The Minister in Ecuador (Gonzalez) to the Secretary of State

No. 225

Sir: I have the honor to acknowledge the receipt of the Department’s confidential instruction No. 84 of December 24, 1935,2 with which was transmitted a copy of the note addressed to the Ecuadorean Legation in Washington presenting a draft of a modus vivendi which would establish unconditional most-favored-nation treatment in the commerce between Ecuador and the United States. The primary purpose of the proposed agreement is to remove the discrimination against American commerce which has arisen as a result of the Ecuadorean-French modus vivendi of July 12, 1935.3 However, in considering the efficacy of the suggested arrangement, the Department must now also take into consideration the Convention recently concluded between Germany and Ecuador3a which provides for the same reductions in import duties accorded to France, as well as other advantages (see despatch No. 224 of January 10, 19364). In view of the latter agreement I deem it desirable to examine the suggested American-Ecuadorean modus vivendi in the light of existing circumstances.

In the first place, Article 5 of Decree No. 1 of January 8, 1935, (Registro Oficial, No. 108, January 12, 1935), must be taken into consideration. This provides that in order to apply the preferential tariff to existing commercial treaties, it will not be sufficient that the latter contains the most-favored-nation clause. Rather the decree contemplates that the existing treaties will be amplified by extending specific customs advantages to Ecuador which will be at least equivalent to those granted by Ecuador. After reciting the advantages already conceded by the United States to Ecuador, as outlined in the [Page 485] third paragraph of the Department’s instruction under acknowledgement, it should not be difficult to convince the authorities that Ecuador is now obtaining from the United States advantages at least as great as it would accord under the proposed agreement. Moreover, the present Government has ample authority to interpret them in that sense, but it would appear essential to make a statement to that effect in the proposed agreement.

The proposed agreement would remove the present discrimination, in so far as concerns France, by obtaining that the import duties imposed by Ecuador on all articles originating in the United States will not be greater than those imposed on similar articles imported from France. However, the French-Ecuadorean modus vivendi goes much further than this in that the reduction of thirty percent in customs duties is accorded on every article imported from France falling within the preferential tariff. Our proposed agreement would obtain this reduction only with respect to those American articles similar to the French ones. Therefore, certain French articles not competing with American merchandise but still coming within the preferential tariff, will obtain the corresponding reduction, whereas American articles of export to Ecuador falling within the preferential tariff but of which a similar article is not imported from France, will not enjoy the reduction provided for.

The Department undoubtedly realized that the proposed measure would not obtain privileges identical with those now enjoyed by France and that it was intended simply to restore equality of treatment as concerns those articles originating in the United States and competing directly with similar French articles.

It is clear from the Department’s Press Release of April 1, 1935,5 relative to our policy on the generalization of tariff concessions, that the United States neither asks nor accords preferential discriminatory treatment—it seeks only that a foreign country treat American commerce no worse than it treats the commerce of any third country and it, in turn, accords equality of treatment to the commerce of foreign countries. The question therefore arises whether, should we endeavor to obtain the thirty percent reduction upon all articles originating in the United States and falling within the preferential tariff, we would be seeking a preferential discriminatory treatment. I do not consider that we could necessarily be accused of doing so since if we obtained this concession we would enjoy a treatment no more favorable than that already accorded to French and German exports to this country. However, it is questionable whether it would be worth while to seek this particular advantage. In most cases the articles specified in the preferential tariff, with the exception of automobiles and a few [Page 486] other articles, would in all probability be imported from either France or Germany and we would thus obtain by virtue of our agreement the treatment sought. Moreover, we would not wish, nor can we afford, to adopt the policy which France has instituted in its commercial relations with those countries of South America enjoying a favorable trade balance as a result of being the source of supply of raw materials. The Department is aware that in such cases France has not hesitated to impose its demands under the threat of closing its markets. Under the circumstances these countries have found themselves in the position where they must either accede or run the risk of losing the French market. In fact, it has not been a choice on their part; it has been simply necessity. In considering the problem from this point of view I feel that should we insist on the general thirty percent reduction we would place ourselves in the same position as France. Of course, it would be somewhat different in the sense that we would take the measure solely to protect our interests and to endeavor to re-establish equality of treatment for American exports. The point, however, appears to be too finely drawn and in the long run it might work against our best interests. Under the circumstances it may be more expedient if we limit our demands to the points covered in the proposed modus vivendi. However, I feel that the occasion should not be allowed to pass without our pointing out to the appropriate authorities that the more advantageous concession accorded to France has not escaped our notice and that we expect that Ecuador will take the steps necessary to restore equality of treatment.

