693.0031/3–2949: Telegram

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

1024. For Sprouse,18 Merrill Gay.19 General impression recent messages Mo Chi [North China] confirmed information Hong Kong re Communist progress setting up facilities handling foreign trade [and] indicate their distinct preferences barter [and] utilization Hong Kong as principal trading center. These developments give special point inquiries made Mukden November 10–15 re their use Hong Kong trading purposes which Mukden implied primary concern British not [but] US view possibly may have conveyed impression Mayor Mukden we might acquiesce such arrangements or be indifferent even though some commodities Manchurian origin destined USA or Communists seek purchase US goods in Hong Kong including critical materials as hydro carbon oils.

While arrangements under way direct trade American ships calling Taku Bar for both import, export cargo evident preference Communists trade via Hong Kong on barter basis create decided disadvantages US banks, traders North China which Communists evidently seek bypass. This attitude further tends discourage hopes gaining recognition consular offices and weakens position our business [Page 923] and cultural interests still seeking function North China. Such development the more unfortunate as these establishments now afford principal bases continuance mutually beneficial contacts with Communist areas with potentialities achieving eventual divergence North China Communists at least our side fence.

Consider imperative Communists be made understand immediately their present attitudes and policies toward American Consul Generals Peiping, Tientsin, and particularly Mukden cannot be pursued indefinitely nor with impunity and secondarily their conduct trade USA must conform international requirements and procedures, not theirs. Longer they can pursue present course of action (thus far without even our public remonstrance), the more difficult it will become for the realization reciprocal obligations which must become ultimate sine qua non our relations with them.

With Mukden already isolated 5 months and view continued Communist “non-recognition” official status Consul Generals North China, strongly endorse approaches lines Peiping’s 415, March 16 [15], reinforced [by] adequate publicity at home.

Further means achieving strictly limited objections [objectives,] obtain access principal Communist officials and other usual facilities required performances on [Consular] functions Consul General suggests immediate application “as temporary measure” enforcement export licensing all hydro carbon oils requiring reference all license applications shipments Communist areas whether directed via Hong Kong to American Consuls concerned for recommendations adequacy local supply, end-use control and local political considerations (mytel 982, March 2420). Understand similar procedure previously used Bulgaria. If public notice required, this obvious function Department Commerce should be disassociated far possible any possible public comment North China problems by Department.

Consul[ate] believes public Department comment Consul[ar] status Mukden, North China now called for, making casual reference calls by American ships Taku Bar, adding incidental comment “we take it North China goods destined USA will be properly invoiced ConGens as heretofore and otherwise shipments handled conformity established international trade procedures.[”]

Also suggest Clubb be authorized hint Communist authorities as expression personal views their apparent by-passing foreign banks (including Chase Bank, Tientsin) evasion normal foreign trade financing procedures and efforts eliminate American trade interests North China being watched and that while we appreciate convenience Hong Kong transshipment point its continued use Communist trading [Page 924] base disadvantage US trade interests may lead adoption penalties which we prefer avoid.

Undesirability US Hong Kong trading base illustrated Hong Kong despatch 60, March 822 re shipment Chefoo Italian SS Cyclops 2500 drums gas, 100 drums transformer turbine oil, 448 bales smoked rubber sheets, other strategic materials.

British lack Consular invoice requirements and Hong Kong authorities evidently reluctant this time resort measures check development barter trade there which obviously their immediate interests promote. Certainly cannot ask British cooperation Hong Kong unless prepared take direct action ourselves by enforcement US export controls or otherwise. Believe Hong Kong authorities willing control exports hydro carbon oils for Communist territories unless licensed and oil firms also cooperative if approached. More strenuous measures as closing Hong Kong to ships trading Communist areas used as club now premature and disadvantageous respect trade “North Korea” where SCAP23 acquiring soybeans and other bean products. Control Hong Kong trade with “North Korea” (convenient euphemism Manchuria evade Hong Kong commitments curb unlicensed trade China) presents exceptional difficulties Consul not prepared to discuss this time.

On control exports North China [to] USA, Consul General considers invoice approach (Contels 903 and 922, March 16 and 1724) ineffective unless supported by other means. Prospects effective results suggestion Hong Kong telegram 112, March 2422 re use quarantine documents no more encouraging. Only minor items, woolen floor coverings, straw braids, curios, touchable [by] withdrawal preferential US import duties accorded reciprocal trade agreement and GATT possibly now justified Communist renovation customs tariff for North China (Tientsin 86, March 2325). Major commodities, raw furs and bristles, duty free or take specific rates directly vulnerable tariff changes absence evidence dumping, unfair trade practices, meaning tariff act. Understand [from] Treasury Attaché ad hoc freezing unusable absence general freezing controls application, also seem premature but may deserve early preliminary exploration Washington and British event results our direct efforts North China induce Communists adopt reasonable attitude American/British interests prove progressively unsatisfactory which we fear. Freezing controls very cumbersome, probably more disadvantageous Allied firms than Communists [because there are?] few assets we could freeze.

[Page 925]

Suggest immediate problem partially solved if adequate means and grounds withholding or delaying such entry barter shipments via Hong Kong could be found (mytel 1010, March 28), possibly placing shipments in bond pending delivery shippers’ affidavits explain origins cargo obtained. Suggest this aspect problem be taken up promptly Treasury and Communists. In event Clubb authorized discuss problems along lines suggested this telegram, he should in our view be instructed mention we will not interfere direct mutually advantageous two-way trade via Taku Bar or Chinwangtao provided normal procedures followed including invoice requirements or with same proviso as regards normal transshipment traffic via Hong Kong but we do object disregard normal control functions both connection trade and other matters and we do not approve trade which ignores normal international trade procedures.

Merchant concurs.

Department pass Peiping as 105 and Tientsin unnumbered. Sent Department 1024, repeated Embassy Canton 216, pouched Nanking 600, Hong Kong 52.

Cabot
  1. Philip D. Sprouse, Chief of the Division of Chinese Affairs.
  2. Assistant Chief of the Division of Commercial Policy.
  3. Post, p. 1002.
  4. Not printed.
  5. Supreme Commander, Allied Powers in Japan (MacArthur).
  6. Telegram No. 922, not printed.
  7. Not printed.
  8. Same as telegram No. 150, March 21, from Tientsin, p. 919.