611.6131/453: Telegram

The Ambassador in the Soviet Union ( Davies ) to the Secretary of State

170. Department’s 91, July 12, 8 p.m.

1. Conference with Foreign Office officials reveals that in case they should be granted the bilateral most-favored-nation provisions they [Page 425] would be forced to insist upon exceptions in favor of Turkey, Iran, Afganistan, China (including Sinkiang and Outer Mongolia), Lithuania, Latvia, and Estonia.

It is not believed that they could yield on this point in view of precedent involved.

2. They stated that the question of the exportation clause is a serious one from their point of view. They are not particularly concerned about the reference to export duties but are anxious to obtain most-favored-nation treatment with respect to taxes, rules, and formalities. They profess to fear that the specific omission of this clause might eventually place them in an unfavorable position with respect to judicial or administrative decisions affecting their imports from the United States.

The Department has also doubtless not failed to note the connotations of such a clause with respect to the possible establishment in the United States of any special system or organization for dealing with the Soviet trade monopoly.

3. They have not changed their attitude with respect to the total sum of their purchases.

4. Stating that they were speaking purely hypothetically, they asked us whether we thought that, if they were to postpone for this year their insistence on the exportation clause and the bilateral character of the most-favored-nation provisions, we would be able to sign the agreement today, specifying a total purchase figure of $30,000,000. We replied, also speaking purely hypothetically, that if they, on the contrary, were to agree to purchase goods to the value $40,000,000, there might be more point in our exploring the possibilities of finding some compromise solution with respect to the bilateral feature. We emphasized however, that if their exceptions with regard to the Asiatic border and Baltic provinces were to be maintained, the question of bilateral treatment would become even more difficult than it had been heretofore, and that an early solution would be highly improbable.

5. In my judgment agreement might be concluded reasonably quickly on either one of two bases: first, if we are prepared to grant (a) bilateral treatment, (b) exportation clause and (c) exception applicable to Central Asia and Baltic States, they might agree purchase 38 or 40 million; or second, if we are prepared (a) to grant exportation clause and (b) accept purchases ranging somewhere between 36 and 38 million, they would probably accept unilateral agreement. Would appreciate further instructions. Believe prompt follow-up would aid prospects [of] agreement.

Davies