(b.) The higher rate of surtax (viz., 5 per cent.) should only be applied where there is a reasonable prospect that it will result in an appreciable increase of revenue. Where its main effect would probably be to protect native industry by excluding or diminishing foreign imports, it should not be sanctioned, as the sole object of the surtax is to yield additional customs
revenue.
(c.) The articles subject to the 5 per cent. surtax should be articles which can be For example, specially taxed without giving rise to discriminations. alcoholic liquors or tobacco should be subject to the higher surtax as a whole, and there should be no differentiation between the treatment of different kinds of wines, spirits or other liquors or between cigars and other forms of tobacco. There is no desire to prescribe in advance a list of articles to which the surtax should be applied, as this is a matter which must be examined by the special conference in the light of evidence obtained on the spot.
For the reasons stated above, the British delegates should resist any proposal to apply the higher surtax, or any intermediate surtax, to the more expensive kinds of textile tissues or other classes of manufactured goods, the imports of which present a considerable range of value. It may, if necessary, be pointed out that, as the Chinese tariff has a uniform ad valorem basis, there are already heavier specific rates on the higher-priced goods, so that there is no logical ground for further differentiation by applying a higher rate of surtax to such goods.
In considering the application of the higher surtax it should always be borne in mind that the general practice of Great Britain and other Western countries which impose high import duties on certain articles for purely revenue purposes is to impose a corresponding excise on similar goods of home manufacture, as otherwise the high import duties may fail to attain their object and merely serve as protection for home industries. Unfortunately, such experience as we have had of Chinese excise duties gives rise to doubt if it is at present within the power of the Chinese Government, even if it so desires, to impose an excise effectively and impartially on a product of Chinese industry unless the production of that article be centralised in a comparatively small number of factories or other undertakings (e.g., sugar refineries). Where an article is produced partly in large foreign-owned establishments and partly as a domestic or small-scale native industry, there is a danger that the tax will only be effectively collected from the former class of establishments, and thus constitute a new differentiation against foreign enterprise. Where, as in the case of refined sugar, the process of refining is necessarily concentrated in a small number of expensively-equipped factories, the difficulty of collecting an excise does not apply, and should it, for example, be decided by the conference to include refined sugar in the list of luxuries, it would be desirable, in order to protect the revenue and reduce the injury to foreign trade, to require as a condition the imposition of an excise.
The difficulties of levying excise above alluded to constituted one of the principal reasons for the low rate of the luxury surtax authorised by the Washington Conference. The British delegates should take care that this point is clearly brought out in the enquiries and report of the special conference.
Subject to the above observations, the British delegates should consider on its merits any specific proposal to include particular articles in the category of luxuries, being careful to telegraph home for instructions in any doubtful case. His Majesty's Government are prepared in principle to place a reasonably wide interpretation on the word" luxuries on the understanding that the object of the inclusion of articles in that category is to raise additional customs revenues.
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The question of increasing the surtaxes on certain articles of luxury such as wines and tobaccos beyond the limits laid down in the Washington Chinese Customs Treaty with the object of settling the cigarette tax controversy is dealt with in Section I above (see also article 2 of the scheme contained in Annex (M) ).
VI. THE ALLOCATION OF THE INCREASED REVENUES AND THE PROBLEM OF THE
UNSECURED Derts.
The chief problem before the conference is how to dispose of the increased revenues to be derived from the raising of the tariff.
A preliminary difficulty, which may prove to be of some importance, confronts the delegates.
Important foreign obligations-the outstanding pre-Boxer loans, the Boxer Indemnity and, finally, the Reorganisation loan are secured on the Maritime customs revenues in order of precedence and so as to exclude priority over them being given to any subsequent obligations. The 2 per cent. surtax will indubitably form part of the Maritime customs revenues, and, as such, forms part of the security for these loans.
The practical consequences of this position cannot be accurately gauged in advance. All that can safely be said at present is that while, in normal circumstances, all the above-mentioned foreign obligations will certainly be met out of the proceeds of the existing tariff, it is easy to imagine conditions in which it would be necessary to draw on the 2 per cent, surtax in order to meet them. The delegates will no doubt be in a position to make more accurate calculations from fuller data when the conference assembles. All that is now necessary is to lay down the principle that the obligations in question have a prior lien on the whole customs revenues, and take precedence, if necessary, of any purposes to which the Special Conference may allocate the proceeds of the surtax.
It might perhaps be argued (a) that, in signing at Washington, without any proviso safeguarding prior liens, an article to the effect that the Special Conference shall authorise the levying of a surtax for such purposes and subject to such conditions as it may determine," China agreed to a provision incompatible with her engagements to various banks, to whom she had already given prior mortgages on the whole of her customs revenues; (b) that the other signatories of the Washington Treaty are entitled to look to that treaty alone, and to ignore the various loan agreements to which they, as Governments, are not parties; (c) that in these circumstances China will be compelled to induce the banks in return for some quid pro quo, financial or other-to abandon their rights in so far as they extend to the additional 2 per cent. duty. But it would be invidious for the conference to encourage, and, indeed. force, China to recede from obligations openly and freely incurred by her towards leading financial groups of the principal Powers represented at the conference. Nor would it in practice be worth while, as the probability of any considerable proportion of the 2 per cent, surtax being, in fact, required to meet the obligations in question is comparatively remote.
It should be mentioned that by a Presidential mandate of the 3rd March, 1921. future customs surplus was assigned by the Chinese Government for the service of their internal loans and the Inspector-General of Customs instructed by them in that sense. The Diplomatic Body at Peking subsequently, in November of the same year. took cognisance of this arrangement to the extent of refusing a release of customs surplus to the Chinese Government for other purposes on the ground that it had already been mortgaged for these loans. Their excuse for this intervention in what was primarily a matter of domestic concern was apparently that foreign interests had subscribed to these loans on the strength of the Presidential mandate in question. Since then the surpluses have in fact been almost entirely devoted to the service of the internal loans and applications by the Chinese Government to the Diplomatic Body for releases for administrative and other purposes have come to an end, with the incidental result that the Diplomatic Body have to a great extent permitted the control of the customs surplus to pass from their hands into those of the Inspector- General, to whom they have been entrusted by the Chinese Government for the service of the internal debt secured thereon. The principal argument. from the foreign point of view, to be put forward in favour of this arrangement is that Chinese financial interests are thereby concerned. equally with foreign interests, in the continued integrity of the customs revenues and the maintenance of the foreign-controlled customs administration. Its disadvantages lie in the increased responsibilities incurred by the Inspector-General and the customs administration and the international jealousies aroused by the former's control over a considerable portion of China's finances. His Majesty's Government were not consulted when the arrangement was made, and have never formally signified their approval of it; indeed, of recent years, they and the Governments of the other interested Powers have on more than one occasion protested to the Chinese Government against the employment of the entire customs surplus for the internal debt when the services of certain of the earlier but inadequately secured foreign loans were in default or in danger of default. Subject only therefore to the recognition of a prior lien in favour of the pre-Boxer loans, the Indemnity Service and the Reorganisation Loan (and in the event of the abolition of li-kin of the Hukuang Loan) it is the duty of the Special
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