American Neutrality and the Far East

Institute of Pacific Relations

American Neutrality and the Far EastAuthor(s): William W. Lockwood, Jr.Source: Far Eastern Survey, Vol. 6, No. 19 (Sep. 15, 1937), pp. 211-218Published by: Institute of Pacific RelationsStable URL: http://www.jstor.org/stable/3022865 .

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FAR EASTERN SURVEY

Fortnightly Research Service

AMERICAN COUNCIL ? INSTITUTE OF PACIFIC RELATIONS

129 East 52nd Street ? New York City

Russell G. Shiman, Editor Miriam S. Farley, Acting Editor

Telephone: Plaza 3-4700 Cable?Radio: Inparci

VOL. VI ? NO. 19 SEPTEMBER 15, 1937 Annual Subscription $2.50 7 aingle Copies - - .25

Contents

AMERICAN NEUTRALITY AND THE FAR EAST

China's New Foreign Credits Blocked by War Japan Faces Loss of China Trade Commonwealth Plans to Aid Filipino Tenants S.M.R. Expansion May Prove Costly

British Borneo Gains as World Prices Rise

AMERICAN NEUTRALITY AND THE FAR EAST

William W. Lockwood, Jr.

The recent fateful turn of events has plunged China

and Japan into a bloody struggle of which the only certain outcome at this juncture is the impoverishment and embitterment of both peoples for a generation to come. Already the Far Eastern conflict has been called

the third battle in a new world war, China War of which the first two, in Ethiopia and Affecls U.S. Spain, brought Europe to the verge of Interests a general conflagration. Like them, the

hostilities now going on in China carry the dangerous threat of spreading embroilment, affect-

ing as they do the interests of all the Pacific powers. Consequently the United States, for the third time since the passage of the first Neutrality Act in 1935, faces the difficult task of charting a course which will avert from its own shores the threat of war while at the same time

serving its vital interest in the political and economic stabilization of the Far East.

Anyone who rested comfortably in the belief that the Sino-Japanese conflict would not substantially affect American interests has had his illusions rudely shattered. Starting in the north, the fighting quickly spread to Shanghai, bringing confusion and disaster at the center of American interests in China. So far five Americans have been killed, a score or more wounded, and thousands have lived for weeks in constant peril. Ships have been bombed, and the forces of destruction have played havoc with the properties of philanthropic and business enterprises built up through years of

patient endeavor. American trade with China has been

brought to a standstill; business with Japan has been thrown into a state of acute uncertainty; and security markets in New York, London and Paris have sagged

in the face of another threat to economic stability. Finally, and of greatest importance, the world has been served with yet another brutal reminder that the post- war system of collective security is in ruins.

In the United States the question of whether and when to apply the Neutrality Act immediately pre-

sented itself as a major issue of policy. President The President, however, has proceeded Moves with with caution. On July 16, in a world- Caution wide appeal which received the endorse-

ment of fifty nations, Secretary Hull reaffirmed America's devotion to the principles of inter? national comity laid down in the Washington treaties and the Pact of Paris. Urging both China and Japan to refrain from war, he also served notice that the United States reserved all rights as regards injury to American lives and property. While energetic steps were taken to hasten the evacuation of American citizens from war zones, the protection of our armed forces was extended to them in the meantime.

These measures, however, did not forestall determined pressure from various quarters for invocation of the Neutrality Act. This demand was answered in a

public statement issued by Senator Pittman, chairman of the Senate Foreign Relations Committee, on August 23. Upholding the course of the President, he pointed out that neither China nor Japan had declared a state of war or blockade, and that no danger to American lives and property yet existed which would be averted

by action under the Neutrality Act. Two days later, however, the situation was materially

altered when the Japanese navy instituted a "pacific blockade" of Chinese coastal shipping from the mouth

? 211 ?



212 American Neutrality and the Far East September 15

of the Yangtze southward to Swatow. Navy spokes? men in Shanghai intimated that if other nations should

ship arms to China Japan might intervene, at least to the point of preempting such cargoes. Approval of this

position in the highest quarters was not made public until September 2, when Foreign Minister Hirota told

foreign correspondents that while Japan would not interfere with foreign vessels "with peaceful inten-

tions," any vessel carrying munitions and war supplies to China "cannot be considered as carrying on peace? ful commerce." On September 5 the blockade was extended to include the entire China coast, with the

exception of Tsingtao and the foreign areas of Hong? kong, Macao and Kwangchowwan.

