statement that as the Chinese have definitely entered upon a policy of encouraging domestic agriculture and industry, it will be difficult to find persuasive ground for objecting to such a policy under present world conditions) and in reference thereto desires to amplify the statement contained in paragraph 2 of its No. 60.

2. Convinced that economic nationalism, which has expressed itself in the constant growth of barriers to international trade, is incompatible with the establishment of our own and world prosperity, this Government has pursued a trade policy the object of which has been and is to induce foreign governments to remove or lower restrictions [upon] an exchange of goods in international trade. We have pursued this policy in the belief that a normal expansion of foreign commerce will improve world economic conditions, raise and enrich living standards, and promote better social and political relations [among] nations. Economic nationalism, manifested through trade restrictions, all too frequently produces the opposite effect.

3. Our trade policy has been implemented largely through the trade agreements program, and the unconditional most-favored-nation principle which is a feature of the trade agreements negotiated by this Government has resulted in a generalization of concessions to all countries according non-discriminatory treatment to American

commerce.

4. The policy of the Chinese Government to which you refer does not differ materially from policies of economic nationalism in some other countries and runs counter to the trade policy of this Government. An increase of 150 percent in the tax on cigarettes using a large portion of American leaf would not in effect differ from a similar increase in import duty on American leaf. The tax, an implementation of a Chinese policy of economic nationalism, would constitute a burdensome restriction upon the importation of an important American product into China.

5. It is suggested that you bear in mind the foregoing brief outline of our trade policy in your approaches to the Chinese authorities in regard to the proposed cigarette tax.

6. Please continue to keep Department informed of developments.

HULL

693.003/1208: Telegram

The Secretary of State to the Ambassador in China (Johnson)

WASHINGTON, April 22, 1937-2 p. m.

74. Your 139, March 26, 11 a. m. The Department's views with regard to the general subject of Chinese customs surtaxes, including conservancy taxes, may be briefly stated as follows:

The Department, for practical considerations, is not disposed to raise any objections to the imposition by the Chinese Government of reasonable customs surtaxes to be used for financing harbor conservancy works or undertakings of a similar character. However, the Department is of the opinion that, in determining our attitude toward the imposition of specific surtaxes, there should be borne in mind (1) that, inasmuch as the American Government pursues a trade policy the object of which is to effect the removal or reduction of excessive barriers to trade, the imposition of customs surtaxes which place burdensome restrictions upon American trade would be a matter of concern to this Government (Department's telegram No. 65 of April 1, 6 p. m.) and (2) that, inasmuch as it appears that the Chinese Government is committed to the maintenance of the principle of uniformity of duties on all customs frontiers (Department's telegram No. 249, July 27, 1931, 11 a. m., to Peiping "), the Department would expect that the surtaxes would not be imposed at a rate which would materially disturb the principle of uniformity.

With regard to agreements now in force providing for the collection of conservancy surtaxes (the Whangpoo and Haiho conservancy agreements, for instance), the Department would expect any modification of those agreements to be the subject of arrangements mutually satisfactory to the parties concerned.

The Department desires that the Embassy carefully examine into the character and the possible effect upon American interests of each case involving the imposition of customs surtaxes and that the Embassy be guided by the Department's views as expressed above in determining the attitude which should be taken toward each such case.

With special reference to the conservancy surtax at Canton, the Department would appreciate being informed by mail despatch in regard to (1) the character of that tax, (2) the attitude of the Chinese Government toward the Japanese protest mentioned in your telegram under reference, and (3) the views of the French and other interested Embassies in regard to the imposition of the surtax.

HULL

693.003/1211

The Ambassador in China (Johnson) to the Secretary of State No. 467

NANKING, May 15, 1937. [Received June 15.1

SIR: I have the honor to refer to the Department's telegram No. 74 of April 22, 2 p. m. and to despatch No. 1213 of May 6, 1937 from the Embassy at Peiping 1 regarding the Conservancy Tax at Canton and

60 Foreign Relations, 1931. vol. III. D. 998.

61 Latter not printed.

205655-54-42

to complete that office's report by the following details concerning the views of other interested Embassies on the subject.

The Counselor of Embassy at Peiping reported to me under date of May 9, 1937 that the British Embassy there informed him that it did not consider that any grounds existed for an official protest in this matter. The British attitude on this general question is that the effect of the tariff autonomy treaties was to restore to China full liberty of action in regard both to taxation to be levied by the Customs for conservancy purposes and the particular schemes to which the proceeds of such taxation are applied.

The French Embassy in Nanking has ascertained from its Consul at Canton that the tax has insufficient bearing on French interests there to justify a protest. However, they state that they are not disposed to yield the right to the Chinese Government to impose such taxes where French interests are involved, as, for example, in the case of the Special Consumption Tax in Yunnan.

In view of the fact that the Japanese are alone in protesting this tax at Canton and also that it has been in effect, apparently, since February 2, 1937, and seems to have no important practical bearing on American interests, I request that I be authorized to instruct the Consul General at Canton to make no protest against it at this time.62 Respectfully yours, NELSON TRUSLER JOHNSON

693.003/1212

Memorandum by the Counselor of Embassy in China (Peck) of a Conversation With the Third Secretary of the Japanese Embassy in China (Okumura) 63

NANKING, June 5, 1937.

