THERE is a great deal of wishful thinking concerning the outcome of the present Sino-Japanese conflict. Some observers insist that American economic and financial interests in China are not in danger because the Japanese Army can never really impose its will on that country. Others maintain that even the destruction of Chiang Kai-shek's National Government would not threaten American interests because Japan has neither the economic resources nor the technical ability to exploit the fruits of a military victory. Still another school of thought not only accepts the possibility of a Japanese victory but argues that it would bring positive benefits to American business by increasing American exports to a new China developed under Japanese control. It is my conviction -- arrived at after several months spent last year in both the free and occupied parts of China, in Manchuria, and in Japan -- that all such reasoning rests upon a number of false, or at least very questionable, assumptions and that we must make a more realistic appraisal of present developments in the Far East.

It is by no means a foregone conclusion that Japan will be unable to carry through her plans for the conquest and pacification of a substantial part of China. Though Chiang may possibly keep the Japanese from making further large-scale advances, his armies do not appear to possess enough power to force their withdrawal. The Chinese may have ample equipment for defensive and guerrilla warfare, but they are deficient in the artillery and aircraft necessary for an offensive campaign. Free China has great difficulty in obtaining supplies from abroad, and her remaining lines of communication are, at best, very precarious.

If the Japanese Army is forced to withdraw, it will be (1) because China receives more help from third Powers than hitherto, or (2) because Japan is subjected to severe economic pressure by the Western Powers, or (3) because the Japanese themselves come to the conclusion that their economic structure will no longer support the burden of the military campaign. Though the last of these possibilities is often emphasized by Western observers, there are many reasons to doubt the imminence of so complete a change in Japanese policy. The military group would lose far too much in prestige by any such admission of failure, and even those industrial leaders, who at one time opposed the war, are now convinced that it must be carried through to victory, so dependent has the entire economic life of Japan come to be on success in China.

There are signs of economic strain in Japan; but the war has brought an apparent prosperity. The pressure of population in the rural areas has been relieved by mobilization and by the movement of labor into industry. There is a boom in heavy manufacturing; unemployment is not a problem; prices and the cost of living have advanced, but not as much as family money earnings. It is true that plenty of economic troubles are being piled up for the future -- a huge internal debt, inflation of the currency, the prospect of runaway prices, over-expansion of industry -- but where these dangers are appreciated they only strengthen the determination to push ahead in China. Everything has been staked on success.

Foreign exchange is the weakest point in Japan's economy. She must import certain essential commodities -- scrap steel, petroleum, raw wool, raw cotton, crude rubber, machine tools and other industrial equipment. Thus far the conquests on the mainland have failed to improve Japan's international trade position. Exports to the yen-bloc areas -- Korea, Manchuria and North China -- do not create foreign exchange, and those areas are not as yet supplying Japan, to any important extent, with the commodities she lacks. The commodity balance of trade with the countries outside the yen bloc continues to be adverse. In recent months, the payment of international balances has been a heavy drain upon Japan's limited gold supply. Her position is undoubtedly extremely vulnerable, and if the Western nations wish to exert pressure upon her they now can do so most effectively through her foreign trade.

If such pressure is not applied, the prospects are that the war will be protracted into a stalemate or that it will end in an undeclared peace during which Japan, through a puppet régime, will continue to pacify the areas she now occupies. There is the possibility that China, faced with a long struggle and deserted by other nations because of their preoccupation in Europe, might accept a compromise. At the present writing, Wang Ching-wei's projected Central Government of China seems to be completely discredited; nevertheless, there is evidence that his régime has received promises of support from influential Chinese, who dread a prolonged conflict or who object to the Communist associates of Chiang Kai-shek.

Events of recent weeks have also indicated the possibility that Japan, for the time being at least, desires to suspend the campaign for crushing Chiang Kai-shek and to concentrate all her resources on the consolidation of gains already made. The cost of establishing and maintaining order in the occupied areas has probably been exaggerated. Aided by airplanes and a mobile ground force, relatively few men would be needed, especially if they resorted to ruthless reprisals. The living expenses of the individual Japanese soldier are not great, and in any case China would be expected to contribute to the support of this "peace preservation army." A recent report estimates that the Japanese armies of occupation in North China are already deriving about 75 percent of the cost of their upkeep from local sources. In Japan it is not felt that the maintenance of an army in China, even for an indefinite period, is too great a burden. It is looked upon rather as a means of avoiding unemployment and preventing a revival of social unrest in the rural areas.