This development, together with the steady advance in the scope and bitterness of the hostilities in China,

made it increasingly difficult for the

Neutrality President to defer application of the Action Neutrality Act. Under the law, he will

Postponed not be forced to act until one side or the other actually declares war, or

until American ships or cargoes are deliberately seized or destroyed. The policy of watchful waiting avoids the evils of precipitate action; yet if the Act is even-

tually to be applied, it involves certain risks as well. Invocation of the Act following a serious incident is more likely to be dubbed "cowardly" by chauvinistic

Americans; and the longer such action is postponed, the more danger it runs of being interpreted as a mark of partiality to one or another belligerent.

As we go to press the issue, still undetermined, re? mains the center of a lively debate. Congress undoubt-

edly approved the measure with its eyes fixed upon Europe. It is argued that if applied to the Far Eastern

conflict, rigid and non-discriminatory neutrality would

hamper efforts at American mediation; that it would entail serious and possibly permanent trade losses; and that it would mean abandonment of the Open Door and other foundation stones of our traditional Far Eastern policy. Moreover, it is said, invocation of the Act at this juncture might induce a declaration of war

by one of the belligerents and the application by Japan of a full blockade. Finally, it is alleged that the Act would make the United States the economic ally of

Japan, and hamstring any collective efforts to check

Japanese aggression. To these arguments the reply is made that war

already exists, whatever it may be called; in short, that this is precisely the sort of situa-

Debate tion that Congress had in mind when Over it passed the Neutrality Act to safe- Issues guard the United States against in-

volvement in foreign quarrels. Fur?

ther, it is said, the present temper of China and Japan admits of no mediation; American shipping and goods in transit are already menaced; Japan will apply a

blockade as quickly and thoroughly as she deems it

necessary, irrespective of American action; and under these circumstances American neutrality is likely to

prove of greater benefit to China than to Japan. As for coliective action by the powers, one look at the

European scene, it is asserted, will dispel any illusion on that score, while the desperate mood of Japan con- firms the likelihood that economic sanctions would

spell war. Withdrawal behind the shield of neutrality may mean permanent trade losses, but this is regarded as the lesser evil.

In short, the Far Eastern crisis has raised the question not only of the effectiveness of the present Neu?

trality Act in achieving its declared aims, but also the broader issue of whether the "new neutrality" is in fact a desirable policy as applied to the Far East. Into the latter question I do not propose to enter here; but a

dispassionate examination of the probable actual effects of applying the Neutrality Act, particularly in the economic sphere, should assist in clarifying the issue, since a good deal of exaggeration and distortion has characterized the arguments of both sides in the pres? ent controversy.

It should be made clear at the outset that this discussion is not concerned with the ultimate effects of the war on American trade in the Orient. A pro- longed struggle between China and Japan, even if no other countries become involved, will produce profound changes in the political and economic situation in the Far East, such as no one can now foresee. Certain it is that no short-lived trade in war supplies can possibly compensate for the economic exhaustion which always follows in the wake of such disasters. My concern here is with the more immediate question of trade in relation to neutrality during the hostilities.

In order to deal effectively with this topic, it is not

enough to know merely what American trade with China and Japan has been in the past.

The Outlook The more important question is what without it will be in the coming months if

Neutrality neutrality restrictions are not applied. This analysis will be based on the

assumption that war between China and Japan will continue on a large scale, but that other powers will not be drawn openly into the military conflict. To the extent that these assumptions prove false, the problem of neutrality either disappears or becomes radically different in character. Furthermore, in view of the

many unknown or changeable elements in the situa?

tion, we must necessarily admit a large element of con-

jecture. Hard and fast answers are impossible, but a

general picture of the implications of neutrality emerges which at least carries the weight of probability.

When the neutrality legislation was before Congress as a possible safeguard against involvement in war, two dangers were foremost in the minds of its pro-



1937 American Neutrality and the Far East 213

ponents. One was the likelihood of a wartime export boom which would not only prolong the war but would

generate an inflationary dislocation of the American

economy after the pattern of 1914-17 and finally force the United States into the war on the side of its eco? nomic ally. The other was the danger of conflict with

belligerents over neutral rights at sea, which also might embroil the country in war.

The first type of danger is not serious in the pres? ent situation under the assumption stated above?that

the conflict does not spread to Europe. Danger of In recent years the exports of the War Boom United States to China and Japan have

Slight amounted to little more than 10% of total American export trade, which in

turn takes considerably less than 10% of total Ameri? can output. Last year American sales reached $204.3 million in Japan and $46.8 million in China. Clearly a sizable expansion (and eventual collapse) of either or both would create no acute problem of economic in-

stability for the country as a whole, although a few industries might build up a profitable trade which they would be loath to lose.

