632.6231/66: Telegram

The Ambassador in Brazil ( Gibson ) to the Secretary of State

147. After handing me the memorandum transmitted in my 146, June 6, 7 p.m., Macedo Soares told me that on more careful examination it had proved to be impossible to find any method for reconciling in the form of even a temporary agreement the needs of the German system of directed economy and the Brazilian system of free commerce and that consequently the idea of the provisional German-Brazilian trade agreement had been abandoned.

He stated that two steps would be taken in the near future:

1. The Brazilian Ambassador in Germany will address a note to the German Government stating that the Brazilian Government will permit purchases for compensation marks of Brazilian cotton to a maximum amount of 62,000 tons staggered over a 12 months period. The Brazilian action is unilateral and equivalent to the placing of a Brazilan export quota on cotton in exchange for compensation marks and makes it clear that any purchases above this amount must be paid for in currency of international acceptance. Once this is done Macedo anticipates that the German Government will announce import quotas on various Brazilian products.

Inasmuch as the Germans bought 82,000 tons of cotton last year Macedo believes that to meet their needs they will be obliged to buy at least that amount this year and to pay for the surplus in international currency.

2. As the Brazilian-German trade treaty has been denounced and expires on June 30th it is necessary to take steps to maintain most-favored-nation treatment for both countries; consequently there will be an exchange of notes stating that each country recognizes to the other the right to most-favored-nation treatment pending the conclusion of a definite commercial treaty. Macedo states that he can foresee no possibility of concluding a final treaty so long as Germany continues under the compensation system and that once most-favored-nation treatment is assured it will be necessary to carry on by dint of expedients, temporary arrangements, et cetera.

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Macedo states that in apprising the German Chargé d’Affaires of the difficulties in concluding a trade agreement he made a verbal communication to him to the effect that Germany must keep within normal bounds her exports to Brazil of certain products normally acquired by Brazil from countries dealing in exchange of international acceptance—which he said was equivalent to saying the United States. He informed the Chargé d’Affaires that if Germany disregarded this warning and persisted seeking unduly to enlarge her sales of motor cars, machinery, et cetera, the Brazilian Government would be obliged to “take steps”. He added to me that the Brazilian Government proposed to make effective its objections to having the market flooded with German products to the detriment of normal commerce with the United States.