The Under Secretary of State (Welles) to the German Ambassador (Dieckhoff)


The German Ambassador on June 30, acting on instructions from his Government and referring to an invitation extended him by the Under Secretary of State to discuss with him the nature of the conversations which officials of the United States Government were carrying on in Washington with the Brazilian Ambassador and the Brazilian Minister of Finance, made oral representations to the Under Secretary26 raising the question whether these conversations did not involve unwarranted and unfair interference on the part of the United States in trade relations between Germany and Brazil, The Ambassador stated that Germany during recent years had been endeavoring to rebuild its exports to Brazil, which had fallen to low levels after the [Page 334] World War, and that it had only recently succeeded in doing so and in fact in somewhat exceeding its pre-war percentage in Brazilian importations. This he said did not constitute a threat or jeopardy to American commercial interests in Brazil and the increased trade had not been derived at the expense of the United States. The Ambassador said that his Government was most heartily in accord with the principles maintained by the Government of the United States as to the necessity of unconditional most-favored-nation treatment and as to the need for the elimination of trade barriers, and that the autarchic policies now pursued by Germany were intended only to obtain for German exports the same advantages which had accrued to the exports of the United States and of other great commercial nations through the devaluation of their currencies. He concluded by saying that his Government reserved complete liberty of action to take such measures as it might find necessary in case activities of the Government of the United States should lead Brazil to limit its trade with Germany.

An oral reply was at once made to the Ambassador’s representation. It is now desired to confirm and amplify this reply.

The Ambassador has said that the German Government is in hearty accord with the principles maintained by the Government of the United States as to the necessity for most-favored-nation treatment and the removal of trade barriers. The Government of the United States does indeed attach great importance to the principle of equality of treatment in international commerce as the most satisfactory basis upon which a healthy international trade can be reconstructed as a permanent foundation for peace.

The Government of the United States has been endeavoring to promote the restoration of international trade through the immediate reduction of excessive trade barriers and has adopted as the most practical means to this end a program of negotiating bilateral trade agreements with individual countries while extending to all countries which do not discriminate against its trade the benefit of the tariff reductions and other trade advantages it grants any country (Cuba always excepted). The United States has also urged on other countries, and especially on the great commercial countries which exercise a preponderant influence on the commercial policies of the world, the adoption and active execution of similar principles and policies, and the abandonment of policies and practices which conflict with and threaten to thwart the movement for restoration and liberalization of world trade.

Unlike the policy of countries which by clearing and compensation arrangements make access to their markets depend upon the obtaining from other countries of special terms of payment which require purchase of their exports, and do not therefore permit the full and ordinary action of international competition, the commercial policy of the [Page 335] United States imposes no such requirement on the export trade of other countries and involves no economic coercion. The United States seeks equality of commercial opportunity for its trade in other countries, subject to certain reasonable and recognized exceptions. It gives other countries equality of opportunity to buy and sell in the United States, subject only to the requirement that countries which receive non-discriminatory treatment from the United States shall not discriminate against the United States, and to the historical and recognized exception in favor of Cuba. It is not a narrow policy of seeking advantage for the United States and it will in part have failed if it does not serve to promote a general increase in the volume and value of international trade from which the United States and the world will receive greater benefit than would be possible from any cumulation of special advantages under discriminatory trade régimes.

It must be manifest that such a policy is not motivated by hostility to or jealousy of the commercial expansion of any country nor does it seek unfair advantage over the trade of any country. The United States does not impute such motives to any country. It does believe, however, that certain types of commercial policies of other countries, for whatever reasons they may have been adopted, may tend to hamper and thwart its own more liberal policy and its broad objectives, and it feels fully warranted in discussing this problem with any government in whose territories it may arise and in seeking a mutually satisfactory solution.

The Government of the United States welcomes the German Government’s repeated expression of approval of the principle of most-favored-nation treatment and of the removal of trade barriers. Certain aspects of current German commercial policy would appear to make more difficult the application of these principles rather than to advance them.

