The Secretary of State to the Minister in Nicaragua ( Lane )

No. 55

Sir: Reference is made to your despatch No. 65 of January 24, 1934, regarding the proposed reciprocal trade agreement between the United States and Nicaragua. In accordance with your request there are enclosed for your confidential information copies of the English and Spanish texts of the agreement signed December 15, 1933, by the United States and Colombia.8 In accordance with Article XI the agreement will not become effective until after the enactment of legislation in both countries to give it effect. Such legislation has not yet been enacted in either country.

The following analysis of the provisions of the agreement may be of assistance to you in connection with your discussions with the Nicaraguan authorities.

The principal provisions of the agreement are found in Articles I and II under which customs concessions or commitments are made by each party with respect to specified products of the other. The last [Page 500] sentence of the first paragraph of Article I was included in order to conform to the definition of customs duties laid down in the Colombian law, and the limited scope of this definition necessitated the addition of the second paragraph of the article in order to include all other duties, charges and taxes imposed on importations. The text of Article I is therefore peculiar to the agreement with Colombia. The first sentence with the insertion of the words “and import charges” after the words “customs duties” will probably suffice in the case of most countries.

Article III contains certain reservations and exceptions. The first of these reservations relates to the right to impose special duties on articles not properly marked to indicate the country of origin and is included in order to give effect to section 304 of the United States Tariff Act of 1930.9 The second reservation relates to anti dumping duties and has been included in consequence of the Anti Dumping Act of 1921 (42 Stat. 11). This reservation, however, is subject to a proviso whereby the Anti Dumping Act will not be applicable to unroasted coffee originating in Colombia. The proviso was included on the insistence of the Colombian negotiators and was not desired by the United States. Since the proviso has been included in the agreement with Colombia a similar proviso could, if necessary, be included in the proposed agreement with Nicaragua. But this Government would be unwilling to extend such a proviso to include any product other than unroasted coffee.

The articles on which commitments are made by the United States in the agreement with Colombia are all on the free list, the obligation of the United States being to refrain from subjecting them to duty. As to such articles the above-mentioned reservations suffice. If any dutiable articles should be dealt with in such an agreement certain additional reservations might be necessary, such as a reservation permitting the imposition of countervailing duties on bounty-fed articles (section 303, Tariff Act of 1930).

Article IV deals principally with internal excise or consumption taxes as distinguished from charges imposed at the time of importation. These provisions are designed generally to prevent the nullification or impairment of the customs advantages obtained under the agreement through the imposition or the increase of taxes on goods after clearance through the customs. The principal elements which should be kept in mind in considering the provisions of this article are as follows:

The kinds of internal taxes dealt with are (1) national or federal taxes, and (2) state, departmental or municipal taxes. The products affected are in two categories, namely, (1) those on which customs concessions [Page 501] or commitments are made as listed in the schedules appended to the agreement, and (2) these and all other articles. The kinds of treatment stipulated are (1) national treatment, whereby each party agrees to treat imported products the same as like products of domestic production without, however, assuming any obligation as to the absolute amount of the taxes imposed, and (2) a limitation on the absolute amount of the taxes imposed.

The first paragraph of the article relates to all articles and provides for national treatment with respect to national or federal taxes. Provisions for general national treatment have been customarily included in treaties entered into by this and other Governments. A general purpose of such a provision is to confine any discrimination against foreign as compared with domestic goods to the customs houses and thus to simplify the foreign exporters’ problem of determining the competitive disadvantage to which imported goods are subject in the importing country as compared with articles produced therein. This provision serves also to prevent the impairment or nullification by means of discriminatory taxes of the improved competitive position of imported goods established under other provisions of the agreement. It tends to result in more moderate taxes on foreign goods than might otherwise be imposed since due regard must be had for the interests of any domestic producers concerned. It is provisions of this type to which reference was made in the memorandum handed to the Chargé d’Affaires of Nicaragua and regarding which you have inquired in your despatch under reference.

The second paragraph of the article also provides for national treatment, but relates only to certain products included in the schedules instead of being generally applicable to all products; and to state, departmental or municipal taxes as distinguished from national or federal taxes. The provisions of this paragraph reflect certain peculiarities of the tax system of Colombia. The United States desired a general provision for national treatment in respect of all taxes, national, federal, state, departmental, or municipal, on all articles, but was unable to obtain acceptance of such a provision by Colombia. The provisions of the second paragraph of the article represent a compromise whereby national treatment with respect to departmental or municipal taxes in Colombia is limited to certain products in the appended schedule.

