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5. Although the present adverse trade situation has been brought to a head by speculation due to certain economic causes, such as rising world prices and the probable increase in Japanese import duties, it is in the main due to increased purchases of commodities needed for the carrying out of national policies. The degree of dislocation in Japan's trade position which can be traced to such purchases, aggravated as the dislocation is by continued export of capital to Manchukuo, has now become an integral factor in Japan's economic situation and to that extent may be regarded as a matter of deliberate and calculated policy.

6. It is our opinion that an expression of concern by the American Government over the Japanese exchange control system, for the reason that such control tends to prevent expansion of trade, would probably be met with the rejoinder that Japan had substantially increased its total imports since the exchange control regulations became effective, its imports from the United States having increased in point of value by 30% as compared with the corresponding period of last year. While such increase has been caused chiefly by greater purchases at higher prices of certain primary commodities and semimanufactured articles there has been increasing difficulty in effecting imports into Japan of other commodities not falling within these two categories. Although it is our opinion that exchange control as now applied is so closely tied up with certain Japanese national policies that it is unlikely that an expression of concern by the American Government would bear useful result, nevertheless we feel that as exchange control is irreconcilable with American commercial policy and as it is being used to restrict imports of certain types of American products, an expression of concern such as that outlined in Department's telegram under reference might properly be made.

GREW

611b.9417/242: Telegram

The Secretary of State to the Consul at Hong Kong (Donovan)

WASHINGTON, July 24, 1937—3 p. m. Trade Commissioner at Manila reports heavy increase in arrivals at Philippine ports of Japanese cotton textiles transshipped from Hong Kong. Please report by naval radio declared exports of these products for May, June, and July to date, together with available information explaining increases, if any.

Please forward Trade Commissioner at Manila report of declared exports of Japanese cotton textiles for months of 1936 and 1937 to date.

HULL

6116.9417/253
The Japanese Embassy to the Department of State 10

MEMORANDUM The Japanese Embassy has transmitted to the Department for Foreign Affairs of the Japanese Government the memorandum of the State Department, dated July 2, 1937, in which it is proposed by the Government of the United States that the existing arrangement as set out in the Conversation of October 11, 1935 relating to the importation of Japanese cotton piece goods into the Philippine Islands which is to expire on July 31, 1937, will remain in force either for a period of six months or one year.

The Japanese Embassy is now instructed to inform the Government of the United States that the Association of Japanese Exporters of Cotton Piece Goods into the Philippine Islands agrees to the continuation of the present arrangement for a period of one year from August 1, 1937 to July 31, 1938, and further that, as to the importation of Japanese cotton piece goods into the Philippine Islands via intermediate ports, the Association of Japanese Exporters of Cotton Piece Goods into the Philippine Islands, which has been taking measures to restrict the exportation of the said goods to the Philippine Islands, will as far as possible continue its voluntary adjustments by exerting every effort to make the restrictions at least as effective as they were during the period November, 1936, through May, 1937.

WASHINGTON, July 27, 1937.

611b.9417/256 : Telegram

The Consul at Hong Kong (Donovan) to the Secretary of State

HONG KONG, July 29, 1937–5 p. m.

[Received July 30—3:34 p. m.] Referring to the Department's telegram of July 24, 3 p. m. Exports of textiles manufactured in Hong Kong and China from Hong Kong to the Philippines amounted to 248,000 linear yards valued at 70,500 Hong Kong dollars in May and to 312,000 linear yards valued at 89,000 Hong Kong dollars in June. Similar exports of Japanese made textiles amounted to 1,338,000 linear yards valued at 233,000 Hong Kong dollars in May and to 3,527,000 linear yards valued at 760,000 Hong Kong dollars in June. Figures for July will be forwarded by August 3rd."

10 Handed by the Counselor of the Japanese Embassy to Mr. Ballantine on August 3 in substitution for a previous version handed to Mr. Ballantine on July 27 (not printed).

Not printed.

Six leading firms, comprising both local manufacturers and exporters, have been interviewed on this subject. Four of these firms were unable to give any explanation for this increase other than seasonal demand and improved business conditions.

The other two firms gave the following reasons: Japanese textile manufacturers anticipating trouble in North China with a reluctant [resultant?] lack of demand in that area and a drop in prices.

Japanese textile manufacturers were short of ready cash and therefore disposed of their products at any price obtainable.

Increased vigilance of the customs authorities in North China has recently made smuggling of Japanese textiles very difficult.

Manila importers bought heavily due to fear of a Sino-Japanese war with consequent irregular sailings, higher freight rates, and higher insurance rates.

The new Imperial Preference requirements for cotton textiles will affect unfavorably the demand for Japanese textiles as reported in my despatch No. 593 of July 23, 1937.12

It is difficult to evaluate the reasons given but it is believed that all of them played some part in the recent increase. The volume of June exports is still below the figures for some months of 1936.

