CO129-496 - Public Offices - 1926 — Page 539

I

[F 4132/1/10]

16

ANNEX III.

The Customs Administration and the New Taxation Proposals at Canton.

A

THE Canton Government propose to levy consumption taxes and production taxes on all imports into and exports out of Canton. These taxes have been levied all over China for many years past. We have fought them with very little success. formal protest is sometimes registered, but in many cases, the goods being in the hands of Chinese, the foreign merchant is ignorant of the taxation which they are subjected to. The peculiar feature of the present taxes is that the Cantonese propose to levy them with the assistance of the Maritime Customs, who, if they accede to the request of the Canton Government, will refuse to clear cargo through the customs inward or outward without production of a voucher showing that the taxes have been paid. This will relieve Canton of all cost of collection, will make them much more productive and much less onerous to the merchant, but it will also make them practically a surtax on customs revenues, and, moreover, a surtax which, by some- thing more than a coincidence, is (apart from exports) fixed at the same figure as the Washington surtaxes. Cases have occurred in the past where the customs have refused to grant facilities except on proof of payment of some inland extra treaty tax, but not on a scale comparable to the present proposal.

The position of the Customs Administration is one of great difficulty. Sir Francis Aglen may take up the line that these taxes are not authorised by treaty and refuse to collect them. He, however, is the servant of the Chinese Government, and not of the Powers or the Diplomatic Body, and though he must, very rightly, do his best to induce the Chinese to observe their treaty obligations, in the last resort it is not his function to interfere in a treaty dispute between China and the Powers, and he must either obey the orders of the Chinese Government, or resign, or be dismissed. He may refuse to collect the taxes because the order of the Canton Government is not endorsed by the Central Government, whose servant he really is. But the Customs Administration at each port depends very largely on the goodwill of the local administration, and especially at Canton it cannot afford to antagonise the de facto Government within whose jurisdiction it functions.

There is at present no indication of any desire to attack the Customs Administration. On the contrary, there is a welcome tendency to respect its authority. But, in view of the recent history of the customs question at Canton, we are skating over thin ice. Between 1918 and 1924 the Powers staged five naval demonstrations at Canton because Canton objected to the use being made of China's customs revenues and demanded her share of her own revenues after the secured foreign obligations had been met. She specifically objected to the domestic loans raised by Peking at ruinous rates for nefarious purposes. Sir Francis Aglen had undertaken the service of these loans out of surplus customs revenues, and the effect of the naval demonstrations by the Powers was to ensure that these surplus revenues should not be seized by Canton, but should continue to be remitted to Sir Francis Aglen's account at Shanghai, there to be used by him for the service of the domestic loans

It is now recognised that the policy of the naval demonstrations was a mistake. Fortunately, the Cantonese have not again raised the question of surplus revenues. They are content to leave the present revenues and the system of handling them alone. but, in effect, they want to increase the customs revenues in such a way that the increase will not come under the control of Sir Francis Aglen, but will be paid direct into the coffers of the local Government.

It is perhaps Sir Francis Aglen's greatest pride that he has acquired control over the whole customs revenue. If Canton succeed, future customs revenues will not be under his control, and, in judging his attitude towards the new proposals, the There are, however, more solid personal equation must be taken into account. reasons than Sir Francis Aglen's personal feelings for scrutinising very carefully the new situation that has been created by Canton's démarche. If Canton collects these new taxes with the aid of the customs, then-

1. Every other regional Government may in a short time do the same.

2. We shall hear no more of the "

grant

"of tariff increases by the Powers

The Chinese will not want to increase the tariff after they have discovered this method of collecting what are, in fact, increased customs duties.

3. This will eventually be equivalent to tariff autonomy.

17

4. There will be a danger that surtaxes at different rates will be imposed in different centres. That is to say, there may be a different tariff at each port.

5. There seems now no disposition anywhere to attack the present method of handling existing customs revenues-the proceeds of the 5 per cent flat rate-but additional revenues will not be under any sort of foreign control.

6. The result of 5 will be that debt consolidation will be rendered impossible, but, on the other hand, it might be possible to arrange to pay off China's debts out of the existing customs revenues after the present obligations have run off. This would mean securing no more loans on existing revenues. This might not please Sir Francis Aglen, but, on the other hand, he might like the idea of being made the guardian of the whole existing revenue for the purpose of paying off gradually the whole of China's present debt.

On the whole, therefore, if the customs agree to collect these taxes for the Canton Administration, the consequences do not seem to be very alarming. China must some day acquire tariff autonomy and resume control over her customs revenues a control which she only lost in 1911-and this seems as smooth and easy a way of achieving that end as any. Indeed, the fiasco of the Tariff Conference seeins to indicate that it is the only feasible way.

On the other hand, if the customs refuse their assistance, the consequences of such a non possumus attitude, following so soon after the naval demonstration policy of 1918-24, may be very serious. Any administration set up by the Cantonese to collect the taxes would grievously harry foreign trade. The welcome change that has come over the Nationalists, not only in Canton, but also in other parts of China where they have recently established their domination, might be checked and the whole movement towards more friendly relations might receive a severe setback. The Cantonese would certainly entertain very bitter feelings towards the customs and they might definitely lay plans to seize the administration and eject the foreign or perhaps only the British-element from it as soon as they were ready. A healthy evolutionary movement might, if checked and turned back on itself, end in disaster.

His Majesty's Government have decided to acquiesce in these new taxes and to favour assistance being rendered by the customs solely because that seems to be the only means of terminating the boycott and because the price we are called upon to pay is not too heavy. But if the question be examined from the point of view of high policy, it is probable that, on these grounds also, this decision will be found to be both wise and far-sighted.

Colonel Hayley Bell, Commissioner of Customs at Canton, has advised that the Customs agree to collect the new taxes, and Mr. Edwardes, Acting Inspector- General of Customs, concurs in this view. Even if Sir Francis Aglen were convinced of the soundness of this advice, he could not lightly agree to Canton's proposals. To do so might expose him to the suspicion of using the Customs Administration to help the British out of their boycott difficulties in Canton, and this might expose him to such violent attacks from other Powers, e.g., Japan or America, as to make his position untenable. He must demand that the instructions to collect these taxes reach him through the usual channels, and if the instructions plainly conflict with treaty stipulations, he is entitled to demand that the difficulties with the foreign Powers he adjusted before collection begins. In the last resort, if the Chinese insist, he is only entitled to collect these taxes if compelled thereto by force majeure, and in order to save his administration from grave danger. Sir Francis Aglen has already stated that he will not collect the taxes except under force majeure, and we have nothing to complain of in such an attitude, which seems to be perfectly correct.

Far Eastern Department, Foreign Office,

September 29, 1926.

J. T. PRATT.

535