The Japanese Ministry for Foreign Affairs to the American Embassy in Japan

No. 163, Asia I

Note Verbale

The Imperial Ministry of Foreign Affairs presents its compliments to the American Embassy at Tokyo and, acknowledging the receipt of the Embassy’s Aide-mémoire of July 15, 1940, concerning [Page 885]the exchange control system in North China, has the honor to forward the following reply:

1. The first point mentioned in the Aide-mémoire of the American Embassy seems to be the alleged exertion of extremely severe pressure upon American business men in North China and upon the trade of North China with the United States by the import exchange allotment adjusting system and the system of import permits without exchange which have been enforced in North China since June 25. With regard to this point, the Imperial Ministry of Foreign Affairs wishes first to supply the American Embassy with information obtained by the ministry concerning the present measures taken by the North China authorities, in the hope that it may help the Embassy in understanding the matter.

(1) Under the so-called exchange concentration system which has hitherto been in force, although the concentration of export exchange has been effected by the Federal Reserve Bank, all of the foreign currency obtained thereunder, except a very small part utilized for unavoidable non-trade payments and other purposes, has been supplied to cover the import exchange. Under that system, no restriction whatever was exercised by the North China authorities with regard to import materials, so long as the materials in question were listed in the comprehensive table of articles desired to be imported. It is, therefore, natural that there was a tendency to import those articles most profitable in the calculation of each individual.

However, as to actual conditions in North China, it is a well known fact that a state of famine has existed due not only to a shortage of imported foodstuffs resulting from reduced import capacity but also to a decrease in local production and shipment to markets of foodstuffs. The causes for the situation were both internal and external, the former, damage from last year’s floods and drought, etc., the latter, dull export trade due to the outbreak of hostilities in Europe.

In view of such circumstances, the North China authorities exerted every effort for the acquisition of foodstuffs, and the Imperial Government as well offered all facilities in endeavoring to increase food supplies to North China. For this purpose, the Imperial Government has taken even such measures as purchasing foodstuffs from third countries with its own foreign currency and supplying them to North China. In sympathy with distressed conditions in North China, Japanese commercial firms in that area also voluntarily took measures to concentrate their imports, which have to be linked with their exports, upon foodstuffs and other articles deemed necessities in the region. Thus, North China was able barely to survive the critical period between the old and new rice crops.

The condition of North China, however, has been such that self-sufficiency in foodstuffs is impossible. For the time being therefore [Page 886]it is inevitable that a considerable increase in the amount of foodstuffs to be supplied from Japan and Manchuria should be expected and at the same time that foodstuffs, especially wheat, should be imported from the United States, Australia, etc., to the extent permitted by the limited import capacity of North China. It is for this purpose that regulations have been made so that the aforementioned imports, which hitherto had been left to the free calculation of profit by each individual, might be made to conform, as necessary, to measures taken by the authorities.

At the same time it is natural that, with regard to general imports as well, it is desired that the greatest possible emphasis be placed upon necessary goods.

(2) In the trade with third countries of six North China ports in 1939, there was an import excess amounting to over 100,000,000 Yen. Taking into consideration the actual amount of export exchange sold and purchased, this import excess reveals the large volume of imports made without exchange and not in accordance with the exchange concentration and allotment system of the Federal Reserve Bank. Accounts for a large portion of this have been provisionally settled in the legal tender which has its base in the British and French Concessions in Tientsin. Furthermore, there is no room for doubt that such accounts will eventually be settled by smuggling North China products out of the country and by other means. In order to prevent such irregular conditions, the North China authorities have recently enforced a general permit system for non-exchange imports as well.

It is conjectured, however, that, in view of the present shortage of materials in North China the authorities, in applying the said permit system, hope to permit the import of as large a quantity as possible when application for importation of goods necessary to North China is made and when the method employed in settling the account thereof is acceptable.

(3) In the recent measures taken by the North China authorities, no special exceptions are provided in the case of importation on consignment of articles to be sold. Even in the instance of importation of such articles, as far as the exchange question is concerned, in principle the matter will naturally be regulated by either (1) or (2) above. As a matter of actual fact, it is believed that the amount of imports permitted and other matters will be determined by the degree of necessity of consigned sales articles and the terms of settlement of the account.

In short the Imperial Government is convinced that the measures which have been taken by the North China authorities in the present circumstances are steps necessary for the protection of the welfare [Page 887]and interest of the people of North China. For this purpose, the Governments and peoples of Japan and Manchoukuo have accorded every cooperation to the authorities of North China. We are confident that on the part of third countries as well, an understanding and cooperative attitude will be taken toward the measures of the North China authorities on the basis of judgement formed from a truly fair view of actual conditions in North China and that therefore it will be understood that the time is propitious for expanding and maintaining sound trade with North China and for participation in the reconstruction of North China.

