Foreign Relations of the United States, Diplomatic Papers, 1936, The Far East, Volume IV

893.102S/1427

The Consul General at Shanghai (Gauss) to the Secretary of State

No. 482

Shanghai, November 18, 1936.
[Received December 16.]

Sir: I have the honor to inform you that some weeks ago when Sino-Japanese tension was particularly critical, and when foreign business and banking interests were concerned as to a possible Sino-Japanese conflict and the status of Shanghai in event of such a situation, I requested Consul E. F. Stanton to prepare for me a memorandum examining the available material on the subject of the possible neutralization of Shanghai in event of a Sino-Japanese conflict. Mr. Stanton has submitted to me the enclosed memorandum. I concur with his conclusions.

I am aware that there has been considerable discussion in foreign business and banking circles as to the possibility that the Powers might seek to bring about the neutralization of Shanghai in event of serious difficulty between China and Japan approaching a state of war. I have carefully abstained from discussing this subject, but I have been interested to note the feeling amongst non-official British circles that the British Government would be likely to move in an attempt to neutralize Shanghai in event of Sino-Japanese hostilities. It is not possible to say whether there is any foundation for this non-official British opinion.

Respectfully yours,

C. E. Gauss

[Enclosure]

Memorandum by the Consul at Shanghai (Stanton)

[Shanghai,] October 6, 1936.

[Here follows a historical summary of the development of the foreign Settlement at Shanghai.]

It will thus be seen that the conception of the exclusion of the International Settlement from the operations incidental to either internal or external warfare had its origin in the necessity which existed early in the life of the Settlement to protect the lives and property of its residents and the inability of the Chinese authorities to fulfill their recognized obligations in this regard. Necessity gradually assumed the characteristics of a recognized “right” not only to protect life and property but to maintain, by force if necessary, the integrity and neutrality of the Settlement as such. Paralleling this development there has been recognition by the foreign powers of that necessity, of the right of the constituted authorities of the Settlement to defend the lives and properties of its residents and of the obligation to assist in such measures of protection when necessary; to this end the powers have from time to time warned opposing Chinese factions engaged in internecine warfare that the Settlement must be excluded from the area of war-like operations. With a few exceptions, where there has been war between China and a foreign country in the past there has also been recognition by the foreign belligerent of the extensive international interests in the Settlements and of the desirability of leaving those areas undisturbed.

Possibility of Effecting the Permanent Neutrality of Shanghai

It would thus appear that the neutrality of the International Settlement and French Concession has been based upon contingencies rather than definite international agreement. It has been maintained for the most part against the country which by virtue of the sovereign rights it continues to claim over these areas is charged with the primary responsibility of protection. It has been maintained by force and has been contingent therefore upon the inability or unwillingness of China to oppose such force with greater force. It has been maintained upon the further contingency of the interests of the concerned powers being coincident, for experience has shown that where there is any deviation of interests independent and unneutral action may easily follow. The neutrality of the Settlement, therefore, rests on a precarious and uncertain basis. What are the possibilities of placing neutrality on a more permanent and secure basis through the medium of collective international agreement?

The more important factors underlying this question appear to be (1) the scope of such neutralization including (a) area and (b) such questions as municipal and national services, taxation, revenue and related fiscal matters, and (2) the attitude of the interested powers and more particularly China and Japan.

(1) Scope of Neutrality:

(a) Area: The experience of the past few years has clearly demonstrated that effectively to maintain the neutrality of the Settlement there should be excluded from the field of military operations not only the Chinese city but an area of from ten to fifteen miles around the entire city and port of Shanghai. Modern weapons and modern methods of warfare which are now being utilized by Chinese as well as foreign armies have made the defense of the Settlement and French Concession a hazardous and difficult undertaking where the Chinese city or the territory immediately adjacent thereto is available as a base of operations. To protect adequately the Settlement it seems vitally necessary that a sufficiently deep neutral zone be created from which defensive operations when necessary might be conducted without serious risk to the Settlement. There is the added consideration that much of the residential property occupied by foreigners and representing an investment of approximately twenty-five million dollars is located beyond the limits of the Settlement; there has been a growing tendency for the past few years to occupy these areas even more extensively. It, therefore, seems essential to include the whole area embraced by the Municipality of Greater Shanghai and to establish a neutral zone around the whole city.

