The Secretary of State to the Ambassador in Cuba (Caffery)

No. 60

Sir: Reference is made to the Department’s telegram No. 43 of February 6, 1934, authorizing you to commence negotiations for a revision of the reciprocity treaty with Cuba, to your telegram No. 161 of February 17, and to the Department’s telegraphic reply No. 51 of February 21, and to a memorandum of the Commercial Attaché of February 17,23 citing certain basic questions which will present themselves for decision in the course of the negotiations. With reference to the questions raised by the Commercial Attaché the following considerations are submitted for your information and guidance.

(1) Can increases in duties be requested on certain highly competitive products of foreign countries?

The Department considers that the general rule should be to seek no increases of rates of duty on importations from foreign countries. In this connection, however, the Department is sending you a further instruction making certain observations on this point, (a) It is inconsistent with the general policy of the Administration to encourage the raising of foreign tariff rates, even when the United States would seem to benefit in the short run. We would resent similar action by [Page 118] foreign countries, (b) It is possible that dumping by foreign countries may in some cases be a proper subject of concern from the standpoint of the United States. Such a situation should, however, be met by an application of anti-dumping provisions against the particular importations which have been sold at less than their foreign market value or cost of production, or of provisions designed to offset bounties which particular importations may enjoy, rather than by subjecting all importations of a product to penalties which are justified only with respect to a portion of them.

(2) Is it contrary to the policy set forth under (1) above to request a consolidation of a consumption tax with a duty in order that the preference obtained on the duty would also apply on the tax?

Where there is a genuine consumption tax, that is, one levied on a substantial domestic production at the same rate as upon imports (e. g., our excise tax on cigars), it is not to be consolidated with the duty nor is a preference therein to be sought.
Where the consumption tax is a disguised import duty collected in fact almost entirely upon imports, the American product should get the preference therein, whether or not consolidated with the duty. You are requested to refer to the Department for decision all borderline cases.

(3) Would a request for the application of the maximum rate of duty provided for in the Cuban tariff be considered inconsistent with the principles set forth above?

No proposal should be made by the United States whereby foreign goods which now pay the Cuban general rates would be made subject to the higher “maximum” tariff rates.

(4) Can the United States request seasonal reductions in Cuban import duties on agricultural products without offering reciprocal concessions on such products?

The Department suggests that the discussion of seasonal reductions in duties on fruits and vegetables be deferred until this Government is in a position to indicate what concessions, if any, it will be able to offer in the way of seasonal reductions on Cuban products. Your attention is called, however, to the existence in the present Cuban tariff of provision for seasonal tariffs on potatoes and onions.

(5) Shall the provisions of Article 1 of the present treaty, which provides for free entry into the United States of products on the free list when the treaty was concluded, continue in effect?

The purpose of the negotiations is to improve conditions for trade and the presumption must be that articles now free of duty will be guaranteed free entry. It may be necessary, however, to make an exception to this rule in the case of some products, such as avocados. [Page 119] As soon as investigations which are being made here regarding this matter have been completed, the Department will instruct you further.

(6) To what extent can the United States appropriately request reductions in existing Cuban internal taxes?

The United States now levies internal taxes on Cuban tobacco. In addition, a bill is now pending in Congress24 to make Cuba’s principal export product, sugar, a basic commodity for the purposes of the Agricultural Adjustment Act,25 and to make it liable to a processing tax. Thus, if this bill is enacted into law, Cuba’s two most important export products would be liable to internal taxes in this country.

It does not follow, however, that this fact should necessarily prevent the United States from requesting reductions in Cuban consumption taxes. The question above propounded can not be dealt with in principle, but only in relation to particular products. Whether a request for a reduction in the internal tax on a product is justified depends upon various factors, including the amount of the customs duties and other charges to which the article is subject and the amount of the reduction in the customs duty which is offered. If, for example, a material increase in the trade in a given product can be effected by a reduction in the import duty only, a reduction in the internal tax may be foregone.

Generally speaking, it would simplify the problem to provide so far as possible for the maintenance of the status quo or for the establishment of specified limits with respect to internal taxes on products dealt with in the agreement, and to make the desired trade adjustment through the medium of the import duties. However, there may be instances in which the customs duty on a product is so low and the internal tax on the product is so high that even the complete abolition of the import duty would not give the desired opportunity for trade. In such cases a reduction in the internal tax should, of course, be requested.

(7) May a revision of the consular invoice fee, which in effect amounts to an additional import duty, of five percent ad valorem, be requested?

