The Global Zeitenwende
How to Avoid a New Cold War in a Multipolar Era
AMONG the economically less-advanced areas of the world, China is peculiar in that it is not a new country awaiting the beginnings of an ordered civilization, like much of the African and South American continents; it is a country of dense population, not only with a distinctive culture and a high degree of social organization, but already possessing a very considerable industrial, commercial, and financial development of its own. Industrial enterprises, therefore, and more especially the modern means of communication such as railways and steam shipping, find in China a field already plowed and harrowed for the sowing. Once built with honesty, and operated with even a minimum of efficiency, a railroad in China pays for itself almost from the beginning. Its course lies through a region already under intensive cultivation, and through towns which immemorially have possessed local industries, whose opportunity for expansion has hitherto been limited by the enormous transportation costs incident to the old methods of conveyance by donkey, by camel, or by wheelbarrow; and within reach of it dwells a population more densely settled than in any region of the world, except perhaps some portions of northwestern Europe. A railway in China has not, therefore, to develop the country which it is to serve and from which it is thereafter to derive its revenue. The economic problem which it presents is rather one of adjustment and development, which takes place automatically as between the industries and the markets of the region which has been awaiting this quicker and cheaper means for the disposal of its products.
China is also peculiar among the economically less-advanced areas of the world in that its development through foreign capital has been undertaken, not by the nationals of any single power, but by various nationalities simultaneously--some of them inspired by political at least as much as by economic motives. Among these powers the Chinese Government has intrigued, playing off one foreign influence against another, and offsetting concessions to one set of interests by "compensations" to other interests. This has resulted in a haphazard development, neither continuous nor consistent, often ignoring economic necessities in favor of considerations of immediate political expediency. It has, moreover, had other results more positively dangerous alike to Chinese interests and to the interests of the foreign investing nations. It has from time to time resulted in acute international rivalries which have in turn led to an accentuation of particularistic and exclusive designs, such as have found expression in the various claims to so-called "spheres of interest," or, as they are sometimes designated, "spheres of influence." Under these conditions, economic and political motives have interacted one upon the other, and have become blended and confused to an extent that is perhaps not equaled elsewhere in the world.
As has been said: "Financial, economic, and industrial concessions have been made the objects of international policies; such advantages have been sought by governments--both directly, in the form of general conventional stipulations, and indirectly, in the form of special grants to particular banks or industrial organizations--through all the means available to one state in its intercourse with another; the holders of such concessions have often spoken with the voice of their governments in insisting upon their own construction of the rights granted to them; and such commitments to individuals of one nationality, even when left unutilized and allowed to lapse by the terms of the concessions, have now and again been claimed as a basis of protest against a grant to the nationals of any other country. The result of this merging of individual with governmental interests has been that matters which would elsewhere be of merely commercial character, susceptible of judicial determination in case of dispute, are in China matters of international political concern, for the settlement of which the ultimate recourse is to diplomatic action. It is thus in a sense true that the international status of the Chinese Government is determined and conditioned by its business contracts with individual foreign firms or syndicates, scarcely, if at all, less than by its formal treaties with other governments."
It would be unfair, however, to convey the impression that the reliance of China upon foreign private capital is intrinsically bad or harmful to Chinese interests. Harm has indeed been done to the interests both of China and of the other powers in certain cases in which nations ambitious of political advantage, or of exclusive economic position, have insisted upon an admixture of uneconomic elements designed to serve ulterior ends. This is, of course, most marked in cases involving encroachments upon the territorial or administrative integrity of China, or upon the principle of the open door or equality of economic opportunity for all nations in China. It has been exemplified particularly in connection with certain railway lines constructed by nominally private enterprise--enterprise, however, which was in fact a disguised agency of government, assuming to exercise within Chinese territory the administrative and fiscal functions of a government, and insisting upon a fantastic reverence for the sacredness of its property rights. Along their right-of-way such railway companies have assumed to nullify the treaty rights of foreign residents in China, to assume jurisdiction over their persons and property, and to levy taxes upon them; and the railway right-of-way has been treated as so far identified with the national territory of the foreign company that roads could not be built across it, nor could Chinese troops in hot pursuit of bandits be permitted to trespass upon the line even for the purpose of putting down lawlessness. But these are instances not of the harmfulness of private financial enterprise in itself, but of the perversions which have from time to time occurred in consequence of the desire of governments to use business enterprises as pretexts for political penetration.