German trade with most of the countries of Europe and with some in other parts of the world is governed by compensation arrangements under which the proceeds of the sale in Germany of the products of the soil or industry of the other party are required to be spent, with limited exceptions, for German goods for export to and use in the territory of the other party. With some other countries the same result is brought about without a compensation arrangement by German regulations limiting the use of the proceeds of their exports—the system of compensation marks. Restrictions on the transfer and on the use in Germany of funds payable to non-residents on indebtedness and other accounts not directly connected with current international trade have been used for the same purpose. It is argued that this is intended to obtain for German exports only the same advantages which other countries have obtained by devaluing their currencies. It is none the less clear that where the sale of the products [Page 336] of a country or the effective possession of property of its nationals can be attained only by the importation of German goods in corresponding value, equality of opportunity for exporters of other countries to compete with German exporters vanishes. With the refinements of practice devised by the German exchange control authorities for purposes of commercial policy, German compensation mark practices become in fact effective weapons for obtaining advantage [over?] competitors of non-German residence. The restrictions on the use of the bank deposits in Germany which are designated as compensation marks result in the transfer of such marks among residents of other countries at prices much lower than the official parity of the Reichsmark with gold. The highest legal adviser of the United States Government, after careful consideration of procedures of this kind as used in German trade with the United States in 1936, ruled27 that they constituted the payment or bestowal of a bounty or grant calling for the imposition of countervailing duties under the laws of the United States.

Germany is not the only country fostering exports by compensation arrangements or by permitting its currency to be sold at depreciated prices to certain non-residents for restricted uses, although it is outstanding among such countries. Its exports, however, receive one distinctive advantage, inconsistent with a régime of equal competition, through provision for massive but selective direct subsidies. In the form of voluntary self-aid, German industries subscribe annually to an export subsidy fund which is reputed to amount during the current year to 1,000,000,000 Reichsmarks. This would permit a uniform subsidy on all German exports of more than 20 percent of their value. Naturally, however, the actual direct subsidization is selective and, while the facts are not officially published, it is understood that subsidies as high as 50 percent and even 60 percent of invoice value have in some instances been paid to enable German exporters to meet competition in foreign markets.

The effect of trade methods such as have been described appears to be manifest in shifts in trade too extensive to be ascribed to any normal change in competitive conditions. Thus Brazilian statistics show the following percentages of participation of Germany in supplying Brazilian imports:

1934 Germany 14.02% United States 23.67% Others 62.31%
1935 Germany 20.44% United States 23.36% Others 56.20%
1936 Germany 23.50% United States 22.12% Others 54.38%
1st Quarter
1937 Germany 26.03% United States 21.02% Others 52.95%
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The problem which such subsidizations present to the exporters of other countries, including those of the United States, must be appreciated. By the use of subsidy procedure every field of trade, no matter how reasonable the price of the commodity offered, no matter how well established the business connection, may be disturbed by some administrative decision to subsidize a competing product sufficiently to disturb the business. Competition so directed seems to this Government to be contrary to the principle of equality to which the German Government declares itself to be attached. Furthermore, it takes the determination of trade movement out of the ordinary competitive circumstance and places it into the hands of Government officials whose calculations need not correspond to those of competitive cost. Against the possibility of competition open to such direction it would seem plain that competition of private business, dependent solely on itself, needs safeguarding. Without such safeguard both the principles embodied in the trade agreement between the United States and Brazil and the trade benefits to be expected therefrom are brought into jeopardy. In return for the trade opportunities granted to Brazil under the Agreement, American trade was pledged corresponding opportunity. Trust was placed solely in the operations of those private business calculations which have built up Brazilian-American trade in the past, to extend that trade if tariff barriers were lessened. All these expectations would be invalidated if American trade were dispossessed as a result of the use of a system of compensation procedures and governmental subsidies. The German Government surely realizes the problems created by the use of these procedures; their continued effect would be to weaken any commercial treaty arrangements based on other principles unless safeguards were taken against them; and with the weakening of these commercial treaty arrangements the underlying principles themselves will become inoperative.

There is no basis for statements, or implications that the Government of the United States has been influencing the Brazilian Government in its trade relations with Germany by threats of coercion. A trade agreement based on the principle of most-favored-nation treatment was concluded between the United States and Brazil two and a half years ago and Brazil was the first American power to join the United States in its policy of reconstructing international trade on the basis of equality of treatment. Both Governments are directing their efforts to assure that the principles underlying this Agreement shall be sustained, and that the anticipated benefits be realized in their mutual trade relations.

  1. Memorandum of conversation not printed.
  2. 38 Op. Atty. Gen. 489.