Economic History Association

The International Tea Cartel during the Great Depression, 1929-1933

Author(s): Bishnupriya Gupta
Source: The Journal of Economic History, Vol. 61, No. 1 (Mar., 2001), pp. 144-159
Published by: Cambridge University Press on behalf of the Economic History Association
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 The International Tea Cartel During the
Great Depression, 1929-1933
BISHNUPRIYAGUPTA

An international sample of 349 British-owned firms is analyzed to test the effective-

ness of the International Tea Agreements of 1930 and 1933. Although the agree-
ments reduced output overall, in 1930 there were significant regional differences in
the extent of compliance, with firms in Eastem India reducing output more than did
firms in Ceylon. These differences can be attributedto regional differences in organi-
zational structure. Archival evidence suggests that the breakdown of collusion in
1931 and 1932 was due to a bargaining conflict between established producers in
India and Ceylon and the newer plantations of Java and Sumatra.

Producers of commodities like wheat and sugar may envy

thefacility with which the tea growing industry obtained a
30 percent rise in average tea prices and a 90 percent en-
hancement of tea share values-all within the space of a
little more than six months.
The Economist, 26 August 1933

This studywill analyzeeffortsto cartelizethe internationalmarketfortea

between 1929 and 1933. Theparticipantswereproducersin India,Cey-
lon, andthe DutchEastIndies,the threecountriesthatdominatedthe world
tea trade(Table1). These effortswere widely viewed as successful:output
fell, anda steepdeclinein teapriceswas reversed(Figure1). The firstcollu-
sive agreement,signed in 1930, was open, explicit, and voluntaryin the
sense thatthe industrydid not rely on legal sanctionsto enforcethe agreed
outputrestrictions.Producersfailed to renew the agreementin 1931 and
1932, but in 1933 they signeda new initiative.This second agreementwas
longer-livedand was also backed by legislation in the three countries.I
analyzedatafrom a sampleof 349 British-ownedfirmsto test for compli-
ancewith the agreements.Thesefirmswere mainlylocatedin EasternIndia

The Journal of Economic History, Vol. 61, No. 1 (March 2001). ? The Economic History
Association.All rightsreserved.ISSN 0022-0507.
Addresscorrespondenceto BishnupriyaGupta,Departmentof EconomicHistory,LondonSchool
of Economics,HoughtonStreet,LondonWC2A 2AE, UnitedKingdom.E-mail:b.gupta@lse.ac.uk.
My debtsareto Nick Crafts,TimHatton,two anonymousreferees,andthe editorsof this JOURNAL
forvaluablesuggestions.I thankV.Bhaskar,SteveBroadberry, MortenHviid,TedTo,andthe seminar
participantsat Essex, Oxford, the WorldCongress in Cliometricsin Munich, the Globalization
workshopatWarwick,andtheEARIEConferenceatCopenhagenforcomments.TheRoyalEconomic
Society and the NuffieldFoundationfundedthis project.I am gratefulto the staff of the IndiaOffice
Libraryfor their help, and to AlexanderCobhamfor his careful researchassistance. The usual
disclaimersapply.

144
 InternationalTea Cartel 145

TABLE1
TEA PRODUCTION AND SHARE OF WORLD EXPORTS, BY REGION, 1929-1933

Share of World Exports (percentages) Output (million lbs.)

East and Java and East Java and South

South India Ceylon Sumatra India Ceylon Sumatra India

1929 39.7 26.0 16.5 433 167 58

1930 40.1 26.1 17.7 391 159 55
1931 38.2 27.0 19.2 394 179 57
1932 39.7 27.1 18.6 434 255 181 63
1933 43.6 25.5 18.7 384 221 166 61
Source: International Tea Commititee, Bulletin of Statistics, 1946.

and Ceylon, and accountedfor a large share of tea output.1 Outputwas

reducedat the level of the firm in both years of the agreement.2However,
the geographicalheterogeneityin our sampleallows us to conducta more
disaggregatedanalysis, which reveals significantdifferences in behavior
across regions. Following the voluntaryagreementof 1930 there were
significant discrepancies in the degree of compliance, with Ceylonese
firms failing to reduce outputto the same extent as their counterpartsin
EasternIndia.After the impositionof quotaenforcementin mid-1933, by
contrast,therewereno significantdifferencesin compliancebetweenthese
two regions.
Theempiricalevidenceis interpreted usingthetheoryof oligopolisticcollu-
sionunderconditionsof repeatedinteraction.Althougheachfirmhas a short-
termincentiveto deviatefromthe collusiveagre-ement by increasingoutput,
it is restrainedfromdoingso, as sucha deviationresultsin the breakdownof
collusioninthefuture.3Thistheoryalsoprovidesoneexplanationforepisodes
of "pricewar":if individualoutputsarenot observedby otherfirms,collusion
is enforcedby respondingto a low priceby a pricewar.4An alternativeexpla-
nationfor the breakdownof collusionis bargaining conflict,if thereexist a
multiplicityof possiblecollusiveagreements,with a differentsharingof the
benefitsamongtheparties.Thepartiesmayfail to agreeoverthe termns of the
agreementandabandoncollusion.Bargainingconflictsarelikelyto be severe
whenthepartiesconcernedareasymmetrically placed,withwide differences
in market share,as was the case in tea. These in marketsharehave
differences
implicationsalso for the extentof compliancein the event of an agreement.
If an agreementmandatesuniformreductionsin outputacrossfirms,and if
these firm-levelreductionsin outputare not observable,then smallerfirms
will have a lesserincentiveto complyfully.

