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

611B.9417/209

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

[Washington,] July 17, 1936.

Conversation:	Mr. Seijiro Yoshizawa, Counselor of the Japanese Embassy;
	Mr. Sayre;
	Mr. Veatch.

Mr. Sayre referred to the statistics handed to Mr. Yoshizawa on July 15, 1936,⁷² giving arrivals of Japanese cotton goods in the Philippines during the first eleven months of the agreement. Mr. Yoshizawa said that the same statistics had been forwarded to the Foreign Office in Tokyo by the Japanese Consul General in Manila. He indicated, however, that his instructions regarding the attitude of the Japanese Government had not been changed and he proceeded, therefore, to review the course of the discussion between Mr. Sayre and the Japanese Ambassador regarding this entire problem. He recalled that early last spring Mr. Sayre had insisted upon the inclusion of transshipments in the quota as provided for previously in the agreement, but he commented upon the further fact that the American Government had made no attempt to press the Japanese Government for an answer on this point.

Mr. Yoshizawa stated that the Exporters Association had so controlled the allocation of quotas for shipment to the Philippines during the second six months of the agreement that the total shipped directly from Japan to the Philippines during the first year of the agreement should not exceed 45,000,000 square meters. The Association had allocated permits to export only 15,226,430 square meters between February 1 and June 20, 1936, and the total allocation for the period February 1 to August 1 would not exceed 19,000,000 square meters as compared with the 23,500,000 square meters which the Exporters Association maintained it would be justified in exporting to the Philippines during this period under the terms of the agreement. If, during this period, arrivals in the Philippines of Japanese goods transshipped from Hong Kong had not exceeded 4,500,000 square meters, then the maximum quota allowed by the agreement would not have been exceeded even under the interpretation of the American Government.

Mr. Yoshizawa emphasized again the fact that the Japanese Government had warned the American Government that Japanese exporters were unable to control shipments via Hong Kong and the American Government had been requested, therefore, to do something itself to prevent or to limit arrivals of transshipped goods.

Mr. Sayre replied that of course the United States had studied this request very seriously but had been unable to find any means of controlling such transshipments. It had always been the opinion of the American Government, however, that Japanese goods arriving in the Philippines via Hong Kong should be included in the maximum quota for Japanese goods because in the first place Japanese manufacturers did get the advantage of the sale of the goods transshipped via Hong Kong and, conversely, the opportunities for sales of American goods in the Philippines were limited just as much by sales of Japanese goods transshipped via Hong Kong as by goods arriving directly from Japan.

There was considerable further discussion of this problem and of the record of the two Governments in the discussions of the problem during the past several months. Mr. Sayre emphasized the fact that this Government had not in the past and did not now intend to be a stickler for the letter of he agreemnt. He was not wishing to find fault with the Japanese. The real problem regarding the continuance of the agreement for a second year did exist, however. It appeared probable that arrivals of Japanese goods in the Philippines during the full twelve months of the agreement would exceed the maximum of 49,500,000 by three or four million square meters. There probably would be eight to nine million square meters of Japanese goods arriving via Hong Kong, in excess of the 45,000,000 square meters arriving directly from Japan. Mr. Sayre felt that the Japanese Government would not wish to maintain that this large amount of Japanese goods entering the Philippines should be completely overlooked and excluded from the agreement. If this Government is willing to overlook the apparent violation of the terms of the agreement which will result from arrivals in excess of 49,500,000 square meters, then it would appear to be fair for the Japanese Government to agree to a smaller quota of arrivals of Japanese goods in the Philippines for the second year of the agreement, particularly if only goods arriving directly from Japan are to be included in the quota for the second year.

Mr. Yoshizawa emphasized again the disadvantage at which exporters to the Philippines are placed because of the license fee which they pay to the Association on all direct shipments to the Philippines. Chinese importers in the Philippines, therefore, find it possible to compete with these goods by importing Japanese goods from Hong Kong, on which no fee has been collected. Furthermore, he made the point that the greater the reduction in the amount of Japanese goods arriving directly from Japan, the better the market which is created for goods shipped in from Hong Kong.

Mr. Yoshizawa said that if he understood Mr. Sayre to say that either transshipments must be included in the quota or the American Government will consider the agreement as having broken down, then he would wire this information to Tokyo immediately. Mr. Sayre replied, however, that this Government did not wish to take a hard and fast position on this or any other point affecting the agreement. It was the desire of this Government to keep the agreement alive and to make it work as well as possible. He assumed that the Japanese Government had the same desire and he wondered if the Japanese Government could not bring forth some other possibility, perhaps an agreement upon a lower figure for next year if the quota were limited to goods arriving directly from Japan.