In the economic field, there is little room for speculation concerning Japan's intentions in China. If Chinese resistance collapses, or if there is an undeclared peace, or if China accepts a compromise that leaves the Japanese a foothold on the mainland, Japan will carry through her plans for the economic development of China. And we may be certain that those plans call for the development of China in the exclusive interest of Japan. The Chinese will participate only in a minor capacity, and foreign enterprise will be either curtailed drastically or forced out completely. Any share of China's foreign trade which third Powers manage to retain will be on the sufferance of Japan and will be permitted simply because Japan herself cannot take care of it. Any foreign businessman who thinks that Japanese domination in China will bring him greater opportunities, or even a renewal of past opportunities, is blind to the record of Japanese expansion in other areas of Asia. The parts of China under Japanese control will become closed to foreign enterprise just as completely as Korea and Manchuria are closed to it today.

There need be no mystery concerning Japan's economic intentions in China, nor concerning the methods to be employed to effect them. The pattern of development and control has been established in Manchuria.[i] In North and Central China, sufficient progress has been made to indicate that Japan's economic exploitation there is to be equally thoroughgoing and exclusive. It is true that Japan is short of the capital and equipment required to develop China and is in great need of foreign financial assistance. Japanese spokesmen have indicated repeatedly that such assistance from abroad would be welcome only if it came in the form of loans and credits placed under the control of Japanese interests. If foreign capital is forthcoming under those terms, development will proceed rapidly; if there is no foreign assistance, the program may be retarded, but it will not be abandoned.

Japan's immediate goal in North China seems to be the production, for shipment to Japan proper, of a number of raw materials essential to industry -- coal, iron ore, cotton, wool and salt. Though she had hoped to obtain these commodities from Manchuria, salt is the only one that has been shipped to Japan in substantial quantities. Most Manchurian iron ore is of low grade and cannot be transported economically over any distance. Manchuria's output of coal has risen since the Japanese occupation; but the surplus for export to Japan has declined sharply because of increased consumption in Manchuria. The production of raw cotton is negligible, and cannot be expanded materially. The quality of the wool is unsatisfactory, and any improvement will require many years and a complete revolution in the Manchurian sheep industry.

China, especially North China, is richer than Manchuria in all these raw materials, and Japan's plans to develop them are therefore being pushed rapidly. The Lungyen iron ore deposit, on the border between Chahar and Hopeh provinces, is considered one of the most promising in all of China. It is said to contain 100 million tons of ore (with an iron content of from 52 to 60 percent), an amount small in comparison with the Lake Superior or the Lorraine deposits, but much greater than the iron ore reserves of Japan proper. The development of the Lungyen deposit has begun, and the new mines produced most of the 78,000 tons of iron ore shipped to Japan from North China in 1938. It is still questionable whether ore can be transported economically from Lungyen to Japan on account of the long rail haul to the sea-board; the Japanese nevertheless plan to mine two million tons in 1941 and are completing vital rail connections between the mines and the Peiping-Suiyuan Railway.

The Japanese have also taken over the iron ore deposits in Central China -- properties at Tayeh on the Yangtze River below Hankow and the mines in Anhwei Province near Wuhu. The ore in both of these groups of deposits is of high grade, averaging 55 to 60 percent in iron content, and the reserve is estimated at 200 million tons. While the fighting was still in progress along the Yangtze, the Japan Iron Manufacturing Company had engineers at Wuhu and Kiukiang ready to take over the operation of the Anhwei and Tayeh mines as soon as they should fall under Japanese military control. The stocks of ore at these mines (some 300,000 tons) and at Wuhu were seized immediately and shipped to Japan. Before the present war Japan was obtaining over a million tons of ore annually from the Yangtze valley, and the Tayeh and Anhwei mines have for some time been a major source of supply for the great Imperial Steel Works at Yawata. Now that these mines are under Japanese control, ore shipments to Japan will doubtless increase. New discoveries of iron ore in Central China were announced several years ago in connection with the plans of the Chinese Government to build an iron and steel plant somewhere along the Yangtze River. The Japanese now control the area where these deposits lie. Plans were also being made by the Kwangtung provincial government for the construction, near Canton, of an iron and steel plant to utilize the iron ores of South China. Japan is consolidating her occupation in this area too. All known ironore deposits of any importance in China have thus passed under the control of Japan -- a fact of considerable importance to a country seeking to become self-sufficient in a basic commodity.

