Foreign Relations of the United States, 1901, Appendix, Affairs in China, Report of William W. Rockhill, Late Commissioner to China, with Accompanying Documents

Mr. Hay to Mr. Rockhill.

No. 20.]

Department of State,
Washington, April 11, 1901.

Sir: Referring to my telegraphic instructions to you of this date in regard to the revision of the commercial treaties with China, * * * I have to inclose for your information copy of a report on this subject by Mr. John A. Kasson, special commissioner plenipotentiary, dated March 2, 1901, with the accompanying communications.

I am, sir, etc.,

John Hay.

[Inclosure 1, with dispatch No. 20.]

Report on questions relating to Chinese taxation, indemnity, and proposed conventional provisions.

The Secretary of State:

Upon reference by the Secretary, the undersigned has examined the following papers:

1. Letter of A. E. Hippisley to the Secretary of State, November 23, 1900, with extracts from his address before Johns Hopkins University.

2. Letter of same to same, January 3, 1901, with accompanying translation of memorandum submitted by him to Li Chung-Tang, suggesting certain financial arrangements in re indemnity.

3. Letter of same to same, dated January 5, 1901.

4. Letter from American Asiatic Association (John Foord, secretary) to same, January 25, 1901, with accompanying memorandum touching the revision of commercial treaties with China.

I have also sought further information in our consular reports from China, among which I note the following:

1. Jernigan (Shanghai), December, 1896, Commercial Relations, 1895–96, page 796.

2. Report on Japanese Treaty, December, 1896, Commercial Relations, page 791.

3. Fowler (Cheefoo), No. 192, September, 1896.

4. Smithers (Chung King), Commercial Relations, 1898, volume 1, page 1023.

5. British Consular Report accompanying the foregoing, page 1033.

6. Gracie (Fuchau), Commercial Relations, 1898, page 1039.

7. I have also examined the conventions which have been made by the United States with China.

The incompleteness and uncertainty of all our information in respect to the economic system prevailing in China, and the unreliability of all the statistics of the revenues of China, except that collected under European officers, render it impossible for the investigator abroad to arrive at any satisfactory conclusion in respect to the financial policy to be pursued with the object of providing indemnities.

It is alleged on all sides that collections of revenue by Chinese officials are dishonestly conducted, are largely appropriated to private uses, and that a minor fraction of these collections reach the official treasury to which they are destined. This is alleged to be true in respect alike to the collections for the Imperial and for the provisional treasuries. The total revenue received by the Imperial Government is approximately ascertained. The actual amount collected from the various sources of revenue is conjectural, with the exception of that derived from the customs duties. The following appear to be the principal sources of taxation:

1. Land tax, in kind, commuted to money payment.

2. Land tax, in kind, for Pekin use.

3. Customs collected under European control.

4. Salt duty.

5. Native customs.

6. Likin.

Of the foregoing taxes it is ascertained that a large part of the first (land tax) is absorbed by peculation, and that if honestly collected and paid over the aggregate proceeds would be much more than double. But the attempt to put this revenue throughout the vast interior of China under European control would encounter such obstacles and popular opposition as to render it impracticable.

The fourth (salt duty) is already so high as to induce much smuggling, and being an article of necessity ought not to be increased.

The fifth (native customs) yields a small amount of revenue, and foreign intervention therein is not advisable.

The sixth (likin) appears by unanimous testimony to be locally variable, often repeated, and the most obnoxious tax of all which affect imported goods, and is the most burdensome of all upon foreign commerce, both inward and outward, and ought to be wholly abolished, certainly upon imports, and if possible on the exports of China.

The third (customs under foreign control) is the only item in the list in respect to which changes can be made with a safe calculation of results in the amount of revenue to be derived from an increase of rates.

It is possible that the likin (transit tax) on goods for export coming from the interior might, like the likin on imported goods, be commuted at an agreed rate, and collected under European supervision at the port of destination. If this can be done, the result would be a large increase in revenue from this source, with a diminished burden on the goods. As an alternative it might possibly be stipulated that likin should be collected only once in each province of China, the amount to be definitely limited.

As provincial governments must have some source of revenue, the Imperial Government should be at liberty to set aside for provincial use from the proceeds of these likin taxes, if commuted, at least so much in amount as is now derived therefrom by the provincial treasuries. This would conciliate the viceroys and might remove their objections to the exterior collection of this revenue, while avoiding local expenses and peculations.

