894A.50/4–2847
Memorandum by Mr. Melville H. Walker, of the Division of Investment and Economic Development, to the Chief of the Division (Havlik)
Subject: Proposal for economic development of Formosa with U. S. supervisory assistance.
The attached despatch from Ambassador Stuart33 covers a wide range of possible American assistance to China, including military, railroads, currency stabilization, “productive development”, and educational loans, but it most immediately requires a reply concerning a proposal for American assistance for economic development of Formosa. In Embtel 689, March 29,34 Ambassador Stuart reported that in discussing with the Generalissimo the pressing need for better and cleaner government in Formosa, he (the Ambassador) broached the possibility that the great economic resources of the island be exploited with an adequate staff of American technical advisers; that this would require willing cooperation of the islanders; and that export profits might somehow be employed for repayment or guarantee for any future American loans. Ambassador Stuart said the Generalissimo was emphatic in his endorsement of this proposal and asked that the Ambassador proceed to work out concrete proposals (regarding which the Department was referred to subject despatch 588). The Ambassador said he suggested that something of the same sort might be worked out for Hainan and the Generalissimo showed himself equally ready to undertake it.
Nanking’s message 689 was repeated to Secretary Marshall at Moscow. On April 2 a message was sent to the Secretary suggesting that the Department await receipt of despatch 588 before preparing a reply to Ambassador Stuart. Mr. Vincent informed the Secretary that materials available to the Department on Formosa were being-studied, that “assistance in economic development of Formosa appears sound in principle but, at first blush, we question practicability of sending technical advisers without reasonable prospects of supporting credits.”
On April 17 Ambassador Stuart was informed35 that his despatch 588 of March 26 had been received and was now being studied by appropriate officers of the Department, and on this date there was repeated to him the text of the message sent to Secretary Marshall on April 2.
[Page 461]There follow my comments and reactions to several aspects of Ambassador Stuart’s proposals regarding Formosa:
1. It would not appear desirable to accept in principle the idea of treating Formosa, or any other area in China, as a “special economic area” for development with assistance of American or other foreign advisers. To develop Formosa in this way, as Ambassador Stuart suggests “might be worked out either before or as a part of the peace treaty with Japan,” would seem to open the way for fragmentation of China into zones of economic influence, a consequence which would not be consistent with our general policy toward China and which would weaken the basis for our opposition to Russian measures in Manchuria.
2. Ambassador Stuart stresses the “enormous economic resources of the island”, and that proceeds of Formosan exports could be utilized to guarantee or liquidate American loans—without making clear whether he is thinking only in terms of loans for reconstruction in Formosa or has in mind loans for reconstruction elsewhere in China as well. Clarification on this point would appear desirable, since it is possible that the Generalissimo understood him to be thinking in terms of pledging proceeds of Formosan exports for general loans to China.
3. It is stated in despatch 588 that the annual overseas trade of Formosa under the Japanese was valued as high as US$225 million. This figure is a total for exports and imports combined, and exaggerates the economic potentialities of Formosa as far as providing dollar exports to guarantee or liquidate loans from the U. S. Over 90 percent of Formosa’s pre-war exports, which in 1937 amounted to yen transactions equivalent to US$126,731,000, went to Japan and Korea; and over 85 percent of imports equal in total to US$80,900,000 came from these same sources.
Exports to the U. S., consisting chiefly of tea, camphor and pineapple, amounted only to $1,848,000 compared with imports from the U.S. totaling $845,000.
Nearly 75 percent of the total value of all Formosan exports in 1937 consisted of sugar and rice. Formosa supplied 90 percent of the sugar imports into the rest of the Japanese Empire and about 6 percent of Japanese rice requirements, with smaller quantities of a number of semi-tropical fruits and other products.
Even if the island’s production were restored to pre-war levels, principal Formosan exports are not of a character which can be exported directly to dollar areas. To the extent that it would free China from importing rice from Siam, for which sterling and dollars are now being called for, expansion in Formosa rice production would be beneficial to China’s exchange position. The sugar situation, however, [Page 462] may require special consideration since the island’s industry was developed on the basis of tariff protection, and in cost terms Formosa cannot compete with either Javanese or Indian sugar.
Aside from ship repair facilities, Formosa’s principal industrial resource was the hydro-electric generating capacity which the Japanese installed beyond the island’s immediate needs and which provided a basis for expanding activity in fields of industry in which availability of electric power was a primary consideration, e. g., aluminum refining in Takao and the newly developing artificial fertilizer industry. Such industrial units, however, are all dependent upon imports of crude materials. There was no important textile manufacturing on the island before the war or other important export manufacturing industries.
Formosa’s mineral resources appear limited in both quantity and variety. Some gold is mined, and some bituminous coal, (around 2 million tons annually in pre-war years) but the only other mineral resources of importance are copper and salt, and the very small output from Formosa’s “oil fields”—including carbon black—might be mentioned.
Thus the most careful analysis would be required to appraise Formosa’s capacity for export into dollar areas in any substantial quantity. It should take into account destruction of facilities during the war, availability of technical and skilled personnel, needs for imported raw materials and equipment for Formosa’s industries. From the standpoint of exports to United States, particular attention should be paid to the present market and supply situation regarding black tea and natural camphor. From the standpoint of relieving China of foreign exchange costs of imports, the rice situation should be closely studied. Under UNRRA some consideration has been given to cement and artificial fertilizer projects on the island. In pre-war years, these were essential Formosan imports, and I do not know whether these projects are intended to produce for Formosa’s needs, or for export to China, Formosa was geared in pre-war years to sell to Japan, from which it received necessary imports, notably textiles, and other consumer goods, iron, iron manufactures, machinery and vehicles. Reconstruction and integration of Formosan economy with that of China, will require that China be in position to supply Formosa with essential products, both from standpoint of people’s livelihood and for industrial reconstruction, and that China not continue to regard the island merely as a source of needed imports.
Ambassador Stuart, in his despatch 588, does not present specific projects, and such a concrete approach would be necessary for consideration of the magnitude of possible loans required and their repayment projects.
[Page 463]4. While in Nanking I met with several groups of American engineers who had been employed by the National Resources Commission to survey various aspects of the Formosan economy. One group worked especially on electric power resources; another, I believe, surveyed mineral possibilities; and the National Resources Commission has entered a contract with the Universal Oil Products Company, a California concern, to provide technical assistance for rehabilitation of the Takao petroleum refinery. On these established industries the Chinese Government already has had technical assistance or has arranged for it; and the problem as is true so generally, appears as one of carrying out in practice competent technical recommendations already made.
Apparently Ambassador Stuart’s program envisages introducing American advisory personnel into actual policy determination and administrative activities of the island, and if so this underlines the political rather than the strictly economic phases of the measures contemplated. On the basis of experience, in recent years at least, it appears doubtful that such a program could be carried through without offense to the National Government leaders, even if substantial U. S. Credits were provided. Unless the U. S. administrators were given real policy-making responsibilities, and were successful with the Chinese Government in carrying them out, the net result of the program could easily be for the U. S. rather than the Chinese Government to be blamed for the island’s subsequent economic and political deterioration.
5. The views of ED regarding loan assistance to China are as expressed in the attached memorandum of April 23, 1947,36 and the principles enunciated therein, in my opinion, should apply to Formosa as well as to other parts of China.