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There may also be reluctance at this time to antagonize countries whose friendship and financial assistance are desired to strengthen China against Japan. There is also a possibility that the Chinese are hoping, before giving notice to all extraterritorial powers, for a friendly gesture which will smooth the way for them but in this connection we were interested to learn on April 20 from Hsu Mo 42 that he had not read the March 14 speech of the British Ambassador at Hankow (Hankow's despatch 247, March 20; page 2 our despatch 389, March 20)43 which was almost tantamount to such a gesture.

3. The only disagreement with the campaign for abolition of extraterritoriality we have seen appeared in the influential and independent Ta Kung Pao as reported by the Central News Agency, Shanghai, April 12.

4. This journal (1) described the movement started by various Shanghai Chinese organizations as preparatory only, there being no hope to achieve the goal unless China becomes a strong nation; (2) stated that in 1930 the unilateral denunciation of treaties by the Government was ignored by the foreigners; (3) warned the public against envy of the Egyptian Capitulations Conference which involved "a mere change in the name of the Mixed Courts”; (4) stated that when the right time arrives special foreign privileges will be “fundamentally abolished by a mere announcement”; (5) emphasized that reconstruction and resistance against aggression are the two urgent problems confronting China today, adding that the Chinese people should concentrate their efforts in this connection for 5 years or 10 years and if they succeed therein the question of special rights will take care of itself. 5. Sent to the Department, by mail to Peiping, Shanghai, Tokyo.

JOHNSON

793.003/883

The Ambassador in the United Kingdom (Bingham) to the Secretary

of State No. 3197

LONDON, July 10, 1937.

[Received July 21.] SIR: I have the honor to refer to the Department's telegraphic instruction No. 107, March 27, 12 noon, regarding the question of the possible resumption of extraterritorial negotiations with the Chinese Government, and to the interim reply which Sir Alexander Cadogan 44 made on behalf of the British Government and reported in the last two paragraphs of the Embassy's No. 292, May 18, 6 p. m.45

43

42 Chinese Vice Minister for Foreign Affairs.

Neither printed. * British Deputy Under Secretary of State for Foreign Affairs. Vol. III, p. 102.

45

In this connection there is transmitted herewith copy of a further communication from the Foreign Office dated July 9, 1937. Respectfully yours,

For the Ambassador: HERSCHEL V. JOHNSON Counselor of Embassy

[Enclosure] The British Deputy Under Secretary of State for Foreign Affairs

(Cadogan) to the American Counselor of Embassy in the United Kingdom (Atherton) No. F3546/1906/10

[LONDON,] 9 July, 1937. DEAR ATHERTON: In the interim reply on the subject of extraterritoriality in China that was sent to you on the 14th May last a further communication was promised after His Majesty's Government had considered the questions of policy involved. I now write to say that His Majesty's Government adhere to the view that it would be best to wait until the Chinese Government take the initiative in this matter. In the event of a request being received from the Chinese Government to negotiate on the subject of extraterritoriality, His Majesty's Government are of opinion that they should adopt the same friendly and sympathetic attitude as in the previous negotiations, and that they should adhere substantially to the policy of the 1931 draft. His Majesty's Government agree with the view expressed by the United States Embassy in China that the Chinese Government may now endeavour to obtain a more far-reaching abolition of extraterritoriality than that envisaged in the 1931 draft. Nevertheless it would seem best to begin negotiations on the broad basis of that draft and defer consideration of details until after the negotiations have actually begun.

As I have already indicated in my interim reply, His Majesty's Government welcome and reciprocate the desire of the United States Government for continued collaboration between the two Governments in this matter. Yours sincerely,

ALEXANDER CADOGAN

CONCERN OF THE UNITED STATES RESPECTING IMPOSITION IN CHINA OF CUSTOMS LEVIES AND OTHER TAXES HAMPERING TO AMERICAN TRADE 4

693.113 Cereal Products/120 : Telegram The Acting Secretary of State to the Ambassador in China (Johnson)

WASHINGTON, December 22, 1936—noon. 87. American flour exporters are pressing this Government for a further approach to the Chinese Government in an effort to secure reduction of the tariff on wheat flour. They stress particularly the fear that the large differential between the tariff on wheat flour and the tariff on wheat will result in stoppage of all or practically all importation of foreign flour and they regard this situation as contrary to the spirit of the commitment of the Chinese Government, in the R. F. C.47 cotton and wheat loan agreement, to place no embargo on the importation of American flour.

* For previous correspondence, see Foreign Relations, 1934, vol. III, pp. 566 ff. 46

This Government is considering whether the matter should be placed before the Chinese Government and will appreciate a full report by naval radio covering the general question of existing Chinese tariffs on wheat flour and wheat, especially with relation to the following points:

(1) Is the wide differential between the rates on wheat flour and wheat maintained by the Chinese Government for the definite purpose of encouraging the domestic milling of all flour required ?

(2) Is the milling industry in China at present capable of meeting all domestic requirements?

(3) Is there any program for expansion of the milling industry and is expansion probable if the present tariff differential is maintained

(4) To what extent have imports of foreign flour during the past 2 or 3 years been limited to the by-product known as "clears” as opposed to straight and patent flour and what is the present situation? What factors govern the demand for foreign "clears”?

(5) How great is the present demand for foreign flour in China and what grades or classes are required?

