Memorandum of Conversation, by Mr. C. Thayer White of the Division of Commercial Policy70

Participants: Dr. Kan Lee, Commercial Counselor of the Chinese Embassy; Mr. Liu;71 Mr. Sun.72
Mr. Woodard,73 CA; Mr. Drumright,74 CA; Mr. Willoughby, CP; Mr. Wilson,75 CP; Mr. Hollis,76 CP; Mr. White, CP.

Dr. Lee opened the conversation by asking our view as to the probable date that the treaty negotiations will be concluded. Mr. Willoughby replied that it is our hope to proceed with negotiations as soon as the Chinese Government is ready to do so. Dr. Lee indicated that he felt both parties are certainly willing to proceed as expeditiously as possible and, in this connection, referred to the provision in our treaty with China relinquishing extraterritorial rights which expresses the intention of the two governments to enter into negotiations for a treaty of friendship, commerce and navigation not later than six months after the end of hostilities. In reply to a question, Dr. Lee stated that he would try to expedite negotiations but that he had no information with respect to the plans of his government.

Mr. Drumright asked what departments or ministries of the Chinese Government are interested in the proposed treaty, to which Dr. Lee replied that the Ministries of Foreign Affairs, of Economic Affairs, of Finance, of Justice, of Communications, of Interior, and the Supreme National Defense Council, the War Production Board, Central Planning Board, and the National Resources Commission, etc., would probably all be consulted. He did not know whether the Standing Committee of the Kuomintang would have to approve the Treaty, but indicated that the final approval of the Executive and Legislative Yuans would be essential.

[Page 1320]

Dr. Lee wondered whether some of the articles in the draft treaty might not be simplified. He expressed the view that two sentiments prevail in Chungking: (1) insistence on equality and (2) caution in entering into commitments which may have an important bearing upon the economic development that is bound to come in future, together with all the implications. He said that the first sentiment is derived from Chinese history (the system of extraterritoriality), while the second sentiment reflects the desire of China not to tie its hands with respect to future policies which it may wish to adopt in order to meet developing economic conditions. Therefore, the provisions of the treaty must be equal (mutual) and must take into account future Chinese economic policy. Dr. Lee went on to say that for these reasons he had directed our attention to certain provisions of the proposed treaty which are not fully reciprocal. For example, he wondered whether the articles with respect to the rights of corporations (Articles III and IV) might not take the form of those included in previous treaties entered into by the United States. Also, in view of the discriminations against banks chartered by other states or foreign countries included in the laws of our states, he wondered whether the word “financial”, as brought into Article III by reference to Article II, might be dropped.

Dr. Lee wondered whether the provisions under Article VIII with respect to real and immovable property might be changed to accord most-favored-nation treatment only. Dr. Lee also referred to Article XV and stated that he wished it clearly understood that the provisions with respect to monopolistic restrictions is confined to international commerce and does not apply to domestic commerce. In reply, his attention was drawn to the fact that the Article specifically states “monopolistic restrictions in international commerce” (underlining added).

In answer to a question by Mr. Woodard as to Chinese commercial policy, Dr. Lee replied that the negotiation of a treaty would in itself be a step in the determination of Chinese policy and pointed out that the answer to a number of current questions would be established in the treaty. Dr. Lee said that in his opinion private enterprise will have an important role in the Chinese economy; however, this statement reflected his personal opinion. He said he had been concerned at the possibility that the memorandum for use in negotiating the treaty would have legal standing, with the result that the Chinese Government would be bound by the principles set forth therein with respect to private enterprise and freedom from monopolistic restrictions. In reply, it was indicated that the statements in this regard made on page 2177 of the memorandum are merely an assertion of [Page 1321] the policy of the United States and do not commit the Chinese Government to these views.

Dr. Lee stated that the future policy of the Chinese Government with respect to the use of the conditional versus the unconditional most-favored-nation clause must be determined by the Chinese Government. Dr. Lee said that personally he favored the use of the unconditional clause. Mr. Willoughby asked whether China has not followed the unconditional policy in the past, and referred to a book by Dr. Sze, Tsung-Yu entitled “China and the Most-Favored-Nation Clause” as a possible source of information on the subject. Dr. Lee replied that it was his impression that China had in practice followed the unconditional most-favored-nation policy but he knew of no official pronouncement of this policy.

With respect to Dr. Lee’s previous statement regarding mutuality, Mr. Wilson referred again to the fact that we have written this principle into the treaty as fully as possible, although it has been necessary to take into consideration our federal system. Dr. Lee recognized the American efforts at mutuality but said we had to realize “the hard fact” that our system of law has led to necessary modifications which, in effect, make these provisions not fully reciprocal. Dr. Lee asked whether in lieu of Articles III and IV of the draft treaty we could not agree upon provisions similar to Articles 12 and 13 of the United States commercial treaty with Norway. Dr. Lee added that China had some similar provisions with respect to corporations in its treaty with Canada, signed April 1944.78 Mr. Wilson replied that the provisions in Articles III and IV of the draft represent an attempt to provide liberal treatment with respect to the corporate form of business enterprise; he added that they represent a recognition of the place of the corporation in modern society. Mr. Hollis stated that the Articles are intended to place some limit on the restrictions which might be imposed by either of the contracting parties on the activities which may be carried on by corporations of the other party, whereas the Norwegian treaty provides no protection from such discriminatory laws and regulations.

