893.24 FLC/5–1048

Memorandum by Major General Philip E. Brown2 to the Assistant Secretary of State for Economic Affairs (Thorp)

Subject: Status of Operations under Surplus Property Bulk Sale Agreement with China

A. General

An agreement between the United States and China for the sale of certain surplus war property in the China-Pacific Ocean area was signed on August 30, 1946.3 A primary purpose of that agreement was to bring about the speedy turnover to China of war surpluses for use by China in rehabilitating its economy, combating inflation, and acquiring foreign exchange through sales for export. On the part of the United States additional objectives of the agreement were to relieve the United States as promptly as possible of the expenses of care and custody of the surpluses, most of which were scattered among numerous islands, to avoid continued losses due to deterioration and pilferage, and to facilitate the reduction and demobilization of service personnel in the area. During the negotiations leading up to the signing of the agreement, it was recognized by representatives of both governments that time was of the essence and that if the project were to attain its objectives the transfer of the property to the Chinese and its removal by them from the islands should be completed as quickly as possible. Our representatives took steps which were intended to insure the efficient and expedient completion of the movement of the surpluses. Among other things, the agreement established certain time limits within which the Chinese were to take over custody and remove the property. Moreover, in order to facilitate the outloading, shipment, and reconditioning for sale, it was [Page 705] agreed that the United States should establish a fund of $30,000,000 (US) for the charter of U. S. vessels, the payment of engineering services, and the purchase of spare parts. An appropriate provision to this end is incorporated in the agreement. The Chinese undertook to employ an established U. S. engineering firm or firms to assist in the overall operation and agreed to utilize to the greatest possible extent established commercial distribution channels for the disposal of the property.

At the time the agreement was being negotiated, it was estimated by the Army and the Navy that there would be available for sale to China movable property representing an estimated aggregate procurement cost of approximately $500,000,000 and fixed installations with an estimated aggregate procurement cost of $84,000,000, of which over one half of the combined total had already been declared surplus at the time of the signing of the agreement. At the present time, of this total estimate of $584,000,000, we have made available to the Chinese property having a procurement cost of approximately $444,000,000 of which approximately $395,000,000 worth has been taken into Chinese custody or ownership. On the basis of estimates obtained from the owning agencies, it now appears that the total surpluses which can be made available for transfer to the Chinese will fall short of this original estimate by about $100,000,000 worth of movable property. The full value of fixed installations has already been declared and transferred to the Chinese.

B. Acceptance and Removal Problems

We recently sent our Area Director, Mr. F. T. Murphy, on an inspection trip to several of the islands and Shanghai. As a result of his reports and observations, which are concurred in by our senior representative in Shanghai,4 we are convinced of the necessity for a meeting as soon as possible with appropriate Chinese Government officials for the purpose of bringing about more orderly and efficient management of the operation by the Chinese. Moreover, there are several matters which at this time require adjustment by mutual agreement of the parties to the contract.

It is abundantly clear that at their present rate of operation the Chinese will not fulfill their obligations under the agreement; i. e., they will not complete the removal of the surpluses from the several islands. In December 1947 a major slowdown and disruption of the Chinese removal operation began to develop. Through Bosey5 and [Page 706] its representatives, China indicated both informally and formally, in writing, that it did not desire to nor plan on accepting substantial portions of the surpluses which were being made available. Evidently the Chinese Government itself was concerned over the current rate of progress because in November 1947 it undertook a drastic change in the disposal arrangement. Part of the change was a sale by Bosey of virtually all the surpluses on the islands to the Central Bank of China. Apparently, it was hoped that the Bank would be able to provide more businesslike management of the sales effort, to the end that large quantities of the surpluses would be sold for export from the area. This has been an abortive effort on the part of the Chinese and the surpluses are not being moved. We believe one of the reasons for this failure is the insistence by the Chinese on obtaining what are, in the light of our own experience and that of WAA,6 considered to be excessively high prices for the property.

There is one exception to the general failure of the Chinese to remove property from the islands. That is their satisfactory operation on Okinawa, where we have turned over to the Chinese approximately 660,000 M/T,7 of which they have removed approximately 535,000 M/T. At the other two locations of very large quantities of property, i. e., Manus and the Guam-Marianas area, removal operations have been and are virtually at a standstill. They have removed only about 28% of the property made available to them. Only negligible quantities have been removed since December 12, 1947.