Mr. Yoshizawa said that he would be glad to cable this suggestion to Tokyo if Mr. Sayre wished to submit it, but Mr. Sayre assured him that he did not wish to submit any proposal to the Japanese Government. He merely wished to emphasize the serious concern of this Government regarding the working of the agreement and his feeling that a real problem for the serious study of both Governments was created by the present situation and by the desirability of finding a satisfactory adjustment of the agreement for the second year.

Mr. Yoshizawa asked whether it would be possible for the Philippine Assembly, which is now in session, to take action with respect to transshipped goods if the American Government feels that imports of such goods must be included in the agreement. In reply Mr. Sayre said that such action would run counter to the whole trade policy of this Government since it would create direct discrimination against Hong Kong. It would mean the creation of a precedent justifying similar action on the part of other countries.

Mr. Yoshizawa thought the final point of particular significance since it would give a precedent for South American countries to cut Japanese goods out of their markets.

In response to Mr. Sayre’s continuing interest in any constructive way in which the present difficulty might be met, Mr. Yoshizawa said that unfortunately he was not in a position, within the scope of his instructions from the Foreign Office, to offer any constructive suggestions. It would be necessary first for him to lay the problem before the Foreign Office and to receive further instructions.

In this connection he asked if he might say in his despatch that in the event that the Japanese Government insists the transshipments must be excluded, the whole agreement will fall through. In response Mr. Sayre said that he would not so word the position of this Government. Rather, he would suggest that Mr. Yoshizawa’s despatch should state that if the Japanese Government cannot find some constructive way of meeting the present situation, the American Government will have an exceedingly difficult time in defending the continuance of the agreement to the American cotton textile industry. The agreement had been an attempt to divide 50–50 the joint market for Japanese and American cotton goods in the Philippines. During the period February-June 1936, Philippine imports to American goods had not exceeded 12,000,000 square meters whereas arrivals of Japanese goods had exceeded 23,000,000 square meters; taking account of the embroidery goods sent to the Philippines and reexported to the United States, it was probable that American cotton cloth sold in the competitive Philippine market did not exceed during this period 25 percent of the amount of Japanese cotton cloth sold in that market. In spite of this poor showing for American cotton textiles, however, this Government was not interested in pressing for strict interpretation of the letter of the agreement. It had yielded on many points of interpretation of the agreement in the past and its one interest now was to seek a constructive adjustment of the agreement. Larger issues even than the cotton textile trade itself were at stake.

Mr. Yoshizawa agreed with the desirability of keeping the agreement alive. On the other hand, he said that when his Government yielded to pressure from the American Government, while Japanese imports of American goods greatly exceeded in value American imports of Japanese goods, new difficulties were created for his Government in its efforts to prevent new barriers against Japanese trade in South American markets. When Japan seeks to protect her export trade in those markets, she is asked why she does not insist more strongly upon the extension of her exports to those countries which at present buy less from her than they sell to her. As an example of the attitude which Japan is being forced to take against such countries, Mr. Yoshizawa mentioned the action of the Japanese Government in invoking the trade protection law against Australia since Australia sells much more to Japan than she buys from her.

Mr. Yoshizawa said that many Japanese industrialists and traders could not understand why the Japanese Government yielded to the American Government to the extent of agreeing to control of Japanese exports to the American market or to the Philippines. He said he saw no harm in telling Mr. Sayre that a group of Osaka cotton textile exporters had been in Washington recently and had pressed Mr. Yoshizawa for an explanation of the negotiations regarding an agreement for voluntary restriction of Japanese exports of cotton piece goods to the United States. Following his explanation, these exporters had expressed their gratification that negotiations for such an agreement had broken down since they were convinced that in spite of the recent tariff increases they would be able to ship 100,000,000 square yards of cotton piece goods to the United States before the end of the year. There would be time enough then for negotiation of an agreement. Mr. Yoshizawa insisted that of course these opinions did not express the attitude of the Japanese Government itself; he had called attention to this experience merely as an illustration of the difficulties which the Japanese Government was facing.

Mr. Sayre expressed his hope that the Japanese Government would continue to seek constructive and mutually satisfactory adjustments of the incipient trade conflicts between the two countries. The two Governments must look to the future and try to protect the broad interests, which were more important than any temporary trade advantage. It was important to both Governments that trade wars be avoided since they were inevitably destructive of the best interests of all parties concerned.

72. Not printed.