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the results and gradually extending the abolition to other parts of China The difficulties of this procedure are that the full surtax of 7 per cent. would have to be imposed on goods entering particular provinces, and this would appear to necessitate a cordon of custom-houses round the provinces in question, and that goods entering these provinces may have already paid li-kin in transit through other provinces. These difficulties might to some extent be minimised, though not entirely removed, if, instead of individual provinces, groups of provinces, or trade areas dependent on the several ports of entry for foreign imports, were taken as the units for abolition.
3. The rate of li-kin might be periodically reduced by a uniform percentage. The difficulty of this procedure is that the Chinese Government has insufficient control over the provinces to ensure that the reduction is uniformly and fairly applied, and that the existing rates of li-kin vary so widely that it would be difficult or impossible to check whether any particular rate had been bonâ fide reduced. Moreover, this method would do nothing to reduce the obstruction to trade due to the existence of li-kin barriers.
4. The opportunity might be taken of exploring the possibility of effecting the partial or complete abolition of li-kin on foreign trade by means of a scheme of compensation in the form of a pro rată distribution of customs revenues among the provinces, accompanied by a system of refunds from There are, the customs administration for illicitly collected li-kin. of course, grave objections to and difficulties in the way of distributing actual customs revenues, ie, the proceeds of the import and export duties, amongst the provinces; but it is possible that these difficulties might be overcome by arranging that, while the customs revenues proper should continue to accrue to the Central Government, the proceeds of the consolidated li-kin collected by the customs (the transit pass fees), which have hitherto gone to Peking, should in future he allocated to the provinces through which the goods pass.
A possible method of dealing with the problem on the above lines, with the development of extending, as far as may be practicable, transit pass privileges to all goods, whether native or foreign, moving about the main trade routes, without reference to their provenance or ultimate destination, is indicated in article 1 of the scheme for a settlement of the questions before the conference, which is attached as Annex (M) to these notes. One of the drawbacks to this method of dealing with the li-kin problem lies in the fact that the certification of goods moving about the country would continue to be a feature of the new system; and it is generally admitted that the multiplication of certificates and the resulting establishment of barriers for the inspection thereof constitute to no small extent the evil in the present system. But is is understood that without a system of certificates the customs administration would be quite unable to effect a satisfactory pro ratâ distribution of the proceeds of transit pass fees amongst the provinces.
His Majesty's Government incline to the view that the course outlined above under 4 represents the most promising method of dealing with this difficult problem and making material progress towards the speedy abolition of li-kin. It is a matter of common knowledge that the trouble in connection with the existing system has arisen largely from the fact that the provincial authorities, if they have not deliberately obstructed, have at least been notoriously dissatisfied" with, an arrangement under which foreign trade escapes the provincial li-kin in return for transit dues paid to the Central Government. It is understood that in certain provinces, such as Shantung, for instance, transit passes are little used because the local authorities gain their end by keeping the provincial li-kin rates at or below the level of that of transit pass fees, so that foreign merchants pay the former in preference to the latter; while in other provinces the foreign oil companies, in order to secure the goodwill of the Provincial Administrations, have recently concluded special agreements for the payment to the latter of special internal duties at transit pass rates instead of using transit passes.
Suggestions for dealing with the problem of the consumption taxes, on the lines in the first instance of limiting the amount and determining the circumstances under which such dues may be levied pending their eventual abolition, will also be found in the scheme above referred to (see Annex (M)), as well as suggestions for
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settling the question of the irregular 20 per cent. consumption tax on cigarettes, now being enforced with greater or less effectiveness in most of the provinces. These latter proposals provide for the imposition of taxation on wines and tobacco beyond the limits of the surtaxes sanctioned at Washington, and would therefore, if adopted, entail special reference to the Governments concerned. It would however, be a matter of grave disappointment to His Majesty's Government if the opportunity afforded by the Special Conference were allowed to pass without obtaining a settlement of this vexatious question of the taxation of cigarettes, and it is difficult to see how this can be effected without going so far as this particular class of commodities is concerned beyond the limits of the tariff increases conditionally agreed to at Washington
II. THE COAST-TRADE DUTIES.
Closely connected with the abolition of li-kin is the question of coast-trade duties.
Under the present system, native goods shipped from one Chinese port to another in foreign-built ships (junk trade being regulated under a different system) pay export duty at the port of departure and half import duty at the port of arrival; the latter is generally described as coast-trade duty, and is returned as such under a special heading in the customs statistics, though the export duty, which is not placed under a separate heading but included in export duties generally, is equally a tax on coast trade. These duties are levied by the Chinese maritime customis. It should be noted that any increase in the customs tariff will automatically increase the coast-trade duty (.e., the half import duty) unless special provisions are made.
There is an intimate connection with li-kin in that the latter plays the equivalent part for internal trade which these duties play for coast trade. It would be only logical that the abolition of the coast-trade duties should synchronise with that of li-kin; otherwise the coastal trade would be penalised pro tanto in relation to internal trade, though there are probably few points at which the two are in effective competition.
It would, therefore, appear appropriate to raise the question of the coast-trade duties in connection with the discussion of the preparations for the abolition of li-kin Failure to secure the abolition of li-kin would not necessarily prevent the abolition of the coastal-trade duties, as these are collected by the Chinese maritime customs. Such abolition might even be agreeable to the Chinese, and might serve as an incentive to the abolition of li-kin.
The principal difficulty is the diminution which the abolition of these duties would produce in the revenues of the Chinese maritime customs. In 1920 the total maritime customs revenue was approximately 50,000,000 taels, or, say, 75,000,000 Chinese dollars. Out of this, the " coast-trade duties" (.e., the half import duty) accounted for approximately 3,750,000 dollars, while export duties levied on goods shipped from one Chinese port to the other amounted to approximately 7,500,000. If, therefore, the half import duty is abolished, it will mean an approximate loss of 5 per cent. of the total customs revenues; or if the export duty on coastal trade is also abolished, the approximate loss will be 15 per cent. Even though these losses would of course be more than covered by the 24 per cent. surtax, so large an inroad into the customs revenues could not be sanctioned without a serious examination of the points involved.
The question of the coast-trade duties should, therefore, be borne in mind and brought up for discussion at a favourable moment at the discretion of the British delegates, who, after exploring the ground, will be in a better position to judge how far any relief in this direction is practicable. With a view to presenting the problem in a concrete form, the scheme contained in Annex (M) provides for the abolition of both the coast-trade duties proper and the export duties on goods carried coastwise, and their replacement by transit dues levied at the same rate and in the same way and for the same purposes as on land and river-borne goods.
III. EXCISE ON NATIVE MANUFACTURES.
Another subject closely allied to the question of li-kin is that of native manufactures competing with foreign imports.
There is a provision under section 9 of article 8 of the Mackay Treaty requiring the imposition of an excise duty of 10 per cent. ad valorem on machine-made yarn
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