The Director of the Office of Financial and Development Policy (Knapp) to the Chinese Minister (Tan)2

My Dear Dr. Tan: In reference to the Lend-Lease Agreement of June 2, 1942,3 the so-called Pipeline Agreement of June 14, 1946,4 the Military Aid Agreement of June 28, 1946,5 and other lend-lease arrangements between the United States Government and the Chinese Government, the Department of State is now prepared to propose terms for final settlement of the obligations of the Chinese Government under these agreements and arrangements.

Lend-lease aid furnished to the Chinese Government by the United States Government under the Agreement of June 2, 1942 and other arrangements, according to our latest reports, amounted to a total of $1,626,998,525, including $849,360,232 before September 2, 1945 and $777,638,293 since that date.

Of this total, the United States Government considers the following as obligations subject to payment by the Chinese Government:

a. Maintenance Items $130,000,000
b. Inventory 40,000,000
c. Pipeline 51,750,000
d. Military Aid Agreement 25,000,000
e. West China Balance 20,000,000
f. Air Cadet Training 10,000,000
g. ITA6 Training 531,000
h. Dodge Trucks 6,183,000
i. Automotive spare Parts 3,075,000
j. Chrysler Maintenance 80,000
k. Tire Plants 61,000
l. Miscellaneous    34,000
Total $286,714,000

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Following is a brief summary of the items listed:

a. Maintenance Items . . . . . $130, 000, 000

These maintenance items were supplied after September 2, 1945 under an authorization by the President in a memorandum dated September 5, 1945,7 on terms to be decided by the Secretary of State and the Administrator of the Foreign Economic Administration.8 The Secretary of State and the Administrator of the Foreign Economic Administration ruled that maintenance items should be supplied under this authority subject to cash payment in full, and this policy has been adhered to consistently with respect to other countries. The figure of $130 million is the best estimate of the United States Government of lend-lease aid in this category. This estimate admittedly may prove inaccurate in either direction when the final accounting is completed. However, we are proposing this figure as a fair estimate on the basis of the information now available in order to avoid prolonged accounting and recording operations.

b. Inventory . . . . . $ 40, 000, 000

Under our principles of settlement for lend-lease items, as applied to China the State Department has considered it appropriate that payment be made for civilian held articles in inventory on September 2, 1945, and for articles of civilian utility held by the armed forces on June 30, 1946 (excluding articles charged for as maintenance items). In the absence of inventories, these two types of holdings have been estimated at $40 million.

c. Pipeline . . . . . $ 51, 750, 000

This is an obligation of the Chinese Government under the Agreement of June 14, 1946, to be paid over thirty years at two and three-eighths per cent. The exact value of the pipeline is not yet definitely known, but the figure of $51.75 million was agreed as a basis for the first interest payment paid July 1, 1947.

d. Military Aid Agreement . . . . . $ 25, 000, 000

Final reports are not yet completed on the total amount of aid furnished to China for the reoccupation of Chinese territory and the disarmament and repatriation of Japanese troops under Article II, subparagraph (a) of the Military Aid Agreement of June 28, 1946. The United States Government believes that the total amounts to more than the $25 million ceiling set in the Agreement. However, the State Department is prepared to settle the Chinese obligation for the reoccupation, disarmament and repatriation program for this amount. Article III of the Agreement states that China will pay the appropriate price, as determined by the United States Government, upon presentation of bills.

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e. West China Balance . . . . . $ 20, 000, 000

The Chinese Government assumed an obligation to pay this amount as the balance remaining due pursuant to an agreement9 concluded with General Wedemeyer10 in November 1945 for the turn over of a quantity of supplies in West China excess to the needs of the United States Forces.

f. Air Cadet Training . . . . . $ 10, 000, 000

The United States Army continued the air cadet training program from December 1, 1945 to June 30, 1946 on the understanding that the Chinese Government would reimburse all costs incurred, as indicated in a communication from the Generalissimo11 to President Truman dated November 14, 1945.12 Costs for this period have been estimated by the Army Department and the Lend-Lease Fiscal Office of the Treasury Department at $10 million. (The Chinese Government has paid for the program since June 30, 1946.)

g. ITA Training . . . . . $ 531, 000

The Chinese Government accepted the obligation to pay cash for continuing training after September 2, 1945 of technicians who were in the United States, en route, or scheduled to come for training under the International Training Administration. The figure given is for the period from September 2, 1945 through October 31, 1945, after which China took over the program under direct arrangements.

h. Dodge Trucks . . . . . $ 6, 183, 400

A total of 1,483 Dodge trucks were turned over to the Chinese Government in Kunming in October 1945 against a promise to pay landed cost on demand. The price given is based on landed cost at Calcutta, but does not include any charge for transportation of the trucks from Calcutta to Kunming.

i. Automotive Spare Parts $ 3, 075, 250

Dodge truck spare parts also were turned over at West China depots in September 1945 on a promise to pay landed cost, which has been calculated at the above figure. Bills have been submitted but have not been paid.

j. Chrysler Maintenance Contract $ 80, 000

This item covers estimated charges after September 2, 1945 for a maintenance, repairs, and training project for Dodge and other trucks in China under requisition C–1497.

