617.003/180 (Suppl.)

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

No. 270

Sir: In amplification of the Department’s telegram No. 25 of June 8, 3 p.m.,4 concerning the three-column tariff law which President Sacasa plans to send to the Nicaraguan Congress on June 11, 1935, you are authorized to inform the appropriate officials of the Nicaraguan Government that this Government would view with concern the adoption of the proposed law in view of the possibly unfavorable effects of the law on the future course of trade relations between Nicaragua and the United States. While it is not believed that the Nicaraguan Government, in drafting and proposing the enactment of the law, intended that such unfavorable effects should result, this Government deems it advisable to make its position in the matter entirely clear.

[Page 816]

The proposed law, if enacted in mandatory form, could be so construed on the basis of past trade balances between the two countries as to result in the application of the medium rather than the minimum rates to American products. According to statistics available here, Nicaragua’s trade balance with the United States was unfavorable to the former in 1934 and in each of the preceding five years, 1933 excepted. In 1934, United States purchases from Nicaragua were 68 per cent of United States sales to Nicaragua.

Application of medium rates would conflict with the commercial agreement of June 11, 1924, between Nicaragua and the United States,6 which provides for most-favored-nation treatment. It appears, however, that this agreement would probably be terminated by the proposed law either pursuant to article five of the law or by virtue of that provision in the agreement itself which stipulates that the agreement shall automatically lapse if either country is prevented by legislative action from giving effect to it.

This government would thus view with concern the enactment of legislation which, depending on the basing period employed, might immediately result in the imposition of discriminatory duties on products of the United States, or which might have this result at any time in the future. Future trade relations between the two countries would thus be governed by unpredictable and uncontrollable factors.

You may also point out that if Nicaragua discriminates against the products of countries with which it has an unfavorable balance of trade, it cannot justifiably complain if its commerce is denied equal treatment in those countries. Moreover, countries with which Nicaragua has a favorable trade balance, have ipso facto an unfavorable balance with Nicaragua, and, if they followed Nicaragua’s example and applied the same system, Nicaraguan commerce would be subject to discriminations in such countries. For example, Section 338 of the Tariff Act of 1930,7 of the United States specifically provides for action that may be taken by the President of the United States in cases involving discrimination by foreign countries against the commerce of the United States. Similar provisions are found in the laws of numerous other countries. Moreover it is the announced policy of this Government to extend the benefit of the minimum rates resulting from its trade agreements only to countries which reciprocate by extending to American commerce the benefit of their minimum rates.8

In this connection, the Department assumes that according to Article 5 of the draft of the three-column tariff law, the Franco-Nicaraguan [Page 817] modus vivendi of 1921 would be abrogated. Its abrogation would presumably result in higher duties on certain American products now enjoying the benefit of the lower rates provided for in the modus vivendi. The Department would view with concern raising of import duties by the Nicaraguan Government at a time when the two countries have agreed to negotiate a trade agreement, which is primarily designed to increase world trade by lowering tariff and trade barriers.

The Government of the United States cannot, therefore, view with indifference the enactment of a law which might inject into the hitherto satisfactory trade relations between the two countries principles which could be decidedly injurious to American commerce with Nicaragua.

Please assure the Nicaraguan Government that the foregoing observations are made in the spirit of the greatest friendliness and that this Government sincerely hopes that its trade relations with Nicaragua may be maintained in the future on the tested bases of equality of treatment and nondiscrimination which have proved most satisfactory in the past. In giving expression to this hope, the Government of the United States is motivated by the genuine belief that maintenance of such bases is to the best interests of both countries, as well as to the world as a whole.

There is enclosed a memorandum, which you may use as you see fit, describing certain general aspects of the problems created by discriminatory tariff legislation of the type which Nicaragua apparently proposes to enact.

Very truly yours,

For the Secretary of State:
Sumner Welles
[Enclosure]

Memorandum

The policy of regulating trade relations by trade balances, if generally applied, not only would promote uncertainty and discriminations but would tend to wipe out the excess of exports of each country having a favorable merchandise balance, a situation which would be particularly serious for debtor countries which must rely on an excess of merchandise exports to take care of invisible items in their balance of payments. It would tend to reduce all world trade to bilateral trade, and thus drastically reduce its volume. According to one reliable study, this reduction would amount to one third.

Such a system is inherently inequitable. Its apparent purpose would be to induce foreign countries with which Nicaragua has an adverse trade balance to buy more Nicaraguan products. Yet the fact that Nicaragua’s exports to a particular country may be very limited or even negligible may be due entirely to the lack of a demand for products of the particular kind which Nicaragua has to sell and not in the [Page 818] slightest to governmental action. In effect, such a system could work to the benefit of countries whose trade policy toward Nicaraguan commerce is illiberal but whose purchases from Nicaragua are greater than its sales owing solely to natural factors of production and demand. Trade relations between the United States and Nicaragua clearly illustrate the potential inequities of such a system. Products of principal export importance to Nicaragua are either free of duty or subject to very low duties in this country. Yet because of factors over which this Government has no direct control, American trade might be made subject to discriminatory treatment in Nicaragua, while products of other countries, by virtue of naturally favorable factors of production and demand, and possibly despite illiberal governmental measures affecting Nicaraguan products exported to the countries concerned, would enjoy preferential treatment in Nicaragua.

One of the most objectionable features of a discriminatory system of this character is its tendency to breed international friction and ill-feeling. It is the antithesis of the system based on the principle of unconditional most-favored-nation treatment. This principle was endorsed by the American Republics at Montevideo and is regarded as the best basis for the restoration of a healthy international trade. It forms the central principle of the trade agreements program of the United States.

  1. Not printed.
  2. Exchange of notes between the American Chargé in Nicaragua and the Minister for Foreign Affairs, Foreign Relations, 1924, vol. ii, pp. 514517.
  3. 46 Stat. 590, 704.
  4. See “An Act to Amend the Tariff Act of 1930” (Trade Agreements Act), June 12, 1934, 48 Stat. 943; see also Foreign Relations, 1935, vol. i, pp. 536 ff.