One of the serious industrial deficiencies in Japan has always been the scarcity of coal, particularly coking coal. North China contains one of the world's richest stores of coal, including coking coal in a number of deposits. A recent Japanese estimate puts the coal reserves of North China at 200 billion tons -- some thirty times those of Japan proper. All the larger mines in North China, except those under foreign control, have been taken over and are being operated under Japanese management, though as yet these properties are not very productive, since time will be required to repair the destruction done by the retreating Chinese. The deposit with the greatest potentialities seems to be in the Tatung area of northern Shansi, now included in Inner Mongolia, where the reserves are tremendous. Though machinery has already been installed there for large-scale development, transportation presents a major problem still to be solved, for the gradient on the railway connecting Tatung with Tientsin is steep and the haulage is costly.

Coal has been shipped from North China to Japan in steadily increasing volume during recent years, the greater part of it coming from the mines of the Sino-British Kailan Mining Administration in Hopeh Province north of Tientsin. During 1939, 2.4 million tons of coal, practically all from North China, were shipped to Japan, whereas only one million tons were shipped during 1936. North China now sends more coal to Japan than does Manchuria, and the possibilities for further increase are also much greater.

Salt, an essential raw material in the Japanese chemical industry, is not produced in Japan proper in adequate quantities. To obtain the salt fields of northeast China has long been an objective of Japanese imperialism: salt was one of the reasons for the seizure of Shantung by Japan during the World War. By June 1939, the Chinese-owned salt refining plant at Tangku, at the mouth of the Hai Ho below Tientsin, was being operated under the direction of the Japanese Army. In August, the North China Salt Manufacturing Company was organized for the exploitation of the Changlu fields in Hopeh and of those in Shantung. Salt exports to Japan from China and Manchuria totaled 993,000 tons in 1938; by 1941, North China alone is expected to produce 2,100,000 tons, or four times the average production of Japan proper.

China has long been an important producer of raw wool for world trade. The wool, though superior to that of Manchuria, is coarse and is usually classified in the trade as carpet wool. The United States was formerly the chief market for it, with Germany second and Japan a poor fourth. Japanese plans for obtaining wool from North China have thus far been a failure, due largely to the greed of the Japanese wool-purchasing monopoly, a guild composed of the large Japanese textile manufacturers to which the Japanese Army ordered that all Chinese wool must be sold. The guild fixed a low price and paid for the wool with notes of the newly-established puppet Federal Reserve Bank. It succeeded in obtaining the wool which had already been assembled at the trading points; but that still in the hands of the producers disappeared into the interior, perhaps into free China or into Outer Mongolia and Russia. As a result, China's total exports of wool in 1938 dropped to 3,800 metric tons, less than one-fourth of the average for the three previous years. The United States almost disappeared as a market. The amount exported to Japan increased substantially, though the wool was unsuited to Japanese needs. Germany, with whom Japan had barter agreements, took two-thirds of the total wool exports, though the quantity was smaller than the amount she had taken in previous years. In 1939, these monopoly practices were modified somewhat; yet wool exports continued to decline. Present Japanese plans call for the export of 500,000 tons of raw wool in 1941. Such a figure is fantastic, for China would then be the world's leading wool exporter, outranking even Australia. It will be hard to restore China's wool exports even to the normal level, for the unfair practices of the monopoly have destroyed the growers' confidence.