It appears that the paying stations for likin are not limited, but may be increased in number, and the total assessments vary largely in different provinces of China. There is also a “perfectural” duty (fu-shui) in some provinces, which is reported as “a great incubus on trade.” There is, besides, a regular export duty of 5 per cent in conformity with treaties, and it seems that this may (like the regular import duty) be in effect indefinitely increased by the likin on exports. There is further reported an additional customs duty collected by native authorities on goods passing from one port to another, called a coast-trade duty, which is said to be assessed on both imports and exports.

It also appears from the note of the American Asiatic Association that the Chinese have further applied a kind of octroi, called tso-ku, and a sort of destination duty, called tso li, since the likin tax was commuted to a fixed percentage.

Against all these varying and vexatious exactions outside the regular duties, provision should be made by the proposed treaty, in order to give security to international commerce.

It is also extremely desirable to abolish likin charges on exports, but as their incidence is upon native products, the question of their abolition, or of a commutation of them by a fixed per cent ad valorem, to be paid in such manner as to be agreeable to the interests of the Chinese treasury, must be deferred to the negotiators of the new commercial arrangements. It is plainly for the interest of Chinese production and export that some beneficial change should be made in the present system.

conclusions.

First. I concur in the opinion expressed by the writers of the communications above referred to, that the total indemnities to be paid by China, both on personal and on national claims, should be so graded as not to exceed in the aggregate $200,000,000. A larger amount would threaten bankruptcy of the Imperial treasury, or so weaken the provincial treasuries as to provoke discontent and disorder in the districts where it is of the highest importance to foreign commercial interests to promote peace and prosperity.

Nor should it be forgotten that looting and destruction of property in China by foreign troops should be taken into account in adjusting claims for indemnity, if indemnity be considered a part of the punishment imposed on China.

But aside from this point of view, excessive indemnity would depreciate largely the value of the existing obligations of China now held abroad, and would diminish the value of the new obligations to be issued by China. On the contrary, if the indemnities now to be established are plainly within her ability to pay, the value of her securities, both old and new, will be maintained.

It should be especially remembered that full indemnity to foreign governments is far less important to them than is the progressive improvement of their trade with China. Future adequate security for commerce, inward and outward, and for the persons who conduct it, is of far greater advantage to the United States, to Russia, England, and Germany, than are a few millions, more or less, paid now into their treasuries. The latter is a temporary advantage, the former a permanent investment which, wisely managed, will be followed by increasing returns with unlimited gains to their respective peoples.

This view increases in importance in the ratio of Chinese prosperity. Let the treaty arrangements assuredly promote this prosperity, with secure opening of the country to foreign trade, and other compensation to foreign governments might properly be scaled down to unquestionably moderate figures to the advantage of all countries concerned.

Second. Assuming that the indemnity will be restrained within a reasonable limit, consistent with Chinese resources, it seems practicable to obtain the income required to defray the annual charges by an increase of the customs duties, aided by a commutation of the likin charges (inward and outward), such commutation to be collected under foreign supervision, and paid in some defined proportion into the Imperial treasury.

It appears to be the better opinion that the duties on imports must be raised at least to 15 per cent ad valorem in lieu of the present rate. The calculations must, of course, be based on the amount of the indemnity, now unknown. Assuming this not to exceed 200,000,000, and further assuming that the powers will accept the bonds of China instead of compelling her to sell these bonds to raise the indemnity money in open market with a further loss of capital, then it seems reasonable to believe that China might provide for the annual interest and sinking fund out of the proceeds of the augmented customs receipts, reenforced as proposed by commutation of likin taxes, a definite proportion thereof to be retained by the Imperial treasury.

Under no circumstances should it be forgotten that the main purpose of an adjustment is to leave China in condition to produce profitably and to buy in exchange for her production. If she is impoverished or reduced to misery it means destruction to the growing market for which the powers are now competing. Such punishment will fall on the commercial nations equally with China.

Third. Instead of the continued occupation or proposed destruction of the Chinese fortifications on the Peiho River, which latter more represents temporary vengeance for the past than rational security for the future, it seems to me a wiser policy for the allies to disarm the forts and to reserve the right to reoccupy them in cases of disorder endangering foreign rights or in case of future violation by China of the provisions of the treaties, and to stipulate their nonoccupation by the Chinese without the consent of the powers until the indemnity is fully discharged. In this way the irritation caused by the perpetual presence of foreign military sovereignty in Chinese territory would be avoided and an additional motive supplied for the faithful observance of the treaty.

Fourth. It is desirable (if such an agreement by the allies shall be possible) to provide that China shall not hereafter grant to nor place under the jurisdiction of any foreign government any portion of her territory without the consent of all the signatories to the present treaty.

