{ | “i r ie es OF THE FOREIGN PoLicy ASSOCIATION NINE EAST FORTY-FIFTH STREET, NEW YORK CITY This Service provides editors and publishers with essential facts on international questions, gathered from reliable sources and assembled without bias for use in preparing editorials and special articles. QP perpies 1925-26 October 24, 1 IN@is a6 THE CHINESE TARIFF CONFERENCE - OCTOBER 26, « Lo { EDifORIAL INFORMATION. SERVICE UNIVERSITY OF VIR il 925 Le25 | | | | X032 This veport presents briefly t On Which the discussions of the Conterenese at Peking, auth Customs Treaty of the Washington Con be based, It covers the f Scope of the Conference China's Request for Tariff Autonomy The Powers' Reply of September 4, 1925 Background of Foreign Customs Control China's Specific Proposals Foreign Objections to China's Provocsls The Likin Propléem and its Rela Rates. China's Objections to Existins Tariff Regime J 3 g PROVISION FOR THE SPECIAL TARIFF CONFERENCE Article II of the Nine Power Customs Treaty signed at the Washington Conference provides that a special confsrence i 8841 wi Weves a meet in China within three months of the coming into force of the present Treaty, on a day and at a place to be designated by the nN VOn= Chinese Government". The article further vrovides ference “shall be composed of representatives of the that the Signatory Powers and of such other Powers as may desire to participate and tiay adhere to the present Treaty". With the ratification of France the Nine Power Treaty came into effect August 5, 1925, and China promptly invited the Powers to convene in Peking, October 26. The Powers partioipating include: The United States, Great Britain, Japan, France, Italy, Belgium, Portugal, The Netherlands and China as Signatories of the Nine Power Customs Treaty, and Norway, Sweden and Denmark by special adherence. Ls,SCOPE OF THE CONFZRENGE duties: (1) The Special Tariff Gonference is charged with the following Preparation of "The Way for the Speedy Abolition of Talan (a local faz on Gecds in inland transit) and for the Pula fillnent of the Qther conditions Laja Down! an Bariiee = Wréeacties. a roe These Treaties are: (1) The Sino-British (Mackay) Treaty of 1902; (2) - The supplementary Sino-Japanese {reaty of Oetober 6, 19033 (5) The Treaty of the same date between the United Statés and China, The Mackay Treaty presented a plan whereby China was wholly © abanden likjn charges upon articles of import and export in exchange for the right to increase her import duties to a tetal of 123% ad valorem and her expert duties to 75%. Provision was made, however, that this arrangement before becoming effective should receive the approval of all the other Powers entitled to most-favored=nation treatment. This approval has been given only by Japan ana the United States. in the Sino-Japanese Treaty, Japan consents to pay the same gsurtax as is agreed upon between China and all the Treaty powers, with the understanding that the commerce, rights and privileges of Japan shall not on account of the above be placed at any disacvantage as compared with the conmerce, rights and privileges of other powers, In the American Treaty, China undertakes to abandon the levy ef likin and all other transit duties throughout the country, and to abolish the offices, stations and barriers maintained for their collection, and not to establish other offices for levying duties on goods in transit. In return the United States consents to allow a surtax of not to exceed 123% ad valorem on foreign goods imported by citizens of the United States and Te% On Chinese produce destined for export abroad or ceastwise, on the understanding that pay-~ ment of the import duty and surtax shall secure fer forcien imports complete immunity from all other taxation, examina- tien or delay, The provisions of these treaties have never become actually Operative, both because of the failure of other Powers to give the requisite approval, and because of the many difficulties inherent an thie task of abalishing likin in China, These treaties were, however, reiterated by the Nine Power Customs Treaty as the basis of procedure at the forthceming Tariff Confsrence,. Therefore, if these terms of reference are rigidly follewed, the tariff can be raised only to a maximum of ics per cent,9 7 —-3- \- --hete pre indieations, however, in the replies os wie Powers, as indicated below, that the scope of the tariff eonference may be enlarged. (2) Consideration of the Interim Provisions to be Applied, Since the executicn of these provisions must at best require a Vey conbiderable period; Of time. at as stapulatied by Article III, paragraph 1 of the Nine Power Treaty that the Special Tariff Conference shall consider "interim provisions tO be applicd prion fo the apolataon of. likin, and ame au filment of other conditions laid down in the articles of the Treaties mentioned above", Authorization of Surtax and Special Luxury Tax. The most important interim provision under contemplation, is that of a surtax which, by the same article, the Special Tariff Conference is authorized to levy "on dutiable imports, as from such date, for such purpose, and subject to such conditions as it may determine". This surtax "shall be at a uniform rate of 23% ad valorem". It is also provided "that in oase of oertain articles of luxury which in the opinion of the Special Conference oan bear a greater increase without unduly impeding trade, the total surtax may be increased but may not exceed 5% ad