As a matter of fact, the immediate effect of hostilities has been the decline of trade, and this is likely to continue for the time being. Trade with Japan is now

suffering from uncertainty over the future of the yen and the threat of a shipping shortage; while that with China has practically ceased at the present time. As for the future, it is obvious that if war continues, both China and Japan will have need of enormous supplies of imported war materials, in addition to usual peacetime needs. Future trade possibilities, however, will be determined not by the need for imports but by the

ability to pay for them plus the ability to arrange for their transport.

What means of payment will be at the disposal of China and Japan ? The chief possibilities include mer- chandise exports; fresh borrowings abroad; and pres? ent holdings of gold, silver, foreign securities and credits. Most important is the continued sale of ex?

port goods in world markets. China's export trade, however, is already demoralized. While some recovery may occur, there is every indication that funds from this source to finance imports will be greatly curtailed if hostilities continue.

Japanese exports are less predictable. War mobiliza- tion will have adverse effects on export industries and

shipping revenues through its demands

China, Japan on shipping facilities and on other pro- Lack Means ductive resources in Japan. The need of Payment to allocate available exchange to im?

ports of war materials, moreover, will

cripple export industries dependent on imported raw materials like cotton, wool, wood pulp, iron and steel, etc. On the other hand, against the likelihood of rising

costs must be set the possibility of further yen deprecia? tion or of subsidies as a stimulus to exports. But

depreciation will raise the cost of vital imports in so far as they are not already stocked in Japan, and either course might easily provoke retaliatory tariffs and

quotas abroad. How this dilemma will be met is one of the most critical issues in Japanese policy. Certain it is that in a period of large-scale military effort, ex?

ports can be maintained at a high level only with great difficulty.

Foreign borrowing is another possible method of pay? ing for imports. In this case, however, it is not avail? able to either China or Japan in any large degree to finance purchases of American goods. Neither country could now float a public loan abroad or secure large private long-term credits except at prohibitive cost. In the case of China the problem instead will probably be to prevent a flight of private Chinese capital to safer

regions. Japan's credit rating has long been high, but with the slump in the price of her securities in London and New York and with the financial difficulties now facing her, no market exists for a new issue. Moreover, those European countries which might be disposed for political reasons to extend credits to either China or Japan have little surplus dollar exchange. Finally, private American banks and industrial concerns will

hardly be willing to grant extensive dollar credits to either belligerent without more prospect than now exists for funding such credits and passing them on to the public. In the case of China even ordinary export credits are now severely restricted because of the risk of destruction of cargoes.

A third means of paying for imports is the use of

existing stocks of gold and silver, foreign balances and

foreign securities. On August 7, the Bank of Japan re?

ported gold holdings of $395 million, while gold produc? tion in the Japanese Empire is put at $62 million for the current year. With a note issue amounting to only $430 million late in July, a substantial amount of this gold is available for export should necessity require it.

As a matter of fact large shipments of gold to the United States have been under way since last March,

the amount reaching about $159 mil-

Mobilizing lion up to September 5. Whether this

Foreign movement of gold has been for the pur- Balances pose merely of restoring depleted for?

eign balances or of building up reserves for future use is not definitely known. That the former is the case, in large part at least, seems likely in view of the exchange difficulties under which Japan has been

laboring for months. The value of gold exports this

year does not greatly exceed the amount by which

Japan's trade deficit to date surpasses that of last year. Moreover, in view of the fact that about 70% of Japan's normal commercial requirements for foreign exchange




are sterling, it is perhaps significant that most of the dollar proceeds of gold shipments to the United States have been promptly converted to sterling and not held as balances in this country.

Whatever foreign credits remain, however, are avail? able to finance imports. In addition, Japanese dollar bonds and other foreign securities of an undetermined amount are held in Japan. A year ago the total feached $400 million. In an emergency a substantial sum in foreign currencies could presumably be realized

through the sale of some of these securities, although any attempt to unload Japanese bonds in large quantities would break the market.

