The Secretary of State to the Ambassador in Italy (Phillips)
Washington, October 19, 1937—5 p.m.
- You should inform the Italian authorities that we are gratified with the progress thus far made in these negotiations and appreciative of the spirit of cooperation shown by the Italian Government. You should say further that this Government is prepared to cooperate to the end that the treaty may be signed and the provisions of Article VIII be brought into operation at an early date; and thereafter to begin discussions concerning the basis for a trade agreement.
- An outstanding question to be settled before treaty negotiations can be concluded or, in any case, before trade-agreement negotiations can be formally instituted, is that presented by the Italian proposal [Page 459] for broad exceptions to the most-favored-nation clause in respect of preferences to Albania and countries of the Danubian Basin. This proposal would permit preferential treatment to eight countries representing a considerable part of the territory of Europe with no limit whatsoever on the products which could be affected or on the extent of the disadvantage to which competing American products might be subjected in the Italian market. It is understood that several of the countries covered by the proposed exception are not now receiving preferential treatment in Italy. Thus, under a treaty which would require the United States to continue to extend to Italy duty reductions under existing and future trade agreements, with the sole exception of the one with Cuba, American trade might be subjected to new competitive handicaps in the Italian market of very considerable importance. In view of these considerations and of the importance which this Government attaches to the most-favored-nation clause as a basic principle of commercial policy, the Italian authorities will doubtless fully appreciate the difficulties presented by their proposal.
- It is not our intention to object to the granting of all preferences of the kind in question, but we feel that the products on which, and the countries to which such preferences may be granted in derogation of the most-favored-nation clause should be specified, and that the character and degree of preference accorded on these products should be agreed upon and stated. In the case of products of any considerable interest to the United States, the degree of preference should not be such as to exclude the American products from the Italian market nor to prevent them from participating substantially therein. Our several requests for information as to the preferences now granted were made in order to facilitate the formulation of proposals along the lines above indicated. You should advise the Italian authorities in this sense and suggest that in lieu of providing the information heretofore requested, they may wish to submit, as a basis for discussion, a list only of the products on which they desire to grant preferential treatment, indicating for each product the nature and amount of the proposed preference and the country or countries to which it would be granted. You may say that if such a list could be submitted in the near future, it might be possible to reach agreement on the provision to be included on this subject in the treaty now under negotiation in time to permit its signature before the old treaty expires.
- In the same spirit of accommodation which has characterized the negotiations thus far we do not, however, wish to take any position which would delay the conclusion of the treaty unduly and are ready to adopt any procedure, consistent with attaining a satisfactory adjustment of the matter above discussed, which will facilitate the early conclusion of the treaty. Accordingly, if it appears that the [Page 460] negotiations in respect of preferences cannot be completed within the time indicated, we would be prepared to consider including in the treaty suitable provisions of a temporary character and to leave the final disposition of the Danubian preference problem for settlement in connection with subsequent trade-agreement negotiations. If it should be necessary to adopt this procedure, the treaty might provide that, as a temporary measure pending the negotiation of a trade agreement or other suitable arrangement, this Government would not invoke the provisions of Article VIII in respect of customs tariff preferences now granted to specified countries in the Danubian area. However, it would be necessary in order to determine whether such an arrangement would be feasible to have the information previously requested regarding the preferences now accorded. The information is desired also for possible use in connection with obtaining Senate approval of the treaty. Our definitive treaties are not ratified except upon the advice and consent of the Senate. The Senate accords such treaties very close scrutiny and should the Executive be unable to supply full information, he may be subjected to embarrassment and the treaty may fail to receive Senate approval.
- If the plan under 4 above were adopted, we would be prepared after the treaty has been concluded, to enter into confidential discussions embracing the subject of Danubian preferences as a preliminary to the initiation of trade agreement negotiations. However, in any event, it would be necessary to find a satisfactory solution of the preference problem before trade agreement negotiations could be formally instituted.
- For your information and appropriate use, the word “embracing” in the preceding paragraph is used advisedly. In any discussions you may have with the Italian authorities, you should make it clear that we are not, of course, committing ourselves to proceed with definitive trade agreement negotiations before the general bases have been explored and we are sure that the negotiations would not break down following announcement on other grounds than those discussed in this cable. If it seems desirable you may orally cite as an example that prior to announcement of trade agreement negotiations, we would need to arrive at an understanding that Italy would not have as one of its objectives the alteration of the balance of trade, but would agree that any agreement should result in a roughly equivalent expansion of trade in both directions.
- Department wishes to be assured that its understanding and the understanding of the Italian Government of the main provisions of Article VIII is identical. Will you therefore at a suitable point in the discussion ask the Italian authorities orally to confirm the Department’s understanding that the provisions of Article VIII such [Page 461] as the obligation to allocate proportional quotas to the United States will apply to Italy’s total imports of the commodities concerned, including those from countries with which it may have special trade arrangements such as compensation and clearing agreements (leaving out of account the limited Danubian exceptions which are specially discussed), and that any adjustments necessary to bring these arrangements into conformity with Article VIII will be made.