The Chargé in El Salvador ( Fisher ) to the Secretary of State

No. 473

Sir: I have the honor to refer to despatch No. 444 from this Legation, dated October 11, 1935, reporting a conversation between Minister Corrigan and the Minister of Finance, relative to the trade agreement negotiations.

[Page 551]

A few days subsequent to this conversation, a call was made upon Doctor Alfonso Rochac, the official of the Mortgage Bank charged with studying the proposals of the United States. Doctor Rochac had prepared a table showing the anticipated loss of revenue, should the concessions requested by the United States be granted. He had also prepared a preliminary memorandum on the subject, unfavorable to the treaty in general. He furnished a copy of this document and a translation is enclosed. (Enclosure 1).

It was learned that he had already presented this preliminary memorandum to the Minister of Finance; and in order immediately to counteract the effect of the statements therein, a reply thereto was prepared. Copies of the reply are also enclosed. (Enclosure 2.)

. . . . . . . . . . . . . .

In the preparation of his table of loss of revenue, Doctor Rochac used the import statistics for the fiscal year 1931–32 as a basis (this being the year of lowest imports). To these statistics, he applied the present duty rates to obtain the customs income to be expected; and then the rates proposed by the United States. He took the difference of $839,000 as the loss of revenue to be expected should El Salvador grant the concessions requested. He effected a similar calculation for a “good” import year, arriving at a revenue loss of $1,500,000. As is well known, the Finance Minister is primarily interested in the effects of the proposed treaty on the national revenue, and the figures given immediately caught his attention, as previously reported. In the reply to the memorandum, an attempt has been made to point out certain inconsistencies in the method of calculation, and to counteract the effects of this unfavorable presentation of the situation. It is felt that Doctor Rochac took the worst possible view of the trade agreement, and painted its effects as blackly as possible.

Furthermore, although Doctor Rochac makes the mistake of admitting the opposite under item 7, of his memorandum, both he and the Finance Minister have consistently taken the attitude that they would not concede that a reduction of tariff rates will result in increased importations; that it must be proven to them that reduced duties will not result in loss of revenue.

Doctor Rochac has now prepared an additional memorandum as a result of his studies. It is believed to be a comprehensive review of the revenue, economic and other aspects of the treaty, as he sees them. It is thought to consist of some 50 pages, and to contain full tables, showing his calculations. It is hoped to obtain a copy thereof within a few days, and a translation will be furnished the Department as soon as practicable. In the meantime, and as soon as he has had an opportunity to study the reply to his memorandum prepared by [Page 552] this Legation, further oral conversations are to be held with him in the premises.

Respectfully yours,

Dorsey Gassaway Fisher
[Enclosure 1—Memorandum—Translation]

The Salvadoran Ministry for Finance to the American Legation

1. There exists between El Salvador and the United States a commercial treaty signed in 192616 and which expires in 1940.

El Salvador has (gains) no practical advantage from the treaty in question. The only Salvadoran product shipped to the United States in appreciable quantities is green coffee. Just at this moment, coffee is subject to no American customs duty, this treatment being for countries which have and which do not have a treaty with the United States. Thus, if the treaty of 1926 is not favorable to us, much less so is the one now projected, since it includes (grants) more facilities than those included in the table of the Zaldívar-Delcassé treaty.17 (Reference is to Table B, French Treaty.)

2. The commercial balance between El Salvador and the United States is unfavorable to El Salvador not only in recent years, but over a long period. It is desirable for the country, in defense of its currency, to impose the means within its power to obtain the equilibrium of the balance and thus defend the soundness of its currency. There must also be taken into consideration in this, that the shipments of gold to the United States are (not?) only in the field of importation, but also in many others, for example, dividends to companies, premiums for life insurance, fire insurance, etc., freight payments, service of the loan, etc.

3. In the table previously delivered, it is seen that on signing the treaty with the proposed conditions, the fiscal interests will suffer large losses, which would signify the unbalancing of the General Budget.

4. The purchases of Salvadoran coffee by the United States have shown a marked decline in recent years, as can be seen from the following table:

Year Per cent Value in dollars
1928 0.83 $2,577,701
1929 1.13 3,407,200
1930 1.19 2,501,107
1931 1.20 2,096,482
1932 0.79 1,076,983

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El Salvador has placed in force efficacious means to increase its commerce with the United States, for example, the differential tariffs, whose beneficent effect is being felt by the United States more than by any other country.