Fifth. In respect to likin, a treaty provision of the following purport is suggested:

That in consideration of the increased customs duties which in conformity with this convention China is at liberty to impose upon the foreign products imported, and in further consideration of the adjustment herein made in respect to the transit tax (likin), it is agreed on the part of China that no other transit tax (likin) and no octroi tax (tso-ku, loti-shui), destination tax (tso-li), or other tax or charge, for any purpose, in any form, or under any name, shall be levied or collected on the imported goods which shall have paid the stipulated conventional duties and charges; but the same shall be exempt from all other charges, national, provincial, or local, in all parts of the Chinese Empire. A certificate of such payment shall be issued by the collector of the same, in duplicate, one copy to be retained by the importer and one copy to accompany the shipment of the goods to their destination in the Empire.

(If likin on exports is also adjusted, like provision to be made applicable to them.)

Sixth. As far as the United States is concerned, it is important to anticipate the efforts of other nations to secure exclusive advantages for their allegiants, their shipping, or their commerce by agreeing with China on a strongly worded most-favored nation clause. The following is suggested for consideration:

That whatever privilege, exemption, benefit, or advantage is already or may hereafter be conceded by China to the official representatives or to the merchants, subjects, or citizens of any other country, in respect of their persons, property, rights, or occupations, shall be at the same time extended to the like official representatives, merchants, and citizens of the United States; that the lowest rates of duty or other charges imposed on personal property or articles of international commerce of any foreign national origin shall be immediately applicable to the like articles of United States origin; and no other or higher duties, charges, burdens, or restrictions of any kind shall be imposed on the exports of the United States than those imposed on the exports of the most favored nation. All privileges, rights, exemptions, and benefits now or hereafter accorded by China to the vessels of any other foreign nation or to their cargoes or officers and crews shall be equally enjoyed by those of the United States. It is fully understood by both high contracting parties that the United States, the citizens thereof, and their property and personal rights and privileges in China shall continue to be treated on the most favorable terms conceded by China to any foreign nation or people.

Seventh. In view of the state of war which has actually existed between the allies and China, and in order to obtain security against a possible claim that under international law existing treaties were annulled by the war, it seems expedient to make a new treaty between the United States and China, which shall provide for the payment of the indemnity to the United States as adjusted, and shall at the same time declare that all provisions of the conventions between the two countries which were in force on the 1st day of January, A. D. 1900 are continued in full force and effect, except so far as modified by the present convention or by other conventions to which the United States is a party.

The most-favored-nation article would naturally find a place in this suggested treaty.

With the limited information at my command the foregoing embraces all the opinions and suggestions which I feel sufficient assurance to express. They are submitted with entire deference to the criticism of those who, like the British controller of customs in China, have an intimate acquaintance with local conditions, which must to a great extent control foreign official action.

Respectfully submitted.

John A. Kasson,
Special Commissioner Plenipotentiary.

March 2, 1901.

[Inclosure 2.—Instructions No. 20.]

Mr. Hippesley to Mr. Hay.

Grafton Hotel, Connecticut Avenue,
November 23, 1900.

My Dear Sir: At the invitation of the president of the Johns Hopkins University I last week delivered an address on the revenue system of China before that institution. The question of the amount of indemnity to be exacted from China is now actively occupying the attention of the plenipotentiaries in Peking; and as I foresee that the insistence on a sum beyond China’s capabilities will jeopardize both the independence of that country and the future good relations of the western powers among themselves, I venture to send you that portion of my address which dealt with this question, in the hope that the presentation of the actual facts and figures by one who has been occupied with them for many years may help to confining the demands within moderate and feasible limits.

I remain, etc.,

Alfred E. Hippesley.

[Inclosure with Hippesley letter.]

Extract from address to Johns Hopkins University.

The Chinese Government publishes, indeed frames, no national budget. Each autumn, however, the board of revenues in Peking, as head of the financial administration of the Empire, draws up a statement of the requirements of the metropolitan administration and of the contributions to be made toward them by the several provinces. The expenses of the provincial administration are defrayed mainly from the land tax and likin; and from what remains of them, from the salt gabelle, native customs, and the bulk of the foreign customs revenue, those of the imperial household, the metropolitan administration, the defense of the northern provinces by land and by sea, the Fuchou Arsenal, etc., are defrayed. From steady reading of the Peking Gazette, which is a collection of such official documents as the privy council sees fit to make public and which from time to time contains reports (more or less fragmentary) from viceroys and governors on all these subjects, an approximate estimate may be formed of China’s revenue,which may be stated thus:

	Taels
Land tax, levy in kind commuted to money payment	20,000,000	$14,160,000
Land tax in kind for Pekin use	6,000,000	4,250,000
Likin on merchandise, net	15,500,000	10,930,000
Salt duty and likin	12,000,000	8,500,000
Native customs	3,000,000	2,125,000
Customs under foreign inspectors, net (1899)	23,500,000	16,695,000
Miscellaneous	5,000,000	3,540,000
Total	85,000,000	60,200,000

Prior to 1895 the public debt of China amounted to only some $9,250,000. In that year, however, hostilities broke out between Japan and China, the exigencies of which forced the Nan-Yang Ta-ch’en to borrow, with imperial sanction, some $25,000,000, while the final treaty of peace imposed on China payment of an indemnity of taels 230,000,000, or at the rate of exchange agreed upon of £27,615,000 ($138,075,000). Owing to China’s impaired credit and flotation expenses, she had to borrow a nominal total of $239,100,000 to pay this idemnity; and to cover interest and sinking fund on all these loans China has to provide annually—

From date to 1915, 23,000,000 to 24,500,000 taels	$16,285,000 to $17,400,000
From 1916 to 1931, 17,500,000 taels	12,345,000
For 1932, 12,000,000 taels	8,500,000
From 1935 to 1942, 5,500,000 taels	3,850,000

It is now stated that China will be required to pay as indemnity for the destruction of life and property during the recent disturbances and for cost of foreign military expeditions a sum not less than $200,000,000 nor more than $600,000,000. It is quite impossible for her to pay even the lower sum. To pay $138,075,000 it was necessary for China, when her maritime customs revenue was practically untouched, to incur an indebtedness of $239,100,000. Now, when that revenue is mortgaged up to the hilt, it would cost her at least $275,000,000 to raise $200,000,000 in the open market; and that is the only source from which she should attempt to produce funds, for loans granted or guaranteed by one or more foreign governments would inevitably result in constant interference in the administration of the Empire, and therefore in weakening the power and prestige of the Government, and thus tend to promote unrest and eventually disintegration. To provide interest on and sinking fund for such a loan, an annual charge of at least $25,000,000 would be required. How could this be obtained? China’s revenue has been reduced by her present indebtedness from over $60,000,000 to some $43,000,000, and, as the documents in the Pekin Gazette show, the metropolitan and provincial administrations are one and all in the greatest straits and are reduced to pitiful expedients to avoid bankruptcy. To place a further charge of $25,000,000 on the revenue would produce immediate default; the foreign powers, as guarantors, would foreclose, and China’s independence would be a thing of the past.

Is it, then, possible to institute new or increase old taxes to provide funds? That to institute new taxes to pay indemnities to foreign powers is the surest method to create and perpetuate general antiforeign feeling is a self-evident proposition. As regards old taxes, the land tax is moderate in amount, but it has remained so long at its present rate that an increase, for no matter what reason, would create general discontent and probably forcible opposition; to allow it to be published that such an increase was made on the demand and for the benefit of foreigners would be the height of folly. That the salt gabelle is a grievous burden on a necessary article of daily food is proved by the universal smuggling of salt that exists. To increase the tax would be most unwise, and to change the method of collection would be impolitic, if not dangerous, because the system is so complicated that no person can tell what the effect of any change would be. Likin is already the most grievous burden on the trade and prosperity of the Empire. Effort should therefore be directed toward its abolition, not its increase. The foreign customs: It is scarcely probable that the foreign powers would consent to an increase in the treaty tariff, i. e., in the taxation of their own goods, merely to supply funds from which indemnities would be paid to themselves. As regards native customs, it would undoubtedly be a step in the right direction to place these under the control of the commissioners of foreign or maritime customs at the treaty ports, and some increase in this amount would no doubt result, but it could not be sufficient to bear the burden of so large a loan.

The leakage under the existing system of collection is admittedly so great that it has been suggested that were an international financial board substituted for that system it would be possible to enormously increase the collection without adding to the present levies. The objections to such a proposal are, however, serious; for putting aside the international jealousies and intrigues which would inevitably result in China as they have in Egypt from such a system, either the authority of that board would be ignored, or, to enforce it in remote districts of the interior, such constant interference in the provincial administrations would be rendered necessary that the independence of China, which all the foreign powers declare themselves anxious to maintain, would vanish and the control of the Empire virtually pass into foreign hands. The only course would, then, seem to be for the powers to recognize that their treatment of China during late years is, as it undoubtedly has been, one of the chief contributing causes of the recent outbreak, and to therefore forego pecuniary indemnity for lives and the expenses of the relief corps, confining such indemnity to property destroyed alone, and to content themselves with insisting on the adequate punishment of the high officials who actively or passively have been responsible for the atrocities committed as the most likely means of preventing the recurrence of such outrages in the future. Any other course will, I firmly believe, result in calamities beyond all compare greater than any which have yet happened.

