693.113 Cereal Products/124: Telegram

The Ambassador in China (Johnson) to the Secretary of State

6. Department’s 87, December 22, noon. The following report regarding existing Chinese tariffs on wheat flour and wheat is made [Page 645] after consultation with Dawson and Arnold. The numbers attached to following paragraphs correspond to numbers attached to points enumerated in Department’s telegram under acknowledgment:

1. Wide differential was for the purpose of encouraging domestic milling of all flour required. Dawson states that at time tariffs were made effective both foreign wheat and flour were underselling domestic products; that millers insisted upon protection from foreign flours; and that some consideration was given to the idea of making China self sufficient in its flour and wheat requirements. He adds, however, that tariff has not operated to increase wheat production.

2. The milling industry in China is at present capable of meeting all probable domestic requirements.

3. There is no definite program for expansion in the milling industry in China, but according to Dawson there is a decided move to expand milling facilities at points near or within wheat-producing regions. Dawson is of the opinion that while expansion in the milling industry at interior points has been encouraged to some extent by the tariff differential, this expansion would have been expected to occur had duty on flour been in normal relation to the duty on wheat. Further expansion is expected, even should differential be lowered to its normal relation.

4. Present tariff has not limited imports to “clears”. On the contrary, the high flour tariff has apparently tended to reduce the imports of “clears”, as it has raised the price for such inferior grades of imported flour to the point where they can be undersold by the domestic productions. There is a fixed demand [for] high quality “clears” and “patent” flour, which has continued in spite of higher duties. The chief factor governing the demand for foreign “clears” is the available supply of wheat and other foodstuffs in China, and internal transportation conditions.

5. Dawson reports that at this date there appears to be little demand for foreign flour. He states that the present price differential between domestic and foreign flour, as the result of relatively low priced Chinese wheat, is great enough practically to eliminate the demand for the usual run of foreign flour. (See in this connection following paragraph).

6. If the relationship between world and Chinese flour prices in the future should remain as shown by tabulation of Chinese and foreign flour prices at Tientsin a reduction of tariff on flour to yuan 0.39 per bag would permit larger imports of American flour at times when America is in a position to meet world competition. Since September 1936 American and other foreign flours have not been able to compete with the Chinese product, and possibly could not have competed even if the flour duty had been lowered. This situation may be transitory [Page 646] as it is due to a wide disparity (partly seasonal) between foreign and Chinese wheat. For a few months prior to December Chinese wheat at Shanghai averaged over yuan 2.50 per picul below the cheapest available foreign wheat. During December Chinese wheat was only yuan 1.57 lower than foreign. Present estimate is that supplies of domestic wheat will be practically exhausted by March 1st resulting in prices between domestic and foreign wheat coming to parity. With wheats at parity at Shanghai, imports of foreign flour could increase to a small extent, and if flour duty were lowered to 133 per cent of September wheat duty they would increase materially. Lowering the flour duty to within 133 per cent of the wheat duty with the wheat duty left at its present level would probably result in somewhat lower proportional imports of wheat compared with flour. It would be expected that a larger proportion of deficit requirements would be imported in the form of flour suffixed [sic] when flour is discriminated against through a high differential rate as at present. Total imports of wheat and flour in terms of wheat would probably be somewhat greater with a reduced duty on flour alone. Lower flour duties would tend to lower flour prices in general, and lower prices would be expected to stimulate increased consumption, necessitating larger quantities of wheat and flour in terms of wheat from abroad. The total requirements of wheat and flour from abroad each year depend upon the domestic supply of wheat and other foodstuffs and general economic conditions in China. Therefore, imports of American wheat and flour depend on these factors and competitive position with other foreign countries.

Arnold adds following to above which is from Dawson. During period 1921–23 when wheat and flour were both admitted duty free the imports of flour for 1923 [1921?] totalled 500,000 barrels; for 1922, 2,400,000 barrels; and for 1923 nearly 4,000,000 barrels. Thus, before tariff autonomy there were heavy fluctuations in imports of flour due to varying factors. Among these factors affecting flour imports were character of wheat crop in China, relative prices of imported compared with domestic flour, allowances being made for variations in silver exchange, and availability of substitute cereal food products at comparable or lower prices.

7. It is Dawson’s opinion that present wheat and flour prices in China are not sufficiently high to cause Chinese Government favorably to consider a reduction in wheat and flour duties, or a reduction in the different kinds between the two. It is expected, however, that by March, 1937, as a result of scarcity of domestic wheat, domestic mill flour will be increased to near a parity with foreign prices with present import duties included. Whether or not it reaches an actual parity depends upon whether or not a large amount of the consumption will shift to lower priced substitute products as has already occurred to [Page 647] some extent. Should the present unfavorable outlook for the 1937 Chinese wheat crop continue (outlook for the crop being only 70% of the 1936 production) it is possible that the Chinese Government might consider a reduction in wheat and flour duties, but no significant reduction in the differential between the two. A reduction in the differential of 1 to 1⅓ would probably meet unyielding opposition from commercial millers who are still largely in the hands of banking institutions closely connected with Government finance. Arnold agrees to this point of view.

8. It is my opinion, based on above statements of fact, that there is little prospect of any beneficial effect upon the situation to be derived from friendly representations by this Government, although if future wheat prospects retail [at] price as calculated by Dawson an effort might be made in season or later to capitalize the resulting situation with a view to persuading the Chinese Government to lower the tariffs. It is Arnold’s belief that something might be accomplished through a reciprocal tariff arrangement which might cover a long list of products, both in imports and exports, making tariff changes possible on a bargaining basis.

Since 1927 there has been a continuous decline in the importations [of] all foreign flours. It is our opinion that the radical relative decline in imports into China of American flours is due to the relatively higher price of American flour as compared with world prices. The great decline in the importation of foreign flour into China is no doubt due to the expansion of China’s domestic milling industry, with consequent increased ability to provide for domestic needs, and it is therefore felt that, other factors remaining unchanged, a bad wheat crop conditions during the next few years would result in greater imports of wheat rather than flour. It is our belief that Chinese mills which produce only a “straight” flour offer a product that is better in quality than the American “clears” which in the past have comprised the bulk of Chinese importations of American flour.