China has large silver reserves, most of which are now in the hands of the government banks as a result of the nationalization decree of November 1935. At

the end of June the four principal Chinese banks held

U.S. $275 million in bullion and foreign currencies. Recent press dispatches have reported that U.S. $30 million in silver, believed to belong to the Bank of

China, has been shipped to Hongkong for storage since the outbreak of hostilities. Some of this will eventually be sold in the open market if fears prevailing in London are realized. China's existing foreign balances, like those of Japan, are of unknown amount, but large ex?

ports of silver following its demonetization two years

ago have undoubtedly resulted in the accumulation of some millions of dollars in the form of dollar credits and gold held abroad, including the dollar credits cre- ated through the purchase of an unrevealed amount of

gold from the United States Treasury in July. China's

foreign balances will doubtless be further augmented to some extent by patriotic contributions from the

eight million Chinese now residing abroad.

In summary, despite the scantiness of available data, it is reasonably safe to conclude that the means of pay?

ment which can be mobilized by China Effectof and Japan, especially the latter, will

Japanese permit sizable imports of war essen- Blockade tials, but that the outlook cannot be

said to be favorable to the expansion of total American trade with either country. In the

case of China, the contraction of trade becomes a cer-

tainty when we consider the disruption of trade chan-

nels by the war and the likelihood of a blockade. If

history serves as a precedent, Japan with her naval

supremacy undisputed in the Far East will not hesi- tate?in fact, will be driven?to apply the weapon of blockade if there are signs of a reviving China trade in war materials.

Nor are the possibilities for large-scale evasion of

such a blockade by American goods shipped through Hongkong or across China's land frontiers at all favor?

able. The rights of third powers to trade with bel-

ligerents through adjacent neutral ports have always been respected in direct proportion to the force avail-

able to back them up. Whether either England or France would be prepared to keep open Hongkong or the ports of Indochina in the face of determined pres? sure from Japan seems open to doubt. For all goods except such as may be transported by air, including aircraft itself, there is the further question of China's

ability to preserve rail connections from these ports into the interior. The probabilities here support the above conclusion that so long as large-scale hostilities continue the China trade will remain far below its old level. Moreover, in view of past experience in Man? choukuo no American could be optimistic about trade

prospects in Japanese-controlled areas of China.

No such problem of blockade and physical devasta- tion faces Japan in maintaining her imports, and as we

have seen she has comparatively large U.S. Exports assets which can be mobilized to

May Shrink finance such trade. Moreover, among imports of war materials which will

doubtless be given precedence in the issuance of ex?

change permits are such American products as oil, iron and steel, and certain types of machinery. Neverthe-

less, in view of her recent exchange difficulties which have led to drastic import controls, and in view of the

problem she faces in the maintenance of exports under war conditions, a similar conclusion as regards Ameri? can trade seems inescapable.

While the character of American trade with China and Japan will doubtless be somewhat altered under war conditions, gains in some lines offsetting losses in

others, the probable outlook points to a shrinkage in total American exports to China and Japan rather than to a trade boom. If this is true, then one of the prime reasons for trade controls is absent in this case. If the conflict should spread to Europe, and especially if it should involve England, the economic picture would of course be radically altered. Britain, for example, has

gold reserves of $1,600 million in the Bank of England, as well as holdings of American long-term securities estimated at $1,736 million on March 31, 1937. By expenditure of such vast reserves, even without additional borrowings, American agriculture and industry could be swept into a wartime boom of great propor? tions. But that is another story.

The second danger against which Congress sought to

legislate in the Neutrality Act?embroilment over at- tacks on American lives, shipping and

Danger of export goods?seems already close at Incidents hand in the Far East. So far, to be Remains sure, the damage has occurred mainly

on shore and in the port of Shanghai, and has affected American citizens and property al?

ready on the scene before the outbreak of hostilities. This led marine underwriters late in August to raise insurance rates on shipments to Far Eastern waters and to refuse insurance altogether on storage and



1937 American Neutrality and the Far East 215

lighterage in Chinese and Manchurian ports and in

Hongkong. On August 30 United States authorities warned American merchant vessels away from Shang? hai, although later they were offered convoy protection whenever possible. The blockade announced by the

Japanese navy still awaits clarification but, as we have

seen, has threatening implications. If an attempt is made to stop shipments of war supplies to China, this will not only jeopardize American ships and cargoes, but will present the old problems of confusion of iden?

tity already signalized by the Chinese bombing of the President Hoover. From present indications, then, the continuation of American trade and shipping along the China coast may well mean periodic incidents involv?

ing American lives and property and leading to diplo? matic controversies with one or both belligerents.

