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Mr. Litton has seen opium caravans going south from places as far west as Yungehang (between Tengyueh and Tali), and the mules which take the opium come back laden with cloth imported through Mengtse, and yet Yungchang is geographically in our sphere, and can be more easily supplied from Burmah than from any other source. The important influence on the trade of the transport conditions must not be over- looked. The opium of Yunnan, at least half of which is said to be produced in the valleys west of Tali, must find its way out either south by Mengtse, or by the northern It must be carried on mules, the number and east ru routes to Szechuan and Canton. of which is limited, and the import trade naturally returns along the same lines because the mules are available to bring the goods back. Mr. Litton estimates the population of the valleys around Tengyueh and Yungchang at 500,000 souls, who can at present be supplied more easily from Burmah than by any other route. But the difficulty that hampers the Bhamo trade is that the mules which take goods to Tengyneb must for the most part return to Bhamo empty, while the mules which carry away the opium of Yungehang and Shunning are compelled by the Burmah prohibition to travel in the opposite direction. These considerations seem to the Lieutenant-Governor to justify the view that the removal of the prohibition must lead to an expansion of the trade, and that this expansion is not problematical, but certain. The extent of the expansion cannot, of course, be foreseen. But the trade being chiefly barter, it may fairly be assumed that all the opium sent out by Rangoon will be paid for in kind, and that the mules which bring the opium to Bhamo will not be allowed to remain idle. The mere fact that the import trade will no longer have to bear the burden of the mules returning empty from Tengyueh, which means, of course, higher rates or freight, should alone give a stimulus to importation, for in these days of keen competition no facilities to trade can safely be neglected. There is also the fact, as pointed out by Mr. Tilly, that a powerful Syndicate of Chinese merchants has already been formed in Rangoon to operate at once in opium in the event of the prohibition being removed, and this indicates that it is expected in business circles that the trade will be profitable. The arswer therefore that may be given to paragraph 3 of your letter under reply is that the natural trade outlet of Western Yunnan is Burmah, and not the Red River Valley; that owing to the transport conditions, any movement of opium to Burmah must necessarily "ause a permanent expansion of the import trade, and that, while the full extent of the expansion cannot be foreseen, the numbers of the population to be supplied justify the belief that it will be considerable.
4. With reference to paragraph 4 of your letter, I am to say that it does not follow that the adoption of Mr. Litton's scheme will make Yünnan opium any cheaper in Canton. The Chinese authorities, by raising their li-kin, will probably see to it that it is not cheaper. Even if the price remains the same, the opium, in Mr. Litton's opinion, will take to the Barmah route because of its greater safety, and its freedom from illegitimate attacks on the exporters' profits, and because of the prospect it affords of a remunerative return trade from Rangoon. But the real answer to the con- siderations put forward in this paragraph appears to the Lieutenant-Governor to be that the maintenance of the existing prohibition of import into Burmah cannot keep Yünnanese opium out of Canton, and is not likely for long to prevent its reaching Canton by sea. The Lieutenant-Governor understands from Mr. Litton that so far the French have been content with that share of the opium trade which supplies their own markets in Tonquin, and that they have made no attempt so far to arrange with the Chinese that Yünnan opium sent via Tonquin by sea to Canton should be admitted and taxed as native opium. But it is difficult to suppose that the French will fail to see the advantages of such an arrangement directly their railway reaches Yunnan-fu, or even Mengtse, and it seems inevitable that, unless we anticipate the French, all the Yunnan opiam destined for Canton and Eastern China will ultimately go by the French railway to Tonquin, and thence by sea. It is true, no doubt, that, when this comes to pass, we can claim a similar concession for opium travelling viâ Burmah, but we shall have the disadvantage of not beinz first in the field. As regards the possible competition of the Yunnanese opium with Indian opium, the Lieutenant- Governor is not in a position to give any opinion of value. He can only repeat Mr. Litton's opinion that the Indian drug has a market of its own that is confined to the wealthy and fastidious classes; that even at the present time Yünnan opium in Canton only fetches half the price of its Indian rival, and that consequently all the competition possible already exists, and cannot be appreciably increased, even if prices did fall slightly owing to the use of the Burmah route. Possibly inquiries from the Consular officers at Canton would throw more light on this part of the subject.