'The sample also includes a small number of firms located in Southem India and in Java and
Sumatra. In the latter region, the majority of firms was Dutch-owned and is not in the sample.
2This replicates Gupta's ("Collusion") conclusion for a sample of 114 Eastem Indian companies
registered at the Calcutta stock exchange.
3Friedman, "Non-Cooperative Equilibrium."
4Green and Porter, "Non-Cooperative Collusion"; Porter, "Study"; Ellison, "Theories"; and
Levenstein, "Do Price Wars?" have discussed the role of price wars in sustaining collusion.
146 Gupta

25 -

20-

Assam

*~~
10
-~Ceylon

-Cachar--
S- ----Java

0 I I I I I '
1926 1927 1928 1929 1930 1931 1932 1933

FIGURE 1
TEA PRICES IN LONDON, 1926-1933
(annual averages)

Sources: As in Table 1.

This article will address the following questions. First, was non-
cooperativeenforcementof collusionmore effective in EasternIndiathan
in Ceylon,so thatlegislativebackingwas necessaryfor a trulyinternational
cartel?Second,didthe differentialresponseof firmsto the 1930 agreement
result in price wars in 1931 and 1932, as suggestedby E. Green and R.
Porter,or did the failureto renew the agreementresult from a bargaining
conflictoverhow to sharetheburdenof outputreduction?Archivalmaterial
on the correspondenceamongthe producersover this period suggests that
the period of high outputin 1931/32 was due to a bargainingconflict be-
tween the DutchEastIndiesandthe Britishcolonies ratherthanthe punish-
mentphaseof a collusiverepeated-gameequilibrium.A key eventin resolv-
ing thebargainingconflictmayhavebeenthe introductionof ImperialPref-
erence in 1932, which affordedIndiaand Ceylonpreferentialaccess to the
Britishmarketandreducedthe bargainingpower of Dutchfirns.
The analysisbegins with a discussionof the organizationalstructureof
the industryin EasternIndiaandCeylon,andof the collusive agreementsof
the 1930s. It is followedby statisticalanalysisand,lastly,by a discussionof
the qualitativeevidenceon the negotiationsoverthe formationof the cartel.
 InternationalTea Cartel 147

ORGANIZATION OF THE INDUSTRY

Tea plantationswere organizedas joint-stockcompanies.In India and

Ceylon,theseweremainlyBritish-owned.Inthe Dutchcoloniesof Javaand
Sumatramost were Dutch-owned,buta few were registeredon the London
stockexchange.Indiantea companieswereregisteredas sterlingcompanies
in Londonor as rupeecompaniesin India.However,theplaceof registration
did not make any significantdifferenceto the functioningof the company.
Managementwas always in the handsof Britishmanagingagentsworking
on long-termcontracts.The Britishagentshadlocal counterparts who were
responsible for day-to-dayoperations.These Calcutta-basedagents also
managedthe rupeecompaniesin EasternIndia.A typicalmanagingagent
ownedsharesin severalcompanies,bothsterlingandrupee,andwas respon-
-siblefor theirmanagement.5
Indianplantationswere locatedin two distinctregions:the East and the
South.The ownershipstructurewas somewhatdifferentin SouthernIndia,
as the majorityof the companieswere small andlocally registered.Due to
this differencein organization,I treat SouthernIndia as a region distinct
from EasternIndia.6
The organizationalstructureof the industryin Ceylonwas similarto that
in EasternIndiain manyways. Companieswereregisteredeitherin London
(sterlingcompanies)or in Colombo(rupeecompanies)and run by British
agents. An importantdifferencewas that most agents were smaller and
responsiblefor managingfewer companies.
Despite the largenumberof firmsin the industry,the managing-agency
systemresultedin some concentrationof controlandcreatedthe possibility
of coordinatingoutputdecisionsacrossfirms(Table2). A managingagent
who was responsiblefor severalplantationswould be likely to take into
accountthe negative effect of one plantation'soutputexpansionupon the
prices andprofitsof his otherplantations.