Stocks of Japanese textiles in Hong Kong are at present estimated at 3,006,000 linear yards. Trade Commissioner Manila fully informed.

DONOVAN

894.5151/43

The Secretary of State to the Ambassador in Japan (Grew)

No. 1345

WASHINGTON, October 4, 1937. SIR: Reference is made to your despatch No. 2535, dated August 7, 1937, enclosing a memorandum from the Commercial Attaché entitled "American Funds Frozen in Japan",13 in which it is suggested that this Department take immediate action to secure the transfer into United States dollars of some 30 million yen of surplus funds owned in Japan by American citizens.

The situation reported by the Commercial Attaché is substantially a repetition of developments which have taken place during the past several years in numerous countries which have instituted rigorous exchange controls. In such situations, in the absence of pertinent treaty provisions, neither the imposition of non-discriminatory restrictions on payments abroad nor the recall of holdings from abroad appear to afford ground for protest as a violation of rights of other

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governments. Such situations have, however, been the occasion for the development of the widely prevalent system of clearing and payments agreements and the bilateral balancing of trade implicit in such agreements. On grounds of policy which have been frequently stated, this Government has not only not entered into such clearing agreements but has consistently opposed such agreements as being the most disruptive, discriminatory and restrictive types of trade-control devices. This Department is, therefore, not disposed to take action looking toward the withdrawal of funds of American concerns from Japan by offset against funds of Japanese concerns in the United States, as the Commercial Attaché would appear to suggest.

The Department has found it useful in such situations to do what it can informally to seek to induce governmental authorities to make exchange available for the gradual paying off of frozen commercial indebtedness of this kind, certainly to the extent that exchange is made available to creditors of other nationalities either by the free action of the exchange control authorities or as part of clearing or other control arrangements. It therefore believes you should take suitable occasion to explain to the Japanese authorities that the American enterprises concerned are naturally embarrassed by the tying up of their liquid working capital as a result of exchange controls, and that this Government hopes the Japanese Government will do everything within reasonable possibilities to provide the exchange necessary to Jiquidate this indebtedness.

Moreover, it may be assumed that in view of the experience of American business firms with the exchange controls and currency depreciations in numerous countries in all parts of the world, the American firms having funds in Japan will be familiar with the problems arising in such situations. There will no doubt be many requests for the assistance of American officials in the premises. Such requests should be given sympathetic consideration within the ordinary framework of appropriate assistance to private interests affected by foreign governmental regulations. The exchange control systems lend themselves readily either to practices of arbitrary discrimination or to discriminations on grounds of commercial or other policy affected by the nationality of the foreign private interest concerned. The Embassy should be vigilant to watch for developments of this kind, which may give occasion for the exercise of good offices, for informal representations and eventually for formal representations or protest.

In several cases where considerable amounts of blocked funds owed to Americans have accumulated, the eventual negotiations for the liquidation of such frozen funds have been conducted by private organizations such as the National Foreign Trade Council, by direct negotiation with the foreign government concerned.

In such negotiations this Government has sometimes been able to play an effective informal role in bringing the negotiations to a successful conclusion.

The Embassy is requested to keep the Department informed of all developments in this field in view of its commercial economic and financial importance. It should endeavor to secure accurate estimates in bulk and in reasonable detail of the volume of frozen funds, and keep close observation over any agreements which the Japanese authorities may enter into with other governments dealing with this inatter. Very truly yours,

For the Secretary of State:

SUMNER WELLES

611b.9417/267
Memorandum by the Assistant Chief of the Division of Far

Eastern Affairs (Ballantine)

[WASHINGTON,] November 2, 1937. The attached statement appearing on a Japanese Embassy letterhead 14 was handed to Mr. Ballantine by Mr. Suma of the Japanese Embassy and relates to new measures to make more effective the control of transshipment of Japanese cotton piece goods to the Philippines by way of Hong Kong. Mr. Suma referred to the conversation 15 which Mr. Ballantine had on October 22 with Mr. Sakamoto, First Secretary of the Japanese Embassy, in regard to measures of control previously put into effect, and asked whether there had been any decrease in transshipments. Mr. Ballantine said that the October figures had come in, which showed no decrease over those of the previous month, but he assumed that as the measures referred to by Mr. Sakamoto did not go into effect until October 26, the effect would not be apparent until we receive the November figures.16

611.9431/140 : Telegram

The Ambassador in Japan (Grew) to the Secretary of State

TOKYO, December 17, 1937–4 p. m.

[Received December 17—9:30 a. m.] 649. Department's 351, December 16, 3 p. m.14

1. We have, on several occasions when discussing at the Foreign Office Japanese exchange control and regulation of imports and ex

14

Not printed. 15 Memorandum of conversation not printed.

16 The Japanese Consul General at Manila, Uchiyama, also discussed this problem in a letter of November 5 to the U. 8. High Commissioner, McNutt (not printed).

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