In those cases in which foreign economic developments in China have been left free of political designs, however, and allowed to develop with a sole view to the security of the bondholders and the success of the enterprise, the record is on the whole one which China is not warranted in resenting, and in which the operations of international finance appear in a favorable light. Even where the safeguards have involved a degree of foreign supervision over Chinese revenues (so as "to touch very nearly the administrative independence of China," as it was put by President Wilson in the public announcement of withdrawal of support from the American group of the Consortium, in 1913), it must in fairness be admitted that the arrangements of this sort actually made up to the present time have more than justified themselves by the inestimable service which they have rendered to the Chinese Government. One has but to point to the international services established in connection with the Maritime Customs and the Salt Revenues.
The Customs service, as is well known, had long ago grown up as a result of historical circumstances, under the organizing genius of Sir Robert Hart; but in connection with the Anglo-German loans of 1896 and 1898, made for the purpose of paying the Chinese indemnities to Japan after the war of 1894-95, it was stipulated that the system of foreign supervision over the administration of the Customs should remain unaltered during the life of these loans, which were charged upon the Customs revenues; and the provisions of these loan contracts, therefore, constitute the basic agreement with regard to the continuance of the present system of international supervision over the Customs administration. In 1913 a similar service, of an international character, was provided for by the terms of the Reorganization Loan, in connection with the security of that loan upon the revenues of the Salt Gabelle. Both of these organizations have rendered to the Chinese Government loyal and efficient service of which they may well be proud, and which has won for them in an extraordinary degree the confidence of the Chinese people.
In a brief review of the operations of private financial enterprise in China, it is possible to deal only with a few of those aspects of the problem which are fundamental and peculiar to the case of China. This paper will therefore confine itself almost exclusively to the question of railways, making only incidental reference to the important series of administrative loans by which China was enabled to meet the indemnities imposed upon her as a result of the war with Japan, and by which after the revolution of 1911 she was supplied with the means of organizing and consolidating the new Republican Government. It will be necessary to leave almost without comment the activities of the original Consortium--a combination of American, English, French, German, Japanese, and Russian banking interests--which in 1910 and the following years took so momentous a part in establishing international financial coöperation in China, but which dealt solely with administrative rather than with industrial financing.
From the time, thirty years ago, when China first had recourse to foreign capital to aid in her internal development, there has grown up a sharp though somewhat artificial distinction between loans for the general purposes of the Government, conveniently designated as administrative loans, and those devoted to industrial developments undertaken by the Government--these so-called industrial loans being in practically every case for the purpose of railway construction.
The building of railways was a task for which neither the Chinese Government nor the Chinese people were competent by training or tradition. They lacked the necessary technical education and experience, and were not familiar with the kind of coöperation on a considerable scale which is necessary for public works or corporate undertakings. Without undue reflection upon the Chinese people, it may be recalled that their standards of public or corporate responsibilities as trustees have never been developed, as in the case of Western nations. For reasons peculiar to their social and political fabric, the Chinese have developed standards different from our own--in some respects more punctilious than those of Western peoples, but involving none of that regard for the sacredness of a trust which is so conspicuous in the legal and moral concepts of the Occident. To risk a generalization so broad that it must necessarily be at least partly faulty, one might say that the Chinese are singularly conscientious about the obligations of a debt, but equally unresponsive to the obligations of a trust. This has been evident in such corporate activities as the Chinese have undertaken during the past generation. Directors of corporations have not felt any inhibition upon their borrowing corporate funds for the purpose of speculation, in stocks or in exchange, for their personal profit. It has resulted that Chinese corporations have frequently ended in bankruptcy through some fluctuation in shares with which the corporation itself was in no wise concerned.
As the result of these and other handicaps, Chinese financiers have never yet succeeded in building a railway; and the failure of the effort in the case of the province of Szechwan railway was so conspicuous and so disappointing that it constituted one of the causes which brought on the Chinese revolution in 1911. Nor has the Chinese Government itself ever built more than a few odd miles of railway, except in the case of the Peking-Kalgan line, which was indeed a fine technical accomplishment and a successful enterprise, but which during the past few years has been made the sport of political and personal ambitions, until at present it has lost its original independence of foreign influence and has become almost irretrievably burdened with debts.