The third paragraph provides for a limitation on the absolute amount of all national, federal, departmental, state or municipal taxes on articles with respect to which the parties have respectively made customs concessions or commitments under the agreement, subject to the proviso that with respect to state, departmental, or municipal taxes any state, department or municipality of either country may [Page 502] increase its taxes to an amount equal to those imposed on the day of the signature of the agreement by any other state, department, or municipality in that country. The purpose of the limitation on the absolute amount of internal taxes on products in the schedules is to ensure that the customs concessions on these products will not be nullified or impaired. This provision is particularly important in relation to products not produced in substantial quantities in the importing country and with respect to which a provision for national treatment is of little practical value. Thus, as regards products of particular importance to each party as indicated by their inclusion in the schedules of products on which customs concessions or commitments are obtained, a double safeguard of national treatment and of a limitation on the absolute amount of internal taxes is provided.

The fourth paragraph of the article is designed to make it clear that the obligations assumed by the United States under the second and third paragraphs apply to state taxes only in so far as they are subject to statutory control by the Federal Government. The provisions referred to would not, for example, apply to a tax imposed by a state of the United States which was held by the courts to be a tax on intra-state commerce and hence not subject to statutory control by the Federal Government.

The fifth paragraph relates to discriminatory transportation rates and is a special provision occasioned by certain discriminations to which American trade has been subject in Colombia.

Article V is designed to ensure that tariff concessions will not be nullified or impaired by means of prohibitions or restrictions. The article relates only to products on which customs concessions or commitments are made under the agreement. The provision against the imposition of prohibitions and restrictions does not apply under certain circumstances and conditions which are specified in the article and which will probably be found self-explanatory. As regards products not included in the schedules provision is made in Article VII for most favored nation treatment with respect to prohibitions and restrictions.

Article VI provides for notice of changes in administrative rules effecting advances in duties and charges applicable to imports. The purpose of this provision is to prevent the disruption of plans and arrangements of traders which sudden and unforeseen changes are likely to entail. It will be noted that the provision applies to administrative changes only; not to changes effected by legislation. Legislative changes normally receive sufficient publicity prior to enactment to warn traders of impending changes and to allow them to make their plans accordingly. The exceptions to the rule regarding notice of changes will probably be found self-explanatory. The clause, [Page 503] “unless otherwise provided under constitutional requirements”, at the beginning of the article was considered to be necessary by the Colombian negotiators to meet certain legal exigencies in that country. Its inclusion is not necessary from the standpoint of the United States. The phrase “or customs courts” is also unnecessary from the standpoint of this Government.

Article VII provides for unconditional most favored nation treatment regarding import and export duties, charges, restrictions and formalities. Provision for unconditional most favored nation treatment is desirable in so far as products included in the schedules are concerned since the value of concessions made by one party to the other might, in the absence of the most favored nation clause, be seriously impaired by the subsequent granting of greater concessions to some other country. As regards articles which for one reason or another are not included in the schedules each party will at once obtain, under the provisions of this article, the benefit of any concessions made on such articles by the other party under reciprocity agreements with other countries. The importance of this latter consideration lies in the fact that concessions granted by the United States to each country will apply only to products of major importance to that country. This limitation is necessary because any concessions made to one country will be freely extended at least to countries with which the United States has treaties or agreements providing for most favored nation treatment, and concessions on products of importance to those countries must be reserved for negotiations with them. The inclusion of the unconditional most favored nation clause in the reciprocity agreement assures the parties thereto that in addition to reciprocal concessions on products of major importance to them, they will obtain concessions on other products of less importance as soon as reciprocity agreements affecting these products are concluded with other countries.

In carrying out a reciprocity program concessions will normally be made to each country on products of which that country has been the chief source of imports into the United States. Statistical studies show that under such a plan concessions made to each country can be generalized to all others and an ample basis for negotiating with most of the important countries of the world can still be maintained. However, the execution of a reciprocity program while retaining the advantages of a general policy of unconditional most favored nation treatment presents certain aspects more or less peculiar to Nicaragua and some of the other Latin American countries. Certain products, notably coffee and bananas, occupy a predominant place among the exports of a number of these countries. It may be considered advisable, if and when negotiations with Nicaragua shall have been completed, to postpone actually bringing the agreement into force until [Page 504] negotiations shall have been completed with certain other countries to which coffee or bananas are important export products, in order to preserve a basis for negotiations with such countries. Steps have already been taken to determine the possibility of concluding agreements similar to that with Colombia with several other countries to which coffee or bananas are of predominant importance, namely, Brazil,10 Costa Rica, Guatemala and Haiti.11

The first four paragraphs of Article VII of the agreement with Colombia follow closely the text of model most favored nation provisions drawn up by the Economic Committee of the League of Nations. The first five paragraphs of the article will probably be found self-explanatory. The other paragraphs perhaps require some comment.