valorem". Any surtax imposed in pursuanee of the Treaty is to be "levied at a uniform rate ad valorem at all land and mari-~ time frontiers of China", save in sertain exoeptions whioh may be made in the Tariff Conference. It has been pointed out that the wording of the Treaty instructions gives the Special Tariff Conference very wide powers to specify the use which shall be made of the increased revenue resulting from the levy of the surtax. (4) Rules for Future Tariff Revisionc. In order to prevent delay in future tariff revisions, rules of prooedure are to be laid down by the Special Tariff Con- ference. (5) Uniformity of Land and Maritime Rates. The Conferenoe is further instrueted to "make arrangements to give practical effeot to the Principle HF Uniformity in the rates of eustoms duties levied at all land and maritime frontiers of China". At the same time the Conference "is authorized to make equitable adjustments in those eases in which a customs privilege to be abolished was granted in re=- turn for some local esaonomig advantage". (6) Provision for @ Board of Reference for Far Eastern Questions. A speeial resolution adopted by the Washington Conferense February 24, 19228, provides that the Special Tariff Con- ferenee "shall formulate for the approval of the Powers aon- cerned a detailed plan for the constitution of the Board" of Referenee for Far Eastern questions.Ce i vo ay - 1 - Ph CHINA'S DESIRE FOR EXTENDING SCOPE OF THE CONFERENCE While accepting the provisions laid down at Washington rith reference to the Chinese Customs Tariff, the Chinese delegation explicitly stated on January 5, 1922 that it did not relinguish China's claim for the restoration of her tariff autonomy. ‘The specific statement was as follows: "In view of the inherent difficulty and injustice of the present regime ana of the wholesome and desirable effect which restoration of tariff autonomy is sure to have upon the trade and economic develoonent of China as well as upon the evolution of her fiscal system, the Chinese delegation feel in duty bound to declare that theugh this Committee does not see its way clear to consider China's claim for the restoration of her tariff autonomy, it is not their {the delegation's) intent in assenting to the agreenent now before you to relinquish their claim; on the contrary it is theiz intention to bring the question up again for consideration on all appropriate occasions in the future". The Chinese Government availed itself of this reservation in connection with extending its invitation to the Powers to attend the Special Conference. The text of China's note of August 18, 4925, is reported to state that: "In pursuance of the above declaration the Chinese Govern- ment proposes that the said cuestion si:ali be also brought up at the forthcoming conference, and exnects that some arrangement will be made to remove the tariff restrictions hitherto imposed on China". AGENDA PROPOSED BY CHINA That China will demand consideration of full tariff autonomy as the first subject for discussion at the Conference is indicated in the draft agenda proposed by the Chinese Government, and for- warded to the State Department by John Van A. MacMurray, U. S. Minister to China. The text of the agenda to be put forward by China was released by the State Department October 19 without comment. It reads as follows: "(A) Taxitt Autonomy 1. Adoption by the Chinese Government of the Chinese Gener- al Customs tariff. For practical convenience a period is to be agreed upon within which to make preparations for the coming into force of tariff autonomy and the application of the Chinese General Customs tariff. @, Acvolition of Likin "(B) Provisional Measures to be taken during the Interim Period lL. Levy of an interim surtax &. Levy of a surtax on luxuries 3. Arrangements to unify the rates of customs duties at the land and maritime frontiers. 4, Valuation of Commodities: "(C) Related Matters 1. Arrangements to ascertain the country of origin of imported goods or products. ®. The depository of Customs revenues".-5= THE, POWERS' HEPLY OF SEPTEMBNR 4, 1925 The States party to the Nine Power Customs Treaty replied to Ohina's proposal for extending the scope of the Confererce an §dentic notes delivered September 4. Paragraph 5 of the American note reads; "The questions of the conventional tariff and the extra- territorial rights under which nationals of the Treaty Powers reside in China, are two of the important questions Taised by the Chineee Government's note. Both received con- sideration at the Washington Conference, and it is the be- lief of the Government of the United States that the most feasible method for dealing with them is by a constant and scrupulous observation-of the obligations undertaken at the Conference. To that end the Government of the United States is ready to appoint its delegates to the Syecial Conference on Chinese Tariff Matters provided for in the Treaty of February 25, 1922, and is further-more willing either at the Conference or at a subsequent time to consider and discuss any reasonable proposal that may be made by the Chinese Government for a revision of the Treaties on the subject of the tarat?." The attitude of the Government of the United States is further indicated in the speech delivered by Secretary Kellogg before the annual meeting of the American Bar Association at Detroit, September 2. Secretary Kellogg-said in part: “I believe that the Powers have all come to the conclusion that the