[Inclosure 3, with instruction No. 20.]

Mr. Hippesley to Mr. Hay.

New York, January 3, 1901.

Dear Mr. Hay: I send you inclosed the English version of a memorandum I have forwarded to his excellency Li Chung-tang, regarding the financial arrangements I would suggest in the coming negotiations with China, in the hope that after consideration the proposal contained in it may commend itself to your approval.

I feel strongly that if foreign nations desire a permanent solution of the Chinese difficulty, which, by removing causes of friction, will tend to promote sympathy and intercourse between China and the West, they must abandon the policy followed in the past of regarding only what appear to be their own personal interests in the terms they nominally negotiate, but practically dictate, and must stop to consider what the effect of those stipulations will be on China. Can she give effect to them? Will they be advantageous to her? This of course means the lengthening out of negotiations, because where government is as decentralized as it is in China and the viceroys are rather coordinate than subordinate authorities, it means that these latter must be consulted as to the exigencies of provincial administration and a modus operandi arranged with them. But the time will be well spent if thereby future difficulties are avoided and the appearance of diction removed. For the same reason I should be glad to see provision for the introduction of reforms substituted for the clauses requiring the destruction of the Taku forts and prohibiting the importation of arms—clauses which render China helpless to resist aggression from without or attacks of rebels within her borders.

Opposition on the part of the Chinese to the abolition of likin may be anticipated, perhaps, because of the numerous staffs now employed in the collection who would be thrown out of employment. But it has to be remembered that the Chinese commission on tariff revision itself proposed only a few months ago the abolition of that tax on all foreign goods; so that the present proposal is rather merely another-step forward than a new and radical change. It may, too, be objected that even if China consents to the abolition she can not be relied on to keep her engagements. There is, I believe, no sufficient ground for such an apprehension; for in the case of the exemption of all internal taxation on foreign opium, in return for the simultaneous collection of duty and likin by the foreign customs, China has abundantly shown her willingness and ability to give full effect to conventions that have really been negotiated with her after consultation with the provincial authorities chiefly affected by those conventions.

Finally, four times the tariff rate on exports may prove too high a tax in the case of low-priced articles, such as skins or of others, which have to compete on a narrow margin of profit with the products of other countries; but China may, I think, be trusted to, in such cases, herself grant reductions. In any case, especially to cover the case of tea, values of which have considerably declined since the tariff was framed in 1800, it might be stipulated that the duties as now fixed shall in no case exceed 20 per cent.

I am, etc.,

Alfred E. Hippesley.

[Inclosure with second Hippesley letter.]

Settlement of difficulties in China—Suggested financial arrangements.

It has been officially stated in the German Reichstag that among the proposals advanced by the foreign ministers in Peking with a view to the settlement of the recent outbreak in China, and to preventing a recurrence thereof in the future, is one dealing with a revision of taxation on merchandise. There can be no doubt that revision is eminently desirable, but to be effective and advantageous it must be such as will, on the one hand, further the stability of the Chinese Government, and, on the other, avoid so far as possible the imposition of new burdens on trade, internal and external alike. How can this best be achieved?

That likin is a grievous burden on the trade and prosperity of the Empire is admitted by all, whether Chinese or foreigners. Instituted in the early fifties to provide funds for the operations necessary to effect the suppression of the Taiping rebels, it was then described as an indispensable tax for the time being, and to be abrogated as soon as peace was restored. It has continued indispensable ever since; and its abolition now, when the treasuries, both metropolitan and provincial, have been already reduced to the lowest ebb by the service of the loans required to pay off the Japanese war indemnity, is out of the question, unless means are found to make good from other sources the funds now derived from likin. Yet, because it is such a burden, every effort should be devoted toward effecting the abolition of it. And this would be effected if the foreign powers will consent to the tariff duties being quadrupled, and to the abolition of the duty-free privileges, except for bullion and for articles imported for the importer’s personal use and not for sale, granted by supplementary rule 2 appended to the tariff, on the condition that China abolishes likin and lo-ti-shui, and to secure uniformity.