Raw cotton is Japan's largest import; cotton spinning and weaving form her leading manufacturing industry; cotton piece goods constitute her most important export. Raw cotton also comes first among the exports of the United States to Japan, and for that reason this country should be particularly interested in Japanese plans for developing new sources of supply. For many years Japan has sought to obtain cotton from territories under her own control, but without success. In Korea and Manchuria geographic and economic conditions do not favor an expansion of cotton cultivation. China holds considerably more promise. The present output of that country, however, does not meet Japan's needs in either quantity or quality, and the immediate results of the Japanese cotton-producing program there have been disappointing. Before the present conflict, North China's cotton production amounted to about 40 percent of Japan's consumption, though only a small part of the yield was actually exported to Japan. In 1936 less than 3 percent of Japan's cotton imports came from China. In 1938 the percentage had risen to 17. But in 1939 there was a complete failure of the program, and China's cotton exports to Japan for the year dropped to 10 million pounds from the 212 million pounds for 1938. Unfavorable climatic conditions account in part for this decline; but the Chinese farmers had also failed to plant cotton, partly because they were unwilling to furnish supplies to Japan and partly because they could make more money by raising cereals. This setback to Japanese plans is probably temporary, for it is doubtful whether the Chinese farmers can continue to resist Japanese pressure to raise cotton. The system of "protected" and closely supervised villages is being introduced into North China from Manchuria, and, of more importance, farmers as near the margin of subsistence as those of China cannot afford to give up raising an important money crop like cotton. The prospects are that North China can eventually supply Japan with a substantial part of the cotton now imported from the United States.

It is clear that Japan must still overcome serious difficulties before she can obtain from China sufficient iron ore, coal, salt, wool and cotton to meet all the needs of her industries. Some of her estimates of future output are extravagant and some of her plans are obviously impossible of fulfillment. Yet it would be shortsighted to conclude that her program, in its basic outline, cannot be carried out. Japan has already made much progress in exploiting China's raw materials for the benefit of Japanese industries, and there is every indication that she is aiming at nothing less than the complete engrossment of all of China's economic resources. It is estimated that Japanese immigrants in North China already number over 200,000, and new arrivals are pouring in at the rate of 10,000 a month. Guerrilla warfare is still troublesome, but in time North China may be pacified as completely as Manchuria. A portion of the Chinese population appears to be accepting the Japanese conquest, and there is no scarcity of cheap labor for Japanese enterprises.

Japanese economic exploitation in North China is in the hands of the North China Development Company, a huge semi-governmental corporation, established in November 1938 under Japanese law. It is capitalized at 350 million yen, of which the Japanese Government's share is 175 million. It has the blessing of the Japanese Army; indeed, the plans for its organization were made by the Army's economic advisers. A similar corporation, the Central China Development Company, with a capital of 100 million yen, was created at the same time for Central China. A South China Development Company has also been proposed. Under the direct management of these large bodies subsidiary companies have been set up for the conduct of particular enterprises. Their capital is subscribed by the development companies, by Japanese capitalists, by the provisional Chinese governments and, in theory at least, by Chinese capitalists.

Japanese capital is now taking a prominent part in the economic exploitation of China. This participation is in marked contrast with the attitude which the old established houses, like Mitsui and Mitsubishi, assumed toward the development of Manchuria: there they were reluctant to coöperate, perhaps because they considered the enterprises uneconomic, perhaps because they objected to the close control exercised by the Kwantung Army. The Japanese Army in China has adopted a less rigid policy toward business. The opportunities open to Japanese capitalists have also been more attractive, for in many instances they have taken over going concerns belonging to the Chinese -- such as mines, factories, transportation systems -- at small expense, and are operating them with little outlay for new equipment. In some cases Japanese industrialists have even drawn up plans for exploiting certain areas in China months before the Army took them over. They have sent out survey parties to scour North, Central and South China to investigate economic possibilities. Mining experts have sometimes waited immediately behind the Japanese lines for the advance of the Army.

Given this active participation by Japanese business leaders in the China venture, it cannot be argued that they oppose it. Disputes between different agencies do occur from time to time; but the question at issue between them is the division of the spoils, not whether Japan should be in China.

