investments, the lowering of Philippine wages and standards of living, and the loss, in general, of much of the economic and social progress effected during the past 30 years of American sovereignty.

For the United States the imposition on American products entering the Philippine Islands of 80 per cent of the full Philippine tariff duties would probably mean the loss of a present considerable and potentially very large Philippine market and of an important trade outpost in the Orient. The Philippines also constitute an important present source and more important potential source of essential raw materials produced under the American flag.

A growing Philippine-American trade has been built up during the past 30 years and the possibility of its future maintenance and development should not be disregarded. If possible, the permanent trade relations between the United States and the Philippine Islands, and the adjustments incident to their establishment, should be on the basis of expanding and mutually advantageous future trade rather than on the basis of reciprocal exclusion of products.

Examination of the facts will show that the dissatisfaction which has been recently voiced, by certain elements in both the United States and the Philippine Islands, over existing and prospective Philippine-American trade relations, is based upon relatively few factors of importance. All of these are believed to be susceptible of reasonably satisfactory adjustment in the direction of continuing expansion of reciprocal trade relations, both before and after independence. If a solution of Philippine-American trade relations along such lines is practicable, it would appear to be mutually advantageous from the standpoints of both the United States and the Philippine Islands.

Such Philippine dissatisfaction as may exist regarding present trade relations with the United States is primarily political and psychological rather than economic. It is based partly on the theory that continuance of the present specially favored access of Philippine products to United States markets may bind the islands so effectively to the United States with economic ties that independence may be postponed indefinitely. There is, also, genuine Filipino apprehension lest either a sudden grant of independence, or the activities of certain American interests which are agitating for the exclusion of Philippine products, should result in the abrupt termination of the favored access to United States markets which Philippine products now have with accompanying economic chaos for the Philippine Islands and all the consequences that such conditions would presumably entail. The attitude of many Filipinos appears to be that, if the islands are to be threatened constantly with the loss of United States markets, even while under United States sovereignty, a principal economic advantage of the present relations with the United States becomes of very uncertain tenure. Under such conditions, the practical value of the existing trade relations is materially lessened. Some believe, therefore, that more stable, even if less advantageous, trade relations with the United States would be preferable, in the end, for Philippine trade and business. There is also some recognition of the fact that indefinite continuance of present trade relations may tend ultimately toward an unbalanced development of certain Philippine crops and industries—a condition which would not, in the end, be to the interest of the Filipino people. Most of the intelligent and informed Filipinos are well aware, that, from an economic standpoint, the islands have enjoyed, and are now enjoying, great net benefits from the existing trade relations with the United States.

Assuming, as is believed to be the case, that the problems of Filipino immigration to the United States may be solved with reasonable satisfaction to all concerned, the principal active and visible opposition, from United States sources, to the continuance of the present trade relations with the Philippine Islands is voiced by growers of beet sugar and cane sugar, by cotton seed-oil interests, by dairy interests, and by certain agricultural organizations. Various proponents of exclusion or restriction of Philippine products have based their arguments upon the alleged competition of Philippine sugar with American sugar and the alleged competition of Philippine coconut oil with American begetable oils, dairy products, and animal fats. The remedies usually proposed have been, either an American tariff on Philippine sugar and coconut oil, or limitation or exclusion of those products as regards duty-free entry to the United States. These proposals are believed to be based, in general, either upon a misconception of facts, or upon claims of certain American interests for special consideration of a kind that is not in accord with the net general interests of the industries and people of the United States as a whole. Those who have real reason to oppose the dutyfree entry of Philippine sugar into the United States are: (1) Cuban, not American, sugar-producing interests, and (2) certain Americans-mainly international

bankers who have apparently permitted themselves to become deeply involved in the fate of Cuban sugar properties. Such commitments may take the forms of loans, investments, or speculations based upon Cuban properties and effected during the period of high sugar prices. Under existing United States tariff laws, duty-free entry of Philippine coconut oil to the United States involves no material competition with the products of American farms, dairies, or animal industries. Even, however, were the contrary the case, imposition of a United States duty on Philippine coconut oil would be an absurdity, in so far as concerns protection for American farm, dairy, or animal products, so long as copra comes into the United States free from all the world, as it does now. Various American interests may be expected to oppose actively the imposition of duties on both copra and Philippine coconut oil.