64

Mr. Okumura called and inquired of Mr. Peck about the position taken by the American Embassy with respect to this surtax. He said that the tax imposed a burden of between $600,000 and $700,000 annually on Japanese shipping and merchants and that the Japanese Consul General had repeatedly protested against it on the ground that its collection, without consultation with the Japanese authorities, constituted a violation of the Japanese-Chinese Treaty of 1930 conceding tariff autonomy to China.

Mr. Peck observed that according to his recollection, the American Consul General at Canton had reported that the view of the Japanese Consul General at Canton was that since the collection of Customs

62

The Department, in telegram No. 99, June 25, 4 p. m., to the Ambassador in China, approved his proposed instruction to Canton.

63

Copy transmitted to the Department by the Ambassador in China in his despatch No. 495, June 9; received July 12.

The conservancy surtax at Canton.

surtaxes for conservancy and other purposes was not among the matters specifically listed in the "tariff autonomy treaties" as being within the sole competence of China, it remained among those matters which, according to earlier treaties, required mutual consultation between the Chinese and foreign authorities.

Mr. Okumura said that this was the position taken by the Japanese authorities. He observed that the position of the British authorities seemed to be that the "tariff autonomy treaties" had deprived Great Britain of the right to insist that Customs surtaxes for conservancy purposes should not be collected except after consultation with the British authorities; Mr. Okumura remarked, with a smile, that the attitude taken by the British authorities in connection with the Chefoo Harbor conservancy matter had indicated this stand quite clearly.

Mr. Peck said that he thought the British were quite convinced that their Government had relinquished, through the British treaty with China restoring tariff autonomy, all right to intervene either in the collection or amount of conservancy surtaxes, or in the matter of how the proceeds were utilized. He said that the Department of State had never informed the Chinese authorities that it regarded its right to protest against such surtaxes as revoked by the treaty of 1928 restoring tariff autonomy to China, but the Chinese Government might argue that the treaty in question had produced this result. However, the State Department took the position that the Chinese Government was still committed to the principle of maintaining uniformity between the taxes levied on foreign trade at land frontiers and at water frontiers, a principle enunciated in the Washington Conference Treaty concerning Customs matters.

The net result was, Mr. Peck said, that the American Government had never abandoned its theoretical right to be consulted in regard to Customs conservancy surtaxes, but was inclined in practice to argue such matters on a basis of rationality, that is, on the basis of reasonableness of amount, justifiability of the purpose of collection, and discrimination. So far as the conservancy surtax at Canton was concerned, the tax seemed to impose a negligible burden on American firms and did not seem to arouse much opposition from them. Consequently, the American Embassy had decided not to protest against the collection of the tax for the time being.

In order that Mr. Okumura might have a more adequate picture of the American position in respect to taxes of the sort under discussion, Mr. Peck told Mr. Okumura that the Embassy had filed a protest with the National Government against the increase of the dike tax at Hankow, put into effect recently. The arguments presented in this

65

65 Protest not printed; for attitude of the Department, see Foreign Relations, 1932, vol. IV, pp. 596 ff.

case were based upon equitable, rather than legalistic grounds, exception being taken to the fact that the increase bore exclusively on foreign trade.

Mr. Okumura said that, to return to the Canton surtax, the reply of the Chinese had been that the tax was small and was collected in support of a purpose which was beneficial to everybody concerned at Canton and, therefore, should be paid by Japanese firms. Mr. Okumura said that one thing which the Japanese strongly objected to was the fact that the surtax was collected on goods arriving by vessel, whereas it was not collected from goods arriving by railway. He said that the Embassy had just about arrived at the conclusion that further protests against the surtax would be unavailing and should not be made, since nothing was to be gained by keeping alive controversies with the Chinese authorities when there was no prospect of success.

Mr. Peck observed that the American Embassy had come to a somewhat similar conclusion in regard to certain taxes levied in the interior of China, for example, the $1.00 tax on petroleum products in Fukien. In the Fukien controversy the Embassy had, in theory, gained its point, since it had reason to believe that instructions were actually issued by the National Government to the Provincial authorities to cease the collection of the objectionable tax. However, the tax was still collected and the Embassy had reason to believe that it would continue to be collected until such time as the National Government could supply the Provincial authorities with a substitute source of revenue. The same practical condition existed in reference to other improper Provincial taxes. The American Embassy had fallen into the practice of not pressing protests against such taxation when the circumstances indicated that the National Government was unable to supply substitute sources of revenue and thus to gain its point that a particular tax should be terminated by Provincial authorities.

Mr. Okumura thanked Mr. Peck for his explanation of the position of the American Embassy toward the Canton conservancy surtax. WILLYS R. PECK

893.61331/94

The Ambassador in China (Johnson) to the Secretary of State No. 1275

PEIPING, June 7, 1937. [Received July 12.]

SIR: I have the honor to refer to the Embassy's despatch No. 1180 of April 13, 1937,66 in regard to the proposed increase in consolidated taxes on cigarettes, and to enclose for the information of the Department copies of despatch No. 824, dated June 1, 1937, from the Consul General at Shanghai to the Embassy 6 on the subject.

66