The sixth paragraph applies the most favored nation principle to quotas. It is evident that it would be inequitable to divide the total authorized importations of a product equally among the exporting countries. If one country had been supplying 90% of the imports of a product and another 10%, the allotment of equal quotas to the two countries might result in a very drastic curtailment of imports from the first country while permitting and facilitating an actual increase in the imports from the second. The paragraph has in view alloting quotas in accordance with the share of the trade which each of the countries might normally expect to obtain, thus disturbing as little as possible their relative positions. If the total importations of an article in recent years have been 100 and one country has supplied 90% and the other 10% of this amount, and if the total importations from all sources were restricted to 50, the quota for the first country might be 45 and for the second country 5. Under this system the trade of each is reduced in the same proportion. The share of the trade in each product obtained by each exporting country in a period of years preceding the application of the import restriction would be the basis for allotting the permissible imports among the exporting countries concerned. The inclusion of provisions regarding quotas is not, of course, to be taken as implying an intention on the part of this Government to adopt a general quota system.

The seventh paragraph contains the exceptions to the most favored nation clause. The “generally recognized exceptions” referred to in the memorandum handed to the Chargé d’Affaires of Nicaragua, regarding which you inquire in your despatch under acknowledgement, include such exceptions as are provided for in this paragraph.

The first of these exceptions refers to advantages accorded to adjacent countries to facilitate frontier traffic. This exception, which is [Page 505] included in the model clause drawn up by the Economic Committee of the League of Nations, would not permit preferences by either party to all importations from adjacent countries. It has in view special circumstances in which localities or cities are divided by the frontier and is designed to permit free intercourse between the parts on each side of the frontier without the necessity of extending such exemptions to the products of the other party to the agreement.

A further exception to the most favored nation clause which is commonly recognized in treaties, and which is included in the model clause of the Economic Committee of the League of Nations, relates to advantages to countries which have entered into customs union with one of the parties. Countries which have entered into a customs union are regarded as having been merged into a single entity for customs purposes.

Under the exception regarding police and sanitary regulations either party may impose such requirements regarding the entry of merchandise as may be necessary for the enforcement of such regulations. It is evident that governments must retain complete freedom of action in such matters. For example, it is necessary to permit the imposition by either party of a prohibition on the importation of plant or animal products from the territory of the other party in order to guard against diseases prevalent therein, without applying such a measure to importations from other countries where such diseases do not exist.

The provisions regarding the commerce of Cuba and regarding the commerce of the dependencies of the United States are exceptions to the most favored nation clause which have been recognized in numerous treaties and agreements concluded by the United States.

Under the last paragraph of the article a dependency of the United States, while permitted to grant preferences to the United States or other dependencies thereof, must accord equal treatment to the commerce of the other party as compared with that of foreign countries.

Article VIII defines by elimination the area to which the agreement applies, this area being that to which the Tariff Act of 1930 applies. It will be noted that the only provisions of the agreement which apply to the dependencies named in Article VIII are the provisions of Article VII, and that none of the provisions of the agreement applies to the Panama Canal Zone. For the purpose of the Tariff Act and the regulations issued thereunder, the Panama Canal Zone is treated as a foreign country. Exports from the Canal Zone to the United States therefore pay duty in this country as from a foreign country, and articles imported into the Canal Zone from the United States, with certain exceptions such as articles for Government departments, officials and employees, pay the regular duties of Panama.

With reference to Article XI it is possible that this Government would desire a different term for future agreements than the two year [Page 506] term specified in the agreement with Colombia. This matter can be left for decision until after the other provisions of such agreements have been decided upon.

As indicated in the Department’s instruction of January 4 a statement of the concessions which this Government would seek from Nicaragua will be prepared as soon as possible. However, owing to the pressure of work arising from similar studies relating to other countries the completion of this statement may be somewhat delayed. Pending the receipt of this statement you are requested to have a study made of the imports into Nicaragua from the United States and the customs treatment to which American trade is subject with a view to submitting your recommendations regarding the concessions which might be requested. In preparing a list of products on which concessions might best be sought you should proceed on the assumption that any concessions granted by Nicaragua to the United States will be extended to other countries in accordance with the unconditional most favored nation principle. As a general rule, therefore, concessions should not be sought by the United States on products of which countries other than the United States are the chief source of imports into Nicaragua and which Nicaragua might conceivably desire to use as a basis for reciprocity negotiations with such countries.

Very truly yours,

For the Secretary of State:
Francis B. Sayre