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

611B.9417/140

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

[Washington,] March 3, 1936.

Conversation:	The Japanese Ambassador,
	Mr. Seijiro Yoshizawa, Counselor of the Japanese Embassy,
	Mr. Sayre,
	Mr. Coville,36
	Mr. Veatch.

Mr. Sayre explained that he had asked the Japanese Ambassador to come in for a further discussion of readjustment of the agreement concluded October 11, 1935, regarding voluntary limitation by Japanese exporters of importations into the Philippines of Japanese cotton piece goods. It was his impression that the two Governments might now be ready to agree upon the final adjustment. The suggestions of the Japanese Government had been discussed with the American textile people and with the Interdepartmental Committee on the Philippines and Mr. Sayre believed that this Government is now ready to accept these suggestions.

Mr. Sayre then handed the Japanese Ambassador and Mr. Yoshizawa copies of a draft of a memorandum of conversation,³⁷ which might be initialed by the Ambassador and Mr. Sayre, and this draft was read aloud.

The Ambassador’s first remark upon the draft was to the effect that it did not mention the question of transshipments of Japanese goods via Hongkong or other ports. The Ambassador and Mr. Yoshizawa then spoke at some length of this problem. Their extensive remarks on this subject may be summarized in the following points:

1. Japanese cotton goods shipped by Japanese exporters to the Philippines via Hongkong or by means of transshipments in Hongkong can be limited or controlled by the Japanese exporters in the same manner that direct shipments to the Philippines are controlled;

2. Goods which are exported from Japan for the Hongkong market and which may then be resold by dealers in Hongkong (chiefly Chinese dealers) to Chinese importers in the Philippines create a very special problem with which the Japanese exporters cannot deal. These exporters know of no effective way of controlling or limiting the resale and reshipment to the Philippines of such goods;

3. From the very beginning the Japanese Embassy, particularly through Mr. Yoshizawa, has stated that Japanese exporters could not be held responsible for shipments to the Philippines which they could not control;

[4.] Japanese exporters have considered that Japanese goods re-shipped from Hongkong into the Philippines by dealers in Hongkong are not covered by the agreement and are not to be included in the quota of Philippine imports of Japanese goods which the Japanese exporters accepted under the agreement.

5. At the time the agreement was made Japanese goods transshipped via Hongkong formed a negligible part of the entire Philippine importation of Japanese cotton piece goods. Recently, however, Chinese importers in the Philippines have begun to bring in large amounts of Japanese goods from Hongkong.

6. Japanese exporters and the Japanese Government have recognized that this development would endanger the market for American cotton textiles in the Philippines since they considered these shipments to be made outside of the limits which they had accepted and the Japanese Embassy had, therefore, warned the American Government repeatedly that the American Government or the Philippine Government would have to control such transshipments. The Japanese Government and the Japanese exporters are entirely willing to have the Philippine Government restrict or prevent entirely arrivals of Japanese goods transshipped through Hongkong or other ports—Japanese exporters have no desire whatever to evade the agreement by encouraging such transshipments.

7. The only practical suggestion that the Japanese Government is able to make to the Government of the United States with respect to handling this problem is the possibility of denying American consular invoices for the reshipment of Japanese goods from Hongkong to the Philippines.

Mr. Sayre explained in some detail the definite understanding of this Government regarding the way in which the question of transshipments was handled in the original agreement. He reminded the Ambassador that they had discussed the problem before the agreement was reached and that at the time the memorandum of conversation regarding the agreement was read and initialed by the Ambassador Mr. Sayre had called particular attention to the fact that the agreement provided that Japanese goods transshipped via Hongkong or other ports were included in the total amount of Japanese goods to be imported into the Philippine Islands under the agreement. The agreement refers specifically to the fact that the Philippine customs statistics of imports of Japanese goods are to be used as the measure of the amounts of Japanese goods to fall under the limitation established by the agreement. Mr. Sayre had explained to the Ambassador at the time that the Philippine customs statistics included as Japanese goods all goods originating in Japan no matter what the route of shipment or transshipment might be. Mr. Sayre said that he had understood that there had been no disagreement about this provision of the agreement and no misunderstanding as to its meaning and he supposed that the Japanese Government was not now questioning that provision of the agreement.

The Japanese Ambassador and Mr. Yoshizawa were a little uncertain in their response to Mr. Sayre’s direct questioning as to their understanding of the agreement on this point. The Ambassador nodded his head frequently in agreement with Mr. Sayre’s statements and Mr. Yoshizawa said that in view of the fact that transshipments via Hongkong were negligible at the time the agreement was reached last October the Japanese Government had not objected then to the American suggestion although it did insist that no special mention be made in the agreement to the effect that Japanese goods transshipped via Hongkong would be included in the total amounts of Japanese goods to be imported into the Philippines. These statements of Mr. Yoshizawa left some uncertainty as to his exact meaning, but later in the discussion he made the following statement: “I want you to understand, Mr. Sayre, that I have stated frequently, and you have agreed, that we shouldn’t be held responsible for shipments we could not control”, and Mr. Yoshizawa’s further discussion left no doubt of the fact that he was referring to Japanese goods shipped for the Hongkong market and resold there by Hongkong dealers to the Philippines.

Mr. Sayre took occasion at this point to inform Mr. Yoshizawa that neither Mr. Sayre nor anyone else in this Government had agreed to the exclusion from the limits of the agreement of any Japanese goods transshipped via Hongkong. The agreement was based on the Philippine customs statistics which included all such goods.

