To Westerns accustomed to the complex workings of the free market, the Imperial Chinese customs governing trade may seem burdensome and counterproductive. These customs served important non-economic functions, however. Because of their culture which placed a greater premium on these non-economic functions than on extra profit, the Chinese were willing to keep their ancient customs even when Westerns began appearing on the Chinese coast desiring to trade.
Europeans quickly discovered that they could not simply trade with merchants, the way they would trade with another European. If a European wanted to trade in China, he had to have a gift to offer the Emperor. The Emperor, in turn, would give the European a gift. The European had no way of knowing what he would get or how much he would have to "pay" in gifts to get a sufficient quantity to return home with a profit.
In the first place, this tributary system acknowledged the Chinese Emperor and the Middle Kingdom as superior to their trading partners. In an area where many of their neighbors copied their way of life, this acknowledgment was seen as important. Europeans were not pleased with having to pretend as if they believed China was better than their home country, but they usually broke down and gave the Emperor lip service when necessary.
Further, this tributary system helped create markets and drive demand for exotic luxury goods that otherwise would have had little value. Knowing that such goods could be given to the Emperor or sold to another merchant to give to the Emperor created a secondary market for them. This did not benefit the Emperor directly, but it ensured that merchants competed against each other to give the Emperor ever better and ever more exotic gifts. Those who gave particularly good gifts were rewarded with priceless porcelain and silk.
Perhaps the most important reason for establishing the tributary system is that it created trust and loyalty amongst trading partners. The knowledge that you can probably count on having a good trading partner for many years brings stability and security to an otherwise volatile market.
When you require trading relationships to be as personal as they are in a tributary system, you can feel fairly safe that you will have a trading partner for a long time. If one person is willing to go to the great lengths of following procedure and ritual, they will most likely trade with you in even the worse of conditions.