Apart from certain more or less experimental efforts, the first railway concessions in China were in the strict sense of the word "concessions." They involved the grant, to foreign interests, of the right to build and exploit railways in Chinese territory as foreign enterprises independent of the Chinese Government. To this group belong the Chinese Eastern Railway (the Russian Government's agency of penetration in Manchuria), the German railway in Shantung, and the French railway in Yunnan. These railways, however, are examples of what was in fact a governmental activity, rather than of the use of private capital; and they were possible of development only in connection with adjacent territorial possessions, of which they served as extensions.
In regions more remote from foreign territorial possessions there was an opportunity for the development of a type of contract which has become known as the underwriting contract or bankers' contract. This type of contract provides for a loan to be floated in the foreign money markets by the bankers as underwriters. The bankers then have the railway built for the Chinese Government; they choose the engineer themselves, as also the auditor to supervise the expenditures. In the earlier contracts of this type, the loan was secured upon the railway itself, and under the guise of joint foreign and Chinese supervision the bankers in fact retained what was an effective control of the operation of the railway. But, beginning with the Anglo-German contract for the Tientsin-Pukow Railway, in 1908, this type of contract has been modified by omitting the mortgage upon the railway, and by relaxing foreign supervision in engineering and auditing after the line has been built. With many variations in detail, this is the general basis upon which the railways in China have been built by foreign private capital.
Without attempting too detailed an analysis, it may be pointed out that the essential elements of foreign supervision, alike over construction and operation of railroads of this type, are embodied in these so-called "engineering rights" (the right of the bankers to have the road constructed under the direction of an engineer nominated by them), and "auditing rights" (the control of expenditure, during construction, by a financial representative of the bankers). Closely connected with the "engineering rights" is the question of a preference for materials and equipment manufactured by firms of the same nationality as the bankers. In many of the contracts of this type, provision is made for the establishment of a purchasing agency, which, for a fixed commission, is to purchase all material required for the construction and operation of the line. In practice this has usually meant that all material for the road was purchased from a firm affiliated with the lending bank. Even where no such provision exists, however, it generally works out in practice that the necessary material for the road is supplied by the industry of the country which furnished the money and which nominated the engineer-in-chief. The tendency presents a real difficulty only in cases where several nationalities have coöperated in the building of a line. An attempt to obviate this difficulty was made in the case of the Hukuang Railways, in the construction of which American, British, French, and German capital participated. Sections were allotted to the several nationalities, but the contract provided for an "impartial preference," on all the sections, for the materials of all the lending nationalities. It was assumed that free competition among the manufacturers of the four interested countries would obviate any disposition on the part of the various section engineers to favor materials of their own nationality. But the theory found in human nature an obstacle to its successful realization. The whole training of an American engineer makes him look askance at the rigid type of locomotive suitable to English railways, which in his opinion are wholly impracticable for such pioneer lines as are required today in China; and he regards as a mere extravagance the eternally substantial British type of bridges, with their rivet-holes individually drilled by hand. The British engineer, on the other hand, trained in the practice of a country where the railroad system has long ago ceased to cover new territory and devoted to the perfection of the existing system, regards with complete contempt what he considers the jerry-built rolling-stock and bridge work of his American colleague. Here is an honest difference of views which presents one of the most difficult of the problems incident to international financial coöperation in railway development in China.
It is difficult for us to realize the extent to which the construction of a railway in China constitutes a new focus for the whole economic life of the area traversed. In the present rudimentary stage of the country's railroad development there is almost nowhere any competition by rail or by water. The construction of a new line gives an outlet for industries which theretofore had never dreamed of being more than merely local. Inevitably, the whole economic and commercial organization of the district crystallizes around the new line. Districts that were formerly as remote from each other as China is from us, suddenly have rapid inter-communication. And this new facility, for conference and for the despatch of troops and supplies, brings the government and the people into closer, though not always more harmonious, contact than was possible before.