From the standpoint fo American manufacturing interests, there has been opposition, from a few sources to the duty-free entry of Philippine products. For example, United States cordage interests have opposed the duty-free entry of the limited output of three Manila cordage factories. The Philippine cordage factories have little, if any, real advantage over those in the United States. Native labor constitutes a very minor factor of production costs in cordage manufacture and various other items of production costs are higher in the Philippines than in the United States. The corresponding raw product (abaca) is on the general free list under United States tariff laws.

In so far as regards competition with American products, occasioned by dutyfree entry of Philippine products (raw or manufactured) into the United States, there is little, if anything, in the existing Philippine-American trade relations, incompatible with such Philippine-American trade relations as might properly continue after independence. Should due regard for American interests require minor adjustments (as, possibly, in the case of a few items such as cordage), these could be determined and effected on an equitable basis without any marked change in the existing total of Philippine-American trade.

There exists, however, in the present Philippine-American trade relations one significant factor of instability as regards permanent Philippine-American trade relations. While, in theory, reciprocal free trade substantially exists now between the United States and the Philippine Islands, the results have long been decidedly in favor of the Philippine Islands in so far as regards the net practical trade benefits incident to the relation. Tariff duties waived on Philippine shipments entering the United States duty free in 1930 amounted to about $63,838,000; while duties similarly waived on United States shipments entering the Philippine Islands amounted to only about $15,950,000. These figures are by no means an exact measure of the relative benefits derived from the reciprocal tariff relations. The amount of duties waived is only one factor to be considered as, in certain cases, products (especially tobacco and tobacco products) would have been amply protected by duties lower than those included in the schedules upon which the figures are based. In the case of Philippine cigars, duties thus theoretically waived in the United States amount to more than the sale value of the corresponding products. If, however, the more important of these complicating articles be eliminated from the figures, the advantage still remains decidedly in favor of the Philippine Islands. Considered from another angle, the United States market absorbed, in 1930, about 79 per cent of the total Philippine exterior trade while the Islands purchased from the United States only about 64 per cent of their total exterior purchases. The above and related pertinent facts suggest that the benefits received by United States trade, under the existing trade relations, are not reciprocal to a degree that would constitute a probable satisfactory basis for permanent reciprocal trade relations after independence. should be understood that the inequality in the respective amounts of tariff duties, waived as stated above, was not the result of related tariff legislation, directed primarily to that end, in either the United States or the Philippine Islands. That inequality is due to various causes. One is the fact that the rates of duty under United States tariff laws, based upon conditions in the United States, are generally higher than the rates under the Philippine tariff laws, which (with the exception of duties on sugar and tobacco) are based upon Philippine conditions. There is the further fact that the total value of Philippine shipments to the United States are, in general, decidedly greater in total volume and value than the total value of United States shipments to the Philippine Islands.

It

Other factors bear upon the question of relative United States and Philippine benefits. Duty-free Philippine shipments to the United States are subject, under section 301 of the United States tariff law of 1930, to certain restrictions that do not apply to United States shipments to the Philippine Islands, but the effects of

this feature are relatively small. On the other hand, section 301 gives to the government of the Philippine Islands certain nonreciprocal advantages as regards the remission of United States internal revenue taxes on Philippine products.

Viewed as a whole, there is no doubt that the present trade relations are more advantageous to the Philippine Islands than to the United States and some corresponding adjustments will presumably be necessary in order to arrive at a mutually satisfactory basis for permanent trade relations following independence. The subject presents various angles and complications and it is impossible to state, in advance and in detail, all the adjustments that may be called for. It is, however, possible to outline certain more important adjustments that may appropriately now be initiated. These can subsequently be supplemented, when and if necessary, by further detailed provisions as the exact effects of the initial adjustments are demonstrated by actual experience. Meantime, products of American farm, dairy, and animal industries would not suffer in any material degree, if at all, from such Philippine products as would enter the United States; and American exports to the Philippine Islands should tend to be an increasingly valuable factor in United States foreign trade.

8. If it be agreed that the policy respecting future Philippine-American trade relations should be directed to trade expansion, rather than trade contraction, the question arises as to what definite measures of trade adjustments might now appropriately be initiated.

Methods of procedure that have been, or may be, suggested in this connection include:

(1) Imposition of some form of customs duty or other impost upon certain Philippine products which now enjoy duty-free entry into the United States. This may, in turn, be effected by different methods such as: (a) Imposition of United States customs duties on certain Philippine products; (b) imposition of Philippine export duties on certain Philippine products destined for duty-free entry into the United States.

(2) Quantitative limitation, as regards duty-free entry into the United States, of certain Philippine items.

The method under subparagraph (1) (a) above is in accord with the general principle of bill S. 3080.