5. The Act of June 12, 193418 which amends the Tariff Act of 1930, provides that the President shall not proclaim an increase or decrease of the duties of more than 50% of the rates in force, nor shall he establish the transfer of articles subject to payment (of duties) to the list of articles of free entry and vice versa. From this it is deduced that coffee cannot be penalized in the Tariff Act. If by a special law there should be established an ordinary duty on coffee and a preferential rate on this same product, the latter to be applied to the countries with treaties, it would prevail that, without the necessity of a new pact, the low rate would obligatorily be applicable to El Salvador, since we have a treaty with the most-favored-nation clause, effective until 1940.

6. The reduction of the (tariff) rate on medicinal products, even were it by 50%, would not appreciably affect the retail sales price and consequently the consumption would not increase, but (on the contrary) it would cause a considerable loss to the fiscal interests (of the government).

7. The reduction of the rates on milk, cornstarch and hog lard cannot be accepted, since it signifies damage to national industries which are now struggling with sacrifice to survive, due to the economic depression. Perhaps the milk industry has never suffered a reduction as large as at present. The same thing can be said of hog lard. If the duties are reduced, there will consequently be increased the exportation (importation?) of such products, and the prices will be lower. The argument that there is not produced in El Salvador sufficient lard for (our) consumption, is without merit, since in recent years there has been a notable increase in production. Exactly the high prices have stimulated the producers. It is pertinent to observe that the consumer has always preferred natural, fresh lard to the industrial greases brought in packages from abroad.

8. The experience of Cuba cannot be a promising example for El Salvador, supposing, without conceding it, that with the reduction of the tariff rates, the importation will increase, and there will be recovered the customs income; the national economy would suffer, since El Salvador would have to spend more money (abroad) to acquire a larger volume of merchandise.

9. Wheat and flour.

(a) The requested reduction on flour and wheat would not increase the consumption and thus the importation. In effect, while [Page 554] the (total) general imports by weight declined by 45% from the maximum years (1928–29) to the minimum years (1931–32), the importations of flour by weight declined by 29%, in spite of the fact that the price of flour fell from $147 per ton (1000 kilograms) to $91, or by 39%.

Years Weight in tons Price Price per ton
1928–29 12,409 $1,825,000 $147.00
1931–32 8,855 811,000 91.00
29% 39%

From which it is deduced that reduction of prices, due either to the cost of the product or reduction of the customs duties, do not increase the importation, but that this is a function of the purchasing power of the people, a power which derives from the sales price of Salvadoran coffee abroad.

(b) The only country which could be considered as a rival of the United States in the importation of these products, is Canada, which by the application of the differential tariffs has seen its products subjected to a surcharge of 15%, but we must consider that due to the contracts with the flour milling companies, they may import wheat, paying the special low duty of $2.50 per hundred kilos, without any restriction as to the country of origin or differential tariffs.

(c)The granting of the requested reduction, as refers to flour alone, would occasion to the Treasury a loss of almost half a million dollars, without any compensation whatsoever.

(d) In view of the growing flour milling industry at El Salvador, it would be dangerous to the very life of these industries to compromise the future for many years, without a profound study of the situation.

10. El Salvador places much importance on the fiscal repercussion of the projected treaty. The calculation which has been made, that the loss can fluctuate between $839,394 and $1,510,909, is not exaggerated.

It cannot be overlooked that the best of the incomes of the National Budget of Receipts, is that from customs receipts; it is doubtful if a shrinkage in this Income could be replaced from any other source.

[Enclosure 2—Memorandum]

The American Legation to the Salvadoran Ministry for Finance

I. The Bases of the Trade Agreements Program

The principles of the trade agreements program19 were first promulgated and unanimously approved by the twenty-one American [Page 555] nations at Montevideo, and have received the formal approval and support of the League of Nations.