The Japanese have followed set procedures in acquiring control over Chinese enterprises. In a few cases, limited to small concerns, the Chinese owners have been able to sell to Japanese. Chinese concerns in which there has been any participation by the government, either national or provincial, have been regarded as government enterprises by the Japanese, and on that pretext they have been confiscated and assigned to one of the puppet régimes. Privately-owned properties are first occupied by the Japanese Army, and operation is resumed only with the permission of the military authorities. The Japanese try to obtain the coöperation of Chinese owners in the formation of joint Sino-Japanese companies. The Chinese are expected to contribute their plant and equipment, while the Japanese furnish the working capital and the management. The controlling interest is Japanese. In some instances the Chinese have agreed to coöperate on these terms. For example, some of the Chinese producers of raw silk participated in the organization of the Central China Silk Reeling Company by contributing their filatures. At first, the capitalization of the company was small, and the shares were held in equal parts by the Chinese and Japanese. Then the Japanese decided to increase the company's capitalization to eight million dollars (Chinese), of which they were to hold 75 percent; and, when a dividend was distributed several months ago, the Chinese shareholders were informed that they would receive their portion only after the titles to their filatures had been turned over to the company.

In most cases, the Chinese owners have realized that coöperation means virtual confiscation, and they have therefore placed themselves beyond the reach of the Japanese, either in the International Settlement of Shanghai or in a foreign country. Many mills, the owners of which have disappeared, have been handed over by the Army to Japanese companies for operation. I was told in Osaka by the director of one of Japan's large textile groups that the Army had asked his company to operate a cotton mill in China. My informant said he did not intend to confiscate the mill, but that -- until the owner could be found and persuaded to coöperate -- his company would keep it going in order to provide employment for the Chinese workers. A pretense of legal transaction sometimes covers the seizure of Chinese enterprises. For example, early in the spring of 1939 it was announced by the Japanese that after long negotiations the Yungli Chemical Industries, Ltd., had agreed to the transfer of their properties at Tangku and Pukow to Japanese interests; yet in June the Yungli Company was still running a notice in the newspapers of Shanghai stating that the Tangku and Pukow factories belonged to them and denying any claims of "those who may take advantage of the present disturbance in encroaching upon such plants, irrespective of their nationalities."

In numerous instances, mills have been taken over by the Japanese and operated until their stocks of raw materials have become exhausted. Other factories have been seized and the equipment removed to Japanese plants. Many mills have escaped seizure only by transferring their titles to foreign ownership. Some remain idle because vital parts of the equipment have been removed or destroyed and because the Japanese are unwilling to expend any capital on replacements since their claim to the property rests only upon the consent of the Japanese Army, and ultimately upon a Japanese victory. And lastly, a small part of China's industrial equipment has been carried into the interior and reërected in territory still under Chinese control.

Japan's absorption of China's economic resources and activities has thus been complete wherever the Japanese Army has established its control. And there has been much to absorb, for in the decade prior to the war China had made amazing progress in developing her manufacturing industries and in creating modern means of communication. Every enterprise of any importance in the occupied areas -- transportation systems, power plants, mines, factories -- has now passed into Japanese hands; only the petty establishments, the workshops and retail stores have escaped. The electric power field, for instance, is completely dominated by Japanese interests. The coal mines of North China are being parceled out by the North China Development Company to Japanese firms -- subsidiaries of Mitsubishi, Kaijima, Mitsui, Okura and Meiji Mining; and the important Tatung field is to be exploited by a newly organized company with capital subscribed by the North China Development Company, the North China Transportation Company and the South Manchuria Railway. All the ships of the China Merchant Steam Navigation Company have been seized. Control over the 50 flour mills of North China, originally Chinese, has been put under Sino-Japanese management. Some of them are still controlled by the Army, others have been turned over to the three big Japanese flour interests for operation. The Chinese supply the plant and equipment, the Japanese the working capital, while control is to be divided on the basis of 40 percent for the Chinese and 60 percent for the Japanese. A match syndicate with headquarters in Tientsin has absorbed the Chinese match factories of North China, and if present plans carry through, will eventually include the match factories of Central China.