(b) Services and Facilities within Neutral Area: It would also seem desirable that there be agreement to completely neutralize the essential municipal services such as light, power, water, systems of transportation, telephones, harbor facilities, et cetera—and all national services such as radio, radio telephone, telegraph cables, railways, bus lines, et cetera, located within the neutral area created. During the Sino-Japanese hostilities in 1932 there was constant use by the Japanese forces of docks, wharves, and other facilities, as well as such municipal services as light, power, water, et cetera. In other words it appears essential to specifically delimit not only the area to be neutralized but also to attempt definitely to neutralize all municipal or national services and facilities of whatever nature existing within the neutralized area and thus make impossible its use as a base of operations.

In the event of China being at war with a foreign country there would also arise the question of the neutralization or disposition of the revenues which are ordinarily remitted to the Chinese treasury. The continued remittance of such funds to the Chinese Government in time of war might naturally be objected to by a nation at war with China, as might the flotation by the Chinese Government of loans with Chinese banks or similar fiscal transactions. It is obvious that the drawing of revenues from the largest and most important commercial city in China and the flotation of loans in that city in time of war, if permitted, would be of vital assistance to a belligerent. The belligerent not so favored might rightfully complain that there existed neutrality in name but not in fact since its enemy was deriving vital succor from the so-called neutral area.

On the other hand to deprive China of this very important source of revenue and to deny her the right to protect that source from seizure by an enemy would appear to be equally questionable. This is a point the satisfactory adjustment of which is surrounded by formidable obstacles and yet the failure to resolve it by satisfactory formula would render neutrality largely nugatory. A possible solution might be the holding in trust by the neutral powers of all Chinese national revenues collected within the neutral area and the return of such revenues to the Chinese or other legally constituted and internationally recognized government upon the termination of hostilities. However, it is obvious that such a procedure bristles with difficulties and complications and might not prove acceptable to the parties concerned.

(2) Probable Attitude of Interested Countries:

The more important foreign powers have indicated in the past a very keen interest in the question of protecting and defending their interests in this great commercial port in which their nationals reside and in which they have built up or acquired interests. It should be noted that this natural interest of the powers, with the exception of Japan, has not been accompanied in the past by any manifestation of an ulterior intent. It may perhaps be assumed therefore that their attitude in any international discussions regarding the neutralization of Shanghai would be reasonable, considerate of China’s sovereign rights, and would be common rather than individual as to objective.

The probable attitude of China and Japan toward proposals of neutralization appears more uncertain and conditional. It is obvious that the participation of these two countries in any scheme is vital to its successful implementation unless neutrality is to be maintained by strong armed forces and without regard to either China or Japan; the latter is a solution which would unquestionably be found to be wholly unsatisfactory and quite impracticable, certainly for any extended period.

China:

It is not easy to gauge China’s attitude toward the neutralization of Shanghai or the extent to which she would participate in such a scheme, but perhaps this phase of the question may be most conveniently considered under (a) complete refusal to participate and (b) participation.

(a) Refusal to participate: It is wholly conceivable if not highly probable that China would refuse to participate in any scheme for the neutralization of either the Settlement or a more extensive area. Looking back over the history of the port there appear to have been no indications that the Chinese would welcome or assent to the neutralization of any part of Shanghai. On the contrary, Chinese opposition to suggestions regarding the neutralization of Shanghai has been immediate and strong in the past, a case in point being Chinese suspicions of the neutralization proposals made by the Secretary of State in 1927.⁶⁴ There has been acquiescence in the armed neutrality effected by foreigners in Shanghai from time to time, but that acquiescence has been based on necessity and not volition. It might be remarked parenthetically, however, that this official attitude has not prevented either Chinese officials or private citizens from availing themselves of the security which that armed neutrality has made possible.

Chinese reluctance to recognize or to participate in effecting the neutrality of Shanghai is unquestionably predicated upon the fear that any scheme of neutralization must inevitably result in loss or derogation of sovereign rights and in the relinquishment of control over the richest and most important commercial city in the country. These fears appear to be not without foundation for it is not improbable that to effect the complete neutralization of Shanghai and a broad zone around the city, which is what adequate protection for foreign life and property seems to dictate, there would be some curtailment, if not outright loss, at least temporarily, of certain sovereign rights and certain administrative, judicial and fiscal prerogatives corollary to those rights.