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5. As regards paragraph 5 of your letter, I am to say that the probibition in the Burmah-China Convention against the importation of Chinese opium into Burmah was a stipulation insisted on by the British Government to prevent competition with their own excise arrangemer ts. At that time the only form of importation anticipated was importation for consumption in Burmah. The question of the transit of Chinese opium through Burmah had not arisen. All that is now proposed to concede to China is permission to transport her own opium to her own ports by au casier route that passes through foreign territory. The advantage to the Chinese is greater facility in levying the full li-kin due upon the opium, and consequently a larger inland revenue. advantages to us are greater facilities to our import trade and a reduction of the contraband trade in opium across the frontier. It seems reasonable to suppose that the grant of facilities for a legitimate trade in opium through Burmah will diminish the temptation to contraband trade into Burmah, and, as Mr. Litton points out in the note now forwarded, the question at Canton and Shanghae is not one of the imposition of a customs duty, and of a lesser duty than is levied on Indian opium, but one of the levy of h-kin. His Majesty's Government would not approach the Chinese authorities with the request that more favourable terms should be given at the ports to Yünnan opium than is accorded to Indian opium. They would merely inform the Chinese Government of their willingness to withdraw the prohibition in the case of Chinese opium intended for Chinese ports, provided our regulations for transport through Burmah are agreed to. It would remain with the Chinese to impose such taxation as they thought fit. And it seems possible that our Diplomatic and Consular officers would he able to persuade them that the correct tax to impose is the full l-kin. According to Mr. Litton, the rule that all opium imported by sea is classed as Indian opium and taxed accordingly, is a rule imposed rather by Sir R. Hart than by the Chinese Government, and he thinks that with the good-will of Sir R. Hart this rule could be relaxed.
Inclosure 13 in No. 1.
Notes on proposed Rules for regulating Transport of Yunnan Opium from Tengyueh to
Hong Kong and Shanghae across Burmuh, us framed by Mr. Tilly, Chief Collector of Customs, Burmah.
TENGYUEH to Bhamo is not more than 150 miles--nine short stages; when the new road comes into use, probably eight only.
2. I concur with the Lieutenant-Governor that the proposal to send opium from Tengyuch to the frontier under military police escort may be dropped. I think it is quite unnecessary. If the escort were Chinese, they would be worse than useless, and would certainly try and smuggle on their own account, while the Chinese Government would naturally strongly object to bodies of armed Sikhs coming to Tengyueh for the purpose. If desired, of course a small escort might take over the caravans from the frontier to Bhamo, as arrangements could be made by which the Customs here could intimate to Bhamo when opium was about to start from Tengyueh, in time for the Nampaung or other post to be communicated with, but I doubt if even this is necessary. I would put exporting firms under a heavier bond than Mr. Tilly proposes, say, three times the value of the equivalent quantity of Indian opium in Burmab; and I would have as securities Chinese firms known in Bhamo, Mandalay, or Rangoon. The bond would be to deliver the opium intact at Bhamo to such Customs or other authorities as the Lieutenant-Governor might from time to time approve within, say, eighteen days of its departure from Tengyueh; or, if it was not so delivered, to show cause why the bond should not be forfeited (e.g., force majeure).
5. There is nothing that I know of to prevent Chinese merchants accompanying their caravans to Bhamo. It would be most convenient that they should do so. Burmah has always allowed Chinese traders to go backwards and forwards across the frontier without let or hindrance, and I hope this will continue to be the case.
4. I think most of the opium would go to Canton, and the trade would be almost certainly "pooled
by a few of the big native firms here. If the proposal is put through, I feel sure that the figures of the transfrontier trade will be far more than doubled.
5. Briefly, Mr. Tilly's proposals amount to this: A bonded warehouse would be established at Bhamo; Yunnan opium from the moment it reaches that warehouse would be in the hands of the Burmah Customs, who would have a special arrangement with the
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