The method under subparagraph (2) above is substantially that proposed in bill S. 3377 and in the similar measure now before the House Committee on Insular Affairs (H. R. 8758).

Giving effect to either one of the methods outlined under subparagraphs (1) (a) and (1) (b) above, would operate to promote the purposes in view. The initial procedure under either of these methods could subsequently be modified by increasing or decreasing the respective imposts as conditions might acquire. Any such adjustments should reflect, if possible, approval, by appropriate United States authority, of action initiated by the Philippine Legislature. This procedure also accords with the principles of S. 3080.

Certain advantages and disadvantages might apply to each of the two methods outlined under subparagraphs (1) (a) and (1) (b), respectively.

Imposition of United States customs duties by act of Congress could be effected more promptly and certainly than would result from dependence on Philippine export duties. One objection that might be raised would be the imposition of United States duties on Philippine products while the Philippine Islands still continue under United States sovereignty. This objection would apparently disappear if the measure were understood to be a step in the program of preparation for independence and, especially, if that step were taken at the request of the government of the Philippine Islands. The grounds for any objection would be further weakened by remission of the duties to the Philippine Treasury.

Use of the method involving the application of a Philippine export tax would be contingent upon the previous repeal of so much of section 11 of the present organic act of the Philippine Islands as prescribes "that no export duties shall be levied or collected on exports from the Philippine Islands" and so much of section 10 of the same act as requires that "the trade relations between the islands and the United States shall continue to be governed exclusively by laws of the Congress of the United States." Any such export tax legislation by the Philippine Legislature should go into effect only after approval by the President. Either the customs duty or export tax method would operate to provide additional income for the Philippine government. The proceeds of the customs duties should be remitted to the Philippine Islands. Application of the proceeds of either customs duties or export tax to the retirement of the present public debt of the Philippine Islands would constitute another step in the program of progressive economic adjustment, directed to preparation for independence.

Use of the methods outlined in subparagraph (2) above-quantitative limitation of duty-free entry of certain Philippine products into the United States-would, under such terms as are now included in bill S. 3377 (and its companion House bill H. R. 8758), reflect no step in the attainment of the end of adjusting Philippine-American trade relations to the reciprocal tariff status contemplated for the postindependence period under any one of the bills now before your committee. In so far as regards the sentence of the Philippine Islands to the ultimate economic collapse which would presumably follow the full imposition of United States tariffs on Philippine products, it would reflect a reprieve, not a relief from the execution of the sentence. Quantitative limitation along, with duty-free entry, would, under present United States tariff laws, result in collapse of the economic structure of the Philippine Islands when the change occurred from duty-free status to full-duty status. Extending the period from 5 years to, say, 10 years would merely postpone the crash.

As regards the possible imposition of United States duties under subparagraph (1) (a) above, the percentage stated (10 per cent) in subsection 1 (a) of bill S. 3080 is believed to be a reasonable initial one. It is believed, however, that the purpose in view will be promoted better by applying the proposed duty to a few selected items instead of to the entire dutiable list under United States tariff laws. The first, and by far the most important item, is sugar. Another item suggested for consideration is cordage. It is possible that one or two additional items might be included. The purposes in view could, it is believed, be effected by a legislative provision in form substantially as follows:

(1) From and after all articles coming into the United States from the Philippine Islands shall be admitted in accordance with the law now in force, except that on all articles, now admitted free of duty and classified under schedule five and paragraphs of the United States "tariff act of 1930." there shall be levied, collected, and paid per centum of the rates of duty which are required to be levied, collected, and paid upon like articles imported from foreign countries: Provided, That the duties collected in pursuance of this section shall not be covered into the general fund of the Treasury of the United States but shall be held as a separate fund and paid into the Treasury of the Philippine government.

(2) All articles coming into the Philippine Islands from the United States shall be admitted in accordance with the law now in force.

Provisions reference the disbursement of the proceeds of duties, similar to those incorporated in subsection 1 (a) of bill S. 3080, could be inserted, if desired; in form appropriate to the remainder of the legislation in which the above tariff provisions might be included. A suitable limitation might well be placed on the maximum amount, if any, of these funds to be made available for the development of agriculture, etc., and the remainder (or all) be applied to the public debt of the Philippine Islands.

The imposition of a small United States duty or Philippine export tax on sugar is not required for the protection of American sugar. Such action would, however, be a suitable step in the adjustments upon which must be based more balanced and stable trade relations with the United States. It would tend to check automatically the undue future development of the sugar industry in the Philippines, would be an influence toward healthy crop diversification, and would make available additional revenues for public purposes in the islands.