The United States believes that it, along with the rest of the world, will benefit if trade can be freed from present restrictions. It considers that the removal of tariff barriers, import quota systems, exchange limitations, etc., is bound to result in an increase of total world trade. Narrow economic nationalism has been tried and found wanting. Through the imposition of the above restrictions, it has caused the loss of 22 billions of dollars of world trade. An unfettered interchange is bound to benefit El Salvador.

The United States is not seeking for itself any narrow, individual benefits or concessions. It does not wish to damage the trade of any other country. On the contrary, it asks that any concessions granted it be generalized to all other nations.

The United States has no desire to throw the Salvadoran budget out of balance, nor to cause any loss of customs revenue.

It is believed that attempts to enforce an exactly equal balance of visible trade between each two countries has contributed to cause and deepen the depression, and to result in further stagnation of international commerce. The interchange of the world’s products is more complicated than a bilateral equality of commercial exchange. A typical example of three-way trade, benefiting El Salvador, is as follows: the United States has a favorable balance of trade with El Salvador, leaving it with a currency credit; the United States has an unfavorable balance with Germany, thus in effect transferring its credit balance to that country; Germany thus has foreign exchange with which to purchase large amounts of Salvadoran coffee. There are also four and five way interchanges, all swelling the total of international trade.

The theory of exact bilateral balances is also impracticable in that it wholly ignores invisible payments, which are frequently large enough to change the whole situation, from favorable to unfavorable, and vice versa.

The United States Government has officially stated that it is not its desire that any government with which it may negotiate a trade agreement should grant concessions calculated to deprive that government of needed revenues. It should be borne in mind that the entire trade agreements program is aimed, through reciprocal lowering of tariff and other barriers, at an increase in total world trade. The United States confidently expects, therefore, that individual reductions in duties on properly selected commodities will not result in reduced revenues. On the contrary, it is believed that in many cases a positive increase in revenues will result.

In drawing up its various lists of concessions to be asked, the Government of the United States had constantly in mind the desirability [Page 556] of selecting those articles the market for which was capable of expansion in such manner that total revenues from their importation would probably not be diminished.

It is noted that El Salvador does not consider that it can obtain from the agreement any advantage which would compensate it for the concessions which the United States desires. Considering that coffee, which represents 90% to 95% of El Salvador’s exports, enters the United States free of duty, it is obvious that the United States is not in a position to grant El Salvador further concessions of importance in the reduction of customs duties.

This does not mean, however, that El Salvador cannot expect to derive advantage from the trade agreement. The willingness of the United States to guarantee that coffee will be maintained on the free list, as far as El Salvador is concerned, during the life of the agreement, is a commitment of real value to El Salvador and to its exporters, to whom few free markets for their products remain.

More important than any immediate advantage to be derived out of the trade agreement, however, are the advantages which El Salvador will obtain from the success of the trade agreements program in general. The United States Government is convinced that if the other countries of the world will cooperate with it in making the trade agreements program a success, El Salvador will ultimately obtain advantages much broader and of far greater importance to its vital economic interests than it could obtain from any reduction the United States might grant in customs duties, were such duties in fact being applied on its principal products.

El Salvador is well aware of the growing tendency on the part of nations throughout the world to interfere with normal trade by creating arbitrary hindrances and barriers. El Salvador’s coffee trade has already been adversely affected by obstructive measures of the character suggested, placed in effect by certain European countries, formerly important markets. It is apparent that unless the tendency referred to is reversed, still further obstacles to trade may be placed, not only by those European countries, but by other countries as well, and El Salvador will be exposed to further injury and possible complete loss of other profitable markets.

In the United States today, not only do El Salvador’s principal export products enter free of duty, but they are not subjected to exchange restrictions, quotas, or other arbitrary hindrances to their free sale. In fact, the United States is almost the only large market in the world in which El Salvador’s products are allowed to enter free of duty and without restriction. It is the purpose of the Government of the United States to insure, through its trade agreements program, that this market will remain open to El Salvador and it is hoped, with [Page 557] progress on the program, that other markets now closed to El Salvador will be gradually reopened. The United States, therefore, considers that if it is successful in its program, and it has every reason to believe that it will be, since support from other Governments has already been forthcoming in generous measure, it will have secured for El Salvador advantages of greater importance than the advantages which the United States expects to derive out of whatever immediate concessions El Salvador may agree to accord it.