Particularly in view of the importance and complementary nature of the trade between North China and the United States the positive cooperation of the United States Government and American merchants must be the special desire of the North China authorities.

2. The other important point indicated in the Aide-mémoire of the American Embassy is that the measures taken by the North China authorities permit a freedom of trade between North China and Japan on a basis different from that of trade with third countries, and that this step is discriminatory treatment contrary to the past promises of the Japanese Government. Regarding this point, the view of the Imperial Japanese Government is as follows:

(1) Since Japanese forces are now stationed in North China and the expenses of maintaining those forces are remitted from Japan proper, North China has an enormous excess of receipts apart from foreign trade. Therefore if North China does not maintain an import excess in relation to Japan, it is impossible to balance the revenues and expenditures or stabilize commodity prices. Under these circumstances, by its economic nature, the foreign trade of North China with Japan is obviously different from its trade with third countries.

(2) North China is receiving complete monetary assistance from Japan for the economic construction of the region. In this connection, there is a fundamental difference between Japan and those third countries adopting a non-cooperative attitude. If third countries extend assistance to North China in the form of investments, credits, or loans, etc., it must result that North China cannot help further increasing imports from such countries.

(3) It is recognized that the United States may take the view that North China trade with Japan is left as free as that within China itself despite various control measures applied to North China trade with third countries, and that Japan alone is monopolizing the benefits of this trade. It must be pointed out here that this is not true.

As is well known, since September, 1939, the volume of Japan’s exports to China has not been left a matter of free transactions but has been restricted to a certain limited extent by the Government. Again, [Page 888]since the start of this year, Japan’s trade with China has been quantitatively controlled and planned with the object of accelerating economic development and maintaining the balance of international accounts as mentioned above.

As regards the export items, they have been restricted to those particularly necessary for economic development and maintenance of the value of the currency. Prices have also been placed under control. Naturally, North China also has decided to adopt various control measures in that region to cope with the situation.

The execution of this plan controlling trade with China aims at not permitting unrestricted freedom in the types, quantities, and prices of goods for export to China as would be dictated by considerations of profit on the part of individuals. It must be pointed out here that this is a necessary step to bring about a sound Japan-Manchoukuo-China economy, and at the same time that it is in no way acknowledged that Japan alone is monopolizing the benefits of the trade with China by utilizing the currency system in China, as is apparently feared by the United States.

(4) The situation is similar in the case of Manchurian trade with North China.

In short, the trade between North China on the one side and Japan and Manchoukuo on the other must be discussed on the basis of principles essentially different from those applicable to the North China trade with third countries. This is due to the relation of North China’s international accounts to the special circumstances inevitable under the Incident situation. Another factor is the attitude of cooperation of various countries including Japan and Manchoukuo toward the currency system in North China and economic construction in that region. Therefore, to cope with this situation, the authorities of North China and the Governments of Japan and Manchoukuo have, within the sphere of their respective authorities, been devising necessary measures pertaining to the North China trade with Japan and Manchoukuo and also with third countries. It is not that the Japanese and Manchoukuo Governments are attempting to establish a system whereby those two countries alone, by being permitted freedom will monopolize exclusively the trade with North China.

3. Summarizing the foregoing statements, all present renovation measures in North China including the exchange allotment system, are steps indispensably necessary in view of the status quo of North China, and it is deemed natural that all foreign countries should cooperate in them as stated under 1. above.

At the same time, it is unnecessary further to elaborate on the various measures which have been taken with regard to trade with [Page 889]Japan, as stated under 2. above, which refute the conclusion that Japanese and Manchurian trade with North China is free and monopolistic because of the formalistic reason that of the control measures, in the case of the exchange concentration and allotment system, application is waived for imports from Japan and Manchoukuo.

We are convinced that the North China authorities would welcome an understanding on the part of the United States of the aforementioned points, desiring on the one hand that, taking into consideration world trade conditions, especially the situation resulting from the outbreak of European hostilities, the free, unrestricted trade of individuals not be demanded, that on the other hand, an understanding cooperative attitude toward the actual situation in North China be taken. At the same time they would heartily welcome the proposal of concrete methods which would be of value in enabling American firms to carry on business activities on the basis of actual prevailing conditions.

The Imperial Japanese Government wishes to point out that only in such an atmosphere will the fair and just treatment of the rights and interests of third countries, ever desired by the Imperial Government, be most perfectly realized.