When this rule was framed in 1860 there were but few foreign merchants established in China, and it was considered but fair that articles imported by them for household and office use should be admitted duty free. In the intervening forty years conditions have altogether changed, and many of those articles are now used in large quantities by the Chinese. Thus it results that the Chinese Government is debarred from raising any revenue from the large quantities of flour, wines, spirits, tobacco, underclothing, etc., brought into China not for the importer’s personal use, but for general sale. This is unjust. The wise course would be to abrogate the entire clause. But if that is considered open to objection, all that foreign nations can fairly ask is that what an individual imports for his own use be excepted of treatment by all offices—transfers the native customs establishments at the treaty ports to the control of the foreign or maritime customs. To secure this consent, it is necessary to satisfy the powers that such a rearrangement of the taxes will not only be beneficial to China, but impose no serious additional burden on foreign trade. I believe that not only can this be proved, but that the proposal would actually benefit trade, alike foreign and native. It is therefore proposed to consider the results of the adoption of this proposal as affecting (a) foreign trade, (b) native trade, and (c) the Chinese. Government.

(a) Foreign trade.—The name likin indicates that originally it was intended to represent a tax of only 1 per million ad valorem. If it ever represented so moderate a levy it has long ceased to do so, and in some cases, as reference to the tariffs will show, a single levy now amounts to as much as 18 per cent, while liability to likin in one province is not exhausted until two and one-half levies have been made, and payment in one province does not grant exemption in the next; crossing the frontier renews the liability afresh. What is the average percentage of value thus levied on merchandise in transit in any one province it is impossible to say. But I know from personal experience, while commissioner of customs at Shanghai, that native merchants were willing to pay three and one-half times the tariff rate, or about 17½ per cent, in order to secure transit pass privileges—i. e., exemption from inland taxes and comparatively speedy examination at the tax stations passed—for some of the less highly taxed products of the province (Kiangsu) in which Shanghai is situated. Those products therefore would pay 22½ per cent before export abroad, and 25 per cent if sent to another treaty port in China—i. e., taxes in either case higher than the total now proposed, about 20 per cent; and naturally the payment of this percentage constituted an advantage over payment of inland taxes, or merchants would not have desired the introduction of such an arrangement.

It will no doubt be objected that the transit privileges already enjoyed under the treaty of Tientsin, whereby foreign goods may be sent to any inland mart or native goods purchased by foreign merchants for export abroad may be brought down to any treaty port free of taxes en route on payment of half-tariff duty of 2½ per cent only, are far more favorable than the proposal now submitted. To answer this objection satisfactorily attention must be invited to the following considerations:

• First. Stipulations which the central government may be compelled by force majeure to accept may have the effect of depriving the provincial administrations of funds indispensable to the maintenance of their government. This has been the case in the matter of these transit privileges. And when that is so it stands to reason that the provincial governor must be reduced to the position either of being unable to maintain his administration or of rendering nugatory the stipulations which deprive his exchequer of the funds necessary to the government of his province. Either course will bring him into collision with the central government, but the latter course is so far the less serious from a national point of view that he naturally adopts it. The result is to place the central government on the horns of a dilemma—either it must compel compliance with stipulations, the carrying out of which may ruin the province, or it must acquiesce in, and if needs be defend, the infraction of an engagement it has itself entered into. This state of affairs naturally results in loss of prestige and power to the Government, in charges being brought against it of bad faith, and in constant disputes with foreign powers, as the history of foreign intercourse with China during the past years clearly demonstrates has been the case. And this lamentable state of things will continue so long as foreign nations, looking only to their own self-interest and ignorant or unmindful of the consequences of their demands, insist on China’s agreeing to what it is practically impossible for her to carry out.
• Second. These transit privileges do not touch the question of lo-ti-shui, or local octroi, and past experience shows that the tendency (for the reasons given above) has been to nullify these privileges by requiring goods covered by transit pass to pay on arrival at the specified destination a differential tax amounting practically to the total of the taxes escaped en route to the province. Is it not then the part of wise statesmanship to abandon trying to insist on the impossible, and instead to agree to terms which will put a not too onerous tax on trade and will remove one of the chief causes of constant friction and bickering?

In a word, so far as foreign trade is concerned, I believe this proposal will remove one of the chief causes of discussion between foreign nations and China, and will tend rather to lighten than to increase the taxation now levied on the merchandise that constitutes foreign trade.

(b) Native trade.—Every removal of a tax produces a corresponding reduction in the laying-down cost of commodities. It thus acts as a stimulus to trade, and increases the strength of the Government by calling forth the gratitude of the people toward it for action directly tending to promote its well-being. That the free interchange of products throughout the Empire would largely develop general prosperity, lower prices, and promote consumption, there can be no doubt. Thus the Government would be strengthened, the people enriched, and foreign trade benefited.