In summary, the Government of the United States is endeavoring through its trade agreements program, to remove artificial hindrances which constitute such a serious threat to trade throughout the world. It is evident that El Salvador, because of the vital importance to it of its export trade, is deeply concerned in the success of this program. With this in mind, and having in mind also the possible further injury to El Salvador’s trade and to its entire national economy should the tendency to erect barriers to the free exchange of goods be allowed to continue, the United States is confident that El Salvador will be anxious to cooperate to the extent it is possible for it to do so in insuring the success of the trade agreements program by making the concessions it reasonably can, in connection with the proposed trade agreement.

II. Reply to Memorandum

1. It is believed that El Salvador obtains substantial benefit from the 1926 treaty, which is but the fruit of the policy of the United States for many years: to seek and to grant no special commercial favors. That policy it will continue, through the generalization of the concessions granted in the various trade agreements.

Concretely, this policy results in the United States being the one large, free, cash market still left for Salvadoran coffee. As recently as last year, the restrictions placed by Germany on the sale of Salvadoran coffee caused local growers to wonder, not at what prices they could dispose of the crop, but whether it would be possible to place it at all. The open market of the United States saved the situation, taking 50% of the coffee shipped, for the 1934–35 crop. Competent local opinion holds that the United States will take a much larger proportion of the next crop.

The American free market, resulting from the policy outlined above, has been a life-saver to the Salvadoran coffee grower in a time of great economic stress.

2. It is believed to be much more important to El Salvador that it has a favorable total balance of visible trade, than that its balance with one country or another is favorable or unfavorable. The general problem of equal bilateral exchange, and three and four way trade, has already been discussed at length, above.

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As for the invisible items, not all of the payments are unfavorable to El Salvador. Certainly, in any case, El Salvador receives full value for its payments enumerated, in the development of local resources and industries through the investment of foreign capital, the protection given by the insurance for which it pays premiums, the modern, rapid steamship service which it obtains in return for freight payments, etc. Furthermore, it is necessary to include the tourist traffic, which brings appreciable sums to El Salvador. It is calculated that 5,680 tourists came to this country in 1934. Practically all were Americans.

3. The conclusions derived from the table can hardly be accepted, for it is felt that the method used in its preparation is faulty.

For example, in considering hog lard, the 1931–32 importations were taken, and the present tariff rate (which did not apply at that time) is applied. The income from this fictitious rate is then compared to the revenue to be obtained by applying the requested rate to the same volume of importations. This assumes that a reduced rate will not increase imports, an assumption which is contrary to worldwide experience.

The duty on hog lard was reduced to $8 per 100 kilograms on December 23, 1931, and this rate was in effect until February 24, 1932. It is pertinent to consider that, with the increase in the duty, imports fell to 952 kilograms in 1933, from which the customs receipts, at present rates, were $254.60. It is thus obvious that a decrease in the rate, as requested, could not possibly result in a loss of $44,296, as claimed in the table.

The income in 1930, with an $8 duty, was $45,955. In 1933, with the new, higher rate, the income was $254. The loss of trade and revenue due to the increased duty is evident.

The example given is important in showing that it is possible to increase tariff rates to the point of “diminishing returns”.

It can be shown that a reduction of the duty to the 1931 level, as asked, which should result in a return of trade to the 1931 level (not one of the world’s best trade years) would result in a positive gain to the Treasury of $60,000.

Another criticism of the method of computation of loss of revenue used, will be made under point 9 (wheat and flour).

By applying similar reasoning to the other items in the schedule of concessions asked, namely: applying the requested rate and assuming that trade will revive only to the 1930 level; and comparing the customs receipts with those for 1934 at present tariff rates; it can be shown that the total loss of revenue will be approximately $95,000 instead of $839,000. However, it is to be anticipated that trade will [Page 559] increase beyond 1930 levels, and a real increase in customs income could readily result.

4. (a) It must be pointed out that the table, which appears to show declining coffee exports to the United States, shows values. Coffee prices declined heavily during the years in question. The following table of quantities of coffee shipped to the United States, taken from Salvadoran official publications, points to quite another conclusion.

