711.9327/4–148: Telegram

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

585. ReEmbtels 494 and 505 of March 19, 1948. Merchant and Jarvis met with Chinese on March 31 further discuss bilateral. Lin headed Chinese group composed representatives of CAA, Ministry Commerce [Communications] and Foreign Office.

Merchant moved at opening to dispose of other points under discussion before Shanghai–Hong Kong question in effort obtain favorable action from Chinese on gasoline tax prior to informing them final US position Hong Kong–Shanghai. Lin said Chinese considered other problems “very easy, but Shanghai–Hong Kong question main issue”. Lin insisted upon discussion of Shanghai–Hong Kong immediately, stating his investigation gas tax still uncompleted.

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Merchant then informed Lin that instructions Embassy had received from Washington in response to cable, which outlined at length arguments which Lin had advanced in support Chinese case and also background which had been developed in previous discussion, were as he expected, and on which he had attempted to forewarn Lin. Instructions maintained unalterably US position presented March 18.

Merchant restated US case as follows: “Right carry Fifth Freedom traffic Hong Kong–Shanghai is right which was implicit in negotiation, that English text exchange of notes clearly reflects agreement reached in negotiation, that US engaged in movement such traffic for considerable period before any question was raised by Chinese Government.” Merchant, at this point, again referred to informal statement of US position handed to Chinese on March 18.

Lin pursued line advanced March 18 and said “China would allow US carriers move Fifth Freedom traffic between Hong Kong and Shanghai (presumably by flying boat), but Kowloon is Chinese territory, therefore carriage of Kowloon–Shanghai traffic is cabotage.” Lin changed his description of subject at hand at this point to movement of Kowloon–Shanghai traffic. Lin said “your difficulty is trying to get around this Fifth Freedom, but there is no such principle involved here.” Merchant promptly informed him that US not searching for formula to deny US rights granted under agreements, that negotiators knew at time agreement reached only feasible method serving Hong Kong was through use of Kowloon airport.

Lin said, as we were aware, he had been principal negotiator for Chinese Government, and in conversations which he had with Powell, latter frequently stated US had no interest in movement of traffic between Hong Kong and Shanghai. He was informed it was true that US not interested in operation of “shuttle service”. Any international trunk line operator is primarily interested in long haul through passengers as this movement essential successful trunk line operation. Lin again mentioned discussions with Powell and again stated he had received assurances from Powell that US was “not interested” in the carriage of Hong Kong–Shanghai traffic. At this point, Merchant asked him following question: “Is it your contention that Powell or any other American negotiators gave you secret verbal assurances on behalf US that US would under no condition carry Fifth Freedom traffic between Shanghai and Hong Kong?” Lin responded, “No, that is not the case—not at all,” but that Powell said that US “would not be interested in this kind of traffic.” Lin said he asked Powell “to put this down in writing.” Powell, according Lin, said “No, US Government is advocate of Fifth Freedom principle,” and then Powell mentioned other Fifth Freedom agreements [Page 796] US had concluded, but did state “I can assure you that we will not be interested in such business.”

Lin was then informed that what he had just said coincided exactly with Powell statement which was made in clear context of operation shuttle service between Hong Kong–Shanghai.

Lin said that as US had pursued argument on basis Powell’s written statement, result, there is no argument at all Now, since US could not see Chinese point, Chinese had changed approach, i.e., carriage Shanghai–Hong Kong not involved, but carriage between Kowloon and Shanghai, and therefore cabotage.

Traffic moving between Hong Kong and Shanghai then discussed and brought out by US that Chinese carriers move upwards of 2,000 passengers a month between Shanghai and Hong Kong and that thus far PAA had moved very few passengers. Lin admitted American carrier movement Shanghai–Hong Kong traffic insignificant, but pointed to competition which would develop if Dutch, Siamese, French, et al., should be in position operate on this route. US mentioned safeguards Bermuda principles afforded Chinese.

Near close discussion Lin said that arbitration or denouncement available to China. He would report results this meeting to his Government and inform US side at next meeting Chinese Government decision.

Embassy disbelieves Chinese would take drastic step of denouncement, all present circumstances considered. Embassy also doubts Chinese resort to arbitration in view publicity which would presumably surround first dispute laid before ICAO.

Merchant, in process official calls, will endeavor call on Minister of Communications Yu Ta-wei at earliest to attempt convince Yu soundness US case before subject moves beyond Ministry Commerce [Communications]. Foreign Office participation thus far at low level.

Should, as result this discussion, Chinese attempt administratively block or hamper PAA movement traffic these points, Embassy will make representations highest level Foreign Office.

Other points which Chinese, have characterized minor, under continuing discussion between Lin and Jarvis. Department will be kept informed.

Sent Department 585, repeated Shanghai via courier 233.