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History of International Trade: From Imperial Trading Companies to SMEs

By Karen Lynch

The storied trading companies of 17th and 18th century European imperialism wielded such vast power in international trade that they printed their own money and raised their own armies. Fast forward to today, when millions of small and midsize enterprises (SMEs) can “go global” virtually overnight via the internet, powerful e-commerce platforms, and global shipping companies. Times have changed, but international trade still bears the mark of these first-ever multinational corporations.

Accounts such as Stephen R. Brown’s Merchant Kings: When Companies Ruled the World, 1600-19001 describe the deadly business practices of many of those earliest international trading companies, along with the fates of societies they subjugated around the world. This article focuses on some of the modern aspects of business and international trade that trace their roots to Britain’s East India Company (EIC) and its counterparts in other European nations.

 

Think “too big to fail” was invented yesterday? Think again. The EIC was bailed out in the late 1700s.2 Many business, marketing, and international trade practices that are around today were devised by the international trading companies: limited liability corporations, publicly traded companies, trade financing, branding, global supply chains – even the gig economy (called the “putting-out” system at the time; see more below). Not to mention their seamier cousins: mismanagement, bribery, insider trading, and dumping.

 

The Rise and Fall of International Trading Companies

 

The Dutch East India Company (VOC, for Vereenigde Oost-Indische Compagnie) and the EIC were considered the two great multinational corporations of premodern times.3 Most agree that their influence was far greater than mere commerce, spearheading colonization in Asia and elsewhere.

 

The most traded goods of their day, of course, were not cars, oil, and electronics, as they are in our time.4 Early European demand was for spices, textiles, tea, and porcelain imported from Asian merchants, who primarily traded for silver. The European companies traded within Asia, as well – bringing Indian silk to Japan, for instance, or Bengali opium to Indonesia.5

 

The VOC was predominant in the 17th century. In fact, by a recent estimate, it still holds the record for most valuable company of all time, at an inflation-adjusted $7.9 trillion. “Modern juggernauts like Apple and Amazon don’t even come close,” according to Visual Capitalist, a business media site.6

 

The company built a network of hundreds of bases in Asia, from single offices and warehouses to massive commercial complexes that included production facilities. In the VOC’s heyday, two or three fleets, each carrying hundreds of sailors, soldiers, and other employees, made the eight-month voyage every year from the Netherlands to Asia.7 Some ships turned a 400 percent profit.8

 

The VOC eventually succumbed to a range of influences, including war, staggering debt, and the rise of the EIC. Upon the VOC’s demise, the EIC took over much of its Asian infrastructure.

 

Like the VOC, the EIC owed much of its success to government-granted monopolies – on the import of tea from China into England, for instance. First granted an operating charter by Queen Elizabeth in 1600, the company had made 4,600 voyages from London to Asia by 1833. Among other details from its ledgers, the EIC had imported 1.76 million pieces of Indian textiles (83 percent of its entire trade) by 1684, according to historian Nick Robins.9

 

The EIC was so powerful in England that it was simply referred to as “the Company.” Richard Clive – who started as an EIC clerk and bookkeeper and took power as governor of the prosperous Bengal region of India – eventually became the richest self-made man in Europe.

 

Military power was part of the equation, as well. As a form of competition, for example, the EIC and its French counterpart were known to exchange cannon fire. What’s more, the EIC, “using its rapidly growing security force – its army had grown to 260,000 men by 1803 – swiftly subdued and seized an entire subcontinent,” according to historian William Dalrymple.10

 

It did not end well for either the EIC or the Indians – or even for Clive. As famed economist Adam Smith said at the time: “The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever.” Ultimately, India became a British colony as the EIC was nationalized; Clive committed suicide.

 

International Trading Companies as Business Innovators

 

“The Company pioneered the shareholder model of corporate ownership and built the foundations for modern business administration,” Robins wrote of the EIC.11 “The VOC transformed financial capitalism forever in ways few people understand,” according to Global Financial Data, an online database.12

 

Trade finance, prior to trading companies’ innovations, consisted of partnerships that funded individual ships as they embarked, and then disbanded once the ships returned. The international trading companies introduced limited liability to mitigate risks for their shareholders and companies. To diversify risk, “the colonial trading companies of the 1600s and 1700s took financial capital to a different level, allowing thousands of people to invest in thousands of shipping ventures,” according to Global Financial Data. As stock markets became established, VOC investors also introduced such financial tools as futures contracts, options, and short selling. Government regulation of stock markets was born, as trading heated up.13

 

With the rise of the EIC, London replaced Amsterdam as the engine of global capitalism, losing its place to New York only after World War I.