Dr. Lee thought that China would need American capital in order to reconstruct and develop its economy, and, therefore, favorable treatment would be accorded to American business enterprise regardless of whether the assurances under reference are included in the treaty. However, he felt that because these provisions are not completely reciprocal in their operation, the Chinese Government might have some difficulty in accepting them. Mr. Willoughby pointed out [Page 1322] that American business is exceedingly anxious to obtain assurances of treatment which will permit operation in China on a fair and reasonable basis and that the conclusion of a treaty with Articles III and IV included would be very reassuring. Dr. Lee indicated that American business had not been deterred from going into foreign countries under the provisions of previous treaties, to which Mr. Willoughby replied that conditions which have previously obtained have been far from perfect. Mr. White added that the special conditions in China growing out of a long period of stress and strain resulting from the war and all of its destructive forces will perhaps cause business to be more cautious in entering China than in entering most other countries. Mr. Hollis referred to a statement made by Dr. Lee that once American companies “took the plunge” without unsatisfactory results other companies would follow suit, and observed that the conclusion of a satisfactory treaty might induce such initial interest; in fact, he felt that satisfactory treaty provisions might not be so necessary after a lapse of several years as they are now.

Dr. Lee again inquired as to whether there might not be some middle ground in case China should not be able to accept Articles III and IV in their present form, and referred to the Norwegian treaty provisions and the Chinese-Canadian Treaty of 1944, which, Dr. Lee pointed out, provide for national treatment with respect to status, access to courts, and taxes. Mr. Willoughby replied that in his opinion the reversion to the Norwegian treaty form would be disappointing to businessmen in the United States interested in doing business in China. Mr. Wilson said that although we would be very glad to refer Dr. Lee to any provisions with respect to the rights of corporations which had been included in previous treaties, he was not authorized to suggest any alternative form which might be included in the proposed treaty.

Mr. Hollis wondered whether Dr. Lee would prefer a change in the language from “upon the same terms as such rights and privileges are or may hereafter be accorded therein to corporations and associations created or organized in other states” etc., to some such language as “upon the same terms as such rights and privileges are or may hereafter be accorded to the companies incorporated in any part of the United States, with the exception of any special privileges which may be granted by a state to its own corporations.” Mr. Hollis indicated that such a change would be in language only and the substance would not be affected. Dr. Lee did not comment upon Mr. Hollis’ suggestion.

With respect to the suggested deletion of the word “financial”, Dr. Lee said that in the United States out-of-state banks generally are not permitted to operate and that unless Chinese banks should be permitted to operate in the United States on a basis similar to that of banks incorporated under federal law, China would receive little [Page 1323] or no benefit under the present language. Mr Wilson observed that if we should agree to Dr. Lee’s proposal the Chinese might be accorded better treatment in a particular state than corporations chartered in any of the other 47 states would receive. Mr. Liu said that he had checked the banking laws of thirty states and had found no state which permits the operation of out-of-state banks with the exception of two or three which permit lending operations only. Dr. Lee inquired whether “banking” is covered by the word “commercial”. Mr. Hollis said that he had investigated partially and had failed to find any case in this country where the word “commercial” had been so construed. It had, however, been construed to cover life insurance.

With reference to a question asked at a previous meeting, Mr. Hollis stated that the phrase “fair and equitable treatment” had been included in many trade agreements, in the articles relating to exchange control and government monopolies. Mr. Hollis also referred to the previous discussion with respect to the exception in Article XXVI regarding advantages now accorded or which may hereafter be accorded by the United States to the Panama Canal Zone, and stated that one reason for the exception is that imports coming into the Canal Zone from Panama are accorded duty-free treatment under our Treaty of 1936 with that country.79 He added that all imports, including imports from China, at present enter the Panama Canal Zone free of duty, but that including the Canal Zone under the most-favored-nation clause as to duties might raise problems if this situation should be changed at some future time.

  1. Marginal notation: “Submitted, before final transcription, to the Chinese officers participating in the conversations, and revised in accordance with their suggestions”. Conversations had been carried on with these officers by representatives of the Divisions of Commercial Policy and Chinese Affairs on June 19, 20, 22, and 25; memoranda of these conversations not printed. They deal almost exclusively with article-by-article discussions of the American draft treaty.
  2. Ta-chung Liu, Secretary of the Office of the Commercial Counselor of the Chinese Embassy.
  3. Kung-tu C. Sun, Director of Economic Research for the Chinese National Resources Commission, in the United States on a purchasing mission.
  4. Granville O. Woodard.
  5. Everett F. Drumright.
  6. Robert R. Wilson.
  7. Walter Hollis.
  8. See second paragraph of comment on Article XV, p. 1300.
  9. Treaty for relinquishment of extraterritorial rights, signed at Ottawa, April 14, 1944, United Nations Treaty Series, vol. 14, p. 407.
  10. Treaty of friendship and cooperation signed at Washington, March 2, 1936, Department of State Treaty Series No. 945 or 53 Stat. (pt. 3) 1807.