(6) Should the differential between the duties on wheat flour and on wheat be reduced to 113 times and should American wheat and flour be in a position to meet world price competition, to what extent might American wheat as wheat and American wheat flour be able to reenter the Chinese market?

(7) In view of present high wheat and flour prices in China, is it felt that the Chinese Government might consider favorably a reduction in the wheat and flour duties and particularly a reduction in the differential between these duties?

(8) In your opinion, what effect upon the situation might result from friendly representations by this Government ?

It is suggested that you request Dawson 48 and Arnold “9 to cooperate fully in supplying you with pertinent information.

MOORE

49

693.113 Cereal Products/124 : Telegram The Ambassador in China (Johnson) to the Secretary of State

NANKING, January 7, 1937–3 p. m.

[Received January 8–5:35 p. m.] 6. Department's 87, December 22, noon. The following report regarding existing Chinese tariffs on wheat flour and wheat is made after consultation with Dawson and Arnold. The numbers attached to following paragraphs correspond to numbers attached to points enumerated in Department's telegram under acknowledgment:

4 Reconstruction Finance Corporation. 48 Owen L. Dawson, Agricultural Attaché in China at Shanghai. Julean Arnold, Commercial Attaché in China.

40

1. Wide differential was for the purpose of encouraging domestic milling of all flour required. Dawson states that at time tariffs were made effective both foreign wheat and flour were underselling domestic products; that millers insisted upon protection from foreign flours; and that some consideration was given to the idea of making China self sufficient in its flour and wheat requirements. He adds, however, that tariff has not operated to increase wheat production.

2. The milling industry in China is at present capable of meeting all probable domestic requirements.

3. There is no definite program for expansion in the milling industry China, but according to Dawson there is a decided move to expand milling facilities at points near or within wheat-producing regions. Dawson is of the opinion that while expansion in the milling industry at interior points has been encouraged to some extent by the tariff differential, this expansion would have been expected to occur had duty on flour been in normal relation to the duty on wheat. Further expansion is expected, even should differential be lowered to its normal relation.

4. Present tariff has not limited imports to "clears". On the contrary, the high flour tariff has apparently tended to reduce the imports of "clears”, as it has raised the price for such inferior grades of imported flour to the point where they can be undersold by the domestic productions. There is a fixed demand [for] high quality "clears” and “patent” flour, which has continued in spite of higher duties. The chief factor governing the demand for foreign “clears" is the available supply of wheat and other foodstuffs in China, and internal transportation conditions.

5. Dawson reports that at this date there appears to be little demand for foreign flour. He states that the present price differential between domestic and foreign flour, as the result of relatively low priced Chinese wheat, is great enough practically to eliminate the demand for the usual run of foreign flour. (See in this connection following paragraph).

6. If the relationship between world and Chinese flour prices in the future should remain as shown by tabulation of Chinese and foreign flour prices at Tientsin a reduction of tariff on flour to yuan 0.39 per bag would permit larger imports of American flour at times when America is in a position to meet world competition. Since September 1936 American and other foreign flours have not been able to compete with the Chinese product, and possibly could not have competed even if the flour duty had been lowered. This situation may be transitory as it is due to a wide disparity (partly seasonal) between foreign and Chinese wheat. For a few months prior to December Chinese wheat at Shanghai averaged over yuan 2.50 per picul below the cheapest available foreign wheat. During December Chinese wheat was only yuan 1.57 lower than foreign. Present estimate is that supplies of domestic wheat will be practically exhausted by March 1st resulting in prices between domestic and foreign wheat coming to parity. With wheats at parity at Shanghai, imports of foreign flour could increase to a small extent, and if flour duty were lowered to 133 per cent of September wheat duty they would increase materially. Lowering the flour duty to within 133 per cent of the wheat duty with the wheat duty left at its present level would probably result in somewhat lower proportional imports of wheat compared with flour. It would be expected that a larger proportion of deficit requirements would be imported in the form of flour suffixed [sic] when flour is discriminated against through a high differential rate as at present. Total imports of wheat and flour in terms of wheat would probably be somewhat greater with a reduced duty on flour alone. Lower flour duties would tend to lower flour prices in general, and lower prices would be expected to stimulate increased consumption, necessitating larger quantities of wheat and flour in terms of wheat from abroad. The total requirements of wheat and flour from abroad each year depend upon the domestic supply of wheat and other foodstuffs and general economic conditions in China. Therefore, imports of American wheat and flour depend on these factors and competitive position with other foreign countries.

Arnold adds following to above which is from Dawson. During period 1921–23 when wheat and flour were both admitted duty free the imports of flour for 1923 [1921?] totalled 500,000 barrels; for 1922, 2,400,000 barrels; and for 1923 nearly 4,000,000 barrels. Thus, before tariff autonomy there were heavy fluctuations in imports of flour due to varying factors. Among these factors affecting flour imports were character of wheat crop in China, relative prices of imported compared with domestic flour, allowances being made for variations in silver exchange, and availability of substitute cereal food products at comparable or lower prices.

7. It is Dawson's opinion that present wheat and flour prices in China are not sufficiently high to cause Chinese Government favorably to consider a reduction in wheat and flour duties, or a reduction in the different kinds between the two. It is expected, however, that by March, 1937, as a result of scarcity of domestic wheat, domestic mill flour will be increased to near a parity with foreign prices with present import duties included. Whether or not it reaches an actual parity depends upon whether or not a large amount of the consumption will shift to lower priced substitute products as has already occurred to

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