611.6131/463: Telegram

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

183. Department’s telegram No. 104, July 20, 7 p.m.

1. Foreign Office officials continue to insist on modification of our exceptions to exportation clause. They say that they have no objections to any exceptions which we may desire to make regarding most-favored-nation treatment with respect to exports in time of war. They point out however that the first of our proposed exceptions as it now stands could be used to justify discrimination against them in peace times with respect to the export of arms, ammunition, implements of war or other military supplies. They say that the phrases “implements of war” and “military supplies” are subject to wide interpretation and may be construed to include a large proportion of the merchandise which they plan to purchase in the United States. They state that if we would agree to add the desired preface to the first of the exceptions cited in section (b) of the Department’s telegram [Page 433] No. 103, July 19, 7 p.m., they would not object to the omission from the second of the exceptions of the words “of section 2 (b)”, thus exempting from the action of the most-favored-nation clause not only the provisions of that section but all the provisions of the Neutrality Act in their entirety.

2. They continue to insist on the inclusion of a reservation which will permit them to reduce their undertaking from $40,000,000 to $30,000,000 in case the courts should decide adversely on the coal tax. They point out that the termination of the whole agreement in case of an adverse decision might be subjected to misinterpretation regarding the state of American-Soviet relations and that they might prefer therefore merely to reduce the amount of their pledge. Their agreement [argument?] is that the cessation of the coal discrimination is the only reason for their increasing their pledge and that if it should transpire that this discrimination is to continue, their pledge should be no greater than that of last year. They suggest that their pledge note read as follows:

“In reply to your inquiry regarding the intended purchases by the Union of Soviet Socialist Republics in the United States of America in the course of the next 12 months, I have the honor to inform you that, according to information received by me from the People’s Commissariat for Foreign Trade, the economic organizations of the Union of Soviet Socialist Republics intend, provided that the law of the United States of America shall permit the complete operation with respect to imports of coal from the Union of Soviet Socialist Republics into the United States of America of the most-favored-nation provisions embodied in our exchange of notes of July (blank) 1937, to buy in the United States only in the course of the next 12 months American goods in the amount of at least $40,000,000.

Should the law of the United States of America not permit the complete operation of the above-mentioned most-favored-nation provisions with respect to imports of coal from the Union of Soviet Socialist Republics into the United States of America, it may become necessary for these economic organizations to modify their plans for purchases in the United States of America, as set forth above, but in no case do they intend [to] purchase American goods in an amount less than $30,000,000.”

3. Although they maintained a firm position with regard to both points mentioned above their insistence upon the inclusion of a clause qualifying the reservations seemed to be stronger than that upon the inclusion of a clause giving them the right to reduce the amount pledged. There is a possibility that if some way could be found to satisfy them with regard to the former question they might be induced to yield on the latter.

Davies