Foreign Relations of the United States, 1949, The Far East: China, Volume IX

893.00B/7–1749: Telegram

The Consul at Shanghai (McConaughy) to the Secretary of State

Shanghai, July 17, 1949—6 p. m.
[Received July 17—1:57 p. m.]

2806. Darkening political, economic picture threatening personal safety all foreigners (ConGentel 2796, July 16⁹³), especially top management Shanghai; indicates need for consideration ways, means facilitating gradual orderly liquidation, withdrawal American firms, organization individuals whenever they voluntarily, or as result excessive pressure, desire to do so.

Problem presents exceptional difficulties, particularly so long as Nationalists’ blockade keeps shipping out of Shanghai, leaving at best diminishing trickle tonnage via Tientsin, other North China, Manchurian ports difficult access to foreigners from Shanghai due Communist rail travel restrictions.

While blockade lasts, imposition export controls would appear have slight effect on Communist policies or economy in Central China, except possibly turn focus anti-foreigner campaign that direction and apply further heat on American firms [and] citizens without serious direct effects detrimental to Communists at Shanghai, Nanking, Hankow. However, once British cooperation at Hong Kong assured, Consul General⁹⁴ believes export controls should be authorized, carefully timed and adjusted as to scope, flexibility warranted by circumstances.

Consul General appreciates mechanical difficulties inherent freezing controls on emigrant remittances from USA to Communist China, especially should Canton fall, since, to be effective, we would have to include Philippines, Thailand, NEI,⁹⁵ Burma, Straits, and particularly Hong Kong in our controls. Moreover, seriously to impair viability Communist economy, should that become our objective, cooperation among these countries in taking parallel action would have to be sought, but would probably be unobtainable effectively due fears political repercussions from Chinese colonies in countries named.

Consul General understands serious implications application general Treasury licensing controls to Communist China, but Communist effort repatriate Chinese capital held USA, to assume control Chinese Government fiscal institutions and assets in USA,⁹⁶ and to extort funds from American firms to cover excessive overhead due lock-ins, other labor pressures to which arbitrary discriminatory punitive capital levies added at Hankow, Tientsin, envisaged at Shanghai also,⁹⁷ indicate need for fiscal controls to protect American interests comparable British Treasury licensing which could be invoked in serious emergencies.

To illustrate serious nature burdens imposed by labor demands and overhead, Stan Vac⁹⁸ paid equivalent US dollars 178,000 as severance pay [to?] contract terminal labor in addition regular monthly payroll US dollars 140,000 or total US dollars 320,000 for June alone which they hope cover by local sales stocks. Company has received no indication amount capital income tax levies Shanghai but feared may cost between quarter-half million US dollars, but unreasonable amounts under normal trade conditions but ruinous at present.

This connection Consul General notes Tientsin’s 497, July 11 [9]⁹⁹ indicates foreign banks exempt from capital income tax levy, presumably due collection capital deposit for which foreign banks forced sell foreign exchange or other assets. Significant these levies follow close on heels foreign exchange surrender requirements throughout Communist China.

. . . . . . . . . . . . . .

Truth is, due blockade and other above-cited factors, we have little immediate, effective, economic leverage with which to work on Communists. Consul General recognizes Department has shown his [sic] reluctance to use ineffective, premature or provocative measures. However, we now face situation where more positive measures may eventually be needed to deal with Communist attacks on American citizens and interests due Communist unwillingness recognize international obligations, conform international usages or afford decent treatment foreign residents.

In these circumstances, Consul General suggests consideration feasibility following tentative program to be authorized for discretionary application to facilitate gradual orderly liquidation withdrawal by those American firms, et cetera, wishing to leave.

1. Once British cooperation at Hong Kong assured, imposition well-timed export controls carefully adjusted as to scope, flexibility required by circumstances.

2. Imposition Treasury licensing controls on all bank accounts held USA for firms, individuals Communist China.

3. Prompt steps withdraw GATT benefits from chief ports originating in Communist China accompanied by publicity.

4. Publicity re formation, operation Communist state trading companies including dumping suggested Tientsin’s 496, July 11 [9],¹ accompanied by non-liquidation US customs entries.

5. Public hearings by US Tariff Commission to determine justification for increased import duties on tung oil, bristles, walnut kernels, dressed fur pelts, raw furs, other suitable Chinese exports now entitled duty free entry or entry at frozen duty rates under GATT or Tariff Act 1930, at which complaints Communist trade monopolization, discrimination, unfair competition and general unsatisfactory treatment American nationals [and] firms can be publicly aired.

In suggesting above program, Consul General does not recommend use export or Treasury licensing controls as economic sanctions but simply as demonstrations their availability and our ability to apply economic pressures should that become necessary for protection American lives and property. Similarly, with respect publicity, Consul General does not advocate anti-Communist campaign on economic issues but rather maneuvers such as Senator Pepper’s² proposed import duty on tung oil which was soft-pedaled due our obligations under GATT; and objective public investigations comments on Communist trade policies, practices. Our experience Shanghai indicates Communists somewhat sensitive to public statements in USA re our attitude toward them, which we should seek to use to our own advantage to fullest possible extent. These comments made with specific reference Paragraph 9, ConGentel 2796, July 16.³

Although Nationalists’ blockade prejudices immediate effectiveness either export controls or threats to saleability Chinese exports in American markets, Consul General believes even at this time significance such measures will not be wholly lost on Communists in North China or (to less extent) [garble] in view Tientsin’s declared exports to USA for June of US dollars 1,500,000, and possibility Tientsin may replace Shanghai as major export port in case blockade less effective there.

Consul General believes objective publicity re Communist problems, policies and behavior in economic as well as political field at home and via VOA,⁴ radio and world press affords useful means mobilization public opinion to which Communists top levels may be somewhat responsive and a means likely to produce results.

Sent Department, repeated Nanking 1582, Department pass Tientsin.

McConaughy

93. Vol. viii, “Political and military situation in China”, chapter VI.
94. Mr. McConaughy was acting as Consul General, Mr. Cabot having departed.
95. Netherlands East Indies.
96. For correspondence on this subject, see pp. 729 ff., passim.
97. For correspondence on this subject, see vol. viii, “Problems of United States Consulates in areas occupied by the Chinese Communists”, chapter II.
98. Standard-Vacuum Oil Co.
99. Not printed.
1. Not printed.
2. Claude D. Pepper, of Florida.
3. Vol. viii, “Political and military situation in China”, chapter VI.
4. Voice of America.