Most of the surpluses now owned by the Chinese occupy storage space needed by the Army and Navy or landowners or rest in buildings which have been sold separately to other customers. As time goes on, the failure of the Chinese to remove such property will undoubtedly be the basis for claims and controversies between the United States and other governments and customers.

Our agreement provides that in the event of Chinese failure to remove the surpluses within specified periods, the United States is authorized to remove, destroy or otherwise dispose of the property for China’s account. Clearly, if China fails to remove the property, a large disposal and removal operation will fall upon both the Department as the disposal agency and upon the Army and Navy as custodians. Manifestly, if the disposal and clean-up work is going to become the task of a U. S. agency, action should be taken promptly while the property still has some value and there is a possibility of marketing it. The effects of deterioration, pilferage and diminishing markets make it increasingly difficult to sell the property at a future date.

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C. The Possibility of an Underrun

Anticipating a substantial disparity between the quantity of property originally contemplated under the agreement and the total quantity of property finally turned over to China, our Central Field Commissioner at Shanghai has suggested, and we concur, that one of the conditions which the Chinese Government should be requested to accept in connection with the China Aid Program8 might be complete waiver by the Chinese Government of any rights under Article 5 of the agreement, which provides for renegotiation in the event of substantial disparities in deliveries. In its dispatch [telegram] No. 742 dated 23 April9 AmEmbassy Nanking expressed its wholehearted support of the foregoing suggestion as an item for inclusion in the contemplated bilateral agreement. Our memorandum of March 25, 1948, subject “NAC10 Document 643—Settlement of 1942 Aid to China” to Mr. Ness, OFD,11 suggests that NAC give consideration to including in its action a provision that China and the United States mutually waive their rights under Article 5 of the Bulk Sale Agreement.

D. Conclusions.

There is need for a meeting with appropriate representatives of the Government of China to resolve problems and establish mutually acceptable interpretations and understandings under the agreement with a view to bringing about speedy removal of the property from the islands. Among other things, the following matters should be dealt with at such a meeting:

Termination date for declarations of surpluses covered by the agreement.
Measures to be taken by the Chinese to speed up the removal of surpluses.
Extension of time for removal of property.
Policy with respect to refusals by China to accept property or to cause its withdrawal once it has been accepted.
Adjustment of disparities which have arisen to date and which can appropriately be resolved at this time.

E. Recommendation

That the American Ambassador at Nanking12 be instructed to arrange a meeting between U. S. representatives and appropriate [Page 708] representatives of the Chinese Government to resolve matters relating to the surplus property bulk sale agreement.

F. Departmental Action

We realize that other economic or political factors involved in this Government’s overall relations with China may render it inadvisable to meet with the Chinese Government on this matter just at this time. Accordingly, it is requested that we be advised of your views as to the desirability of the proposed meeting and, if you concur therein, as to the appropriate time for it to be held. If an appropriate time for the meeting should be indicated, we will, in coordination with other interested divisions of the Department, prepare the necessary instructions to be sent by the Department to the Ambassador at Nanking and to be sent by this office to our Central Field Commissioner at Shanghai.

  1. Deputy Foreign Liquidation Commissioner, Office of the Foreign Liquidation Commissioner (OFLC).
  2. At Shanghai, Department of State, Office of the Foreign Liquidation Commissioner, Report to Congress on Foreign Surplus Property Disposal, October 1946, p. 40. For correspondence on negotiation of this agreement, see Foreign Relations, 1946, vol. x, pp. 1033 ff.
  3. Capt. S. N. Ferris Luboshez, Central Field Commissioner, China, Japan, and Northern Pacific.
  4. Board of Supplies of the Chinese Executive Yuan, charged with taking possession of and distributing surplus property.
  5. War Assets Administration.
  6. Measurement tons.
  7. For correspondence on this subject, see pp. 442 ff.
  8. Not printed.
  9. National Advisory Council.
  10. Memorandum by Maj. Gen. Donald H. Connolly, Foreign Liquidation Commissioner to Norman T. Ness, Director of the Office of Financial and Development Policy, and document No. 643 not printed. For correspondence on the $500,000,000 credit to China in 1942, see Foreign Relations, 1942, China, pp. 419 ff.
  11. J. Leighton Stuart.