(c) Chinese Government.—The collection reported by the various provinces on account of likin and lo-ti-shui amounts to a maximum sum of taels 16,000,000 annually. It is proposed, in order to win the support of viceroys and governors to the scheme, to allot to each province from the Chinese collection the full amount reported, together with an allowance in addition of 25 per cent, or 20,000,000 taels in all. The proposal would then work out as follows:

	Taels.
The foreign customs revenue for 1899 amounted to	26,660,000
From this must be deducted opium already subject to special taxation which produced	7,540,000
	19,210,000
Further, tonnage dues would not be affected by this arrangement; they must therefore be deducted	640,000
	18,570,000
Lastly, transit dues and reimport duties, would no longer be leviable; deducting these	2,000,000
There remains	16,570,000
If the treaty tariff be quadrupled, the collection would amount to	66,280,000
Add opium duty and likin as at present	7,450,000
Add native customs transferred to foreign inspectorate	10,000,000
Total	83,730,000
Deduct cost of collection, say	4,730,000
Net	79,000,000

This compares with present receipts approximately thus:

	Taels.
Foreign customs, net	23,500,000
Likin and lo-ti-shui	15,500,000
Native customs	5,000,000
	44,000,000
An approximate increase of	35,000,000

The disbursements to be provided for under present conditions are:

For service of loans now existing	23,500,000
To pay provincial treasuries amount of likin and lo-ti-shui, with allowance of 25 per cent increase	20,000,000
	43,500,000
Leaving a balance for Government purposes of	35,500,000

If, as it is rumored, foreign nations exact an indemnity of $200,000,000 gold, an annual sum of at least 24,000,000 taels will be required for the service of the necessary loans; but 11,500,000 (some £1,875,000) would thus remain to meet the needs of the Government. To exact an indemnity of $200,000,000 gold, without assenting to the proposed plan would plunge the Empire into bankruptcy; to exact more, even if that plan be assented to, would render the introduction of necessary reforms in the administration impossible, even if the Empire were not reduced to penury. To adopt this scheme and confine the indemnity to, at the most, $200,000,000 gold, would, I feel confident, strengthen the Government, impose no increased taxation on foreign trade, remove all difficulties as to navigation of inland waterways, eradicate most of the causes of friction with foreign powers, and facilitate internal commerce—not unimportant steps toward peaceful and satisfactory relations with this great Empire.

Alfred E. Hippesley.

December 22, 1900.

[Inclosure 4, with instruction 20.]

American Asiatic Association,
New York, January 25, 1901.

The President of the United States.

Sir: In compliance with the request made by you to a delegation of this association which had the honor of waiting on you on the 3d instant, the executive committee desires me to transmit to you the inclosed memorandum in regard to the revision of the commercial clauses of the treaties with China.

I have the honor to be, yours, respectfully,

John Foord,
Secretary.

Memorandum on the revision of the commercial treaty with China.

The American Asiatic Association, recognizing the fianancial necessities of the Chinese Empire, has no objection to offer to the proposed increase of duties on foreign imports. The suggestion which, according to Sir Robert Hart, was formulated last spring by the special commission appointed to consider the subject of tariff revision, is deemed a reasonable one. This was to the effect that the import duty should be fixed at 10 per cent plus 5 per cent transit due, payable simultaneously, coupled with the total abolition of all other taxes on such imports forever after and everywhere. In other words, it is proposed to double the present customs duty on foreign imports, and with it to double the sum charged for transit dues. Assuming that this is all that is intended, and that no attempt will be made, by changing the present method of fixing the ad valorem duties, to subject foreign trade to more than twice the present import rates, the association can see no objection to the acceptance of such a basis of tariff agreement. The suggestion seems to offer all the more satisfactory a solution of the vexed question of inland taxation, since it was only agreed to after consultation with the provisional authorities, and since it was to be accompanied by a stipulation that the General Government was to arrange for the equitable division of the amount so realized between the central and the provisional treasuries.

In approving of such a plan this association is not unmindful of the fact that the inland transportation tax collected under the name of likin has been from the first a most objectionable impost, was devised to meet special conditions of financial necessity, and has been continued in defiance of promises that when the finances of the country had recovered their normal condition the likin should be abolished. But the most serious grievance has been that the agreement in regard to the payment of likin on imports bears a totally different meaning to the Chinese authorities and to the foreign merchants. In the convention between the United States and China for the regulation of trade, concluded November 8, 1858, the undertaking as to likin seems to be expressed with sufficient clearness. It is as follows, the language being identical with that of the agreement concluded between Great Britain and China:

“Merchandise shall be cleared of its transit dues under the following regulations:

“In the case of imports. Notice being given at the port of entry from which the imports are to be forwarded inland of the nature and the quantity of goods, the ship from which they have been landed, and the place inland to which they are bound, with all other necessary particulars, the collector of customs shall, on due inspection made and on receipt of the transit duty due, issue a transit-duty certificate. This must be produced at every barrier station and viséd. No further duty shall be leviable upon imports so certified, no matter how distant the place of their destination.”

