Russell Young to Frelinghuysen, October 18, 1882

No. 67. Mr. Young to Mr. Frelinghuysen.

Sir: On the 21st September I received from Mr. Cheshire, acting consul-general at Shanghai, a dispatch which I inclose. Mr. Cheshire recites the fact that Mr. W. S. Wetmore, an American citizen, resident at Shanghai, and doing business there, had organized a company for the manufacture of cotton yarn. In doing this Mr. Wetmore and his associates acted under the laws and in the enjoyment of a right which they believed to be secured to them by treaty. Shares were issued. Deposits were paid by shareholders to the amount of 100,000 taels, and the company was about to embark in active business. Thereupon a notice appeared in a Chinese newspaper to the effect that Mr. Wetmore’s proposed company was illegal in this, that it was in contravention of a monopoly for the manufacture of cotton cloth, which had been granted for ten years to a Chinese company by the Chinese northern superintendent of trade.

Chinese investors were forbidden to take shares in Mr. Wetmore’s company, “as it never would be permitted to go into operation.” As many of the shareholders were Chinese, and as this announcement inspired a sentiment of distrust, Mr. Wetmore’s enterprise came to a stand-still, and entailed upon him pecuniary loss. Mr. Wetmore asked the intervention of the acting consul-general. That officer reports to the legation that he called upon the taotai and presented the case. He pointed out to the taotai that many branches of manufacture had been established by foreigners in Shanghai, and that Mr. Wetmore had, in addition to his legal rights, only followed many precedents in forming his company.

The taotai informed Mr. Cheshire that he was acting in obedience to the minister superintendent of northern trade, and that his orders made it incumbent upon him to issue a mandate forbidding Chinese to invest in the shares of Mr. Wetmore’s company.

The taotai gave Mr. Cheshire a copy of the decree, a translation of which I inclose, and which presents the Chinese case. It is written by Chang, at present minister superintendent of trade, as well as viceroy of Chihli, who succeeded Li Hung Chang, when that statesman went into mourning. In this decree the minister superintendent states that Li Hung Chang, his predecessor, had, in view of the difficulties attendant upon any new business enterprise, and as encouragement to manufacturers, granted to a Chinese company the exclusive right to manufacture cotton cloth in Shanghai for ten years, and that he had done sounder “the patent, law existing in western countries.” This concession was submitted to the throne, and had received the sanction of the Emperor. The minister superintendent refers to the embarrassments accompanying the efforts of his company to manufacture cotton cloth, partly from the character of the native cotton, partly from the want of experienced artisans and proper machinery. An American named Danforth, “a diligent and careful man,” had therefore been employed to look into these difficulties, and the result of his efforts is that Mr. Danforth believes he can, by an improved loom and other processes, make good cloth out of native cotton. Orders had accordingly been given to carry on the enterprise, when “all of a sudden” his excellency learns that another “factory” is announced in competition.

His excellency does not overlook the fact that while his monopoly covers the manufacture of cloth the company of Mr. Wetmore simply contemplates the manufacture of cotton yarn, branches of industry as far apart as making shoes and tanning leather. But he meets this difficulty by the ungracious intimation that Mr. Wetmore and his associates have “clearly avoided styling theirs a cloth factory with the intent to covertly subvert Chinese interests. His excellency feels that if the new company is not suppressed his labor and trouble will be wholly spent in vain. Its success would prove greatly detrimental to commercial interests in China.” The taotai is therefore ordered to take necessary steps to suppress the new company and protect the monopoly.

The case of Mr. Wetmore is presented fully and clearly in letters from that gentleman which I inclose. Mr. Wetmore is the head of one of the largest mercantile houses in China, and a merchant of high standing. Before starting his company he called upon Mr. Denny, the consul-general, and was informed by that gentleman that there was no reason why it should not be organized, and mills erected in Shanghai for the manufacture of cotton yarn. Mr. Wetmore recites at length the obstacles thrown in his way by the Chinese, to which I allude above in referring to the dispatch of Mr. Cheshire. He avers that the effect of the taotai’s action has been to bring the enterprise “to a deadlock,” and unless he can have assurance of protection he is afraid he “will be compelled to abandon the project altogether.” Such an ending he fears would result in “serious consequences.” He had been acting in good faith as a business man seeking an holiest business purpose. He had the assurance of protection from his consul-general. Under this assurance two-thirds of the shares had been allotted, and machinery telegraphed for. There had been estimates for building and negotiations for land. Mr. Wetmore points out that foreign manufactures of acids, brick, leather, flour, iron-ware, matches, glass, and paper have been permitted in Shanghai. He naturally sees no reason why cotton yarn should be prohibited.

A further dispatch from Mr. Cheshire, dated September 23, recites certain facts and rumors in, reference to the Chinese company monopolized by the Government. * * *

Although these rumors have no bearing upon the point at issue as to Mr. Wetmore’s rights under the treaties, they have some interest as a part of the history of the case.

