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break from the policy of free trade followed since its foundation, and adopt a tariff which it can use as a bargaining point with China and other countries.
We are unanimously of the opinion that such a step would cause added confusion to an already confused state of affairs. While we are not sentimentally disposed to regard the free-trade policy of the Colony as unbreakable should circumstances demand a moderate measure of protection to Hong Kong products, we are of the opinion that generally speaking Hong Kong's prosperity is still largely due to its free trade status and we do not recommend that this should be changed. The evidence that we have heard on this subject entirely supports this view.
11. Soon after we commenced our deliberations it was suggested to us that if the Colony in some way were to come within the tariff wall of China as far as trading with China was concerned, the consequent facility of closer contact and co-operation would be of great mutual benefit. It was considered that such an arrangement would open the whole area between Hong Kong and Canton to indus- trial and other development on a large scale, as an arrangement of this nature would conduce towards confidence in the economic future and reduce to a minimum that bugbear, to both China and Hong Kong, of the great but unascertainable amount of smuggling which goes on. Various alterative schemes were proposed with which it is not necessary to burden this report. Roughly they ranged from the total inclusion of the Colony within the Tariff Barrier to an inclusion of only the New Territories therein. By the adoption of some such a scheme it was anticipated that the revenues of China would be greatly increased and that both the industrial development started by Canton under the Three Year Plan and the small industries of Kowloon would expand into industrialisation of the area between those two places. The Commission has been given to realise from various press reports that suggestions such as these would at first blush meet with opposition from certain sections of the Canton Community. While this report is being drafted numerous paragraphs are appearing in the Canton press opposing "a proposal for the creation of a Customs House at Kowloon on the grounds that such would hinder the deve- lopment of agriculture, industries and commerce, increase the dumping of foreign goods and end in economic bankruptcy ".
12. The Commmission have no knowledge of any such suggestions having been made either by or to the Government of Hong Kong and much time seems to have been spent on combating an unformed suggestion. We are aware that negotiations took place between the Chinese and Hong Kong authorities in the year 1929 for the conclusion of a Customs Agreement somewhat on the lines of the suggestions now made. As far as we know, however, the matter has since lain in abeyance until again brought before us for consideration by some of the business community of Hong Kong engaged in importing into and exporting from China.
13. Subsequently we heard a considerable amount of evidence from merchants and manufacturers on this subject, and with few exceptions received the opinion that an inclusion of Hong Kong within the Tariff Wall of China would be of material benefit to the trade of South China both because of the actual moving of the obstructive barrier between two parts of the same Economic Entity and because increased confidence would ensure much greater activity and movement of goods, while trade would be placed on a full and proper and moral basis instead of being handicapped by the present vagaries of smuggling, a practice abhorrent to all good traders.
14. It may be interpolated here that expressions of opinion have been heard to the effect that the smuggling which goes on is actually of benefit to the Colony inasmuch as goods imported into Hong Kong and sold to dealers subsequently find their way into China free of duty, whereas if duty were to be paid the same quantity of goods would not be imported. In answer to this suggestion we are glad to say that every witness with whom this question was discussed was of the opinion that smuggling is an extremely undesirable basis for trade and that as a co-operative movement with South China for an improvement in economic conditions they would like to see steps taken for its removal.
15. Before going further it is necessary somewhat to consider the industrial aspect of the question. According to the 1931 Census Report, 52.87% of the