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While His Majesty's Government adhere whole-heartedly to the principles laid down at Washington, there are two points of importance to which they desire to call particular attention, viz., (1) that the purpose of the concessions proposed at the Washington Conference is to benefit China as a whole, and (2) that effective guarantees must be devised to ensure the fulfilment of this purpose.
As regards the first, it is obvious that the object in view will not necessarily, or even probably, be attained by indiscriminate concessions to the Central Government. The artificial nature of the privileged position which that Government still enjoys must not be lost sight of in the application of the Washington policy to China as a whole. For very many years past it has been the consistent policy of the British Government to support the Central Government as against the provinces, and to The fiscal changes strengthen the former's hold over the sources of revenue. following the advent of the foreigner and his treaties have tended more and more to support the capital at the expense of the provinces; loan upon loan has been raised on behalf of the Central Government on the strength of the maritime customs and salt gabelle, whose administrations are partly under foreign control. So long as the authority of the Central Government was generally recognised, and more or less effective over the whole country, this policy was amply justified; but the Central Government has ceased to represent China, and is hardly superior to any Provincial Government in the authority it wields or the influence it exercises. In the eyes of the provinces, ie., the great bulk of China, the Central Government is regarded as having an unfair advantage by deriving revenues from sources under foreign control. Such being the situation, there is a real danger that the application of the Washington decisions for the benefit of the Central Government, and of that Government alone, may not only foment anti-foreign feeling, but actually aggravate the disunion which it aims at healing. China as a whole may feel that the concessions promised to her at Washington are being diverted to the profit of the foreigner, and of the Central Government, which might be regarded as the foreigner's tool and as representing little or nothing but the interests of its own members and of foreign bondholders
In these circumstances it has become a question for consideration whether the attitude hitherto observed by His Majesty's Government towards the Central Government can be maintained without modification, especially if the amount of foreign-controlled revenue is to be largely increased. In order to guard against the danger of undue partiality to the Central Government it may prove expedient to admit the participation of the Provincial Governments on a pro rata basis in the allocation of any additional customs revenues. The question of how this may best be accomplished is discussed in a subsequent section of these notes. His Majesty's Government incline to the view that it will probably be best to avoid any direct dealings with the provinces, but to impose upon the Central Government the duty of coming to terms with them, any agreement reached between the provinces and the Central Government being subject to the approval of the conference.
While His Majesty's Government desire that the above considerations should be borne prominently in mind, they wish it to be clearly understood that in putting them forward it is not their intention to interfere with the wide measure of discretion which must necessarily be allowed to the delegates, who will be in a better position to judge the situation on the spot in the light of circumstances which cannot all be foreseen in advance. The following detailed observations are therefore intended not as formal instructions, but as general indications of the policy which commends itself to His Majesty's Government as at present advised, but which may require modification in the light of the further information which the British delegates will be able to collect.
I. PREPARATIONS FOR THE ABOLITION OF Li-kin.
It is of the first importance that this subject should engage the earliest attention of the conference. The speedy abolition of li-kin is, under article 2 of the Washington Treaty, the primary object of the conference, and satisfactory progress towards the solution of this problem should be condition of the settlement of the other questions with which the conference will have to deal. The insertion of this question in the forefront of the programme will help to keep its importance in proper perspective in relation to other questions
In pursuance of article 2 of the Chinese Customs Treaty of Washington, it is the duty of the Special Conference to prepare the way for the abolition of li-kin and for the fulfilment of the other conditions laid down in article 8 of the Mackay Treaty
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and the relevant articles of certain other treaties (see Annex (C)) in return for the application of the surtaxes provided for in those articles.
The conditions" referred to are the conditions to be fulfilled by China in order to obtain the surtax of 7 per cent. referred to in the Mackay Treaty. This point is of some importance, because among the treaty articles enumerated in article 2 of the Washington Treaty is article 5 of the United States Treaty of 1903, which provides, inter alia, for reciprocal most-favoured-nation treatment. As certain of the treaty Powers, notably France, do not at present grant complete most-favoured- nation treatment to China, the French delegate raised the question at Washington whether the citation of this article was intended to impose on them any obligation to grant complete most-favoured-nation treatment to China as a condition of the abolition of li-kin. Thereupon Mr. Root, as chairman of the Drafting Committee, made a statement to the negative, which was recorded in the minutes. This statement (see Annex (D)) should be appealed to in the possible event of the Chinese delegate raising the same point at the Special Conference.
As regards the exact steps to be taken to prepare the way for the coming into force of the new régime, His Majesty's Government do not desire to fetter the British delegates with precise instructions. It is obviously impossible to expect the complete abolition of internal taxation under present conditions, in which the influence of the Central Chinese Government over the provinces is almost non-existent. It should, however, be clearly insisted upon that, in order to fulfil the conditions laid down by article 8 of the Mackay Treaty, the abolition of li-kin must be complete, effective and permanent. In particular, it would be of no avail to abolish li-kin as such merely to replace it by some alternative form of irregular internal taxation. In this connection it is impossible not to regard with considerable misgiving the results which may follow from the application of section 8 of article 8 of the Mackay Treaty, which expressly contemplates the imposition of a consumption tax subject to the condition that it shall not be applied to foreign goods. It is, of course, impossible for His Majesty's Government to repudiate a provision to which they are bound by treaty, but advantage should be taken of any suitable opportunity which may occur to endeavour to persuade the Chinese delegates in the interests of China itself to forgo the exercise of this right. Emphasis might be laid upon the extreme difficulty of giving practical effect to the guarantees provided for in the treaty for ensuring that foreign trade shall not in practice be interfered with by the new consumption duties, and the Chinese Government might possibly be invited to submit to the criticism of the conference details of the mode in which they would propose to overcome this essential difficulty.
The conditions laid down above, that the abolition of li-kin must be complete in order to make possible the concession of a surtax of 7 per cent., is not, of course. intended to exclude the possibility of abolishing li-kin by progressive instalments, each of which might, if the treaty Powers consent, be followed by a proportionate increase of the customs surtax. Any proposal from the Chinese for the gradual limitation and restriction of li-kin in advance of its ultimate abolition should be received and studied sympathetically, but the ultimate goal of complete abolition should be steadily kept in mind. It would no doubt be necessary to find some means of compensating the Chinese provinces for the loss of revenue entailed by the progressive diminution of their revenue from li-kin, and the most obvious mode of effecting this would be that suggested above, namely, to increase the customs surtax pari passu with the reduction of li-kin. It should, however, be noted that the Chinese Customs Treaty of Washington does not empower the Special Conference to authorise any surtax beyond those which are specifically provided for in the treaty, and any additional recommendation by the conference on this subject would need to be formally submitted to the Powers for their ratification.
The abolition of li-kin by progressive instalments might take one of the following forms, but, as will be seen, all these methods are attended with special difficulties :-
1. Li-kin or internal taxation of particular types might first be abolished, 8.g., li-kin on the railways, coast-trade duty, &c. The difficulty of this method is that the relief afforded to foreign trade by these partial remissions would not be uniform throughout China, and there might, therefore, be complaints if a uniform surtax on imports were imposed as compensation
therefor.
2. Li-kin might be completely abolished in particular provinces, the administra- tion of which appears to be ripe for the change, with a view to studying [13577]
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