I have given the subject careful attention, anxious to secure Mr. Wetmore isrights, and anxious also not to do anything that might appear like an attempt to interfere with the internal affairs of China, and especially with any sincere effort on the part of Chinese officials to create new branches of industry, an effort which I would support with entire respect and sympathy.

With this view I read with care the order of the minister superintendent of northern trade, considering every argument advanced by him with interest and in a friendly spirit. But the case appears to admit of no cavil. The right of Mr. Wetmore is assured by treaty. There is no special provision in any convention between the United States and China, but the French treaty contains an express stipulation which Mr. Wetmore enjoys under the “favored nation” clause. In the convention signed at Tien-Tsin, June 27, 1858, and ratified in Peking, October 25, 1860, between France and China, there is this provision:

French subjects and their families may establish themselves and trade, or pursue their avocations in all security, and without hindrance of any kind, in the ports and cities enumerated in the preceding article.

In the treaty signed at Peking, November 2, 1865, and ratified at Shanghai October 27, 1866, between China and Belgium, occurs identically the same provision.

Feeling, therefore, that Mr. Wetmore had been denied his undoubted rights as an American citizen, and that the arguments of the minister superintendent were untenable, I addressed a dispatch to Prince Kung, which I inclose, calling the early and serious attention of his imperial highness to the subject. I pointed out the exact position of American citizens in China under our treaty, as well as their conceded rights under international law. I held that the “monopoly” granted by the superintendent of northern trade was void, as contrary to law. I reminded him that in the United States Chinese subjects had engaged in many kinds of manufacturing and mercantile pursuits, from which they had gained large profits, and that Mr. Wetmore was only asking a privilege and right which had been given in America to a multitude of the prince’s countrymen. I might also have shown the detriment to the best interests of China of the adoption of any system of exclusion or monopoly such as was proposed in Shanghai; that instead of benefiting manufactures, it would stifle them, and that it was a violation of the modern laws of practical economy.

As the question will lead to further discussion, however, it seemed best to reserve these considerations and rest our case upon our undoubted treaty rights.

As illustrating the possible feeling of his imperial highness upon the question thus presented to him, I would call your attention to the dispatch of my predecessor, Mr. Holcombe, No. 92, dated April 29, 1882. (See Foreign Relations, 1882.) In this dispatch Mr. Holcombe sends to the Department copies of correspondence between Mr. von Brandt, the German minister, as representing the diplomatic body, and the foreign office upon a case somewhat akin to that of Mr. Wetmore. The result of this correspondence as summarized by Mr. Holcombe was that the Chinese cabinet contended, first, that foreigners had no right to engage in manufacturing operations in China; and, second, that if they did so goods so manufactured must invariably be exported, and could not be sold. “In the opinion of the entire diplomatic body,” Mr. Holcombe continues, “there is no treaty stipulation which can furnish a just basis for either of these assumptions.” The apprehension was also expressed that there “was no present prospect of reaching a satisfactory arrangement.”

I attach much importance to this case, because it will revive in a practical shape, and as directly affecting American rights, the serious problem referred to by Mr. Holcombe, and which has been in abeyance since the date of his dispatch.

* * * * * * *

If there should be any difficulty in convincing the cabinet of the error which has been committed by the minister superintendent in dealing with Mr. Wetmore, my belief and hope are that the ministers of the treaty powers will Unite with me in a general statement of our case, and insist that the real point at issue is not one merely affecting a commercial enterprise in Shanghai, but one that rests at the foundation of all commercial and business relations between Chinese subjects and the citizens of the western nations whose capital, enterprise, industry and genius have done so much to give to China the benefits of an advanced and enlightened civilization.

I have, &c.,

Chang, minister superintendent of northern trade, to Shao, Shanghai customs taotai.

In the matter of an instruction.

Taotai Kung Shou Fu and others connected with the Shanghai Cotton Cloth Company have addressed a petition to me wherein they state that “the establishment of a factory to weave cotton cloth by machinery was undertaken some years ago.

“Previous to the formation of the company, in answer to a petition presented to Li, the late viceroy and minister superintendent of northern trade, he, in view of the difficulties attendant upon the initiative of such an enterprise, and the great expenses that must necessarily be incurred, granted to the company an exclusive right for a period of ten years. In accordance with the patent law existing in western countries, their company was allowed to issue shares, but no other company was to be organized. Wishing the enterprise to be a success, he thus showed consideration for those interested in it. A document, wherein was described the concession of privileges as sanctioned by His Majesty the Emperor was sent to it.

“The petitioners now learn that certain persons have induced a foreigner to organize a company within the limits of the Shanghai settlement, with the intent of utilizing native cotton. The Tsung-li yamêd had long ago memorialized the throne, and communications were sent by that office to the northern and southern minister superintendents of trade to instruct those connected with the cloth company to consider the matter. That the company has not succeeded is owing to the fact that the nature of native cotton is different from that of foreign, and inferior to it in softness, tenacity, and length of the fiber, and that it does not bear much tension when woven on account of its brittleness. For these reasons the officials and merchants petitioned the Government authorities on several occasions, but failed to carry out the enterprise.