Practically all of China's limited blast furnace capacity has passed under Japanese management. The 250-ton furnace at Shichingshan near Peiping, completed by a Chinese company in 1922 but never operated, was blown in on November 20, 1938, under the temporary management of the Japan Iron Manufacturing Company, and is now turning out about 150 tons of pig iron a day. The Okura interests will work the iron deposits and operate the small blast furnaces in Shansi. The furnaces at Tayeh are in the hands of the Japan Iron Manufacturing Company; but they are badly damaged, and it is likely that most of the ore will be shipped to Japan. In recent years, a number of modern cement mills have been built in various parts of China; of these only a small plant in Szechwan and one in Kwangsi now remain in the full possession of the Chinese. The plant in Canton and one in Shansi have been handed over to the Asano interests; the others are, or will shortly become, joint Sino-Japanese enterprises.

Cotton spinning and weaving is probably the most important factory industry of China, and more private Chinese capital is invested in it than in any other. Yet only a few cotton mills outside the International Settlement of Shanghai remain in the hands of their Chinese owners. Mills in occupied territory have been assigned by the Army to Japanese companies. I was told last summer by leaders in the Chinese cotton textile industry that only one small Chinese mill had agreed to coöperate; all the others had been taken over without the consent of their owners.

Not content merely to take over Chinese concerns, the Japanese have also invested some of their own capital in new construction in China. They have done this partly to escape the restrictions placed on manufacturing industries in Japan, and partly as a safeguard against inflation at home. Along both banks of the Hai Ho below Tientsin, new Japanese factories now stretch for miles. They include chemical works, cigarette factories, textile plants and a paper mill. The president of the Kanegafuchi Spinning and Weaving Company has repeatedly advocated the removal of Japan's entire cotton manufacturing industry to China in order to utilize the latter's raw materials and cheap labor.

Up to the present, non-Japanese foreign interests have fared little better in the occupied areas than have the Chinese. For the principle of the Open Door is being violated flagrantly. Treaty rights have been violated. Plants have been seized, and in some cases held for months. The Japanese Army has closed Chinese rivers to foreign shipping on the pretext of military necessity, and no faith can be placed in their recent promises to open such streams as the Yangtze. As Japan's position in China becomes more secure, foreign interests must expect further restrictions upon their activities.

It is in trade that foreign business has been put under the most serious restrictions. In July 1939, the Japanese-sponsored Peiping Government extended its export control in North China to all except a few unimportant commodities. Under the regulations now in force, export permits are granted only if the foreign exchange to cover the proceeds from the export is first turned into the Yokohama Specie Bank for conversion at the official rate of 23 7/16 cents (U. S.) per dollar in Federal Reserve Bank notes (the Federal Reserve dollar is at par with the Japanese yen). Last summer, it was possible to purchase the Federal Reserve dollars in the black market in Tientsin at nine or ten to the United States dollar, whereas the official rate was 3.6. Under such stringent control, it has become difficult, if not impossible, for any except Japanese concerns to engage in the export trade. Imports into China from countries other than Japan are likewise subject to arbitrary tariff revisions and exchange controls. Such trade regulations are now being extended to Central China, though the existence of the International Settlement at Shanghai still impedes their enforcement in that area.

The New Order in East Asia is a vague phrase as it is used by the Japanese; but events in China have made its meaning clear. Substantial parts of the country have been occupied by Japan; a puppet government is being established with Japanese in key positions; all major economic activities are being absorbed by Japanese interests; the rights of third Powers are being ignored; and foreign business is being eliminated through intolerable restrictions. The Far Eastern policies of the Western Powers should be shaped by these developments -- and not by the hope of a Chinese military victory or of a Japanese economic collapse, or by the expectation of sharing in the fruits of a Japanese victory.

[i] For a discussion of Japan's economic control over Manchuria see "Manchuria -- A Pattern of the New Order in East Asia," by Dorothy J. Orchard, in Asia, January 1940.

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  • JOHN E. ORCHARD, Professor of Economic Geography, Columbia University; author of "Japan's Economic Position"
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