500.A 4 e/352b

The Secretary of State to the American Delegation

Sirs: I am transmitting to you herewith the following instructions for your guidance in the performance of your duties as the American Delegates to the Special Conference called by the Chinese Government to convene at Peking on October 26, 1925, in accordance with the provisions of the Nine Power Treaty Relating to the Chinese Customs Tariff, concluded at Washington on February 6, 1922. As you will observe, these instructions are of a general character. The number of Powers participating in the Conference, the complexity and technical character of the matters to be dealt with, and the necessity of constant and careful consideration being given to the changing political situation in China, render impracticable the framing of detailed instructions. It would, moreover, in any event be my desire that you have a broad latitude of discretion in dealing with the specific questions which will confront you. At the same time, it is equally desirable that the Department should be kept fully informed upon all matters of importance and its instructions sought when needed.

Until the last few months, it had been the belief of this Government, and presumably that of the other foreign governments concerned, that the provisions of the Customs Treaty would suffice for the present to meet the Chinese desires on the subject of tariff revision. The events of the last few months have, however, made it evident that these provisions will not satisfy those desires as a step in progress toward ultimate tariff autonomy. Chinese aspirations toward freedom from what they consider to be oppressive restrictions imposed upon them by the Powers are not confined to Customs matters alone, but embrace other subjects upon which they are equally [Page 843]insistent that radical changes be made. I am sympathetic with the aims of the Chinese, and desire to bring about such modifications in our treaties with China as may be just and practicable; but I do not desire to apply abstract principles in disregard of actual conditions in China and of such practical courses of action as may be recommended by a careful consideration of these conditions. I am of the opinion, however, that, with respect to the Tariff, the Special Conference ought to go beyond the strict scope of its activities as defined in the Customs Treaty and enter into a discussion of the entire subject of the conventional tariff, even including proposals looking toward ultimate tariff autonomy. I am also of the opinion that other subjects dealt with in our treaties with China deserve reconsideration at an early date and that the Special Conference may well serve as the first step toward a consideration of these matters. These views have been already set forth in the course of instructions of the last few months to the American Legation at Peking. It must be borne in mind, however, that the purposes of the Special Conference and the scope of its activities as they now stand are defined by treaty and are a matter of treaty obligation. The work of the Conference cannot, therefore, be modified or extended without the concurrence of the governments of all Powers signatory to the Treaty. It is my hope that, either before the opening of the Conference or during the course of its sessions, agreement may be obtained which will enable the various delegations to take up for discussion such further matters relating to its purpose as will constitute a program sufficiently liberal in its agenda to satisfy the demands of the conservative elements of the Chinese people and at the same time not be subversive of the fundamental rights and interests of all the Powers concerned. With this contingency in mind, you are being equipped with full powers to negotiate with the representatives of the Chinese and other signatory or adherent Powers, and to conclude such agreements as may be adopted by the Special Conference, the same to be submitted to the President of the United States for his ratification by and with the advice and consent of the Senate. Such negotiations on your part will eventually call for further instructions; for the present instructions have been framed with a view to your guidance merely in matters specified in the Treaty, the agreements of the Conference in regard to which do not appear to call for subsequent approval by the Senate.

I am of the opinion that the ultimate interests of the United States will best be served by your work being approached in the broadest spirit and with the purpose of rendering the utmost possible contribution to the improvement of trade and of the general welfare in China in so far as these matters may be promoted by the decisions reached in the Conference. The primary function of the Conference [Page 844]is described in Paragraph 1 of Article II of the Customs Treaty wherein it is clearly indicated that its main objective is the amelioration of conditions of trade through the diminution and ultimate removal of local taxation on merchandise in transit. Although in the treaties referred to in Article II, China agreed to abolish likin and the Powers concerned agreed in return to consent to an increase in the import tariff to 12½ percent ad valorem, likin has in fact never been abolished; and, in recent years, numerous other forms of taxation, such as “sales taxes” and “protection fees”, have been additionally imposed upon goods offered for sale which have in effect nullified to a certain extent the provisions of the conventional tariff. From such information as is available on the subject, it appears doubtful whether the Chinese Government, however desirous of so doing, is now, or in the near future will be, able to take any effective measures for the abolition of likin or even to make any substantial progress toward that end. Nevertheless, such an assumption, however well justified it may seem from a survey of existing conditions in China, cannot be taken as an established fact. It is my earnest hope that the contrary may prove to be the case. The Chinese Government must be given an opportunity to present such plans as it may have formulated on the subject; and these proposals should receive your careful and sympathetic consideration. They should, however, be studied strictly in the light of their practical applicability to conditions now existing in China. It is essential that any scheme which may be adopted by the Conference have a reasonable promise of fulfillment; for I desire to avoid the conclusion of any new agreements which may remain inoperative as have the pertinent provisions on the subject in the treaties above referred to in Article II.

In dealing with the question of the abolition of likin, I am of the opinion that the representatives of the Powers other than China are entitled to negotiate with the Chinese representatives on the subject of an increase in tariff, beyond the 2½ percent surtax specifically authorized in the treaty, up to a maximum rate of 12½ percent as contemplated in the treaties referred to in Article 2 of the treaty. Such negotiations appear to be justified in view of the language employed in Article II that the Conference is to “prepare the way for the speedy abolition of likin …57 with a view to levying the surtaxes provided in those articles.” The Treaty would not however appear to contemplate negotiations of this character apart from, or except in conjunction with, a satisfactory plan for the abolition of likin. Such arrangements as might be concluded with respect to any plan going beyond the 2½ percent surtax specified in the Treaty could, of course, not be definitive as in the case of the levying of the 2½ percent surtax [Page 845]and would have to be submitted for the ratification of the various governments concerned in accordance with their respective constitutional methods.