CollusiveAgreements
As prices plummeted,the tea producers'associationsin India,Ceylon,
and the Dutch East Indies in 1930 signed an internationalagreement,
whereby the signatoriesagreedto reduce outputby a percentageof past
production. The stipulatedreductionin output for each firm varied be-
tween 3 percent and 15 percent, dependingon the quality of tea.7 This
agreementwas entirelyvoluntary:the associationsaskedtheirmembersto
5Lokanathan,IndustrialOrganization,pp. 15-21.
6 Both regionswere administeredby the governmentof BritishIndia and faced a commonlegal
system.
'Griffiths,History,p. 182.
148 Gupta

TABLE2
MARKET SHARES OF MANAGING AGENTS, 1929

India Ceylon
MarketSharea Number Percentage Number Percentage

0-i percent 14 34 28 62
1-2 percent 14 34 10 22
2-5 percent 9 22 7 16
Morethan5 percent 4 10 0 0
Totalnumberofagents 41 100 45 100
Totalnumberof fimns 229 94
a
Definedas the shareof totaloutputproducedby all firmsunderthe agent'smanagement.
Source:MincingLane Tea& RubberBrokers'Association, Guide;andInvestors'EasternIndia YearBooks.

restrictoutput,but no enforcementmechanismwas adopted.No penalties

were specified for noncompliance,leavingonly the implicitthreatthatthe
agreementwould be abandonedin the future.Attemptsto renewthe agree-
ment in 1931 and 1932 failed. I shall discuss the reasonsfor this failurein
a following section; here I simply note that an importantfactor was the
failureof plantationsin JavaandSumatrato meettheirtargetedreductions.
Prices continuedto fall in all markets.
The InternationalTea Agreementwas signed in 1933. All signatories
agreedto the samereductionin exports,by 15 percentof the maximumat-
tainedin anyof theyearsfrom 1929to 1932.Exportquotaswere assignedto
individualfirns, but could be reallocatedby managingagents among the
firmstheymanagedso long as eachagent'soverallreductionmet the bench-
mark.The agreementcovereda periodof five years,but the exportquotas
weresubjectto annualrevisiondependingon the stateof themarket.Legisla-
tion in eachof theparticipatingcountriesmadethe exportquotalegallybind-
ing, and limited acreage expansion to a maximum of 0.5 percent per year.
The Indian Tea Control Act was passed in November 1933, at the end of
the harvesting season in Eastern India. However, already as of the middle of
that year exports were regulated by a special notification ofthe Sea Customs
Act, which allowed regulation of seaborne trade.8Similar regulations were
enacted in Ceylon and the Dutch East Indies in May and June of 1933, re-
spectively. The legislation made reduction in exports obligatory, and en-
sured compliance.

EMPIRICAL EVIDENCE: DID FIRMS COMPLY?

Before proceeding to the formal analysis of firm-level data, it may be

useful to discuss the main trends based on more aggregate evidence. Output
8Rothennund,India,p. 197.
 InternationalTea Cartel 149

declinedin all regions in both yearsof agreement(see Table 1; Ceylonese

dataarelackingfor 1930,butthe IndianTeaAssociationreportedreduction
in outputin Ceylon). But this is not to say that all countriesmet theirtar-
getedreductions.Inthe case of CeylonandtheDutchEastIndies,in particu-
lar,it seems clearthatthey did not.
The restriction of output appears to have had an effect on prices
(Figure 1). The beginning of the 1930s was a period of falling prices;
However, the decline in tea prices in 1930 was smallerthan in either the
previous year or the two following, when therewas no restrictionin out-
put. Prices rose from 1933, following the Tea Agreement.A comparison
withpricesof otherbeveragesis especiallyinstructive,as coffee andcocoa
prices continuedto decline. This supportsmy contentionthat the move-
ments in quantitiesof tea producedreflectedsupplyrestrictionsdue to the
control schemes.9
An alternativehypothesis,thatthese reductionsin outputwere mainly a
responseto demandshocks,is less plausible.The mainmarketfor tea was
Britain,which accountedfor 56 percentof the internationaltea market.
Therefore,consumerexpenditurein theUnitedKingdomis a goodproxyfor
aggregatedemandshifts. Real consumerexpenditureincreasedevery year
duringthe period 1929-1933.1oThe correlationcoefficientbetween price
andquantityof teapurchasedin theUnitedKingdomwas - 0.94, suggesting
thatthe supplyshiftsplayedthe decisiverole in thisperiodandthatdemand
shockswere less important.
Finally,in the econometricestimation,priceis treatedas endogenousand
the two-stage estimationprocedureuses demand-sidevariablesas instru-
ments.Thisprocedurerulesout the possibilitythatthe estimationof supply
picks up the effect of shifts in demand.