It is not strange that these wonder-working lines of steel rails, which were to so large an extent subject to the control of one or another foreign interest, became each the nucleus of an influence which was both economic and political. They became, in fact, the primary means of economic and political penetration of China by the several powers; and each became, at least potentially, the basis for the assertion of a sphere of influence and for consequent claims to "special interests" and a particularly favored position. Such claims were at times asserted consciously, with a deliberate implication that the property interests involved were such as required for their protection the acknowledgment of privileges superior to the governmental rights of China and to the treaty rights of third parties. There have also been occasions where the foreign control of railways, without actually asserting any superior rights, has nevertheless resulted in practical trade advantages to citizens of a given nationality, as against all others. These discriminations have seldom been so pronounced as to present a concrete issue. More often they have taken the form of through traffic arrangements which were in practise available only to shippers of a particular nationality, and of technical formalities in regard to applications for cars, customs declarations, way-billing arrangements, and the like. Frequently these discriminations have been the result not of deliberate policy, but of an attitude of self-conscious nationalism on the part of subordinate employees who regarded with interest and zeal the consignments covered by documents in their own language. But whether one considers these practises as warranted or unwarranted, the result was that railway lines came to be identified with claims to spheres of interest where, as the years went by, the trade and enterprise of third countries found themselves more and more excluded, and in which more and more definite claims to paramountcy or predominance of influence were asserted in behalf of the nationalities originally concerned.
It was in the attempt to remove these tendencies towards national discrimination that Secretary Knox in 1909 proposed his plan for the so-called neutralization of railways in Manchuria. The plan provided that the interested countries--including Russia and Japan, which possessed railways in that region, and the United States and Great Britain, whose nationals held contracts for railway construction there--should pool their interests with a view to establishing a single system of railways to be operated by an international syndicate. In the light of what is now known regarding the arrangements existing among the powers at that time, it is evident that this plan never had any prospects of success. It was in fact supported only by Germany, which, like ourselves, was an outsider to the arrangements by which France, Great Britain, Japan, and Russia had arrived at a mutual accommodation of their respective interests in Asia.
Even in its failure, however, the Knox proposal gave an impetus towards international coöperation among the powers most interested in questions of Chinese finance. So far as concerned railways, this coöperation found expression only in the joint financing of the Hukuang Railways by capital from the United States, Britain, France, and Germany. For the purpose of administrative loans, however, the bankers of these four countries and of Japan and Russia associated themselves, in 1909, in what has become known as the Consortium. The American group dropped out in 1913; but the remaining five Powers went on with the flotation of the Reorganization Loan, which marks an epoch of progress in that it caused the development of the Salt Gabelle, a producer of revenue almost as dependable as the Customs. The Consortium did not attempt to deal with industrial loans, however, and therefore failed to contribute anything towards the solution of the problem created by the railways as agencies of economic and political penetration. The difficulties of this problem became accentuated with the passage of time, until in 1917, when an American firm obtained contracts for the construction of a number of lines in different parts of China, it met with protests from Russia against its building of a line northward and westward into Mongolia, from France against its building of a line southward into Kwangsi, and from Great Britain against its building of a line from the lower Yangtsze basin westward into Szechwan. In each case the American projects were held to conflict either with a general superiority of rights in the region in question or with the particular privileges of a corporation which claimed that the new line would be in effect an extension of a railway which it had contracted to build. It is not to be wondered at that the American contractor in question, in the course of a conversation in which certain of the opposing interests pointed out to him the extent of their several spheres of interest, scrutinized the map with some puzzlement and finally asked, "Then where in hell is China?" The crux of the whole difficulty appears in the fact that in each case the Chinese Government, which had selected these lines for development by the American company, actually asked the contractor to forego work on them, in the hope that later opportunities for his enterprise might be found which would not raise an issue with the claims of other nationalities.