The association is fully aware of the fact that the British Board of Trade, when John Bright was its president, approved of an interpretation of this rule calculated to deprive it of most of its value to the foreign merchant. Even as modified by the then minister of foreign affairs, Lord Clarendon, in February, 1870, this interpretation was made to read as follows:

“The fair construction which ought, in the opinion of Her Majesty’s Government, to be placed on these provisions is that foreign produce may be imported on payment of 5 per cent, and circulated in equal competition with similar Chinese products at the port and its vicinity, and maybe placed at any specified place in the interior, also for the purpose of equal competition with such Chinese produce, on payment of a transit duty of 2½ per cent in addition to the import duty. It can not, they think, be legally contended that there is anything to prevent the Chinese from charging whatever general municipal taxes are leviable on Chinese goods at the port or in the interior equally on foreign goods when once they enter into general circulation and consumption.”

The likin stipulation has been applied by the Chinese authorities ever since in this highly elastic sense to the great detriment of the closely related interests of both American and British trade. It was admitted by Lord Granville, in 1883, that the British interpretation has never been recognized by the representatives in China of the Great European powers or the United States, and further, that under other treaties, notably those of France and Germany, it is held that imports which have paid a transit due in addition to an import duty are thenceforth free from all taxation whatever.

The difficulty experienced in the past in making a definite and thoroughly binding bargain with the Chinese Government on the subject of internal taxation must be held to demand the exercise of extreme care on the part of the negotiators of the revised treaties. It has been a constant struggle, attended only with partial success, to compel respect for the validity of transit passes en route; but even when this was accorded, persistent efforts have been made by provincial authorities to indemnify themselves by imposing likin, under another name, at either end of the journey. In southern China, notably, the greatest ingenuity has been shown in subjecting foreign goods to various forms of local taxation. Among these are tso ku (octroi) and loti likin, or tso-li, a kind of destination duty, both calculated to enable the provincial authorities to collect an amount sufficient to reimburse them for the levies they have been obliged to abandon during the transit of the goods.

In any new bargain with China in regard to the taxation of foreign merchandise, strenuous objection ought to be made to the employment of the tax-farming system, under which foreign trade may be made to yield a revenue quite as much for the profit of individuals as for that of the Government. It is a matter of record that in 1891–92, when the Kowloon and Lappa stations took over the collection of likin on kerosene oil previously farmed out they in six months collected, at the farmer’s rates, about 75 per cent more than he would have paid into the treasury in twelve months as the price of his monopoly. Not only is the farm system hostile to all treaty agreements, but, as Mr. J. W. Jamieson has pointed out, it is always open for the holder of the monopoly to trade on his own account and thus be able to undersell all competitors. At the root of the whole question is the difficulty of providing for provincial necessities without having recourse to the levy of exactions on foreign trade not contemplated in the treaties. It must therefore be obvious that any bargain with the Central Government which has not had the approval of the great viceroys must be difficult if not impossible of enforcement. This fact has evidently been recognized by the commission, of which Sir Robert Hart is a member, and will no doubt be given due weight by the negotiators appointed by the powers.

This association approves of the policy indicated by the commission on tariff revision of retaining the 5 per cent rate on exports. Cumbrous as the method seems, it is probable that the only practical way to free exports from cumulative taxation is to do away with the right to bring produce from the interior under transit passes, coupled with an undertaking to refund to the exporter at the time of export to a foreign country whatever amounts he had paid on such produce over and above a half tariff rate between the place of purchase and the port of export. In any case, it seems a suicidal policy for China to subject goods intended for export to any but the lightest possible taxation, and it should not be difficult to convince its negotiators that the country’s growth in wealth must be largely dependent on the encouragement given to the expansion of its foreign trade.

The fact that the permission given to the steamers, native or foreign, to navigate the inland waters of China has been, so far as foreign flags are concerned, a practically barren one, is mainly due to the power for obstruction possessed by the likin officials. It seems probable that until the collection of both native and maritime customs, as well as all transit taxes, is placed under one hand the utilization of either the grand canal or the great rivers for local steam navigation must be indefinitely postponed. At every point of the discussion of improved conditions for foreign commerce in China there is encountered the dominant question of a reform of the whole fiscal administration of the Empire. Into this larger subject this association has not felt called on to enter, believing that the future fiscal system of China must be controlled by considerations which, while vitally important to commerce, can not be regarded as purely commercial either in character or origin.

John Foord, Secretary.

January 25, 1901.