Year Kilograms
1928 5,859,749
1929 8,585,517
1930 8,717,118
1931 7,378,311
1932 5,469,443
1933 12,484,996
1934 12,835,278
1935 25,014,039 (for 1934–45 [35] crop year, to date, or 11 months. 50% of total coffee shipments.)

(b) Even if such a declining trade had obtained, it would not have been because of any unwillingness on the part of the United States to buy Salvadoran coffee; nor could it have resulted from any tariff, quota, exchange or other restrictive action on the part of the United States. The natural explanation is the simplest: Salvadoran coffee brings a high premium in Europe, because of its quality. The United States has not been educated to pay this premium; nor have very serious efforts been made in this direction. Thus the shift to German and Scandinavian markets, had there been any, was the simple result of higher prices offered there. Immediately that those high quotations were no longer available, the shift was back to the free American market, the United States taking all the Salvadoran coffee that was not placed elsewhere, and paying cash for it. The United States thus became the best market for Salvador’s principal export commodity.

(c) As for the final statement in paragraph 4, is it not true that the differential tariff rates were imposed to encourage El Salvador’s suppliers to purchase more Salvadoran coffee; and that the fact that the United States has benefited therefrom is a purely secondary and wholly incidental result?

5. Comment reserved until last.

6. The medicinal rates affect principally American proprietary remedies. A reduction in rates would bring lower prices and increased use, as the medicines will be placed within the purchasing power of a larger proportion of the population.

In view of the statement, in the memorandum, that a 50% reduction of duty would not result in a lowered retail price, a comparison [Page 560] has been made of four items, selected at random, handled by almost every drug store, as follows:

Product Present retail price Retail price with 50% duty reduction Percent reduction of retail price
Bicarbonate of soda ¢0.50 / lb. ¢00.35 / lb. 30%
Sal Hepatica 1.25 /bot. 0.95 /bot. 24%
Listerine 4.00 /bot. 3.20 /bot. 20%
Nujol 3.50 /bot. 2.65 /bot. 24.3%

If, due to the duty reductions, the trade in these products revives only to its 1930 level, the government will receive $7,500 more than the 1933–34 average income at present rates.

7. (a) Dried whole and skimmed milk. If the present duties were imposed to protect a local industry, it is difficult to reply to the memorandum. The question of protecting local producers, and the amount of protection to be granted, is a matter of governmental policy which is wholly outside the scope of this memorandum.

It may be of interest, however, to note that the present rates on dried skimmed milk and dried whole milk are 206% and 38%, respectively. The suggested rates would be 34% and 19%, respectively, thus still affording some protection to local milk producers, especially when freight and other charges are considered.

It is also pertinent to indicate that, even in 1930, before the tariff rate was increased from $2.50 to $30 per 100 kilograms, the total trade in these items amounted only to ¢19,370, which could hardly be a serious threat to the Salvadoran milk industry.

There is also the question of the benefit of dried milk in the diet, particularly of small children.

(b) Cornstarch is defined by the dictionary as “starch made from corn, especially a white flour used in making puddings, etc.” This is not ordinary starch (Almidón), but a preparation used for desserts. Total importations have never been large. The Salvadoran statistics appear to include corn flour as well as cornstarch, and only in 1933 did the trade exceed 2,100 kilograms in both items. The present duty is 140%, and the rate asked is 25.8%. In making this request, it was not understood that cornstarch, as the term is understood in English, is manufactured in El Salvador.

(c) Hog lard is discussed at length under item 3, above, where it was shown that there could not be, for this item, the loss of revenue of $44,296 shown in the table, as total revenue in 1933, for example, was only $254.

In making the request for the reduced duty on hog lard, the committee stated that it was its understanding that, while the Salvadoran government was encouraging the production of more and [Page 561] better quality hogs, the 400,000 animals in El Salvador are not generally of lard-producing types.

The present duty rate is from 93% to 120%, depending on the basis of valuation; and the rate asked would be 26.6%, which would appear still to grant some protection to local industry, especially if freight and other charges are considered.

In reducing the rate on hog lard to $8 (the rate now asked) on December 23, 1931, the Salvadoran government itself stated that the higher rate was contrary to the fiscal interests, that it had resulted in an increased cost of living, and that it had discouraged the importation of superior qualities of lard.