Up to this point we have concerned ourselves largely with a review of the factors shaping the probable course

of American trade in the absence of Effect of neutrality restrictions. Let us now

Neutrality pass to a consideration of the probable Act effects of application of the Neutrality

Act, bearing in mind that any discus? sion of this sort is necessarily conjectural in large measure. In view of a certain confusion as to exactly which of the many neutrality proposals emerged from the welter of Congressional debate which preceded the

adoption of the amended Act of May 1, 1937, it may be well to summarize its principal features. Stripped of legal verbiage, the chief provisions of the Act are as follows. They are applicable to continental United

States, its territories and insular possessions, including the Philippines.

A. Whenever the President finds that a state of war exists abroad, he must forthwith proclaim: (1) An embargo on exports of arms, ammunition and imple-

ments of war to belligerents or for the use of belligerents. (Arms, ammunition, etc. are to be defined by the President. They must include the articles enumerated in the President's proclamation of April 10, 1936, and similar articles, but not raw materials.)

(2) An embargo on all loans and credits to or for the use of belligerent governments; on any solicitation or receiving of contributions for a belligerent (except for medical relief and other charity purposes) ; and on any dealing in the securities of belligerent governments issued after the proclamation. The loan embargo does not apply to the renewal or adjust? ment of existing obligations, and the President may at his discretion exempt ordinary commercial credits of a normal peacetime character.

(3) A ban on American citizens embarking on the vessel of a belligerent except as the President may prescribe. (Ninety days* leeway is given to citizens already abroad and returning to the United States.)

(4) A ban on American vessels (including aircraft) carrying munitions to or for the use of a belligerent.

(5) A ban on American merchant vessels arming themselves if engaged in trade with a belligerent.

B. If he deems it necessary to place restrictions on American exports other than munitions in order to preserve the peace and security of the United States or to protect American citizens, the President after issuing a proclamation as provided in A shall also: (1) Designate certain articles and materials in addition to muni?

tions which may not be carried on American vessels to or for the use of belligerents.

(2) Prohibit all export or transport of articles of any kind to a belligerent except as all right, title and interest therein passes from American hands at the port of shipment.

C. All the provisions of A and B shall apply in the same fashion to the case of a state of civil strife in a foreign country if the President finds that such a state exists and that American munitions exports to that country endanger the peace of the United States.

D. During any war in which the United States is a neutral, the President may restrict the use of American ports by belligerent warships as a source of supply, and also regulate the use of American ports and waters by the submarines and armed merchant vessels of belligerents.

E. The entire Act does not apply to the case of an American republic warring against a non-American state, unless the American republic is cooperating with some non-American state in such a war.

F. A National Munitions Control Board is established, and required and empowered to register all munitions manufacturers and dealers. It shall license exports and imports of munitions except as they are contrary to law, and no shipments may take place without such a license.

The sections which are of principal interest here are those which have been grouped above under A and B, the former mandatory and the latter discretionary. What effects would the application of this Act have, first, on American trade; second, on the balance of

military power between China and Japan; and third, in relation to any possible collective action to restrain

Japan ?

Arms, ammunition and implements of war are now defined by the government to include the following: rifles, revolvers, machine guns and other guns in excess of caliber .22; ammunition; grenades, bombs, etc.; tanks and armored vehicles; vessels of war; aircraft of all types; substances and appliances for chemical

warfare; and propellant powders and high explosives. Exports of these articles to China were $665,627 in

1929, $366,089 in 1932 and $2,626,213 in 1935. Exports to Japan in the same years were

Arms Trade $408,970, $25,991 and $960,780 respec- Relatively tively. The increase in 1935 is note- Small worthy. In 1936 there was a further

gain in munitions orders placed with American manufacturers, especially in the case of China. Licenses issued by the Munitions Board in 1936 for arms shipments to China totaled $7,932,554, and to Japan $1,224,918. In the first seven months of 1937 they dropped to $1,423,618 and $309,508 respec- tively, but in August they rose sharply again. These figures indicate the value of the trade already existing, as distinct from problematical future gains, which would be shut off by a munitions embargo. Despite the recent increases, which have made China the leading foreign buyer of American war products, the amounts in question, while doubtless of great significance to individual arms manufacturers, are extremely small in relation to total American exports to these countries.

The only American industry which would be appre- ciably affected by the closing of this Oriental trade is the aircraft industry. The bulk of the Far Eastern munitions trade consists of aircraft, either commercial




or military types. From 1932 to 1935 munitions ex?

ports, as defined above, were more than 80% aircraft and parts in the case of both China and Japan. Out of licenses for arms shipments to China totaling $9,356,172 from January 1936 to July 1937, $8,248,305, or 88%, represented aircraft and parts. In the case of Japan this item amounted to $1,530,694 out of $1,534,426, or over 99%. The remainder of China's orders were machine guns, ammunition, grenades, bombs etc.