With regard to the authority granted in Article 3 of the Treaty to levy a surtax on dutiable imports at the rate of 2½ percent ad valorem and at 5 percent ad valorem in the case of luxuries, it is not my desire to restrict the scope of your discretion by precise directions. The following observations are, however, offered as indicative of the trend of my thought upon this subject. In the first place, I am of the opinion that the levying of the surtax is substantially mandatory upon the Conference and that, notwithstanding the possible existence of conditions which might lead the Conference to a contrary view, the Conference would not be acting in complete good faith, were it to take advantage of the broad terms of its charter to impose such conditions either as to the date of the application of the surtax or the disposition of the new revenues as would, in effect, nullify the plain intent of the Treaty that China is to receive the increases stated. In this connection it is to be noted that, although the levying of the surtax is by implication allied with the subject of the interim provisions to be applied prior to the abolition of likin, the Treaty does not specifically condition the levying of the surtax upon any measures to be taken with respect to likin; and the Conference is given a free hand to levy the surtax “as from such date, for such purposes, and subject to such conditions as it may determine.” I regard the choice of this language as fortunate, particularly in view of recent developments in the political situation; for it gives the Conference full authority to make such a disposition of the additional revenues as will suit the exigencies of the times.

The assignment of the revenues to be derived from the 2½ percent surtax as compensation to local authorities in any plan for the abolition of likin would not appear to be practicable in view of the insufficiency of the revenues available from the surtax even if it were so used in toto. Should, however, the Conference discuss and conclude arrangements whereby some reasonable plan were evolved for the diminution and gradual removal of the present vexatious restrictions upon domestic trade and in return therefor the Powers concerned were to consent to an increase, graduated or otherwise, of the tariff to a maximum of 12½ percent ad valorem, I should be inclined to feel that the assignment of these revenues, to such an extent and in such a manner as might be necessary to the practical working out of such a scheme, would perhaps prove to be the most beneficial purpose to be served. As I have stated above, I should not be satisfied with a mere paper arrangement or with any plan which did not have a reasonable promise of measurable success in [Page 846]application and which was not calculated to facilitate trade or exercise a tranquillizing and stabilizing effect upon the political situation.

The matter has been brought to my attention of using the revenues from the 2½ percent surtax for the purpose of refunding the large unsecured debt of the Chinese Government, or at least for refunding the external portion of that debt. I am informed that the amount of existing unsecured and inadequately secured obligations of the Chinese Government to American citizens is in the vicinity of $30,000,000; largely consisting of loans in default and of debts incurred for materials supplied to the Chinese Government. These creditors are of the opinion that there is no reasonable prospect of these claims being liquidated through other means than by the revenues available from the 2½ percent surtax. I am informed, furthermore, that the nationals of other Powers have claims aggregating large sums, the Japanese claims equaling approximately the claims of all other foreign nationals combined. The Treaty providing for the Special Conference did not of course contemplate an increase of the Chinese Customs Tariff for the purpose of satisfying foreign claims against China. There is no express provision in that Treaty that the claims to which I have referred are to be considered in connection with the conditions under which the 2½ percent surtax is to be levied; and it would not appear that any Delegation to the Conference could of right insist upon a consideration of these claims. On the other hand, it would appear that the Conference has full authority, if it so desires, to consider such claims under the broad scope given it to determine the conditions under which the surtax is to be levied.

I am inclined to the view that the Conference should discuss the general advisability of using the surtax revenues for the refunding of China’s unsecured obligations and should consider the question of the sufficiency of these new revenues for this purpose. The unsecured obligations, with rapidly increasing interest, threaten to reach proportions which may soon make it almost impossible to relieve the acute financial situation of the Chinese Government. This debt must, unless repudiation is contemplated, be recognized as an obligation which the Chinese people as a whole will have to meet. The earlier the matter is studied and some attempt made to find a solution, the better it will be for all parties in interest. It is fully recognized that the subject must be handled in the light of the political situation and not merely as a purely financial problem. I desire especially to avoid having the impression created that the principal motive on the part of the Powers in assenting to an increase in the tariff is to find means to collect the debts of their respective nationals. The Conference should not lay itself open to the charge of being a Debt Collecting Commission. In this connection, it would be essential to [Page 847]treat the subject of the unsecured debt as a whole and not to lay emphasis solely upon the external debt.

It is of course not now possible to say whether it will prove practicable to deal with the unsecured debt through relief afforded by revenues from the surtax. The practical aspect of the question must be studied by those who are qualified to make such investigations. It is hoped that such studies as may be made will result in the formation of a plan which may be used to alleviate the present financial emergency of the Chinese Government and at the same time safeguard the fundamental and legitimate interests of its creditors. Whatever may be the outcome of the matter, I am of the opinion that the subject should not be left outside the scope of the discussions of the Conference.

The subject of cooperation with the other Delegations to the Conference, I regard as one of great importance. Without effective cooperation on the part of China and of the Powers I doubt if it will be possible for the Conference to attain any high degree of success. I desire, however, that, while exhibiting toward all a most liberal spirit of cooperation, you should retain your complete independence and avoid the possibility of any charge that the American Government is taking sides for or against any other government represented at the Conference.

I am [etc.]

Frank B. Kellogg
  1. Omission indicated in the original instruction.