The immediate annual profits of the Philippine sugar industry would presumably decrease. But the net result to that industry over a considerable period of years would be far better than would accrue from a few years of duty-free access to United States markets, followed by a blank wall on United States tariff duties and a world sugar market in which Java and Cuba could undersell the Philippines. As further appropriate early measures of adjustment, the Philippine Legislature should enact tariff legislation designed to give additional and needed protection to certain United States products. Among items that suggest themselves for consideration in that connection are cotton textiles, wheat flour, and dairy products such as butter, milk, and cheese.

The question of sound and relatively permanent trade relations between the United States and the Philippine Islands can largely be divorced from, and made independent of, the political question of independence. An adjustment on this basis would presumably, when independence may come, be simply continued with minor changes, if any, and be regulated by a reciprocal trade treaty instead of by law. Of course, any legislation attempting to create favored trade relations with the Philippine Islands after independence would have to be considered from the standpoint of international law, especially as reflected in United States trade treaties of the period when the question may arise.

Other relatively minor provisions directed to adjusting Philippine-American trade to a mutually satisfactory and lasting basis might be considered at this time. For instance, it may be desirable to make reciprocal the 20 per cent provision contained in the first proviso of section 301 of the tariff act of 1930. The effect of this nonreciprocal provision has been exaggerated and the elimination of any basis for such claims may be expedient.

The features outlined above are the principal ones suggested for consideration at this time. Experience of the next few years, in the practical effects of the proposed legislation, would constitute a sound basis for further adjustments that might appear to be called for. Subsequent action to be taken by Congress in this connection would be partly dependent upon the extent to which the Philippine Legislature might cooperate in promoting, by appropriate legislation, the purposes in view.

9. Trade relations between the United States and the Philippine Islands represent, of course, only part of the considerations to be kept in mind. Advantages accruing to the Philippine Islands incident to the expenditures resulting from the presence in the islands of United States military and naval forces constitute a most substantial factor in the economic well-being of the islands. No plan involving the gradual withdrawal of those forces would have the approval of the War Department. So long as the United States flag flies over the islands, sufficient United States forces must be maintained there to take care of any situation that may arise. The weakening of United States authority while American responsibility continues should under no circumstances be countenanced or permitted.

10. It is noted that bill S. 3080 does not apparently take into consideration the matter of the final discharge of American obligations to the specially dependent elements of the population represented by the so-called non-Christian peoples. 11. This department does not concur in the expediency of the enactment of sections 8, 9, and 10 of bill S. 3080. The department's views to the effect that it would be expedient to continue in effect the general governmental system prescribed in the present organic act of the Philippine Islands were expressed to your committee in my letter of May 15, 1930, previously cited. No present legislation of a basic character is believed to be necessary in that connection. It is my opinion that most of the difficulties which have been encountered heretofore in the satisfactory administration of that act have not been due to the terms of the act itself.

Should, however, it be the decision of Congress that, in addition to such measures as may be incident to initiating appropriate trade adjustments, legislation involving some basic change in the governmental system of the Philippine Islands should be enacted at this time, consideration is suggested of provisions on the following general basis:

(1) The supreme local representative of United States sovereignty in the Philippine Islands to continue to be the Governor General.

(2) The Governor General, a vice governor, the members of the supreme court and the auditor to continue to be appointed by the President of the United States. (3) General functions of an executive character, including most of the administrative and appointive functions now exercised by the Governor General, to be vested in an official, with appropriate title, to be elected by the Philippine Legislature.

(4) Limited routine, but broad reserve, powers to be vested in the Governor General and appropriate provision to be made for such assistants, funds, facilities and information as will make practically possible effective supervision of the local government and furnish a sound and informed basis for the exercise of reserve powers when, and if, necessary.

(5) The Vice Governor to act as Governor General when occasion requires and, at other times, to assist the Governor General in the latter's functions of supervision-particularly as regards public education and public health.

The above is, of course, a mere general outline. The essential points, as regards the Governor General, are that, as the representative of the sovereign power, he shall have the powers and prestige essential to the control that must go with responsibility. To that end, he must have at his disposal adequate personnel, funds, facilities and information to discharge effectively his responsibilities of supervision and control to the extent that occasion may demand.

Included among the appropriate reserve powers of the Governor General would be the power:

(1) To investigate any phase of the governmental administration of the Philippine Islands and to develop all information essential in that connection.