Conference will have to be broadened beyond the strict letter of the Washington Treaty. For its own part this Government is willing either at this Conference or at some subsequent time to consider with China a comprehensive revision of the Treaties dealing with the entire subject of the tariff." HISTORICAL BACKGROUND Until the year 1842 China enjoyed the full right of fixing her customs duties, although the administrative system was of such a nature that constant friction arose with foreign merchants engaged with Chine, and culminated in an acute controversy re- lating to the smuggling of opium. This controversy ended in 1842 with the Treaty of Nanking between China and Great Britain. By this Treaty, which marks the beginning of China's present tariff system, it was agreed that five ports should be opened for for- €ign trade, and that a fair and regular tariff of export and im- port customs and other duties should be published. The farst conventional tariff schedule for both imports and exports, based on the general rete of 5% ad valorem, was attached to the sub- sequent treaty of October 8, 1843. The same schedule wag appended to the first treaty with the United States in 1844, During the following years prices began to drop and the 5% customs duty collected appeared conseguently to be in excess of the 5% prescribed. A revision was therefore requested by the Treaty Powers and was effected in 1858. During the next forty-6- inese Government had as made on the the Treaty Powers for @ revi China herself dia not ae Of whe Government &% that years, however, at prices mounted and the Sh been receiving less than the 5% rate, no reouest ¥ part of sion. press for a revis time were comparatively small, were not inadequate to m jon because the nee few and the revenues collected, abihough eet the requirements. The next revision was not made until 1902 when the need for additional revenue to meet whe newly imposed obligatione arising 1" necdssitated further changes. In out of the “Boxer Protoco the rates were calculated on the basis of 1897-1699, and the orices prevailing in to account. Thus the revenue collected sea tariff was scarcely sufficient to the indemnity. In 1912 another attempt taritf in order to bring 44 more in acu~ It proved, however, to be a failure, 17 Porers was not ob- that tariff, however, the average prices of 1901 were not taken in accofding to this increa meet the obligations of was made to revise the cord with actual prices. as the unanimous consent of some 16 or tained. It was only after six years of protracted negotiation that another revision was effected in 1918. The purpose Or opie e7 vision was to increase the rate to an effective 5%, but the re- sulting tariff, which was in force until 1922, yielded only an act tual 33%. A vesolution adopted by the Powers reprecented at the Washing- ton Gonference provided for an immediate further revision of the tariff schedule so that the rates of duty shouid be equivalent to an effective 5%. The Revision Commission sat in Shanghai many.months, and the new tariff came into effect January 7, 19235. CHINA'S OBJECTIONS TO THE EXISTING TARIFF REGIME ariff regime on the following China objects to the existing t 4 tne Wasn= grounds, as brought out by official statements made 4 -ington Conference: (1) Tariff autonomy is a sovereien right enjoyed by all inde= pendent states. Its free exercise is essential to the well- being of the state. The existing Treaty provisions by which the levy of customs duties, transit dues and other imposts ie regu- lated, constitute not only 4a restriction on China's freedom of action but an infringement of her sovereignty. Restoration of her tariff autonomy would only be a recognition of a right which is hers and which she relinquished against her will. me constitutes a serious impedi- ment to the Chinese export trade and to China's economic develop- ment. Under this regime China enjoys no reciprocity with any of the Powers with which she stands in Treaty relations; though every Treaty Power enjoys the right of having its goods imported into China at the exceptionally low rate of 5% ad valorem, Chi nese merchandise on entering into any of these countries is sub~ jected to the maximum rates leviable, in some cases 60 or 70 times the rate which she herself levies on foreign imports. (2) The existing tariff regi The-~7= 1 articles imported ino n such articles ag industries 4 handicap evying uniform duties on al China, on + other hand, makes these duties 0 machinery and raw materials for Chinese to China?’s industrial development. Recessity of 1 he (3) The present tariff as it fails to take into consideration the economic and social as well as the physin- . cal needs of the Chinese people. A uniform rate for all commo ties, without differentiating between luxuries and necessiti€s, has obvious disadvantages. 4g unscientific, (4) The maintenance of the present tariff regime means 4 con tinued loss of revenue to the Chinese Government. As a large part of China's customs revenues is pledged to meet various foreign loans secured thereon, the surplus available for the needs of the Government is entirely inadequate. Much of the elasticity of the fiscal systems of other states depends upon their freedom to reguiate their customs duties. Restoration of to be accorded the PuLi= tariff autonomy is essential if China is riunity to develop and maintain est and most unembarrassed Oppo for herself an efiective and stable Government. 