Foreign Relations of the United States Diplomatic Papers, 1935, The Far East, Volume III

893.48/986

Memorandum by Mr. Raymond C. Mackay of the Division of Far Eastern Affairs

[Washington,] August 14, 1935.

Reference is made to TA’s²⁸ memorandum of July 12, 1935²⁹ (received by FE³⁰ on August 13), in regard to (a) the possible resuscitation of that portion (approximately U. S. $32,000,000) of the Reconstruction Finance Corporation cotton and wheat credit of May 29, 1933, which, due to China’s inability to absorb cotton in amounts valued at the sum indicated, was canceled, and (b) the proposal that the former credit be renewed, under somewhat similar terms of repayment, for the purpose of enabling the Chinese Government to purchase American cotton which the Chinese Government would in turn dispose of largely to Germany in exchange for German products destined for consumption in China.³¹

FE is of course desirous of furthering the best interests of the export trade in American cotton and has no objection per se to a triangular trade such as that under consideration. However, in considering this question it would seem well to bear in mind that, notwithstanding the fact that the Chinese Government has thus far effected payments on due dates in accordance with the terms of the credit agreement under reference, indications are not wanting that the entire transaction has proven to be an ill-advised move on the part of the American Government. On the part of the Chinese Government the deal was in reality an attempt to obtain through indirect channels funds not available from other sources or by the use of other means, and as such it was criticized sharply in both China and in Japan and by Group members of the China Consortium, who viewed the transaction as a violation by an agency of the American Government of the spirit of the Consortium Agreement of October 15, 1920.³² On the part of the American Government the transaction was an attempt to remove from the American market surplus stocks of cotton and wheat and to increase the consumption in China of the products named. Apparently the latter objective failed of attainment, as subsequent developments would seem to indicate that in effect the transaction diminished rather than increased China’s consumption of American cotton.

FE of course realizes that the question of China’s ability to absorb increased amounts of American cotton does not enter into the proposal under reference, as Germany is indicated as the ultimate consumer. FE, however, does not understand why the suggested triangular trade should require the extension by the RFC of credits on terms similar to those of the original credit agreement, i. e., long-term credits, as presumably the Chinese Government would sell promptly for cash the German goods received in exchange for the American cotton and thus provide itself with funds which could, and which should, be utilized to effect repayment of sums advanced under the terms of the American credit. If the transaction could be effected on a normal, commercial basis, for example, payment against documents on a 90 or 120–day basis, it is possible that many of the seeming objections to the proposal would disappear. However, if, as is suggested, the terms are to be substantially in accord with those of the original agreement, i. e., repayment by China to extend over a three to five-year period, the transaction would in effect place at the disposal of the Chinese Government a very large sum of money (in the neighborhood of 80 million Chinese dollars, depending on prevailing rates of exchange). Such a situation would in all probability be interpreted as a further violation of the spirit of the Consortium Agreement. Furthermore, it would likely entail the continued application of customs surtaxes (now imposed by the Chinese Government as a source of revenue for the liquidation of the American wheat credit of 1931 and the cotton and wheat credit of 1933), which surtaxes augment “laid-down” costs and thus affect adversely those interests, including American interests, now serving China’s general import trade.

Although the transaction under discussion conceivably might increase the export sale of American cotton, there would seem to exist a distinct possibility that it might also, due to the flooding of the Chinese market with German goods, shut out from that market similar goods which under normal conditions might be furnished by American producers.

It is believed that, reduced to its simplest factors and possible effects, this transaction, if consummated, might be of some advantage to China (provided it did not provoke and induce new manifestations by Japan of the intent of the Japanese military coercively to restrict China) and also of some advantage to Germany, but that it would not be likely to be of net advantage to the United States.

In view of the foregoing, FE does not, at least under the terms indicated, view with favor a suggested renewal of the canceled portion of the cotton and wheat credit which was extended to China by the RFC in May, 1933.

28. Division of Trade Agreements.
29. Not printed.
30. Division of Far Eastern Affairs.
31. The Consul at Kobe, in his letter of July 15 to the Ambassador in Japan, quoted some information from Shanghai indicating that on July 4 there remained in China only 29,530 bales out of the total of 104,000 bales of cotton shipped under the Reconstruction Finance Corporation arrangement (893.48/975).
32. Foreign Relations, 1920, vol. i, p. 576.