You may request reduction of the consular fee to a nominal amount, or, if in your opinion it is more desirable, its consolidation with import duties. All charges on imports, other than customs duties, or consular fees, if not reduced by the agreement or consolidated with customs duties should be bound at present levels or within agreed upon limits. The agreement might well contain a general provision whereby, in so far as concerns articles with respect to which customs [Page 120] concessions or commitments have been made under the agreement, charges of all kinds which have not been specifically provided for shall not be increased, and whereby no new charges of other kinds shall be imposed.

(8) Is it the intention completely to revise the existing treaty and submit the redrafted treaty to Congress for ratification at the present session?

The Department is not in a position to inform you at the present moment of the form that may seem most advisable for the ultimate trade agreement that you are now working on. If the tariff proposal now before Congress should be enacted (H. R. 8687 of which a copy is attached26) it might be that the powers conferred upon the Executive by that bill will be sufficient to cover the arrangement with the Cuban Government and that the arrangement could be put into effect at once as an Executive Agreement. However, in the event that the treaty calls for concessions by the American Government not within the range of powers conferred upon the Executive by this bill, or in the event that this bill fails of passage, the arrangement would have to be presented to Congress for ratification.

(9) Shall the concessions to be granted by the United States to Cuba on products other than sugar be discussed with the Cuban delegation?

No decision can now be reached regarding such concessions. You may state to the Cuban authorities, however, that you will receive any requests they may desire to make, and transmit them to the Department for consideration. It is extremely important under present circumstances to avoid any publicity whatever regarding the concessions which might be offered by the United States.

(10) Shall the Embassy prepare a draft of the general provisions of the treaty for submission to the Department for approval?

The Department will prepare and submit to you as soon as possible in outline form a draft of the proposed agreement. The Embassy should prepare the texts of any special provisions which it deems advisable to include therein and submit them to the Department for approval.

It is suggested that for the present the Embassy concentrate on the schedule of concessions to be obtained from Cuba, since this part of the agreement involves the greatest technical difficulties and will consume the greatest amount of time. It is recognized that the inability of this Government to indicate what concessions can be granted to Cuba greatly increases the difficulty of this task. As matters now stand, however, there is no help for it. The Department can only suggest that the discussions proceed on the assumption that concessions will be made by the United States and on the basis that concessions [Page 121] offered by Cuba at this stage are tentative and subject to the granting of reciprocal concessions by the United States.

In the future the Department desires that all proposals, including counter-proposals, regarding the concessions desired by the United States be submitted to the Department before they are submitted to the Cuban negotiators in order that the views of the Departments of Agriculture and Commerce and of the Tariff Commission may be obtained thereon. Arrangements will be made whereby such proposals will receive prompt consideration here.

In addition to the questions raised by the Commercial Attaché there are certain further principles by which you should be guided in the conduct of the negotiations, as follows:

(11) It must be borne in mind that the United States, and possibly also Cuba, will desire to enter into negotiations for the promotion of trade with other countries. From this standpoint the preferences granted by Cuba and the United States to each other are significant. In this connection consideration must be given both to the form and to the amount of the preference.

The preference may take the form of a percentual reduction in general rates, whatever those rates may be. This is the form employed in the existing treaty. Or it may take the form of an absolute margin of preference expressed as a specified sum per unit of goods, or a specified percentage ad valorem, i. e., a percentage of the value of the goods. This is the form suggested in the draft agreement enclosed with your despatch No. 46 of March 9, 1934. The form of preference provided for in the existing treaty seems preferable for the following reasons.

(a) The preference in its absolute form sets a limit to reduction in rates. The lowest rate that could be imposed on goods of third countries would be the sum per unit or the ad valorem percentage representing the agreed-upon margin of preference. The preference in its relative form (percentual reduction in general rates) on the other hand, would allow complete freedom with respect to reductions in rates. While there may be little likelihood in the immediate future of either country desiring to lower its rates to third countries to the extent that this implies, it is nevertheless desirable in principle that no limit to rate reductions be imposed.

(b) The form of preference provided for in the existing agreement permits some mitigation of the discrimination against third countries. A reduction in the general rate results in a reduction in the absolute margin of preference. It therefore permits the United States or Cuba not only to offer a third country a reduction in the rate payable on imports from that country but at the same time to afford some measure of relief from the discrimination to which its trade is subject. Thus, on the basis of a 20% preference on general rates: [Page 122]

Present rates
¢ per unit
Rates which might be
offered to
¢ per unit
Mexico (e. g.) 3.0 1.5
Cuba 2.4 1.2
Margin of preference 0.6 0.3

Any such reduction in the margin of preference, however, would tend to be offset by the fact that it would necessarily be accompanied by a reduction in the duties paid by Cuba and by the consequent improvement in the competitive position of Cuban producers as compared with those in the United States.

