The Chargé in Latvia (Packer) to the Secretary of State

No. 272

Sir: With reference to the Department’s telegraphic instruction No. 52 of October 5 [1], 1936, requesting a report on the effect of the Latvian devaluation on Latvian-American trade, I have the honor to submit herewith a memorandum dealing with this subject, prepared by Mr. George M. Abbott, Third Secretary of Legation. In accordance with the Department’s instructions, a number of telegrams and despatches have been already submitted to the Department dealing with the current developments resulting from the devaluation of the lat.14

The enclosed memorandum carefully analyzes the several basic and temporary factors at present affecting Latvian-American trade. The conclusions reached are that the immediate prospect is for an increase in the volume of such trade, particularly with respect to Latvian exports to the United States; and that it is impracticable to state what may be the permanent effects of the devaluation upon such trade. What those effects may be would seem to depend upon the extent to which a revision may ensue in Latvian foreign trade policy, which is at present based upon bilateral balancing of trade with each individual country. There have already been certain tariff reductions and a very limited relaxation of the quota and foreign exchange regulations, and some further moderation of trade control measures is possible, but it is believed that Latvia cannot return to an unrestricted foreign trade unless its two main customers, Great Britain and Germany, do so.

Respectfully yours,

E. L. Packer
[Page 386]

Memorandum by the Third Secretary of Legation in Latvia (Abbott)

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

VI. Effect of the Devaluation on Latvian-American Trade

(a) General Situation

The remarks made in the previous section15 regarding the general effect of the devaluation of the lat on Latvian foreign trade applies in large part to Latvian-American trade. There are, however, certain special factors which must be taken into consideration.

Practically all Latvian exports to the United States since the end of 1934, have been indirectly subsidized through the “export valuta” system. Moreover, with respect to the marketing of butter and rye, two of the most important export items to the United States in recent times, Government monopolies exist which export surplus supplies regardless of the price received. It is therefore believed that the stimulation of Latvian exports to the United States which might normally be expected to result from the devaluation of the lat will be largely neutralized by these special factors.

With regard to imports from the United States, these have already been so controlled and restricted that it is not thought that the devaluation of the lat in itself will have much effect on the volume of Latvian purchases from the United States.

(b) Possibility of Change in Latvian Foreign Trade Policy

Since in ordinary circumstances, the balance of trade between the United States and Latvia will be considerably in favor of the United States, it is believed that the all-important question to be considered in analyzing the effects of the devaluation of the lat on Latvian-American trade is whether or not the devaluation will be followed by a change in the present Latvian foreign trade policy which is based on the principle of bilaterally balanced trade. This policy is being effected through clearing agreements where possible, and otherwise through a system of import licenses, import quotas and foreign exchange restrictions which give the Government complete control over the importer, the goods to be imported, the country of origin and the method of payment. The Government moreover directly controls a considerable share of the country’s foreign trade through the export and import monopolies held by Government organizations. For a more complete description of Latvian trade policy and the effect it has had on American trade see the Legation’s despatch No. 645 of March 14, 1935, “American Trade in Latvia”,16 and subsequent despatches on the same subject.

[Page 387]

There are many indications that the Latvian Government would like to seize the present opportunity to adopt a more liberal policy and some steps have already been taken in this direction.

Minister of Finance Ekis, in his radio speech of September 28, 1936 (see enclosure No. 1 to this memorandum),17 expressed the hope that the stabilization of the foreign exchange situation as a result of the agreement between France, the United States and Great Britain, would be followed by a return to freer world trade conditions. In his conversation with Mr. Cole on the same day,18 Mr. Ekis expressed the hope that certain of the Government measures for the control of foreign trade and foreign exchange could be gradually eliminated. President Ulmanis expressed himself even more freely in his conversation with Minister Lane on October 5, 1936.18 The President said that he, Mr. Ekis and the other members of the Cabinet, were entirely in sympathy with the policy of abolishing trade restrictions and that he hoped within a few weeks it would be possible gradually to relax the present restrictions.

The tariff reductions effected since the devaluation of the lat will of course further imports, or rather partially counterbalance the unfavorable effect of the devaluation of the lat, but it must be kept in mind that these tariff reductions were made not for the purpose of encouraging imports or for removing obstructions to foreign trade, but to prevent an increase in price of certain essential commodities. This was frankly admitted by Foreign Minister Munters in a conversation with Minister Lane on October 23, 1936,18 and by Finance Minister Ekis in his official press statement on October 20,17 following the first tariff reduction.

