893.61331/88: Telegram

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

138. My 129, March 23, 9 a.m.54

Following [three] paragraphs are from an urgent telegram to me from Gauss.

March 23, 3 p.m. American leaf tobacco interests point out that under the proposed new regulation scale of consolidated taxes, the tax on cigarettes selling up to $200 a case will be increased 25%, on goods selling between $200 and $300 a case the increase in tax will be 150%, while on goods selling from 300 to 400 a case the increase will be only 25%. It is stated to me that practically all American leaf imported into China is used in cigarettes selling between $200 and $300 a case. Leaf tobacco dealers feel that the importation of American leaf will be very seriously reduced by the imposition of this 150% increase in tax on goods made of American leaf. They urge that you see the Minister of Finance concerning the matter before the Executive Yuan meeting on the 25th.

[sic] The Acting Commercial Attaché comments that 73% of China’s exports abroad are agricultural products and that 34% of China’s exports go where the duties on Chinese products are low or such products are duty free.
It is felt here that there is abundant ground for charging discrimination against American leaf tobacco through the heavy increase of consolidated taxes on grades which use American leaf.
Taking advantage of Kung’s55 presence in Nanking, I went to see him March 24 and left with him a short memorandum setting forth [Page 650] complaint of American tobacco interests at Shanghai. His reply was to the effect that the present increase in the consolidated tax on cigarettes was generally felt to be too slight and that tobacco merchants should be happy that those who favored a still higher tax (on the ground that China’s tax was not as high as taxes prevailing in other countries) had not prevailed.
It is my view individually while increase of 150% in tax on cigarettes selling between Chinese $200 and $300 a case is in effect a discrimination against American leaf, this discrimination is probably due to the fact that practically only tobacco brought into China is American leaf and no tax could be put on tobacco products using American leaf without being in fact a tax on American products or discrimination in favor of the only other leaf used which is a product of China’s farms. That is, the consolidated tax although imposed on domestic as well as imported tobacco will favor domestic tobacco through its relatively heavier taxation of those grades which cannot be produced within China, thus compels users to consume the cheaper Chinese grades. Since the Chinese have definitely entered upon policy of encouraging domestic agriculture and industry, it is inevitable that such policy will result in effective discrimination against products from abroad which compete with Chinese products and it will be difficult, however, for us to find persuasive ground for objecting to such policy under present world conditions. I have every reason to believe that proposed increases will be effected.
Sent to the Department, by mail to Peiping, Shanghai.
  1. Not printed.
  2. H. H. Kung, Chinese Minister of Finance.