Sorting: The Function of Tea Middlemen in Taiwan during the

Japanese Colonial Era

Hui-wen Koo and Pei-yu Lo

Background

• English merchant John Dodd introduced tea trees to Taiwan in 1865.• Among all industries in Taiwan, the product value of tea was the highest up to 1906.• 包種 was exported to America and 烏龍 to Southeast Asia.• Tea trees grew on hills.• Tea refineries ( 茶館 ) concentrated in 淡水河岸之大稻埕 .

Tea Middlemen, 茶販人 • Fresh tea leaves ( 茶菁 )• Crude tea ( 粗茶 ): farmers did preliminary

processing to rid leaves of moisture so as to lessen transportation cost

• Refined tea ( 精茶 ): product of refineries• In Ching Dynasty, tea middlemen from Fukien

crossed the Strait each tea season to collect crude tea in the hills and resell it to refineries in 大稻埕

• In Japanese colonial era, native Taiwanese assumed responsibility for intermediation.

Indirect vs. Direct Trade

• Indirect trade– farmers tea middlemen refineries– critique: • complicated (market reform in British Africa)• exploitation (buy low and sell high)• tea middlemen mixed up crude tea

• Direct trade– farmers tea auction house refineries 台灣茶共同販賣所 (1923—1942)

Tea auction house

• A farmers’ cooperative• Operating cost was financed by farmers’

membership fees, trading charges and subsides from the Governor-General ( 台灣總督府 )

• 理事長由總督府殖產局特產課之課長兼任• Tea middlemen competed with a subsidized auction

house for customers.• Why did tea middlemen survive?• What’s the function of a tea middleman? How does

he lower transaction cost?

Transaction costs

• Refineries hired experts to appraise crude tea– 佐佐英彥 (1928) calculated a 5-year average of

prices for 17 varieties of crude tea. Each variety was subdivided according to whether the crude tea would be made into oolong or pouchong.

– For crude tea to be refined into oolong, 白毛猴 fetched the highest price per 60kg (40.14 yuan) and 宇治 the lowest (18.60 yuan).

– For crude tea to be refined into pouchong, 青心 fetched the highest price (33.75 yuan) and 白毛猴 the lowest (14 yuan)

• 白毛猴 at oolong refineries must be of a higher grade than at pouchong refineries.

• Refineries with different know-how valued the same variety of crude tea differently.

• Proper appraisal of crude tea was important to refineries.

Price search by middlemen• The search had to be repeated every season

because not only would a given refinery’s offer vary through time, the ranking of refineries’ offers also changed. – This was because the value of crude tea at a refinery

changed drastically with the refined tea’s export price, and prices of various refined tea moved incoherently.

– 包種茶分花香茶及素茶，花香茶又有秀英，黃枝，茉莉等數種 . When the flower price rose, the demand for crude tea at refineries for flavored pouchong decreased, and offers at refineries for plain pouchong might appear more attractive.

Frequency of appraisals

• 20,000 tea farmers• 60 – 105 refineries in 1920s• 98 – 280 middlemen in 1920s• 25 varieties of crude tea under price

regulations in 1942• direct trade: hetrogeneous buyers and sellers:

1,200,000 = 20,000 * 60

Frequency of appraisals• Indirect trade: (1) hetrogeneous sellers and

homogeneous buyers at hills (2) hetrogeneous buyers and sellers in Ta-tao-cheng.

• Trade at hill• 20,000 + 60 * 280 * n (n: number of varieties of crude tea an average

middleman collects)• The frequency in the indirect trade is lower than

that in the direct trade when n < 70.• Trade off of n: frequency of appraisals vs. allocation

efficiency

Transaction cost per appraisal

• Refineries: c1• Farmers: c2• Middlemen: c3 < c2• Q: Are c1, c2 and c3 very high?• research strategy

Farmers’ choice: Who will choose the direct trade?

• (A) A farmer’s crude tea is so much better than others’ in the same lot that he is unwilling to mingle his product with others’ in an indirect trade.

• Adverse selection: after these type A farmers quit indirect trade, the average value of a batch falls. This will trigger the 2nd generation of type A farmers, i.e. those whose crude tea is of higher quality than the new average, to switch to direct trade.

• If c1 is close to 0, we predict: (1) Almost all crude is sold at the auction house. (2) The average price at the auction house is constantly higher than that in the indirect trade.

• (B) Big farmers who can take advantage of a volume sale by themselves. So long as c3 is large enough, type B farmers switch to direct trade to save payment to their middlemen.

• Dynamics

Data• Was c1 close to 0 so that the indirect trade

vanished?• Were c1 and c3 close to 0 so that the price of

direct trade was higher than that of the indirect trade all the time?

• Was c3 high enough to attract big farmers with crude tea of low value?

• Could the auction house survive?