611B.9417/135

Memorandum by Mr. Roy Veatch of the Office of the Economic Adviser

Mr. Yoshizawa came in late in the afternoon with an instruction from Tokyo. Before discussing the points raised in this despatch, he asked if it was the understanding of the Department that an adjustment of the Philippine textile agreement had been finally arranged. In response Mr. Veatch said that apparently the two Governments were in agreement on at least two of the main points, restriction of imports during the second half year of the agreement of 15,000,000 square meters and the use of arrival statistics from now on. Mr. Sayre had just returned and it was probable that he would wish to call the Ambassador on Thursday or Friday to discuss the final understanding of this adjustment.

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Mr. Veatch mentioned the fact that one feature of the proposed adjustment apparently remained uncertain since the American Embassy in Tokyo had been informed by Mr. Kurusu that he would transmit to the Exporters Association the American suggestion that the quota of 45,000,000 square meters for the second year should not be increased by 4,000,000 square meters. No further word had been received regarding this matter.

Mr. Yoshizawa at first stated that information which the Embassy here had received from the Foreign Office indicated that the exporters were willing to agree to the American suggestion regarding this point, but then he apparently feared that he had gone too far and stated that the information the Embassy had received was along the same lines as that received by this Government through the American Embassy in Tokyo.

Mr. Yoshizawa said that the point which he was instructed to raise with the Department was again the question of control of shipments of Japanese goods via Hong Kong. He said that the Japanese position from the beginning had been that the United States should control arrivals of such transshipped goods and that the Japanese exporters themselves were in no position to exercise control over these transshipments. Imports into the Philippines of Japanese goods from Hong Kong had increased rapidly in recent weeks, reaching a total of 2,000,000 square meters, and the problem was becoming so important that something must be done about it. If this development were allowed to take its course it would nullify the agreement. Japanese exporters are not satisfied with the present situation and are making strong complaints. In connection with this last point Mr. Yoshizawa made the following statement: “That means that at any time they may be compelled to take some action to cope with the situation.”

The difficulty is being caused by importations into the Philippines from Hong Kong by Chinese dealers in the Philippines. Not much difficulty was experienced in this way at first because the Chinese importers fully expected that the Philippine Government or the United States Government would prevent or control goods arriving from Hong Kong. Now that they have come to realize that such shipments are not to be controlled by the Philippines or the United States they have begun to buy large amounts of goods in Hong Kong and will be able to import any quantity that they desire. The fact that the Japanese exporters have limited their shipments to the Philippines has decreased stocks and created a greater demand for these goods so that the Chinese merchants are able to sell in a better market and are encouraged to bring in goods from Hong Kong.

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The Chinese importers and the Chinese dealers in Hong Kong have resorted to various forms of subterfuge to cover up part of this trade. The original marks of origin have been torn off in Hong Kong and new ones put on the goods, and in some cases goods have been put through some form of processing in Hong Kong so that they might be imported into Manila as Chinese goods.

The Japanese exporters and the Japanese dealers in the Philippines have attempted to increase prices so that they might take some advantage of the better market created by the limitations they have placed upon the supply of their own goods. Their efforts to profit by this situation have been checked, however, by the competition of cheaper goods brought in from Hong Kong by the Chinese dealers. Furthermore, the Japanese fear that they will lose the foothold which they had gained in the wholesale and retail business in the Philippines, following the Chinese boycott of Japanese goods in 1932. Japanese exporters to the Philippines favor Japanese dealers in the Philippines and, if part of the quota is used up by Chinese importing through Hong Kong, then the Japanese dealers will have their supplies further restricted.

The Japanese Government again wishes to urge very strongly that the United States do something about this problem.

Mr. Veatch explained the feeling here that the problem was primarily a matter to be dealt with by the Japanese exporters. In any event, the Americans had gained the impression that the Japanese exporters were not being forced to make any sacrifice by this development. If more Japanese goods were brought in from Hong Kong, limiting the quantity of Japanese shipments directly to the Philippines, then the market for Japanese goods in Hong Kong was increased to a like extent.

After discussion Mr. Yoshizawa agreed that the Japanese were really concerned only over the following two points.

1.
They are unable to raise the prices of their goods in the Philippines to any great extent and thus are hampered in their efforts to prevent loss by restriction of the quantity of their exports to the Philippines.
2.
Japanese dealers in the Philippines are threatened with loss of business to their Chinese competitors.

Mr. Yoshizawa stressed again the fact that the Japanese themselves are not seeking in any way to evade the agreement by shipping goods through Hong Kong. Japanese importers in the Philippines have been urged not to purchase goods through Hong Kong, and Mitsui and Company, the only Japanese concern which had brought in goods through Hong Kong, had discontinued this practice some months ago. The whole difficulty was caused by the activities of Chinese importers in the Philippines.

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Mr. Veatch explained that the best informed officials in Washington had been called in to conferences to study this problem but that no method for controlling arrivals in the Philippines of Japanese goods transshipped through Hong Kong or other ports had been discovered short of legislation in the Philippines to embargo or restrict such arrivals. The Philippine legislature does not meet again until June. Of course, there is no way of telling whether the Philippine Government would wish to institute such control even then, but at least in the meantime there appeared to be no way of handling the situation in the Philippines. Our only suggestion was that Japanese exporters might be able to control this trade through agreements with the dealers in Hong Kong.

Mr. Yoshizawa thought that it would be impossible for the Japanese exporters to arrange any such understanding with the dealers in Hong Kong. If these dealers saw this opportunity for increased business and profits the Japanese exporters could hardly bring sufficient pressure to bear upon them to lead them to give up this business.

Mr. Yoshizawa asked if this Government had considered the possibility of controlling shipments of Japanese goods from Hong Kong by means of denying consular invoices for such shipments. He said that Dr. Waring had had a long conference with people concerned in Japan (It was not clear whether he meant exporters or Government officials) and that the Japanese had gained the impression that Dr. Waring would propose this method of controlling shipments when he arrived in Washington.

Mr. Yoshizawa took this opportunity to mention again the fact that there was increasing discussion in Japan of the desirability of balancing strictly the commodity trade between the United States and Japan and at the same time increasing irritation caused by the number of separate requests for restriction of Japanese exports to the United States or its possessions. Some weeks ago in a despatch to the Japanese Embassy here the Foreign Office had mentioned the possibility of reaching some general agreement with the United States covering trade problems. The Foreign Office had again referred to this possibility and had now requested the Ambassador to report his ideas regarding such a possibility.

Mr. Yoshizawa suggested that in the event Mr. Sayre does request the Ambassador to call upon him in order to discuss the Philippine agreement it is quite possible that the Ambassador will refer to this possibility of an agreement or an understanding regarding trade matters along more general lines. Mr. Yoshizawa requested, therefore, that Mr. Sayre be informed of the interest of the Japanese Government in this possibility so that he might be prepared to discuss the matter at least in a preliminary way with the Ambassador.

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Mr. Yoshizawa asked also that his discussion of the transshipment problem be laid before Mr. Sayre in detail so that he might be prepared to discuss this matter with the Ambassador.