It is obvious that the official definition of articles which may be embargoed under the Neutrality Act excludes many commodities of prime importance in time of war. Great difficulty is experienced in drawing a line between articles for warlike and peaceful purposes. All types of airplanes, for example, are included because of their ready convertibiiity to military use, but ordinary automobiles and trucks have so far been

excluded, as well as most types of chemicals. The

possibility has been suggested that the list might

legally be extended to include auto trucks, which have been shipped to China and Japan in large quantities.

Raw materials, as we have seen, were specifically exempted by Congress from the munitions clause.

American exports to the Orient, how- Raw ever, include many commodities which Materials are essential in time of war and which

Exempted find their way into munitions manufac? ture and supply. Japan and China,

especially the former, have been heavy buyers of Ameri?

can oil products, cotton, copper, lead, iron and steel

products, chemicals, automobiles and various types of

machinery and electrical goods. Japan's military ma?

chine has profited immensely from large purchases of American scrap iron, and to a lesser extent of pig iron

and finished steel. Statistics of past trade are of limited value in show-

ing the volume of potential commerce which would be cut off by an arms embargo. That such an embargo would be restricted in its economic effects, however, is indicated in other ways. Japan's heavy industries have developed to the point where she is virtually self- sufficient in war-making articles of finished character. China's have not, but the Japanese blockade now

threatening seems likely to restrict entry of foreign arms through China's coastal ports to sporadic gun- running ventures. American arms and aircraft might find their way to China across land frontiers in the absence of an embargo; but this type of trade seems

hardly likely to attain important proportions. We are forced to conclude, therefore, that for the

United States the chief direct effect of an arms em?

bargo, leaving out the ultimate significance of who wins the war, would be to minimize the likelihood of conflict with Japan over the destruction or seizure of munitions cargoes bound for China. In order to cur- tail the supply of war essentials to Japan by govern-

mental action, it would be necessary to widen the scope of the embargo by administrative interpretation of the

present law, by seeking new legislation from Congress, or by informal pressure on American dealers in scrap metal, oil etc.

The second mandatory clause, an embargo on loans and credits, would also seem unlikely to have an im?

portant effect on economic relations Loans with China and Japan. As pointed out

Unlikely above, the prospect for loans to either

Anyway country, whether public issues or pri? vate credits, is distinctly unfavorable

in any case. From the point of view of preserving eco? nomic stability, however, the possibility of thus financ?

ing a trade boom with Japan is worth guarding against, while for the purpose of applying economic pressure on

Japan something might be achieved by forbidding American banks from continuing to lend money to her on short-term account. Apart from the Neutrality Act, the Treasury might also hamper Far Eastern pur? chases of American goods by discontinuing the prac? tice of buying Chinese silver and Japanese gold, al?

though there are difficulties and limitations in any such action.

The remaining mandatory provisions of the Neu?

trality Act concern American shipping. The prohibi- tion against the arming of merchant vessels and the

carrying of munitions to belligerents is aimed at

avoiding a repetition of the World War controversies over the destruction of such vessels at sea or in port. With an arms embargo already in effect, the latter pro? vision would be an added restriction only in the case of an American ship carrying munitions from a for?

eign country. The clause forbidding Americans to travel on the vessel of a belligerent would turn all American passenger traffic from Japanese to American and other lines provided the President gave it full

application. Out of passengers numbering 634,779 who arrived abroad in 1935 (excluding tourist cruises), Japanese ships carried 7,093; and out of departures numbering 623,309, they accounted for 9,214. Most of this travel in Japanese ships was to and from eastern and southeastern Asia. The effect of applying these

provisions would seem to be to benefit American ship? ping, rather than otherwise, although passenger trade

may be expected to decline in time of war, and there is

always the danger of retaliation. The clauses under B are a modified version of the

much debated "cash-and-carry" plan which the Presi? dent may include at his discretion.