TheData

The 349 firmsin my dataset were locatedin fourregions:EasternIndia

(229 firms,representing83 percentof the region'soutputin 1933), Ceylon
(94 firms, 39 percent),SouthernIndia (14 firms, 36 percent),and Java/
Sumatra(12 firms, 18 percent)."Of these firms,235 were sterlingcompa-
nies registeredin London,the rest being rupeecompanieson the Calcutta
stockexchange.Seven region-specificpriceshave been used in the estima-
I
Anotherexplanationcould be a weather-related supply shock. We do not find any mention of
adverseweatherconditionsin 1930 or 1933 in the correspondenceof the IndianTeaAssociationand
the CeylonAssociationor in the reportsof the IndianTeaAssociation.
0Feinstein,NationalIncome,table5, p. T16.
" Six finnshadplantationsin two differentregions;I haveincludedthemin thelargerregionforthe
sakeof convenience.
150 Gupta
TABLE3
COMPLIANCE WITH OUTPUT-REDUCTION AGREEMENTS, 1930 AND 1933
(percentage of firms)

India Ceylon
1930
Reduced output 86 76
Reduced output by 10 percent or more 56 17
1933
Reduced output 89 90
Reduced output by 15 percent or more 52 51
Note: In 1930 the negotiated reduction varied between 3 and 15 percent, depending on the quality of
tea. In 1933 exports were to be reduced by 15 percent in all cases.
Source:Mincing Lane Tea & RubberBrokers'Association, Guide;andInvestors'EasternIndia YearBooks

tion, as the qualityof tea variedacrossthe regionsdependingon soil, eleva-

tion, andclimate.'2
The key variableof analysisis annualfinn-level output.This may have
differedfrom sales, due to changesin inventories,but tea loses flavorrap-
idly and inventoriesthereforecould not be carriedfor very long. It was
estimatedthatJavateas lose flavorin threeor fourmonths,while Indianteas
can be storedfor seven to nine months.'3Firm-leveldataon inventoriesis
not available.However,I do have informationon aggregatestocks of tea
held in warehousesin Britainin variousyears.Thesedatashow thatinven-
torychangesdid not move in sucha way as to offsetthe changesin output.
The averagechangein stockswas 1.6 percentof totalimportsintothe Brit-
ish marketover the years 1929 to 1933. In 1930 stocks increasedby 2.4
percent,and in 1933 they declinedby 4.2 percent.'4Thereforechangesin
stocks in warehousesmay have partiallyoffset the outputreductionsin
1933, but they did not do so in 1930.
Table3 presentsevidence on complianceby firms to a reductionof 10
percentin 1930 and 15 percentin 1933.The 1930 agreementsoughtreduc-
tions thatvariedbetween3 percentand 15 percentdependingon the quality
of tea. Informationon firm-levelmandatedreductionsis not available.In
1933, a uniformexportquotaof 85 percentapplied,but outputreductions
couldvarydependingon how muchthe firmsold in the domesticmarket.If
individualoutputwas not easy to monitor,firms could also choose a level
of outputthatwas differentfromthe.negotiatedreduction,but sufficiently
low in orderto avoidpunishment.Indeed,thisappearsto havebeenthe case.
Althoughmost firmsreducedoutputto some extent,fewer reducedoutput
by the benchmark.The rate of full compliancewas higher in 1933, and
12ForEasternIndiatherearefourdifferentprices,
correspondingto
theregionsof Assam,Darjeeling,
Dooars,and Syhlet.We haveregionalpricesfor SouthemIndia,Ceylon,andJava.The Javaprice is
used forplantationsin Sumatra.
3 hmperialEconomicCommittee,cited in Wickizer,Tea,Coffee,p. 191.
l IntemationalTeaCommittee,Bulletin,tableF1.
 InternationalTea Cartel 151

similaracross EasternIndiaand Ceylon.The numberof firmsthatdid not

reduceoutputwas also lower in 1933.

Estimation
I test for complianceto the two agreementsby estimatingthe following
equation

xit= ai +blpjt+b21930+b31933 +ei (1)

wherexitis the naturallogarithmof outputof firm i in year t, ai is the firm-

specific effect,Pjtis the logarithmof the region-specificprice,"51930 is a
dummyvariablethattakes a value of one in the year 1930, and 1933 is a
dummythattakes a value of one in 1933.16Equation1 is estimatedusing
both ordinaryleast squares(OLS)andtwo-stageleast squares(TSLS). The
instrumentsusedarelaggedprice,laggedoutput,consumerexpenditure,and
the price of coffee in the United Kingdom.17The results are reportedin
Table4. These estimationsallow for firm-specificfixed effects, eitherby
introducinga firmdummyin the case of OLS, or by firstdifferencingwhen
using TSLS. My findingis thatthe controlschemeshad a significantnega-
tive effect on outputin both 1930 and 1933. However,thereis a significant
differencein the extent of firm compliancein the two years.
I now exploreregionalvariationin theextentof compliancewiththecontrol
schemes,and allow the coefficientson the control-schemedummiesto vary
acrossregions.Thefollowingequationis estimatedusingbothOLSandTSLS

xit= ai + blpjt + b2EIndia3O+ b3Ceylon30 + b4Java3O+ b5SIndia3O (2)

