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from all sources, without distinction of the country of origin, that is to be allowed by the Maritime Customs 'to enter China in each year. On the limit being reached, further import would presumably be prohibited for the rest of the year. Under this system the Chinese Government would not be directly concerned with the quantity of opium produced in India or placed on the Indian market for export, but would rely on restrictions to be enforced by the Customs in Chinese ports. The alternative method suggested by the Government of India's letter is that the Indian Government should undertake to restrict the quantity of opium exported from India. This method proceeds on the assumption that, as regards Indian opium, a restriction of the aggregate export of opium from India would in itself bring about the restriction of the import into China desired by the Chinese Government, and would not require to be supplemented by a Chinese Regulation limiting the import of Indian opium into China. At present the whole of the Malwa opium, and two-thirds of the Bengal opium exported from India go to China, either directly or by transfer from Singapore or other intermediate ports. It is believed, and apparently on reasonable grounds, that any reduction in the quantity of opium produced in, and exported from India, would reduce to that extent the quantity consigned to China. There are obvious advantages in regulating the supply of opium at its source; and Mr. Secretary Morley considers that restriction in India, in the manner proposed, might be offered to the Chinese Government as a simple and effective means of meeting their wishes. The restriction of the imports of Persian, Turkish and other opium would, in that case require to be separately arranged, and should be carried out simultaneously.
7. With regard to the second point, the Secretary of State in Council does not anticipate that the Chinese Government would be satisfied if our co-operation were limited, as the Government of India have suggested, to restricting for some years to come, until there was adequate evidence that production and consumption of opinn in China had been reduced proportionally, to 60,000 chests a-year the export of opium from India to China and elsewhere. The Chinese proposal on the other hand, which involves extinction of the import in nine years, would commit India irrevocably and in advance of experience to the complete suppression of an important trade, and goes beyond the underlying condition of the scheme, that restriction of import from abroad and reduction of production in China shall be brought pari passu into play. In discussing the matter with the Chinese Government, His Majesty's Minister should, I am to suggest, point out this difficulty, and, while accepting the principle of a progressive reduction, should propose to limit it in the first instance to a term of three years. But he might be authorized to give an assurance, on behalf of His Majesty's Government, that the export of Indian opium would continue to be reduced in the same proportion beyond that period, if the Chinese Government had within the period observed their share of the mutual undertaking. Expressed in figures, the three years' agreement would be this. In the five years, 1901-1905, the sales of Bengal opium for export averaged about 48,000 chests a-year, of which about 32,000 chests were taken by China. In the same period the exports of Malwa opium averaged 19,000 chests a-year, the whole of which went to China. The gross export of Indian opium beyond seas in the five years thus averaged 67,000 chests a-year, of which China took 51,000 chests. His Majesty's Government would undertake to limit the quantity of opium (Bengal and Malwa) exported from India to countries beyond the seas to 61,900 chests in 1908, 56,800 chests in 1909, and 51,700 chests in 1910, the reduction being at the rate of 5,100 chests a-year, or one-tenth the average export of Indian opium to China in the five years ending 1905.
8. With regard to the proposed doubling of the import and li-kin duty, I am to say that the Secretary of State in Council considers that the Government of India have shown that this measure would not have the prohibitive effect claimed for it by the Chinese Government as it would not alter the price of opium in China. It is desirable that some emphasis should he laid on this point when the Chinese scheme comes under discussion, since the Chinese Government have expressly declared that enhancement of the duty is not sought by them for revenue purposes. But it must be frankly recognized that the Chinese Government have a clear case for proposing to subject foreign opium to as heavy a scale of taxation as is levied on native opium, all relevant circumstances being duly considered in making the comparison. His Majesty's Minister should, it is suggested, be instructed to discuss the proposed enhancement of taxation with the Chinese Government from this point of view. The information before Mr. Secretary Morley is insufficient for definite conclu- sions to be drawn as to the comparative incidence of the existing taxes on foreign and native opium, but the facts are doubtless within the knowledge
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of or readily procurable by His Majesty's Minister. There is first the point raised by the Indian Government, whether the new taxation in China is levied on all native opium. Secondly, there is the point whether the new taxation, so far as it has been made effective, has doubled or largely increased the taxation hitherto levied on native opium. As stress is laid on this by the Chinese in proposing to double the import duty on foreign opium, its accurate determination is of importance. It would seem that hitherto numerous transit duties have been levied on native opium, the collective effect of which was not inconsiderable, and that these have now been swept away and a single uniform tax substituted. Thirdly, there is the point as to the relative values or the relative strengths of Indian and Chinese opium. As to relative strengths there is very little information on record. But, in view of the improvement said to have taken place of recent years in Chinese opium, the statement that Indian opium has double the strength of the native article seems to require verification. As to values, the intrinsic value of a chest of opium in India, as measured by the cost of production, is about 500 rupees. The price of Yunnan opium in Yünnan free of duty was reported in 1904 by Mr. Consul Litton to be from 460 to 600 rupees the picul, the picul being a little less than a chest. On this basis there would not seem to be a case for levying twice as high a duty on Indian opium as on native opium. If the comparison is made with the price of Indian opium in the Hong Kong market, a different inference might be drawn, but it should not be overlooked that this price is not the natural price of the article, but includes the Bengal monopoly tax, or the Malwa Pass duty, as the case
may be.
9. Mr. Secretary Morley considers that these points require to be discussed with the Chinese Government before any conclusion can be come to as to the reasonableness of the proposal to double the present duty. The Chinese Government have undertaken not to discriminate against imported opium. Indian and Chinese opium, it is agreed, should pay proportionally equal taxation. It should be possible as the result of full discussion to settle approximately, though not with mathematical accuracy, what this taxation should be. The Chinese Government recently suggested to Sir Robert Hart that the Treaty Powers should be asked to agree to the present duty of 110 taels being raised to 150 taels. If this was thought a reasonable proposal a year ago, it might be found on examination to be in greater accordance with facts than the present proposal for a duty of 220 taels. There is no question of the imposition of a prohibitive duty, as the Chinese Government seem to suppose. The desired decrease in the comsump- tion of foreign opium is provided for by the proposal for the gradual decrease of its importation.
10. In conclusion I am to say that Mr. Secretary Morley in Council is anxious that a settlement satisfactory both to India and China should be arrived at as soon as possible, and trusts that the Chinese Government will recognize the sympathetic spirit in which their proposals have been met by His Majesty's Government, and the extent of the sacrifice which the diminution of the opium trade will occasion to India.
11. It is understood that the assent of the Treaty Powers will be necessary to an enhancement of the import duty, or to a limitation of the import of opium into China. If, however, the alternative method of restriction by means of fixing the maximum quantity of opium to be exported from India beyond seas is accepted by the Chinese Government as preferable to restriction in Chinese ports, it can be put into force without reference to the Powers, and the Secretary of State in Council would be prepared to take action in this direction to the extent indicated in the last sentence of paragraph 7.
12. The three remaining proposals in the Chinese scheme, which have reference to the Colony of Hong Kong, the foreign settlements and concessions in China, and the prohibition of the import of morphia concern the Foreign Office and the Colonial Office, and do not call for any remarks from the Secretary of State in Council.
I am, &c. (Signed) A. GODLEY.
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