 

History further shows that these international trading companies were also branding pioneers. The EIC, for example, created an identifying mark, called the Merchant’s Mark, for all its goods and cargoes. “This mark was considered by many to be the first commercial trademark and soon became a global symbol of excellence recognizable across all of the brand’s activities,” according to the GeniusWorks professional development site.14

 

Today, the EIC’s business model “should sound familiar: keeping supply and production costs low while maximizing the price of goods sold in England,” according to a Business Insider account. “It ended up outsourcing as much as it could, including manufacturing, shipping, and retailing. The value it added was in the selection of goods and in keeping the supply chain humming.”15

 

A free-trade lobby emerged in London, like the one in Washington today, and was one of the pressures that led to the eventual dissolution of the EIC.16

 

SMEs in International Trade: Then and Now

 

At first, Asians had little interest in such European goods as woolens, but some of the SMEs of the day began turning imported textiles into finished goods that were re-exported. “Cottage industries” were built by individual manufacturers. Merchant traders fostered this increasing involvement of farm families in market-oriented craft production, in what was called the “putting-out system” – akin to today’s gig economy. “This provided a strong platform for commerce with, and settlement in, far-flung territories,” according to a BBC account.17

 

Halfway around the world, Indian SMEs did not fare so well. Forced to sell exclusively to the EIC at whatever price the Company dictated, many had to abandon their crafts. With the arrival of the Industrial Revolution and machine-made textiles from England, their fate was sealed. In India, a craze developed for goods “Made in England” as status symbols and signs of modernity. The competition shut down even more rural artisan industries.18

 

Today, large multinationals continue to control most international trade – though the concentration of business is in no way comparable to the days of the imperial trading companies.

 

Even though digital economy innovations such as e-commerce platforms have lowered SMEs’ barriers to international trading, SMEs’ contribution to exports is only 20 to 40 percent in most advanced economies, according to the Organization for Economic Cooperation and Development (OECD). This is despite the fact that SMEs account for more than 95 percent of all companies.19 A 2017 report from the U.S. Department of Commerce delivered mixed news, with a drop in small-company (fewer than 100 employees) exporters and a slight increase in medium-size company exporters (250-499 employees).20

 

National and international policymakers continue to take steps to improve SME opportunities for international trade. The G20 has gradually advanced work on creating a better global environment for digital trade – particularly for SMEs. Public and private sector groups have called on the G20 for faster results.

 

The

Takeaway:

The international trading companies of the 17th and 18th centuries might have no real counterparts today, but many modern business and trade practices descended from these early giants of globalization. Evolution toward smaller international trading companies continues today, in the era of digital globalization.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. Merchant Kings: When Companies Ruled the World, 1600-1900, Thomas Dunne Books; https://books.google.com/books/about/Merchant_Kings.html?id=DWeUzzrFNX4C
2. The Corporation That Changed the World: How the East India Company Shaped the Modern Multinational, Pluto Press; https://www.amazon.com/Corporation-That-Changed-World-Multinational/dp/0745331955
3. A Splendid Exchange: How Trade Shaped the World; Grove Atlantic Ltd; https://groveatlantic.com/book/a-splendid-exchange/
4. “The World’s Most Traded Goods,” Forbes; https://www.forbes.com/sites/niallmccarthy/2018/02/21/the-worlds-most-traded-goods-infographic/#330ff31961fc
5. “1602 Trade with the East: VOC,” Rijksmuseum; https://www.rijksmuseum.nl/en/rijksstudio/timeline-dutch-history/1602-trade-with-the-east-voc
6. “The Most Valuable Companies of All-Time,” Visual Capitalist; http://www.visualcapitalist.com/most-valuable-companies-all-time/
7. “1602 Trade with the East: VOC,” Rijksmuseum; https://www.rijksmuseum.nl/en/rijksstudio/timeline-dutch-history/1602-trade-with-the-east-voc
8. “The Rise and Fall of the Largest Corporation in History,” Business Insider; https://www.businessinsider.com/rise-and-fall-of-united-east-india-2013-11
9. The Corporation That Changed the World: How the East India Company Shaped the Modern Multinational, Pluto Press; https://www.amazon.com/Corporation-That-Changed-World-Multinational/dp/0745331955
10. “The East India Company: The Original Corporate Raiders,” The Guardian; https://www.theguardian.com/world/2015/mar/04/east-india-company-original-corporate-raiders
11. The Corporation That Changed the World: How the East India Company Shaped the Modern Multinational, Pluto Press; https://www.amazon.com/Corporation-That-Changed-World-Multinational/dp/0745331955
12. “The Rise and Fall of the Largest Corporation in History,” Business Insider; https://www.businessinsider.com/rise-and-fall-of-united-east-india-2013-11
13. Ibid.
14. “The East India Company,” GeniusWorks; http://www.thegeniusworks.com/gamechanger/east-india-company/
15. “Bailouts, Bribes, and Insider Trading: Here's What The World's Leading Business Looked Like 300 Years Ago,” Business Insider; https://www.businessinsider.com/history-of-british-east-india-company-2013-4
16. “A Brief History of the English East India Company,” Qatar Digital Library; https://www.qdl.qa/en/brief-history-english-east-india-company-1600%E2%80%931858
17. “A Flourishing Power,” BBC; http://www.bbc.co.uk/history/british/empire_seapower/trade_empire_01.shtml
18. “How British Rule Ruined the Life of Artisans and Craftsmen in India,” Preserve Articles; http://www.preservearticles.com/2012010920197/how-british-rule-ruined-the-life-of-of-artisans-and-craftsman-in-india.html
19. “Fostering Greater SME Participation in a Globally Integrated Economy,” Organization for Economic Cooperation and Development; https://www.oecd.org/cfe/smes/ministerial/documents/2018-SME-Ministerial-Conference-Plenary-Session-3.pdf
20. “Small and Medium-Sized Enterprises Reaching New Markets,” U.S. Commerce Department; https://www.commerce.gov/news/blog/2017/05/small-and-medium-sized-enterprises-reaching-new-markets

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