+b6EIndia33+ b7Ceylon33+ b8Java33 + bgSIndia33 + eit

I51use nominal prices, as constructing an accurate index of the relevant real price is difficult. Ideally,
one would like to use nominal price deflated by the relevant wage. However, the latter is difficult to
construct since workers were paid in a variety of ways, including money wages, subsidized food grains,
and the use of plots of land. I have also estimated a version of the reported regressions where prices are
deflated by the region-specific general wage, and found that the results are very similar to those
reported. As these wages may not be appropriate to the tea industry, using nominal prices is my
preferred second-best option.
16 The use of separate dummy variables is justified as the two years had different types of regulation.

Table 4 also suggests that the extent of compliance differed in the two years.
'7Lagged price and consumer expenditure are used as instruments in one estimation, and in the other
these variables are used together with the U.K. coffee price. This latter is an appropriate instrument, as
the correlation coefficient for tea and coffee prices is positive (0.47). The results of the second are
similar, except with respect to the coefficient on the price of tea. We report only the first set of
estimates.
152 Gupta
TABLE4
DETERMINANTS OF FIRM OUTPUT
(dependent variable: log output of firm i in year t)

OLS TSLS

Pit 0.03 0.03

(1. 1) (1.0)
1930 -0-05 -0.07
(3.9)*** (6.4)***
1933 -0.12 -0.15
(8.7)*** (6.4)***

R2 0.97
N 1,745 1,396
No. of firms 349 349
*** = Significant at the 1 percent level.
Note: t-statistics are given in parentheses. 1930 and 1933 are dummy variables for the control schemes
agreed in these years; they take a value of I in the year in question, and zero otherwise.
Sources: See the text.

Eightdummyvariableshavebeenconstructedby interactingthefourregion-
specific dummyvariables(for EasternIndia, Ceylon, Java/Sumatra,and
SouthernIndia)with each of the dummyvariablesfor the controlschemes.
Table5 presentstheresults.Thebasicfindingis thatthe responseof firms
was similaracrossregionsin 1930,exceptin Ceylon,whichrespondedonly
weakly (the differencebeing significantat the 10 percentlevel). In 1933
Ceylonfell in line with the othersby reducingoutput,while SouthernIndia
fell out of line by increasingoutput.This latterincreasetoo is statistically
significant.
The resultsfor Java/Sumatra and SouthernIndiashouldbe treatedwith
caution,giventheirmodestrepresentation in the sample.18
Butthe resultsfor
Ceylon and EasternIndiaare robust:firmsin these two regionsresponded
differentlyin 1930, when cooperationwas voluntary,but similarlyin 1933,
when it was mandatory.The resultssupportthe argumentthatincentivesto
collude can differ across firms. Indeed,firms in SouthernIndia were the
outliersin 1933, increasingoutputas pricesrose.19

An Explanation

Why didthebehaviorof firmsdifferacrossregions?Theorysuggeststhat

with imperfectmonitoring,largerfirmshave a greaterincentiveto comply
with a collusive agreementthando smallerones. In the case of the interna-
tional tea industry,size is best measuredat the level of the unit of control:
1 The sample has only those firms, which were registered at the stock exchanges in London and
Calcutta. However the finns from Southern India produced a significant share of regional output.
'9 There was no significant difference in the extent of output reduction between sterling companies
and rupee companies in Eastern India.
 InternationalTea Cartel 153
TABLE 5
DETERMINANTS OF FIRM OUTPUT, CONTROLLING FOR REGION
(dependent variable: log output of firm i in year t)