"Cash and The requirement that all American

Carry" Curb rights and interest in goods destined on Shipping for a belligerent shall be relinquished

before shipment is aimed at minimizing the possibility of claims and controversy arising out of the destruction of American cargoes at sea or in



1937 A merican Neutrality and the Far East 217

the ports of a belligerent. The other clause concerns the same danger as regards American vessels and their crews. The compromise version finally adopted by Congress, however, does not forbid the carrying of all

cargoes to a belligerent but only such articles as the President may prescribe?presumably such as may be

placed on contraband lists. Under the law the President may not differentiate

between trade with China and with Japan, even though the risks named above are in fact confined largely to the China trade. If the ban on carrying trade were

invoked, and if a comprehensive list of raw materials and manufactured goods were designated, American

shipping in the Pacific would be severely crippled. By virtue of the same fact, the difficulties now center-

ing around the danger to American merchant vessels and cargoes (but not American residents and business

properties) at Shanghai would be mitigated. Summarizing this review of the major provisions of

the Act, we find that if it were applied in the Pacific

today it would have a positive, but Effect on limited, effect on American economic U.S. Trade relations with China and Japan dur- Limited ing the hostilities. The major loop-

hole through which a trade boom in

war materials might develop is the absence of any direct restriction of the export of any commodities

except those in the strict category of munitions. Vari? ous proposals were discussed in Congress, for example the normal peacetime quota plan, but none reached the statute book. Nor is there any provision for regu- lating the sudden liquidation of foreign balances in

this country. Loans are barred, it is true, and gold shipments, while not covered by the Act, may be re- fused by the United States government under another statute. It seems, however, that all things considered there is little prospect anyway for a considerable expan? sion of trade, even trade with Japan, during the present hostilities. Consequently for the United States the chief effect of invoking the Neutrality Act from the

point of view of its declared aims would be somewhat to reduce the danger of diplomatic and perhaps mili-

tary involvement over the destruction of American lives and property in war zones.

As noted elsewhere, these conclusions regarding the economic significance of neutrality do not take account of the possible spread of the conflict to other countries, followed by a growing concentration of world trade on a war basis, and the repercussions of such a develop? ment on the American economy. If this is a real dan?

ger, then the argument is strengthened for invoking the neutrality curbs promptly. The longer the delay, the greater the pressure of business and banking inter? ests to be allowed to realize war profits within their

grasp, and the greater the danger that a declaration of economic isolation would be regarded abroad as a hos-

tile act. The inference would be that if the policy of

neutrality is to be adopted at all, it should be done in-

stantaneously and automatically on the outbreak of serious hostilities.

There is a further complication, however, in any program of planned resistance to the economic disloca- tions of war, and this will not be covered by any con? trols upon exports and credits to belligerents. Nations at war may receive heavy shipments of supplies from

foreign countries ostensibly neutral, and the latter may make compensating purchases in the United States. This kind of participation by the United States in what amounts to war trade cannot be checked by any neu?

trality law of the present type. Furthermore, the

prevailing war atmosphere and the resultant arma- ments race has already brought on a war boom in such American industries as metals, oil and machinery and even in certain branches of agriculture. This problem is of fundamental importance in the general problem of economic instability, and no neutrality law is ade-

quate to deal with it. There is no certain way of insur-

ing economic security in a warring and warlike world. The major aim of this article has been to set forth

the implications, and especially the economic implications, of applying the Neutrality Act to the Far East? ern conflict, from the point of view of its effectiveness in carrying out the aim of its sponsors: to keep the United States out of war by withdrawing so far as pos? sible from dangerous contact with the belligerents, while preserving a strictly neutral and impartial attitude toward both. This point of view is not neces-

sarily indifferent to the outcome of the hostilities or to the concern of the United States in the peaceful development of the Far East, but doubts the feasibility or usefulness of active American intervention at this

time, and fears the dangers of attempting to assert the traditional rights of a neutral in time of war.

Such an attitude, however, is emphatically con- demned by many people as a gross neglect of American

responsibility for peace in the Pacific. Effect on This is not the place to debate the Balance broad aspects of this fundamental of Power question of American policy. But since

the opposition to applying the Neu?

trality Act rests in part on the belief that it will aid

Japan and injure China, a final word may be added on this phase of the question.

If the above analysis of the economic and military situation in the Far East is correct, American trade with Chinese-controlled regions is doomed to severe contraction and possibly to virtual destruction for the time being, irrespective of whether or not the Neu?

trality Act is invoked. It may be, of course, that the

threatening Japanese blockade will fail to materialize, or be delayed in application, or be ineffective as re-

gards shipments through adjoining territories. Nor is



218 China's New Foreign Credits Blocked by War September 15

it certain how far Japan would extend the list of con? traband. In the absence of neutrality, then, it is pos? sible that shipments of arms and other supplies to

China, while so small as to be of little significance to the American economy, might nevertheless be of real assistance to the National Government of China.