With regard to the German-Ecuadorean modus vivendi the situation is somewhat more complex in view of the provision made therein for the use of the “Aski” mark as the unit for determining the value of German exports to this country. In my despatch No. 224 of January 10, 1936, I have pointed out that the employment of this monetary unit will permit a saving to the importers of German-goods of approximately twenty-two percent on Ecuadorean consular fees and an equal percentage on ad valorem duties. In products so closely competitive as are German exports with those of the United States, this difference will be very appreciable and I consider that we should endeavor to remove this discrimination immediately. In this connection I venture to point out a possible method of counteracting this ingenious scheme to increase German exports to this country, principally at the expense of American exports. Article 2 of the proposed agreement provides that “Accordingly, it is understood that …with respect to the method of levying such duties or charges…any advantage, favor, privilege, or immunity which has been or may hereafter be granted by the United States of America or the Republic of [Page 487] Ecuador to any article originating in or destined for any third country shall be accorded immediately and unconditionally to the like article originating in or destined for the Republic of Ecuador or the United States of America, respectively”. I believe that this provision could be interpreted and applied so as to accord to American exports the same advantage which Germany has obtained by the use of the “Aski” mark monetary unit. For the information of the Department I would add that the Consulate General has learned from a confidential source that instructions have been received by the Customhouse at Guayaquil that all dollar values of imports from Germany should be converted at the “Aski” mark rate of 3.15 sucres instead of the Reichsmark rate of 4.02 sucres. I perceive no reason why a similar instruction could not be issued for a corresponding reduction in the value of imports from the United States for consular and customs purposes. However, it is quite obvious that such an understanding should be clearly established in an exchange of notes upon the conclusion of the proposed agreement.

Another point which might be dealt with advantageously in the proposed agreement is the question of national treatment. The situation at present existing in Ecuador is anomalous. The Ecuadorean Constitution grants national treatment to foreigners, but this Constitution has been suspended in so far as it conflicts with the policies of the Administration. Therefore, should the Government see fit, it can adopt a measure contrary to the guarantee of national treatment contained in the fundamental document. An example of this attitude occurred as recently as December 31, 1935, when a tax law was enacted against foreign companies providing an impost of one per mil on their working capital. The subsequent cancellation of this measure (see my despatch No. 226 of January 10, 19367) was due to the fact that Mr. Eduardo Salazar, the Financial Counselor of the Ecuadorean Legation in Washington, who is here in Quito, was able to convince the authorities of the inexpediency of the measure.

In regard to the negotiation of a modus vivendi or a definitive commercial treaty with Ecuador, it should be pointed out that the present Ecuadorean Government, and particularly the Foreign Minister, is very favorably disposed to meet the suggestions of the American Government. In this connection I consider relevant the remarks of the Minister for Foreign Affairs concerning the Japanese Delegation which is about to visit this country. He stated that he has no illusions whatever concerning Japanese commerce with Ecuador inasmuch as he considers the quality of Japanese merchandise very inferior and that in particular it is unnatural for Ecuador to establish strong commercial bonds with the Far East. He feels that commercial relations [Page 488] with the United States should be improved and strengthened and that as long as he is Foreign Minister, Japan can expect to receive no great advantage.

Respectfully yours,

Antonio C. Gonzalez
  1. Ibid., p. 512.
  2. Signed July 12, 1935; for Spanish text, see Ecuador, Registro Oflcial, June 9, 1936, p. 348.
  3. Effected by exchange of notes dated December 12 and 17, 1935; for Spanish texts, see Ecuador, Registro Oflcial, June 9, 1936, p. 324.
  4. Not printed.
  5. Foreign Relations, 1935, vol. i, p. 536.
  6. Not printed.