demand for opium eventually led the British government to declare the Opium Wars, legalizing opium trade via the colonial Hong Kong. We also show that, in response to a drastic drop in opium demand and a rising opium trading cost, it became optimal for the British government to abandon opium trade soon after the founding of the Republic of China.
Keywords: Dynamic Trade; Endogenous Institutions; Colonization; Hong Kong; Opium Trade
JEL Codes: E02; E65; F54; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high warfare costs (H56) | duration of phase I (pre-opium war era) (B11) |
| low opium trading costs (F11) | duration of phase I (pre-opium war era) (B11) |
| high valuation of total bilateral trade (F10) | declaration of the opium wars (D74) |
| rising opium trading costs (F69) | declaration of the opium wars (D74) |
| anticipated increases in opium demand (J23) | declaration of the opium wars (D74) |
| significant drop in opium demand (F69) | abandonment of the opium trade (F13) |
| rising opium trading costs (F69) | abandonment of the opium trade (F13) |