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k. General Tire and Rubber Contract $ 61, 091

This item covers charges after September 2, 1945 for personal services of technicians of the General Tire and Rubber Company in supervision of tire retreading shops in West China. The contract was handled under lend-lease until September 2, 1945. It was continued after that date on a cash basis until the Chinese Government requested cancellation.

l. Miscellaneous $ 33, 830

This item covers steel wire, rope, and lubrication material turned over in India on a promise by the Chinese Government to pay landed cost on demand. The above amount has been billed but not paid.

The Chinese Government has paid the sum of $1,725,000 as the first installment on the pipeline obligation. These funds are being held in a special account in the United States Treasury in accordance with the request of Mr. S. C. Wang in his letter of July 1, 1947.13

Payment by the Chinese Government of the obligations listed above would discharge its financial obligations in respect to all straight lend-lease aid and all other lend-lease aid furnished under the specific programs giving rise to these obligations. The United States Government would be willing to consider funding most of these obligations over a reasonable period of time.

In addition to provision for payment of the appropriate sums as listed above, the United States Government proposes to include certain other provisions in the overall lend-lease settlement agreement. These would include the following:

The two Governments would mutually waive other intergovernmental claims, with certain exceptions, arising out of the war or during the war period.
The Chinese Government would assume responsibility for the settlement and payment of claims of Chinese nationals against the United States Government and United States Government personnel arising out of the war or during the war period. The United States Government would be willing to agree to a reduction of the Chinese Government’s lend-lease obligation by a reasonable amount in exchange for this undertaking.
The United States Government would reserve the right to recapture lend-lease arms and armaments, which would be retained by the Chinese Government without payment except that lend-lease naval vessels would be returned to the United States Government in accordance with the requirements of United States law. The Chinese Government would undertake not to retransfer lend-lease arms and armaments to any third government without the consent of the United States Government.
The two Governments would reaffirm their adherence to the principles of international trade set forth in Article VII of the Agreement of June 2, 1942.

In accordance with the proposed outline of these discussions previously handed to you it is proposed to request final settlement for the aid rendered your government under Public Law 442, 77th Congress, 56 Stat. 82,14 and implemented by the Agreement between the Governments of United States and China signed on March 21, 1942.15 In that connection the U. S. Government wishes to request, at your earliest convenience, information outlined in the attached enclosure16 in connection with the uses of the proceeds of this credit by the Government of China.

Finally, as proposed last year, it is desired that any outstanding questions arising out of the surplus bulk sale contract of August 30, 194617 may be discussed and solutions agreed between our two governments during these negotiations.

I shall be pleased to continue these discussions, and to undertake any further explanation of any features of the proposed settlement which you may desire, at your convenience.

Sincerely yours,

J. Burke Knapp
  1. Marginal notation: “Original handed by Mr. Knapp to Mr. Tan, June 9, 1948”.
  2. Signed at Washington, Department of State Executive Agreement Series No. 251, or 56 Stat. (pt. 2) 1494. For correspondence on this subject, see Foreign Relations, 1942, China, pp. 566 ff.
  3. Signed at Washington, Treaties and Other International Acts Series No. 1533, or 60 Stat. (pt. 2) 1760. For correspondence on this subject, see Foreign Relations, 1946, vol. x, pp. 724 ff, passim.
  4. Signed at Washington, Treaties and Other International Acts Series No. 1746, or 61 Stat. (pt. 4) 3895. For correspondence on this subject, see Foreign Relations, 1946, vol. x, pp. 724 ff, passim.
  5. International Training Administration.
  6. See circular telegram of September 13, 1945, 5 p.m., Foreign Relations, 1945, vol. vii, p. 558.
  7. Leo T. Crowley.
  8. For summary, see telegram No. 2116, December 7, 1945, 2 p.m., from the Chargé in China, Foreign Relations, 1945, vol. viii, p. 1191.
  9. Lt. Gen. Albert C. Wedemeyer, then Commanding General, united States Forces, China Theater.
  10. President Chiang Kai-shek.
  11. For text, see telegram No. 1973, November 14, 1945, 8 a.m., from the Chargé in China, Foreign Relations, 1945, vol. vii, p. 629.
  12. Foreign Relations, 1947, vol. vii, p. 1153. Mr. Wang was then Chairman of the Chinese Supply Commission, Washington.
  13. Approved February 7, 1942; it authorized a $500,000,000 loan or credit to China.
  14. Signed at Washington; for text, see Department of State Bulletin, March 28, 1942, p. 264. For correspondence on this subject, see Foreign Relations, 1942, China, pp. 419 ff.
  15. Memorandum of April 30 by Solomon Adler, Treasury representative in China, 1944–47, not printed.
  16. Signed at Shanghai; for text, see Department of State, Office of the Foreign Liquidation Commissioner, Report to Congress on Foreign Surplus Property Disposal, October 1946, p. 40. For correspondence on the negotiation of this agreement, see Foreign Relations, 1946, vol. x, pp. 1033.