4 is exceedingly aifficult t9 (5) Under the existing regime i revise the tariff even for the modest purpose of raising it t9° an effective 5%, since the unanimous consent of more than a dozen Treaty Powers is necessary. AS each country naturally desires ta protect and promote its own commercial snterest in China, they all seek to avoid the burden of the new revenue or increased rete falling upon the industries of their own countries. With this.end in view different conditions are frequently attached by the several Powers to their consent to revised customs taxriit OF increased rate. Furthermore, since unanimity is required, the dissent of one Power is sufficient to withdraw and upset a gen” eral arrangement agreed to by all the others, while by virtue of the most-favored-nation clause a concession or privilege granted by Ch fic consideration, 1s ina to one nation for a speci at once claimed by all without regard to the quid pro gud. (6) Prior to the revolution of 1911 the customs revenue was deposited in the so-called Chinese Customs Bank under the super vision of Chinese authority, thus enabling China to meet commer cial: and industrial needs 4n each community. Since 1911, abl of the customs revenue has been deposited in foreign banks, and the money is no longer quickly accessiole to Chinese customers for legitimate purposes of commerce and trade. As a result con stant anxiety has prevailed in the Chinese commercial and trading communities because money has been scarce and tight. CHINA'S SPECIFIC PROPOSALS tion at the Washington Conference made the The Chinese delega and proposals: following specific requests (1) Immediate increase of the 5% import duty to 123%. (2) Abolition of likin by China on January 1, 1924, and levy ing from that date of certain surtaxes, some of which were al-—B- ready authorized by existing treaties, (3) Establishment within five years by negotiation and treaty of a new customs regime on the bacis of a maximum rate of 25 ad valorem for any article imported into China, within which rate China should be free to fix and differentiate the tariff rates. (4) Abolition of reductions applicable to land customs duties. (5) Abrogation within ten years of the Treaty provisions be- tween China and the Powers by which the levy of customs duties, transit dues and other imposts is regulated. (6) Continuation of the present system of customs administra- tion and the undisturbed division of the customs revenues to the services of the foreign loans secured thereon. While making these representations, however, China voluniari- ly made the formal declaration at the Washington Conference, "that the Chinese Government have no intention to effect any change which may disturb the present administration of the Chi- nese Maritime Customs." In this connection, however, it was made clear that such a “declaration of intention not to disturb the vresent administration could not be reasonably construed to preclude the Chinese people fron realizing the legitimate aspira- tion to make the Chinese Maritime Customs Service an institution more national in character," especially since there is a “very general feeling that more Chinese ehouid os trained to assume the functions of the more responsible pests in the service." As indicated above, China proposed on August 18, 1925 that the entire question of tariff autonomy be brought up at the forth- coming Conference, : FOREIGN OBJECTIONS TO CHINA'S PROPOSALS (Quoted with adaptations from Willoughby “China at the Conference" pp 62-63) Doubt was felt by the representatives of some of the Powers at the Washington Conference whether it would be advantageous to China to give her an increased revenue which might find its way into the hands of the various military commanders or "Tuchuns" in China and thus tend to strengthen those leaders who as yet had not been brought into due subordination to the civil author- ities. Accordingly even those delegations desirous of enabling China to increase her customs revenues were inclined to impose the condition that China should give the undertaking that the increased revenue to be derived by her should be devoted to cer- tain specific purposes. According to Willoughby, there is rea- gon for believing that the United States was not disposed to re~ quire such an undertaking, but that Japan was insistent that out of this inerease provision be made for the payment of outstanding debts to foreign financial interests which had already matured ang that Great Britain desired that this increase should be de- voted to specific productive enterprises. There was also some discussion in the sub-committee as to whether the increased revenues which China might receive might be divided into allot-an as ments - certain percentages to be devoted to debt payments, edu- cation and productive enterprises, and the remainder to be avail- able for the current administrative expeuses of the Chinese Government. This plan, however, came to naught when it was ro nally decided that China was not to be given the immediate Treaty right to levy more than an effective 5% on imports. It shoulda further be said that even when it was proposed that the immediate increase of import duties be limited to 73%, the Japanese delegation protested that this would have such serious effects upon Japanese industries that it could not give its as~ sent. This position was affirmed by the Japanese Government at Tokio. From the very beginning it appeared certain that because of the unsettled domestic