OLS TSLS

pit 0.03 0.05

(0.9) (1.0)
EIndia30 -0.06 -0.06
(4.2)*** (5.1)***
Ceylon30 -0.01a O.Oa
(0.5) (0.2)
Java3O -0.09 -0.06
(1.3)* (1.1)
SIndia30 -0.06 -0.06
(0.9) (1.2)
EIndia33 -0.13 -0.15
(7.3)*** (5-9)***
Ceylon33 -0.13 -0.15
(5.0)*** (5.5)***
Java33 -0.13 -0.2
(2.0)** (2.7)**
SIndia33 0.1 b o.gb
(2.1)** (1.4)*
R2 0.97
N 1,745 1,396
Number of firms 349 349
_Significantat the 1 percent level.
* = Significant at the 5 percent level.
= Significant at the 1 percent level.
a Significantly different (at the 10 percent level) from the coefficient on the dummy variable for 1930
in the other regions.
b Significantly different (at the 5 percent level) from the coefficient on the dummy variable for 1933
in the other regions.
Notes: t-statistics are given in parentheses. The region-specific dummy variables in this estimation are
constructed by interacting the region dummy variables with the dummy variables 1930 and 1933,
which take the value one in those respective years, and zero otherwise.
Source: Mincing Lane Tea & Rubber Brokers' Association, Guide; and Investors 'Eastern India Year
Books.

the managingagent.The decisionto restrictoutputwas implementedby the

managingagent,andfirmsunderthe directionof a singleagentwerepermit-
ted to pool theirquotas.
I calculatethe marketshareof each individualmanagingagent-that is,
the agent's share in total outputin the sample-for 1929. In India, four
agents had a marketshareof over 5 percenteach, and anotherten had a
marketsharebetween2 percentand5 percent;one-thirdhad a shareof less
than 1 percent.In Ceylonthis latterfigurewas as high as two-thirds:only
seven agentsout of a total of 46 had a marketsharebetween2 percentand
5 percent,andof these only one had a shareof more than2 percenton the
basis of Ceyloneseestates.
154 Gupta

The differencesin marketsharesof managingagentscan explain differ-

ences in incentivesto comply.Table2 presentsa comparisonof the market
sharesof managingagentsin IndiaandCeylon.It was notjust the interna-
tional marketshare,but also the relativedegrees of controlover regional
outputby managingagents,thatdifferedacrossthe two regions.Managing
agents in EasternIndiawere more symmetricallyplaced. Each of the top
ten managingagents in EasternIndiahad over 2 percent of the interna-
tionalmarket.Manyof thebig agentsin Calcuttawere responsiblenot only
for their London counterpart,but also for the small London agents in
charge of two or three companies. Controlwas more diffuse in Ceylon.
Therewere manyagentsmanagingonly one or two companies.Theirgain
from deviating from a collusive agreementcould be large, given their
small share in output. In generala managingagent in EasternIndia con-
trolleda much largershareof output,andthusis likely to have hada stron-
ger incentive to abideby the agreement.
The previousdiscussionsuggestsan alternativespecificationfor econo-
metric estimation,where the extent of outputreductionby the firm is al-
lowed to dependuponthe marketshareof its managingagentratherthanon
the regionaldummy.For each firm,the marketshareof its managingagent
is allowed to interactwith the dummyvariablesfor the control schemes.
When this modifiedversionof equationI is estimated,the coefficientson
the modified controlschemevariablesare negative,but not significantin
eitheryear.The new specificationof the regressionperformssignificantly
worsethantheversionwithregion-specificdummyvariables.Therefore,the
regionaleffect is a betterexplanationof reductionin output,which is not
capturedby the managingagent'smarketsharevariablealone.
This findingis intriguing,as one expects individualfirm characteristics
to determinefirrmbehavior.However,this anomalymay be explainedby
local informational flows.20 Firms were aware of output decisions of other
firmsin the sameregion,buthad a poor idea aboutthe behaviorof firmsin
other regions. Consequently,if a firm knew that most other firms in its
region were complyingwith the agreement,this increasedits incentiveto
comply independentlyof the firm's own marketshare. Noncompliance
would be moreeasily detectedamongsmallregionalgroupsandcarriedthe
threatof social sanctions.And if a firmknewthatmost of its neighborswere
free-riding,this might have promptedretaliatorynoncompliance.21 Social
factorscould thus have enhancedthe regionaleffect.
20
Greif,"Reputation,"discussesthe role of infonnationtransmissionwithin a social coalition in
sustainingcooperation.
21 Thenoncompliance of firmsin SouthernIndiais consistentwiththisinterpretation.
Althoughthese
firms had a largemarketshare,therewere many small firmsin the region.The latterhad opposed
legislation to regulatesales in the domesticmarket,which was expandingrapidly.Their attitude
towardsthe generalrestrictionof supplycould have influencedthe behaviorof the largefirms.
 InternationalTea Cartel 155

Lastly, what explains the difference in compliance in Ceylon in the two

periods? A higher level of compliance in 1933 suggests the importance of
legal backing in supporting collusive behavior in industry.The lack of legis-
lative support has been suggested as an explanation of failed cooperation in
the context of the macaroni industryin the United States during the National
Recovery Administration.22A comparison of the two years in the context of
the tea cartel seems to support the view that when the firms are heteroge-
neous, legal enforcement may be necessary to sustain collusion.

