611.6231/483
Memorandum by a Special State Department Committee on Proposed American Policy With Respect to Germany39
Four possible procedures appear to be open to the United States with respect to the current German situation. They are (a) the making of a trade agreement with Germany, (b) the inauguration of a trade war, (c), the denunciation of the existing commercial treaty, and, (d) the continuation of the statics quo.
I. The Proposal To Enter a Trade Agreement With Germany
1. In considering the merits of this proposal it must be clearly borne in mind that Germany wants very definitely to achieve an approach toward a bi-lateral balance of her trade with the United States. This means that Germany is not likely to be satisfied or to be willing to make a trade agreement with us unless the concessions are preponderantly made by the United States. To satisfy Germany it will likely be necessary not only to achieve through this trade agreement a considerable increase in our imports from Germany, but Germany will also likely insist that her imports of products from the United States must be brought to a lower level than that prevailing in recent years. This means that Germany is not likely to consent to concessions which will increase American exports to Germany. The best that could be said from the standpoint of our interests is that an improvement would [Page 449] occur over and above the immediately current deplorable situation under which there is a virtual standstill of exports to Germany except for cotton and petroleum.
The analysis made by the Tariff Commission under the Costigan Resolution40 indicates in a broad general way the possibilities of concessions on the part of the United States of increasing materially German imports into this country. Taking the figures for the year 1932, it appears that our imports from Germany amounted to $73,600,000. Of these, $22,000,000 were duty free, leaving $51,600,000 dutiable imports. Of these imports, however, $10,600,000 were articles of which some other country is the leading supplier—articles, therefore, which presumably we could not make concessions on in a trade agreement with Germany. This leaves then $41,000,000 dutiable imports of which Germany was the leading supplier. Of this $41,000,000, however, $1,000,000 consists of articles which, while coming chiefly from Germany, are also imported heavily from Japan—articles upon which by reason of international competitive factors it would presumably be impossible to make any tariff reductions. This leaves $40,000,000 of imports under consideration. Of these, however, $13,000,000 consist of articles of a character such that the importations would not likely increase materially despite a full fifty percent tariff reduction. For example, cotton fabric gloves would not be reduced in retail price more than, say, fifteen percent by such tariff reduction and it is doubtful that such a reduction in price would materially increase the imports. The same is true of certain types of machinery imported from Germany. Moreover, in the case of hides and dressed furs, the duty at present is only ten and twenty-five percent respectively and the nature of the commodities is such that a fifty percent reduction would probably not materially increase the importations. There remains, therefore, only $27,000,000 for consideration. Of these, $12,600,000 were coal tar products and other chemicals, on which for military reasons and the special considerations growing out of the recent war with respect to protection of our chemical industry it would be very difficult to give concessions. There remains, therefore, for bargaining purposes only some $15,000,000 of imports, the volume of importations of which presumably could be materially increased by tariff concessions.
In addition to this Costigan study, there is also an unpublished analysis by the Tariff Commission of possible concessions which might be made in a trade agreement with Germany. This analysis while by no means leaving one wholly pessimistic about a trade agreement with Germany, indicates, however, serious difficulties.
[Page 450]The probability of satisfying the German demands is, thus, altogether remote. It appears certain that no increase sufficiently large to enable the United States to keep its present relative position in the German market could be obtained. In the circumstances, the United States will be confronted with the prospect of having to make concessions to Germany without attaining any positive advantages. It might, on the other hand, obtain certain negative advantages, namely, that its present position in the German market would be less adversely affected than would be the case if no agreement whatever were made. It is questionable, however, whether this is altogether in the spirit of the reciprocal trade agreements act, the object of which is described as the expansion of markets for American export trade primarily.
2. It is, moreover, most difficult at this time to estimate the possibilities of developing trade in Germany in view of the numerous governmental control boards, the rigorous governmental quantitative restrictions on imports, the clearing and compensation agreements, the barter arrangements, and other artificial measures of import restriction. Government monopolies are, it appears, free to import from any source, giving rise to gross discrimination and yet without formal violation of the most-favored-nation commitment.
3. It is also worth pointing out that seventy-five percent of our exports in recent years to Germany consist of cotton and petroleum products, lard and fruits. At the present moment cotton and petroleum products are the only major imports into Germany. It is probable that at the very worst, these will be able to maintain their position on a relatively high level. Germany is not likely to be able to dispense with American cotton, and, even if she should buy cotton in other markets, we should find thereby new outlets created by Germany’s purchase of cotton elsewhere. In the case of petroleum products, the recent report of our consulate general in Hamburg states that in their view our petroleum interests are sufficiently strong to continue their hold on the German market. In the case of lard, there is admittedly danger of very considerable loss. Yet here also larger German purchases elsewhere would to some extent open up new outlets for our lard in other markets. American fruits could be dispensed with for a time, and it is even conceivable that the German market for these products might be wholly lost.
By and large, our major exports to Germany are of far more vital significance to her economy than are German exports to the American economy. Moreover, it should be noted that our leading exports are largely staple products, the prices of which are determined in the world market and may, therefore, not be seriously affected by the shift in the destination of our exports which a German embargo would bring about. On the other hand, Germany’s exports to us are largely [Page 451] specialty products which are not generally sold in the world market and which, if lost to the American market, would amount to an absolute loss.