Application of an American arms embargo would prob? ably have little effect, since Japan is likely to stop all munitions shipments in any case. Application of the

discretionary cash-and-carry features to commodities needed by China might place her at some disadvan-

tage in so far as she was unable to charter foreign shipping to make up for her own deficiency in this

respect. On the whole, however, it would seem that China is likely to get little aid from the United States which she cannot secure as well elsewhere. If this is

true, the effect of applying the Act as regards the bal? ance of power between China and Japan reduces itself

principally to its effect on American relations with

Japan. This effect may be regarded by some as unfavorable

to China in so far as it weakens the possibility that

Japan's difficulties will be increased by Would involvement in a serious diplomatic Aid China controversy with the United States

over the question of neutral rights. But in other respects neutrality would work in favor of China in that it would place some restrictions on the supply of American war materials to Japan. An

embargo on munitions and loans would definitely close off that avenue of assistance. "Cash and carry" would further embarrass Japan by throwing an additional

shipping burden on her at a time when the shortage of cargo space is a serious problem. And finally, to forbid Americans to travel on Japanese ships would cut to some extent into Japanese shipping revenues.

One sometimes hears the charge that neutrality would make the United States the economic ally of

Japan. The truth is that this country is already the economic ally of Japan, in the sense that Japan buys here a wide range of commodities essential for war,

and it will continue to be so long as the supply of

goods, credits and shipping services is not restricted. On the whole, however, this aspect of American neu?

trality in the Far East has been exaggerated in public discussions. There is little reason to

Neutrality believe that invoking the present Act versus would have any strong effect one way Intervcntion or the other on the outcome of the

conflict in the Far East, save in so far as it gave notice that the United States had no inten- tion of taking active sides in the dispute. It is possible that a policy of positive assistance to China, by either

independent or collective action, would better serve the

long-range ends of American Far Eastern policy. Many believe, however, that such a line of action is outside the range of practical politics at the present time. Into this debate we cannot enter.

If, however, more positive measures are in fact im-

practicable, the above discussion would indicate that

greater aid to China and pressure on Japan, if this be the aim, would not be achieved by repealing the Neu?

trality Act or allowing it to become a dead letter, but

might, on the contrary, be achieved by plugging up some of its major loopholes. Such a revision, more?

over, while providing no panacea against war, would

strengthen the power of the President to back up any international attempts at collective neutrality or col? lective restraint of an aggressor through economic sanctions.

PRINCIPAL SOURCES: U.S. Department of Commerce, Foreign Commerce and Navigation of the United States; First Annual Report of the National Munitions Control Board for the Year Ending November 30, 1936; U.S. Department of State, Monthly Press Releases on the Number of Export Licenses for Arms, Ammunition and Implements of War; U.S. Shipping Board, Water Borne Passenger Traffic of the United States (1935) ; U.S. Maritime Commission, Imports and Exports of Commodities (1935-1936); New York Times; New York Herald Tribune; Nezv York Journal of Commerce; Neu? trality Act of 1935 (Pub. Res. 67: 74-1) ; Neutrality Act of 1937 (Pub. Res. 27:75-1); U.S. Senate, Hearings before the Committee on Foreign Relations (74-2) on Neutrality Act; Joseph C. Green, "Supervising the American Traffic in Arms", Foreign Affairs, July, 1937; Philip C. Jessup, Neutrality, Today and Tomorrow, New York, 1936.

SIGNIFICANT DEVELOPMENTS

CHINA'S NEW FOREIGN CREDITS BLOCKED BY WAR

The outbreak of hostilities in the Far East must have been a severe blow to Dr. H. H. Kung, China's Finance Minister, who was on the point of completing a tour of foreign capitals in which he reaped an impres- sive harvest of loan and credit agreements. An eloquent testimony to China's recently improved credit status, the foreign loans tentatively secured by Dr. Kung would, under normal circumstances, have provided the

Nanking government with funds for extending its pro-

gram of national economic reconstruction, now indefi?

nitely suspended by the exigencies of war.

Following his visit to the United States, where he

negotiated with the Export-Import Bank for financing of the sale of American locomotives to China and with the Treasury Department for a new Sino-American

monetary agreement (see Far Eastern Survey, July 7, 1937, p. 159; July 21, 1937, p. 165; Aug. 18, 1937, p. 191), Dr. Kung moved on to further successes in Eu-



Documents

American Neutrality and the Far East