FAILEDCOLLUSION:PRICEWAROR BARGAININGCONFLICT?

How do we interpretthe breakdown of collusion in 1931 and 1932? Was

this the punishment phase of a collusive equilibrium? This interpretation
would be consistent with our finding that firms in Ceylon did not fully com-
ply with the agreement.
The archival evidence does not supportthis interpretation.There were no
complaints against Ceylonese firms in the reportsand correspondenceof the
Indian Tea Association in London and Calcutta.Rather,blame for the failure
to restrictoutputfell entirelyon Javaand Sumatra.Estimatesshowed the reduc-
tion in output in the Dutch East Indies to be far short of the promised ten mil-
lion pounds-one estimate put it at only one million pounds.23It was argued
thatany reductionin the outputof the Europeanestates of the Dutch East Indies
had been offset by increasedproductionon locally owned plantations.
The associations in India and Ceylon came out in favor of continuing the
agreement and recommended a reduction of 15 percent. In the negotiations
that followed, the Dutch offered to reduce output by 12 percent, provided
that leaf produced on locally owned plantations was kept out of the agree-
ment. Producers in Eastern India and Ceylon were willing to accept a lower
level of reduction, but the proposal failed to get the requisite 75 percent
support in Southern India due to opposition from the rupee companies.
Many of these were young and viewed similar estates of the Dutch East
Indies as competitors; concessions granted to them were seen as providing
an unfair advantage.
Negotiations among the various associations reflected a conflict over
market share. The Dutch East Indies had the smallest market share and did
not favor an agreement that maintained the status quo. Within the interna-
tional tea industry there was a general conflict of interest between old and
new plantations. In Java and Sumatra the area under tea had more than
doubled during the 1920s, and the new plantations had not yet realized their
potential output. Reductions based on past output thus appeared discrimina-

22 Alexander, "Failed Cooperation."

23 Mincing Lane Brokers' Association, Guide, 1930/31.
156 Gupta

tory,so the Dutchplantersaskedfor concessionsto new estatesas well as

exclusionof tea producedby locally ownedplantations,which was bought
by the Europeanestatesandprocessedfor sale.
Correspondencebetween the Indian Tea Association and the Ceylon
Association provides some interestinginsights into the question of what
moved the industryfroma noncollusiveto a collusive equilibrium.I argue
thatthe introductionof a tariffon tea importsintothe Britishmarketwas the
key factorthatchangedthe bargainingpositionof the differentparties.
The associationsrepresentingIndiaandCeylonwere the two mainplay-
ers in the tea market.They perceived the Dutch to be outsiders, partly
becausethey were outsidethe BritishEmpire,but also becausethe planta-
tions in Java and Sumatrawere relativelyyoung and strivingto increase
marketshare.Britishtea importsfromJavaandSumatrahaddoubledover
the 1920s, especiallycheapervarietiesused as "fillers"for teas fromIndia
and Ceylon.
Beginningin 1919Britain'stariffpolicybeganto discriminatein favorof
teasproducedin IndiaandCeylon.UnderImperialPreference,teas fromthe
Britishcolonies paidonly five-sixthof the generaltariffon tea andenjoyed
preferentialaccess to the Britishmarket.As the importdutyon tea declined
overthe followingdecade,theEmpireproducerslost some of the advantage
they had enjoyed.The dutywas abolishedin 1929. The Empireproducers
viewed this with much concem:

Whilst the presentworld tradeunderDepressionhas affectedmarketsoutside the

UK, the home market-which is the principalmarketof the worldfor tea-is being
seriouslythreatenedby the alarmingstridesmadein the recentyearsin the importa-
tion of foreigngrownteas.

Theprospectsof the industryduringthe years 1923 to 1928 encouragedthe planting

of considerableareasof new tea in JavaandSumatra,the produceof which is com-
ing into the marketin increasingquantities.

It is essential a) to createa demandfor Empiretea and b) to obtainprotectionfor

such teas in the home market.... The preferenceon Empiretea which existed from
1919 to 1929 constituteda certainprotectionin this market,but with the removalof
all duty (by the last conservativechancellorin a futile effort to catch votes), the
United Kingdomwas thrownopen to free importof all teas.24

Imperialpreferencewas once againthe remedyof choice. The two Indian

Associationsandthe CeylonAssociationappealedto the Chancellorof the
Exchequerforreintroduction of thetariffon tea,withdiscriminationin favor
of Empireproducers.It was arguedthat"A duty of 6d/lb on all tea with a
rebate of 2d/lb on tea from within the BritishEmpirewould provide the
24 Letter to the Ceylon Association, 27 April 1931.
 InternationalTea Cartel 157