It can reasonably be shown that the requested rate on hog lard would result in the government’s receiving $60,000 more revenue, rather than a diminished income.

8. The experience of Cuba has been used only because it was the one country where a trade agreement has been in force long enough to evaluate its results. The example was used simply to prove a principle long recognized in tariff history: that tariffs can be increased to the point of “diminishing returns”, and that reduced rates result in increased importations.

The objects of the trade agreements program have been explained. It is not desired or intended to upset El Salvador’s favorable balance of trade; but rather, to revive it to previous levels, so that El Salvador would both import more and export more, its relative balance of trade remaining unaffected.

9. The question of the protection of the Salvadoran flour milling industry, and the amount of protection to be granted, is again a matter of high governmental policy which is beyond the scope of this discussion.

It may be pointed out, however, that El Salvador’s 1934 wheat imports, had they paid the full prevailing duty, would have produced $541,405 in revenue; that if all this wheat was imported by the millers (as is probable) at the special rate of $2.50 plus the internal tax of ¢4.40 (or $4.26 in all), the actual income was $262,092. The Government thus sacrificed $179,313 [sic] in income to support this industry, which is principally mechanical in operation and offers but limited work to Salvadorans.

It has been estimated that the granting of the reductions requested in the duties on wheat and flour would, if passed on to the consumer, result in a reduction of approximately 5 centavos per pound loaf of bread. This would reduce the cost of living and improve the diet of the people. The children, especially, need the calcium in American hard wheat, for bone and teeth building.

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The figures given under 9 (a) are considered to indicate exactly the opposite of that claimed, namely: to prove that the market for wheat and flour is elastic, and responsive to price changes, thus:

General importations, by weight, declined 45%. Imports of flour, influenced by a 39% price decline, fell only 29%. Had the market for flour been unresponsive to price declines, it, too, would have fallen by 45%, as did other imports. Consequently, flour has an elastic market, responsive to price declines. This market of course depends, as do all markets, on the general purchasing power, but the figures provided show that it also responds definitely to price changes.

Relative to point (c), it has been said that the drop in the consumption of flour began in 1932, when the rates were increased to $8.80 and $9. The result of this increase in rates has been to increase the price of bread to the consumer (by about 5 centavos per pound loaf), reduce the importations and bring a loss of revenue.

As stated under point three, above, this is another instance where the calculations of the possible losses of revenue are believed to be in error. In the table, the present duty rates were applied to the 1930 and 1931 importations, whereas the rate at that time was only $2. The rates now requested would give a larger customs revenue, on the same volume of imports, than was actually received during those years, as follows:

1930 1931
Imports of wheat and flour for the year, at $2/100 kg. $212,532 $206,918
Same, at requested rates, $2.50 and $3.50 371,742 361,885
Increase $159,210 $154,967

10. As regards the total loss of revenue, it has already been stated under point three that, if the reduced duties result only in the revival of trade to the 1930 levels, the revenue loss will be about $95,000, rather than the huge figure heretofore calculated. With the anticipated revival of world trade beyond 1930 levels, an increase in revenue may be expected.

Point 5 has been saved until the last. The United States does not seek to impose any treaty upon El Salvador, to force it to grant any concessions (even could it do so) nor to occasion any loss of customs revenue. The United States believes that the world has suffered immeasurable losses from the restrictions placed on world trade. It believes that El Salvador is interested, with it, in restoring trade to former levels, and that this result can only be obtained by the removal of these very tariff, exchange and quota impediments to the free movement of commerce. The United States is confident that El Salvador will see that its future, along with that of the rest of the world, is bound up in the trade agreements program; and that it will cooperate in making the program a success.

  1. Signed February 22, 1926, Foreign Relations, 1926, vol. ii, p. 940.
  2. Commercial treaty between El Salvador and France signed January 9, 1901, extended by an agreement of September 20, 1932. For texts of the treaty and the agreement, see British and Foreign State Papers, vol. xciv, p. 590, and vol. cxxxv, p. 506, respectively.
  3. 48 Stat. 943.
  4. See Department of State Conference Series No. 19: Report of the Delegates of the United States of America to the Seventh International Conference of American States, Montevideo, Uruguay, December 8–26, 1933 (Washington, 1934), p. 196.