(b) Participation: To induce China to participate in the neutralization of Shanghai it is believed the foreign powers including Japan would unquestionably be called upon to give the most solemn and definite assurances affirming recognition of China’s sovereign rights over the area neutralized. It is also probable that China would insist upon such questions as the control and use of the customs and other revenues of the port, which would be of such vital concern to her in time of war, being definitely resolved in her favor. She might also desire specific assurances that any temporary assumption of sovereign rights, including administrative, judicial and fiscal rights would be relinquished immediately upon the conclusion of hostilities. An international guarantee covering these points might induce Chinese agreement but agreement is scarcely conceivable without.

In the event that an international guarantee along the lines indicated in the preceding paragraph could not be given by the interested powers because of the refusal of one or more to bind itself or because of disagreement on other issues, would it be possible to induce China to participate in a very limited neutralization? It seems unlikely, for while China might be more agreeable to the limitation of neutralization to the International Settlement and French Concession, she would probably insist in any event upon the favorable solution of such important questions as control within the neutralized zone of national revenues, particularly customs revenues, affirmation of her sovereign rights, et cetera. However, neutralization of the Settlement and French Concession areas alone would be of little practical value so long as contiguous Chinese territory remained available as a base of operations; anything less than the neutralization of the entire city of Shanghai, including a protective zone, would be of doubtful value.

In view of these considerations it is difficult to escape the conclusion that the obstacles surrounding the securing of Chinese assent to any scheme of neutralization are formidable and susceptible of realization only upon certain definite conditions.

Japan:

The attitude of Japan towards neutralization is dependent, it is believed, upon the policies activating her at the time such a proposal is advanced. In the past her views on this subject appear to have been characterized by a desire to bring about the complete neutralization of the entire Shanghai area. This desire received a definite impetus from the Sino-Japanese hostilities of 1932 which resulted in something in the nature of a demilitarized zone being created to the west of Shanghai by the provisions of the agreement of May 5, 1932, terminating hostilities. There is reason to believe, however, that there had also been germinating in the minds of Japanese officials a scheme more comprehensive than the neutralization of Shanghai. The plan is understood to have contemplated the conversion of Shanghai and a considerable area around the port into a free and independent territory and was given considerable newspaper publicity following the conclusion of hostilities in 1932. It is not known whether it was ever officially brought to the attention of the interested foreign governments but the Japanese Government is understood to have sounded out our government and other governments regarding the convening of a “Round Table Conference” to consider the future status of Shanghai and related questions. It seems not improbable that a proposal for the creation of a free and independent city would have been broached if such a conference had been convened.

It should be noted, however, that in the event Japan’s policy is one committed to territorial expansion by military conquest, she would probably avoid making any commitments regarding the future status of Shanghai which might hamper her in any way, for in pursuance of this policy she might conceivably determine upon the seizure of Shanghai, including the International Settlement and French Concession, regardless of possible international reprecussions.

Japanese participation in the neutralization of Shanghai is thus likely to be predicated upon conditions and purposes completely antithetical to those entertained by China. In view of this fact the finding of a formula common to both countries would doubtless prove to be a most difficult if not impossible task.

Conclusion:

One is, therefore, reluctantly forced to the conclusion

(1) that the neutralization of Shanghai by an international agreement subscribed to by both China and Japan is only remotely possible since it is dependent upon too many conflicting political aspirations;

(2) that without the cooperation and participation of both China and Japan, neutrality could only be maintained by a large, well equipped international force, inasmuch as the volunteer corps now being supported by the Shanghai Municipal Council at great expense to the taxpayer is largely obsolete;

(3) that in view of the tense and unstable political situation in Europe and the disinclination of our own and other governments to dispatch large forces abroad, it is highly problematical whether an international force could be assembled in Shanghai sufficiently powerful to maintain the neutrality of the port in the face of determined Chinese opposition or serious Japanese aggression;

(4) and finally that the problems involved in the defense of the International Settlement and the French Concession and the maintenance of the neutrality of these areas are likely to remain subordinated in the minds of the powers to more pressing and seemingly important political questions.

E. F. S[tanton]

64. For proposals, see telegram No. 31, January 28, 1927, 3 p.m., to the Minister in China, Foreign Relations, 1927, vol. ii, p. 59; for correspondence, see ibid., pp. 59–78, passim.