893.24/10–746: Telegram

The Consul General at Shanghai (Davis) to the Secretary of State

1929 bis. 1. Difficulties being encountered by Standard–Vacuum Oil Company in securing import clearance for surplus property purchased from FLC in Guam and Tinian during August [as a] result preliminary negotiations beginning prior June 20 and valued in neighborhood of US dollars 1,000,000. Board of Supplies takes position that sale by FLC was violation terms Nanking agreements June 15, 16 and 2114 between Howard15 FLC and Dr. Soong16 and concurred in by General Marshall. Kiang of BOSEY states that these agreements clearly obligated FLC to hold for account of Chinese Pacific surpluses including those in Guam and Tinian pending conclusion of formal agreement, and that FLC had no right to make such contracts as one with Standard–Vacuum without first obtaining waiver from Chinese or without notifying Chinese Govt and that Nanking agreements were abrogated to that extent.

2. In discussing this matter with Kiang, Consulate General representative pointed out that Standard–Vacuum contract was a bona fide [Page 1085]transaction on part of purchaser, that materials were for direct use of buyer, and that agreement of August 30 signed by two Governments section 1, paragraph 2 clearly exempted Standard–Vacuum transaction. General Kiang was also informed that use of import ban (see Mytel 1783, September 20; repeated to Nanking as 1006) to force settlement of basic issue described paragraph 1 above was not in accord previously stated principles of ban and was grossly unfair to Standard–Vacuum which is innocent third party in dispute. Kiang conceded this point but observed if he permitted exception in the case of Standard–Vacuum on this import without assurances that satisfactory settlement would be made by FLC with Chinese Govt for stated violation of Nanking agreement, he would create precedent for permitting without recourse entry of all sales by FLC on bases now taken over by Chinese.

3. Kiang also raised issue of whether or not prices paid by Standard–Vacuum for FLC purchases would not prove much lower than prices for similar items established by BOSEY in China. He argued that FLC had sold without authorization or consultation goods which had been tentatively transferred to Chinese Govt under paragraph 1 [of] Vogelback memorandum of agreements reached at Nanking, and that if prices charged were too low, this would have repercussions on his sales program here. He agreed, however, that this was fundamentally problem to be negotiated with FLC.

4. In view of the above it is desirable to receive promptly comments from Dept, Embassy and Manila on following points, bearing in mind that transactions in substantial volume will be affected if Kiang’s arguments admitted.

a.
Is US Govt prepared to concede basic Chinese point that Nanking discussions and preliminary oral understanding were binding on FLC to extent that surplus property on bases included in intended sale to China were in effect property of Chinese during course of negotiations leading to final agreement August 30 and therefore not subject to sale by FLC without Chinese permission?
b.
If above admitted, is FLC prepared to settle with Chinese Govt for such sales, which would presumably mean crediting China with dollar proceeds received?
c.
If we are not prepared to concede either of above two points now, are we prepared to negotiate with Chinese to reach some settlement of possible FLC failure to observe moral commitments in Nanking discussion which might have retained validity until final contract August 30 was executed?
d.
In event no obligation under memorandum of Nanking agreement prepared by Vogelback is admitted by United States, can we inform Chinese that August 30 contract only is binding on this Govt and that all tentative understandings that may have been reached prior to that time are superseded by it?

[Page 1086]

5. Pending reply to above, position is being taken with Kiang as follows: We have no knowledge of confirmation of any specific understanding in course of Nanking or other negotiations that FLC would refuse or secure advance Chinese waiver on surplus sale prior to signing of formal written agreement between two Govts. FLC Shanghai completed execution of dollar contracts with established customers between June 15 and August 30 just as Guam and Tinian offices did and which were not protested by BOSEY. Failure to permit Standard–Vacuum surplus contract imports would not only cause criticism of BOSEY as per paragraph 2 above but would create claim for demurrage and other charges which would have to be recognized. Therefore we will strongly urge clearance for this import and negotiation at governmental level of any differences in interpretation arising out of Nanking discussions.

6. This message concurred in by Johnson17 and Davis18 of local FLC office who agree that clarification US views on Chinese interpretation of Nanking negotiations, particularly paragraphs 1 and 5 of Vogelback memorandum August [June] 22 is desirable. Both Johnson and Davis leaving for Manila this weekend and will discuss matter with Vogelback after which former will be asked to comment to Washington particularly on paragraph 4 above.

Sent to Dept as Shanghai serial 1929 [bis], October 7, 3 p.m.: repeated to Nanking as 1099 and to Manila as 89 for Vogelback FLC.

Davis
  1. See memorandum by Mr. Vogelback, June 22, p. 1041.
  2. John K. Howard, then Central Field Commissioner, Pacific and China, OFLC.
  3. T. V. Soong, President of the Chinese Executive Yuan.
  4. Brig. Gen. Bernhard A. Johnson, Field Commissioner, China and Eastern Areas, OFLC.
  5. Donald B. Davis, Deputy Field Commissioner, China and Eastern Areas, OFLC.