Mr. Yoshizawa expressed his belief that there should be inserted in the draft memorandum of conversation which had just been read a statement that the Japanese Ambassador had said that the Japanese Government and Japanese exporters could not accept any responsibility for Japanese goods reshipped from Hongkong or some other port to the Philippines.

In reply Mr. Sayre said that this Government could not consider for a moment excluding transshipped goods from the limitations established by the agreement. Such exclusion would defeat the purpose of the agreement. If the agreement were to be nullified by such a demand on the part of the Japanese then the only alternative would be more extreme action by the Philippines, placing even greater restrictions upon the importation of Japanese textiles into the Philippines. This Government had opposed such extreme measures and had sought this voluntary arrangement which was designed to have the effect of dividing equally between Japanese and American textile exporters the total Philippine market for Japanese and American cotton goods.

The Japanese Ambassador and Mr. Yoshizawa agreed that the Japanese Government would have no objection to a system of quotas to be imposed by the Philippine Government upon imports of cotton piece goods from all sources, so that imports of cheap cotton goods from Hongkong, Shanghai, British India, or other sources, would not capture the market created by limitations of Japanese exports to the Philippines and thus prevent the recapture of some of the Philippine market for American cotton goods. The Ambassador and Mr. Yoshizawa were warned, however, that once the question of quotas be raised in the Philippines it would be difficult to control the action of the Philippine Government upon such a proposal. There probably would be great pressure to set a quota for Japanese goods much below that established by the present agreement. Furthermore, quota action by the Philippine Assembly on this question might create the demand for quotas on many other commodities imported into the Philippines and might lead to ever increasing restrictions upon imports of Japanese goods.

The conversation returned repeatedly to the question of whether or not the agreement provided that all Japanese goods transshipped via Hongkong should be included in the reckoning of the amounts of Japanese goods to be imported into the Philippines under the limits established by the agreement. When the Japanese Ambassador and Mr. Yoshizawa were asked specifically if they had the intention of denying that such transshipments were not covered by the agreement they found it difficult to reply directly. They did leave no doubt, however, that the Japanese exporters have no intention of having such transshipments charged against the total which they have accepted as the limit of their imports into the Philippines. The “legal” question was not finally settled in the discussion but it was agreed that whatever the conflicting interpretations of the agreement might be the question of transshipments was a practical question which should be handled if possible.

Mr. Yoshizawa had stressed particularly the way in which inclusion of considerable amounts of transshipped goods in the quota which the Japanese exporters accept would upset their method of allocating this quota to the various exporters for an entire half year in advance. In view of this situation and the fact that no one knows how much Japanese goods will be shipped into the Philippines from Hongkong during the next few months, Mr. Sayre suggested that the Japanese exporters might shift from the system of allocating quotas by six months periods to an allocation month by month so that the amount of goods shipped into the Philippines from Hongkong in any one month might be subtracted from the total to be allocated to the exporters who will ship directly from Japan to the Philippines during the succeeding month or the second month succeeding.

Mr. Yoshizawa said that of course the Ambassador would submit this suggestion to his Government but Mr. Yoshizawa doubted that the exporters would be able to accept it.

Mr. Sayre asked the Ambassador what he felt should be done next. He wondered if the Ambassador would be able to transmit the text of the draft memorandum of conversation to Tokyo with the suggestion that he be authorized to initial it and that then both governments would continue to make every effort to find a solution to the transshipments problem.

To this suggestion the Ambassador was somewhat noncommittal. He would be glad of course to transmit the draft memorandum but both he and Mr. Yoshizawa seemed to feel that it would be necessary to do something about the transshipment problem before the draft could be initialed in its present form—if there were no direct solution of that problem then the Japanese would find it necessary to insert in such a memorandum of conversation the statement that the Japanese exporters would not be held responsible for shipments of Japanese goods into the Philippines over which they had no control. It was apparent that the proposed readjustment of the agreement, set forth in this memorandum, would be unsatisfactory, if not entirely meaningless, without a clear understanding as to the inclusion of all transshipped goods in the quota to be accepted by the Japanese exporters.

The Japanese Ambassador said that he would refer to his Government the draft memorandum which had been given to him and would report fully upon the point of view and the opinions of this Government. Mr. Sayre in turn said that this Government recognized that transshipments were a practical difficulty and that this Government would explore every possibility of assisting in some way or other in meeting this problem. If in the meantime it proved impracticable to initial such a memorandum as he had presented to the Japanese Ambassador he hoped that the Japanese exporters would hold their shipments to the Philippines to moderate levels. He assumed that in spite of the difficulties over transshipments and the practical problem that had arisen there was no question as to the meaning of the original agreement with respect to such transshipped goods.

In his final comment on this last point, Mr. Yoshizawa said that the instruction which the Embassy had received from Tokyo on the transshipment problem did not make any specific statement as to the wording or the interpretation of the wording of the agreement. It merely instructed the Embassy to get the United States Government to corroborate the understanding of the Japanese Government that the Japanese exporters should not be held responsible for any shipments of Japanese goods into the Philippines over which they could exercise no control and to suggest that the American Government or the Philippine Government take steps to control such transshipments.

36. Cabot Coville, Second Secretary of Embassy in Japan, temporarily in Washington.
37. Infra.