This was one of the conditions which the American Government had in view when, in 1920, it proposed to the British, French, and Japanese Governments that the Consortium should be reconstituted, or rather that there should be formed a new Consortium, which should deal not only with administrative loans but with loans for such industrial enterprises as railways in China. It was proposed that the several national groups should pool into the common resources of the new Consortium such rights as they possessed with regard to the construction of railways and similar enterprises. For a time, there was determined opposition to this proposal on the part of the Japanese Government, which declared itself unwilling to authorize its nationals to enter into this form of international coöperation unless Manchuria and the adjacent portion of Mongolia were excluded from the activities of the new Consortium. The ensuing consultations among the interested governments involved a consideration of Japan's claim to special interests in the area in question; but in the end, when it had been made clear to Japan that the proposal did not contemplate the surrender to the Consortium of vested interests in railways which were already in operation as going concerns, the Japanese Government gave its consent to the participation of its bankers in the new Consortium, the understanding being that each national group, while retaining its individual rights with respect to all railways actually constructed or which had made substantial progress towards completion, should pool all of its contracts for enterprises which had not yet been seriously taken in hand. The new Consortium thus furnishes a means by which future railway construction in China may be made a matter of general international concern, and divorced from particular political pretensions.
The Chinese Government has not yet seen fit to avail itself of the facilities offered by the new Consortium. But if and when the Chinese are ready to deal with it, it will be in a position to make the requisite funds available for them under conditions far less dangerous or subversive to Chinese sovereignty than those effective in the past. Not only will any railway so constructed be purged of implications that it is the basis of a claim to a sphere of influence, but the very fact of its construction under these auspices will negative any such claim heretofore asserted in that region. In the meantime, the mere fact of the Consortium's existence as the result of an agreement for international financial coöperation has been of real service in arresting the tendency of railway contracts to establish rights partaking of the nature of a protectorate.
Closely related to this question is that phase of the work of the Washington Conference on the Limitation of Armaments which dealt with the principles and policies to be adopted by the participating powers in their relations with China. Most of the decisions of the Conference in this regard were embodied in one of the treaties concluded on February 6, 1922. That treaty is not yet technically in force, as it awaits the ratification of France; but the principles which it incorporates have been adopted and followed by all the interested governments as fully and as punctiliously as though the treaty had in fact become the law of the land for all the participating powers. Perhaps, then, while we are awaiting the ratification of France (which it is to be assumed will in due course be given) even the strict legal constructionist will pardon a reference to that treaty as though it had actually entered into force. The treaty not only accepts the mutually dependent principles of the open door and the integrity of China --formulas which, like a worn coin, had lost all distinguishing marks--but it also makes precise provisions for certain applications of these doctrines; it expressly discountenances claims to spheres of influence; and it gives to the doctrine of the open door, or equality of economic opportunity in China, a definition more precise and more far-reaching than has ever hitherto been attempted. In connection with the treaty, the Conference adopted a resolution which should go a great way towards clearing away the atmosphere of secret intrigue which has so often surrounded foreign enterprise in China, by providing for the practically immediate publication of all contracts for concessions from the Chinese Government or from the provinces.
With the Consortium available as a means of international coöperation, and with the open door principle of fair play accepted and defined by mutual agreement, the way is open for a healthy and normal development of the resources and opportunities of China through the participation of foreign capital on a genuinely economic basis, to the advantage of China at least as much as to the profit of foreign investors. It is to be hoped that we are on the eve of an economic development which will take account of the fact that a fair bargain is profitable to both parties, and that no nationality need strive to establish exclusive claims through fear that it must suffer loss in consequence of another's gain. We know that the wealth of China, particularly in mineral resources, has been exaggerated to the point of fable, but it may well be doubted whether, in our dreams of a Chinese Eldorado, we have ever adequately realized the more substantial, because inexhaustible, wealth that lies not in the soil of China, but in the industry, the intelligence, and the fine character of the Chinese people. These are resources which are capable of an incalculable wealth-making power. China, for its own good no less than for the good of those who look forward to supplying its growing market with their commodities, is destined to provide opportunities such that no nationality need have occasion to grudge what falls to another for development.
At present the obstacle to such a development is the prevailing political chaos in China, and the accompanying disintegration of administrative authority. This is doubtless a crisis through which China is compelled to pass as a result of the political and social traditions formed by her people during the longest coherent history of any nation now extant. One may feel discouraged that the end of this period of disorganization is not yet in sight. But no one familiar with the fine qualities of the Chinese people can doubt that there will eventually be a reintegration of their national life. When that time comes, China will inevitably pattern herself more and more closely after our Western world, and of course largely through the means provided by foreign capital. The way in which foreign capital meets its responsibilities in serving the ends of the new China will, more than any other factor, determine the solution of that greatest of all problems confronting mankind--the relationship that is to exist between the civilizations of the East and the West.