In connection with the tariff reductions on October 21, the Latvian Government also removed certain commodities from the quota and foreign exchange restrictions, and certain others from foreign exchange restrictions only. The commodities affected, however, are of relatively little importance, and it is believed that this measure was taken mainly as a gesture and an indication of Latvia’s willingness to cooperate with the great commercial powers in efforts to remove trade barriers.

In spite of these indications of a desire to remove trade restrictions, it is doubtful if any worthwhile steps in this direction on the part of the Latvian Government can be expected in the near future.

In his official statement on October 20, 1936, Minister of Finance Ekis, in referring to the removal of the quota and foreign exchange restrictions on certain articles, pointed out that any further steps, in [Page 388] this direction would depend on the action of other countries in removing restrictions on the import of Lavian products.

The Legation has heard from two well informed sources* that a difference of opinion exists within the Latvian Government regarding its future trade policy. One group, which is believed to include President Ulmanis and Mr. A. Berzins, President of the Latvian Chamber of Commerce and Industry and of the Latvian Credit Bank, is understood to be in favor of immediate relaxation in trade restrictions, especially the import license requirements, foreign exchange restrictions, and clearing agreements. The other group, led by Minister of Finance Ekis, wishes to maintain in operation the system of laws and regulations whereby the Government is in a position to control absolutely the movement of foreign trade, and believes that Latvian trade restrictions can only be removed after the leading commercial powers, primarily Great Britain, have returned to a policy of unrestricted trade. Minister Ekis’ views appear to be in the ascendant at the present time. This is indicated by the fact that Latvia has not taken the opportunity to let its various clearing agreements lapse, but has just concluded special arrangements to adapt the Swedish and Lithuanian agreements to the new conditions and is negotiating with Germany and Estonia.

It is not believed that Latvia will make any decision regarding its future foreign trade policy until the conclusion of the negotiation with Great Britain regarding the revision of the British-Latvian trade agreement of 1934,19 which expires December 31, 1936. It may be pointed out that it was largely Great Britain’s insistence that Latvia take steps to increase its imports from Great Britain which was instrumental in causing Latvia to adopt the policy of bilaterally balanced trade with consequent restriction of American imports.

(c) Immediate Prospects for Latvian-American Trade

Although any permanent change in the status of Latvian-American trade can only follow a change in Latvian foreign trade policy, which in turn, as explained above, is believed to be largely dependent on a change in British policy, the immediate prospects for American trade are likely to be affected by a number of temporary conditions partly connected with the devaluation of the lat but partly entirely independent therefrom.

During the first nine months of 1936, Latvia had a favorable balance of trade for the first time in any period of such length in any year, except 1932, since the establishment of the country. This caused [Page 389] the reserves of foreign exchange held by the Bank of Latvia to increase rapidly and as a result the Foreign Exchange Commission has in recent months been more lenient in granting import permits. Moreover, the stoppage of imports from Germany will undoubtedly result in a temporary diversion of a certain amount of business to American exporters. Thus the immediate prospect is for an increase in imports from the United States.

Latvian exports to the United States have been relatively large in the last year and a half, and may well increase still more during the next six months. It is not believed, however, that this is a permanent development, since the chief commodities involved—grain, butter, and, more recently, clover seed—are items which in ordinary circumstances would not be imported by the United States in any considerable quantity, but for which a demand exists at the present time because of the drought during the past summer. Moreover, the large Latvian exports of rye were only possible because of an extraordinarily good crop here in 1935 and shipments have already stopped, following the subnormal crop this year.

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

G[eorge] M. A[bbott]

[There was no change in the general status of trade relations between the United States and Latvia prior to the outbreak of war in Europe in 1939. No further representations were made with respect to alleged trade discriminations except such efforts as the American Legation could exert locally to facilitate American exports.]

  1. Not printed.
  2. Not printed.
  3. Foreign Relations, 1935, vol. ii, p. 552.
  4. Not printed.
  5. Memorandum of conversation not printed.
  6. Memorandum of conversation not printed.
  7. Memorandum of conversation not printed.
  8. Not printed.
  9. Mr. Andre Kampe, Chief of the Juridical Section of the Ministry for Foreign Affairs; and Mr. Alberts Zalts, Secretary of the Latvian Chamber of Commerce and Industry. [Footnote in the original.]
  10. Commercial Agreement with Protocol between Great Britain and Latvia, signed July 17, 1934, League of Nations Treaty Series, vol. cliv, p. 26.