4. There is also to be taken into consideration the possibility of a break-down in the negotiations. In view of the total inadequacy of the concessions that might be made to German trade as described above, it is doubtful whether the Germans would care to enter into any agreement that could be negotiated. It is also more than probable that the advantages which might accrue to American interests would be so limited that it would be difficult to present them in a sufficiently favorable light to insure acceptance. It would be difficult, if not impossible, to expect a favorable reaction in the United States to a treaty of this nature.
This leaves out of account the fact that the negotiation of such a treaty at this time would give rise to the most severe political animosity in view of the state of opinion in the United States in regard to the racial and religious policy of the Hitler government. Moreover, it should be remembered that the immediate occasion for a possible trade agreement would appear to be not merely the deplorable status of our current trade with Germany, but also—and this is the aspect which has particularly caught the public eye—the failure to transfer the service charges on the Young and Dawes loans. The weight of evidence would thus seem to indicate the advisability of postponing any attempt of negotiating an agreement, and, in particular, to avoid the necessary public hearings, at least until circumstances are considerably more favorable than at present.
II. The Policy of Retaliation and Trade War
1. The consideration of a policy of a trade war involves the weighing of injuries which would be sustained on either side. To begin with, the complete cessation of trade between the United States and Germany would mean a loss of $140,000,000 of American exports to Germany and a loss of $78,200,000 of German exports to the United States. This is based on 1933 figures; at the moment trade both ways between the two countries is seriously curtailed.
With respect to investments, it should be pointed out that, while Germans have some $200,000,000 invested in the United States, Americans have some $850,000,000 at the present moment invested on long term, including both portfolio and direct investments. In addition, Americans have $270,000,000 invested on short term, of which $75,000,000 are unpaid balances due American exporters. Doubtless many Germans have through relatives and agents made investments in the United States about which nothing is known and which could not easily be seized in the case of a trade war. On balance, the United [Page 452] States stands to lose over a billion dollars as against a loss of $200,000,000 German investments in this country.
On current items are tourist expenditures in 1933 in Germany amounting to $3,000,000, while Germans spent $1,000,000 in the United States. $7,000,000 of immigrant remittances and charitable funds to Germany in 1933, while $1,000,000 were sent by Germans to this country. In 1933, $13,000,000 were due Germany by the United States on shipping account, while $2,000,000 were due to us by Germany. On balance, the wiping out of all these current items would mean that Germany would suffer a net loss of $19,000,000 annually.
2. The policy of a trade war also involves certain political considerations. It should be remembered that such a policy is likely to arouse intense feeling among the large body of German-Americans in the United States.
III. The Denunciation of the Existing Commercial Treaty With Germany
1. It has been suggested that without entering upon a trade war, it might be desirable merely to denounce the existing treaty. It is argued that such a denunciation would bring pressure to bear upon Germany because Germany would then lose the benefit of the generalization of the tariff concessions which we are now making in our trade agreements. It should be remarked, however, that such generalizations are not likely to be of much importance to Germany since in each trade agreement concessions will be made on commodities of which the country with which the trade agreement is made is the chief supplier. Moreover, it should be noted that the inauguration of tariff discrimination involves an enormous additional administrative burden and expense in the collection of customs duties, an undertaking which we should not lightly assume.
2. It should, moreover, be noted that the denunciation of the current treaty opens up very serious questions relative to safeguards to our officials in Germany, relative to taxation of American property owners in Germany, relative to due-process of law in relation to real estate holdings, et cetera, et cetera.
3. It should, moreover, be observed that the denunciation of the treaty with Germany can have very little meaning unless it can be regarded as the first step in a trade war. Even if notice is given of determination to denounce the treaty, such denunciation would become effective only one year hence, so that liberty of action is, in any case, deferred for that period. It is rumored that the German Government intends to notify us of intention to denounce the treaty, in accordance with her current commercial policy of special bargaining.
[Page 453]IV. The Continuation of the Present Status
There remains the consideration of the continuation of the current status. Events are moving with great rapidity in Germany and it may well be advisable, at the very least, to await the outcome of Germany’s current bargaining program in the next few months, and particularly to observe the effect of this policy on her balance of payments and to note what disposition she makes of any exchange surplus, should any such develop. Quite possibly the whole complexion of affairs may be quite different in a year or two. It is not likely that the current German commercial policy can last for any considerable period of time. Should it, however, turn out that the policy of rigorous self-sufficiency really proves tenable, it is clear that any trade relations with Germany are of little value. There is, however, the large possibility that the whole world situation may improve for the better, that Germany’s current disequilibrium in the balance of payments may be improved whether by the rise in prices and world prosperity elsewhere or by a change in internal German policies. It is believed that instead of becoming involved in the serious consequences of a trade war, or in futile efforts to make a worthwhile trade agreement, it would be better to wait until the internal conditions of Germany are such that we may come to an agreement with Germany on terms likely to be much more favorable than seems at all possible at the present moment.