Exchequerabout?8,000,000 providedthe distributionof importsremained

the same."25
The tea companiesurgedtheir shareholdersto lobby their membersof
Parliamenton the groundsthatthe shareof Empiretea in the U.K. market
had declined from 92 percentin 1921 to 81 percentin 1930.26 A serious
campaignwas launchedto persuadeconsumersto buy Empire-grownteas.
Associationletterheadbeganto carrythe slogan "DrinkEmpireTea."The
blendingcompanieswere lobbiedto supportthis campaign.Compulsory
markingof tea's countryof originat the retailoutletwas proposed,but did
not succeed.27The move to securepreferentialtreatmentwas extendedto
otherpartsof the Empire.Ceylonteas faced competitionin the Australian
marketfromteas fromtheneighboringDutchEastIndies.The CeylonAsso-
ciation arguedthat discriminatorytariffshad completelyexcluded Dutch
teas fromthe Canadianmarket,andthatthis could be used in Australiato
protectthe marketfor teas grownwithinthe Empire.28
TwodevelopmentsunderminedthebargainingpositiontheDutchproduc-
ers. First, the British governmentreintroducedan importduty of 4d. per
poundon tea in 1932, with a preferenceof 2d. for Empireproducers.De-
mandfor tea from Javaand Sumatrawas directlyaffected.Second, when
Britainabandonedthe gold standardin September1931 sterlingwas deval-
uedvis-'a-visthe guilder,underminingthecompetitivenessofteas fromJava
and Sumatra.Further,Dutcheffortsto develop alternativemarketshadnot
been very successful.
At thispointtheNetherlandsEastIndiesChamberof Commerceinitiated
talkswiththetea associationsof IndiaandCeylonforaninternationalagree-
ment.GeorgeWehry,representingplanter-proprietors in Javatableda new
proposal.Itprovidedforexportquotasfor five years,whichwouldbe nego-
tiated annually.The scheme was to be enforcedby the Dutch East Indies
governmentif CeylonandIndiaagreedto participate.29 A 15 percentreduc-
tion was proposedforthe firstyear-a figuresuggestedby IndiaandCeylon
earlyin the negotiations.
ThisDutchoverturewas viewedwith suspicion.Ina meetingof the coun-
cil, the presidentof the Ceylon Associationreferredexplicitly to the Tea
Agreementof 1930andarguedthatunlesstheDutchcame"wholeheartedly
into the scheme"togetherwith otherEmpireproducers,nothingeffective
could be achieved.30The Ceylon Associationlaid down severalprecondi-

25Letterof 18 November1931.
26Letterto the CeylonAssociation,29 April 1931. These figuresexcludere-exports.
27 MincingLaneBrokers'Association,Guide, 1930/31.
28 Lettersfromthe CeylonAssociationto IndianTradeCommissioner in Londonandto the Empire
MarketingBoard,December1931.
29 Letterfromthe CeylonAssociationto the IndianTea Association,15 September1932.
30 Ibid.
158 Gupta

tions for its support:(1) the Dutch must resolve their internaldifferences; (2)
the government of the Netherlands East Indies must be preparedto regulate
exports; (3) the question of preferential duties for Empire teas must be left
out of the negotiations; and (4) any restriction scheme must be discussed
with the associations representing Indian producers.32The consensus was
that the Ceylon Association would await and carefully consider any proposal
put forward by the Amsterdam Tea Association, and any decision would be
taken only in consultation with the Indian Tea Associations.
The Tea Agreement signed in February 1933 attempted, quite clearly, to
freeze the market share of the three countries and the relative position of
different plantations in the industry. Given the heterogeneity among the
producers, the legally backed export quotas ensured that the agreement
could be implemented in a situation where younger firms had less incentive
to comply with a voluntary agreement.

CONCLUSION

This study has analyzed the effectiveness of the InternationalTea Agree-

ments of 1930 and 1933 using firm-level data from an international sample
of firms. My main finding is that output restriction was effective in general,
but there were significant regional variations in the extent of compliance.
Plantations in Eastern India were consistent in reducing output in both 1930
and 1933. Plantations in Ceylon, by contrast, reduced output by a signifi-
cantly smaller amount in 1930, when the agreement was entirely voluntary.
They fell in line in 1933, when legislation enforced export quotas for half
the year. These differences may be attributableto the higher degree of mo-
nopoly in Eastern India arising from the managing-agency system. Archival
evidence on the negotiations relating to the agreements suggests that the
breakdown of collusion in 1931 and 1932 is better explained as a bargaining
conflict among the parties, rather than as the punishment phase of a
repeated-game equilibrium. The introduction of Imperial Preference on tea
imports tilted the balance in favor of India and Ceylon and brought the
Dutch planters back to the negotiating table. The export quotas provided by
the new agreement were more effective in ensuring uniform compliance
across firms and regions.
32Letterfromthe CeylonAssociation,22 September1932.

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