The size of the percentual preferences granted may likewise be important from the standpoint of negotiations with some third countries. In any such negotiations the third country concerned is likely to demand at least that the absolute margin of preference shall be no greater than that existing before the treaty between the United States and Cuba was revised. A mere reduction in the general rate is not likely to satisfy the third country concerned if the margin of preference to Cuba or the United States, as the case may be, is such that the third country anticipates that it will be unable to compete. The greater the increase in the percentage of preference, the greater must be the reduction in rates in any negotiations with a third country, in order to restore or reduce the absolute margin of preference now existing. If, in the present negotiations, percentages of preference should be materially increased on products which are likely to be important in negotiations with third countries, greater reductions in duty may be demanded by such third countries than budgetary or protective requirements will permit.

In view of the considerations above set forth it seems to the Department advisable (1) to state the preference in the form of a percentual reduction to the United States based on the lowest rate at any time applicable to any other foreign country, and (2) to increase the preference only on articles of which Cuba or the United States, as the case may be, is the chief source or one of the principal sources of imports into the other. There may be some articles of which Cuba or the United States is the chief source or one of the principal sources of imports into the other but which may be an important factor in future negotiations with some third country. Any representations by Cuba or the United States that in such circumstances an increase in preference should be foregone should receive sympathetic consideration.

It is recognized that in the case of some products the observance of these principles may involve a sacrifice of immediate expansion with respect to the trade of Cuba and the United States with each other. [Page 123] But it would preserve, both for Cuba and the United States, the opportunity to expand their trade in other directions.

(12) It is intended that the new trade agreement will provide not merely for specified minimum percentage preferences to the United States, but that the rates of duty on important specified American products be bound as to maxima by the agreement. It is suggested that rates might be bound on all such important articles except those with respect to which such limitation would clearly be of greater benefit to some foreign country than to the United States.

(13) The emphasis should be on obtaining reductions in duties rather than on obtaining increased preferences. The Department considers that there has been too great a tendency in connection with proposals submitted by the Embassy to seek increased preferences. There is a strong presumption in any case against seeking a preference in excess of 50%. A preference of as much as 50% should be sought only in exceptional cases.

(14) A balance of the advantages offered by the parties to a treaty can seldom be effected by each party granting like concessions on like products. It is the trade importance of the concessions granted, not the kind of concessions, which must be compared in determining the equivalence of the concessions granted by the countries concerned. Cuba exports a relatively few articles of great importance in the economy of that country, while the United States exports to Cuba numerous products none of which, taken alone, represents a large proportion of the trade. A substantial concession by the United States to Cuba on sugar will be equivalent, therefore, when measured in terms of trade advantage, to concessions by Cuba on numerous products of the United States. These considerations should be kept in mind in connection with such questions as that raised under point (4) above, namely, the relation of seasonal reductions in duty by Cuba to seasonal reductions in duty by the United States.

(15) In order to stabilize the production and marketing of sugar in the areas supplying the domestic American market, there has been introduced into the Congress a bill which, in effect, will permit the establishment of quotas for these areas.27 In his message of February 8 to the Congress,28 the President indicated that the use of the figures for the last three years as the basis for fixing quotas would result in an approximate balance between supply and consumption. On this basis marketing of Cuban sugar would be 1,944,000 short tons, as compared with 1,608,000 short tons in 1933, an increase of nearly 25 percent. In view, however, of the possibility of change in these figures and of the possibility that the bill might not pass, you should not at this time discuss the matter with the Cuban authorities.

[Page 124]

The bill before Congress concerning sugar makes sugar beets and sugar cane basic agricultural commodities for the purposes of the Agricultural Adjustment Act, thereby making them liable to a processing tax. In order that the levy of this internal tax will not increase prices the pending bill provides that in no event shall the rate of the processing tax exceed the amount by which the tariff on sugar is reduced below the present rate of import duty. In this connection, your attention is called to the preliminary report of the Tariff Commission on sugar, which finds that the tariff on Cuban raw sugar (96°) need be only 1.50 cents per pound, instead of 2.00 cents per pound to equalize production costs.

Very truly yours,

For the Secretary of State:
Francis B. Sayre
  1. Memorandum not found in Department files.
  2. See H. R. 8861, Congressional Record, vol. 78, pt. 5. p. 5691.
  3. Approved May 12, 1933; 48 Stat. 31.
  4. For text of law approved June 12, 1934, see 48 Stat. 943.
  5. H. R. 8861. For text of law approved May 9, 1934, see 48 Stat. 670.
  6. Department of State, Press Releases, February 10, 1934, p. 77.