632.003/194: Telegram

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

69. Your 120, May 4, 5 p.m. The question has been thoroughly examined and it appears that there has been an unfortunate misapprehension in regard to the applicability of Article VII of the Brazilian-American trade agreement to the 2 per cent social welfare tax.

The Embassy is correct in assuming that Article III of the agreement exempts articles of United States origin which are enumerated [Page 305] in Schedule I from the tax. However, since the tax is in no sense an internal tax, being levied only on imports and being collected in the customs houses before the goods are released from customs custody, the provisions of Article VII of the agreement do not apply in any way to the tax in question.

This tax is in fact and legally a customs duty. With regard to customs duties and all other charges on or in connection with importation the United States bound itself only with respect to Brazilian articles enumerated in Schedule II and Brazil bound itself only with respect to articles of the United States enumerated in Schedule I. In the case of articles not enumerated in the two schedules, respectively, the two countries retain full liberty to increase customs duties or any other charge on or in connection with importation, provided only that the same duties or charges are applied to the like products of third countries. There is no legal basis, therefore, on which to rest a protest against the imposition of the tax on articles not included in Schedule I.

The Department regrets that there has been a misunderstanding in regard to this matter and appreciates the difficulty of the situation in which the Embassy may find itself as a result of that misunderstanding. Nevertheless, it is essential that it be cleared up with as little delay as possible. You are requested, therefore, to explain the Department’s views informally, in the sense of the foregoing, to the Minister for Foreign Affairs and to such other officials of the Brazilian Government as you may find it necessary or expedient to acquaint with those views.