conditions in China no promise would be given by the Powers of a definite date at which China wes 50: Gb tain complete tariff autonomy. INCREASE OF TARIFF RATES CONDITIONAL UPON ABOLITION OF LIKIN ‘Of equal or even greater importance, both at the Washington Conference and at the present time, is the close relationship between the increase of the customs duties and the abolition of likin. As pointed out, the Treaties of (BBI4Zlaid down the prin- ciple that the increase in customs Guties to Lake as proposed in those Treaties should be conditional upon the abolition of likin. This position was reaffirmed by all the Treaty Powers repre- sented at the Washington Conference. Likin, literally the "contribution of a thousandth", i.e. 1/10 of 1%, is described by the China Year Book as a tax imposed upon goods in inland transit, originally levied to meet the addi- tional expenditure cause by the Taiping Revolution. It was first imposed in 1853 upon goods in transit from one province to another or from one district to another in the same province. In 1861 when the Taiping and Mohammedan Revolutions were simultaneous ly in progress, the tax was extended throughout the country. Likin stations ("barriers") exist at all large towns and are placed along the main routes of comuerce both by land and water, sometimes at intervals of twenty miles or even less. While an official tariff is in existence, it is, according to the China Year Book, practically ignored both by officials and traders - by the former in order to allow for "squeeze" or graft, by the latter in order to clear more goods than are actually paid for. It is this element of bartering which has made the likin taxes so uncertain. The tax collected is usually 3% at the departure station, and 2% at each inspection station; when goods are trans~ a through several provinces the total may reach from 15% to FOREIGN EXEMPTION FROM LIKIN PAYMENTS By Treaty provision foreign imports and exports, on pa ment to the Maritime Customs of half the import duty plus the ae-10~ valorem tariff, are exempt from likin taxation in the course of transit. In practice, however, this exemption has not always been enjoyed, as is shown by the following quotation from a resolution passed by the 1919 Tariff Revision Commission: "We feel it encumbent upon us to express the opinion that under the official transit pass system, as at present ad- ministered, foreign goods do not receive that full measure of protection from additional taxation to which they are entitled by Treaty, and we would impress on the Chinese Government the urgent necessity of removing this grievance which is a source of constant friction between the Chinese Government and the Foreign Powers." (Quoted in the China Yey Book, 1925, p.778) A very important extension of this princinlb was brought into effect by the Shiminoseki Treaty of 1895 between China and Japan, and is now applicable, by virtue of the most~favored—na-~ tion clause, to all Treaty Powers. By this amendment not only foreign goods imported from abroad are entitled to likin ex- emption, but also articles manufactured by foreign factories lo-~ cated in China. In this connection it should be stated that the Chinese Government is strongly opvosed to this system on the ground that it makes competition on an equal basis between foreign and Chinese manufactures directly impossible. CHINA'S DESIRE TO ABOLISH LIKIN ; China has on numerous occasions formally expressed her de- Szre to abolish likin. Thus Article IV of the Treaty of 1903 between China and the United States reads in part as follows; "The Chinese Government, recognizing that the existing System of taxation known as likin impedes the free circu- lation of commodities to the general injury of trade, hereby undertakes to abandon the levy of likin and all other tran- Sit dues throughout the Empire..." More recently the Chinese delegation at the Washington Con- ference asserted that likin was a handicap to the internal as well as the external trade in China, and that the substantial classes in China favored its abolition. THE DIFFICULTY OF ABOLISHING LIKIN eas The Chinese delegation at the Washington Conference declared “The Government would be prepared to abolish Likin 22 tariff autonomy were granted and if it were possible to agree on an increase in customs duties which would compensate for its abolition." Furthermore, the opinion was expressed that the original¥ —Li- proposal of an increase to 134% would be hardly sufficjent | view of the great increase in public expenses, In considering the possible abolition of likin, however, doubt was expressed by the Foreign Powers as to whether so long as present political conditions should persist in China the Chinese Govermment at Peking would be able to take effective ac~ tion throughout the provinces with regard to this matter. From the Chinese point of view, on the other hand, this difffculty would be not nearly so great as would the problem of finding other sources of revenue to compensate the provinces for the loss of likin. According to investigations made by the Chinese Government in 1930, the annual receipts from likin and Similar inland transit taxes were approximately $54,777,000. (China Year Book, 1925, p.780) The Chinese Government asserts that the only alternative@ source of income is an increase in customs duties. The vroblem is further complicated by the fact that in certain provinces the likin revenues are pledged under the terms of foreign loans.