“In the spring of the year before last the petitioner Kung and others received a dispatch from the viceroy, Li, instructing them to consider the matter and make an endeavor to carry out the enterprise.

“Accordingly capital was derived by the issue of shares. With this means we procured samples of different kinds of native cotton and shipped them to factories in foreign countries for the purpose of converting them into cloth as an experiment. As a result of the experiment the fabric was found to be poor in quality and unsuitable for the market. After much difficulty in making inquiries, with a view to secure the services of one thoroughly experienced in the matter of machinery for producing cotton goods, we again procured native cotton to be shipped abroad for experiment. A telegram from the factory informed us that after repeated trials it was found that native cotton with its own peculiar nature could be converted into cloth after making an alteration in the structure of the loom; and, in truth, the goods sent back to us-were tolerably good. Thereupon we requested the Chinese ministers to England and America to engage a first-class engineer for us and send him to China so that we could discuss with him fully on the subject. The engineer engaged is an American named Danforth, a diligent and careful man. After having examined the different samples of said cloth, he said he could not guarantee the production of equally fine goods out of native cotton, for the reason that he had not manufactured them. Therefore-we directed him to take abroad an assortment of native cotton for trial. First he visited a cotton industrial exhibition in America and there studied into the most perfect patterns of cotton machinery; then he repaired to factories and machine foundries and interviewed the manufacturers and made some experiments himself. Later on we sent our interpreter to America to assist in Mr. Danforth’s work. A recent letter from our engineer informs us that the loom, after several improvements made in it, is now adapted to converting Chinese cotton into fabric, the texture of which is much closer than that of the samples sent over to us before; and on receiving the goods we observed they were in fact superiorto the other samples. Now that we have found suitable machinery for the factory, an order has been sent which will be fulfilled, and the machines forwarded to us in a year.

“We now, therefore, feel a satisfaction in thinking that we have not gone into all this labor and expense for the past few years to no purpose.

“Exercising proper management, it is possible that we shall successfully carry out our enterprise. But all of a sudden, even before the establishment of the factory, certain persons start a company in competition against us, assuming the name of a foreigner in its management, and unlawfully adopt our new plan, thus interfering with our interests. Perceiving the difficulty in attempting to oppose our company, they have cleverly avoided styling theirs a cloth factory, with the intent to covertly subvert our interests. With reference to the manufacture of cloth, from extracting the cotton from the seeds to making the cloth, the intermediate processes, including that of making yarn to be woven into cloth, belong to the same branch of industry.

“Moreover, the cloth company in manufacturing cotton fabric must of necessity manufacture yarn also. If steps are not taken to suppress the company and if its existence is permitted to continue, surely all our labor and trouble will be wholly spent in vain, and it would be impossible to say whether the enterprise would succeed or not, and it would prove greatly detrimental to commercial interests in China. As to the promoters of this enterprise, though the names of responsible persons are not known, yet we have good reason to believe that the company was incorporated by Chinese and not a project of foreigners. The facts of the case should be clearly set forth and a prohibitory notification be issued everywhere, so as to render powerless the efforts of those interested in the yarn company, and thus restrain them from carrying it into operation. We have already acquainted the taotai here of the facts of the case, and begged him to make further inquiry, from time to time, concerning the yarn company, and we cannot but also petition and pray your excellency to look into this matter, and to consider the difficulties merchants have to contend with, and to issue instructions to the Shanghai customs taotai to investigate the matter and to prohibit the formation of any company whatever for the purpose of manufacturing cotton yarn with machinery, so as not to undermine the foundation of the cloth company, to the end that it may gradually attain success; and we shall feel our most sincere gratitude for your excellency’s assistance. Whether such a course should be adopted or not, we humbly await your excellency’s instructions.”

With reference to this matter laid before me, namely, that pertaining to the establishment of a factory to manufacture cotton cloth with machinery, the viceroy, Li, had already memorialized and received a decree from the throne granting to Chinese merchants the privilege to start such a company and issue shares, forbidding the establishment of other companies for a similar purpose within the space of ten years. All processes, from extracting the cotton seeds and spinning yarn to weaving cloth, are a series of one and the same kind of work.

From the above petition it appears that some persons have organized a yarn company within the limits of the Shanghai settlement under the name of a foreigner, likewise intending to use native cotton for its manufacture, thereby unlawfully copying the new plan of the cloth company, by which means they will rob its interests, infringe upon its rights, and cause great detriment to its welfare.

The petitioners are hereby instructed to wait an investigation of the Shanghai customs taotai into the case, and the necessary prohibition issued, and to wait also the instructions of the southern minister superintendent of trade to the said taotai in regard to the matter.

The intendant is instructed to act accordingly and report.