632.6231/150
The Secretary of State to the Chargé in Brazil (Scotten)
Sir: The Department acknowledges the receipt of your telegram No. 37, of April 23, noon, reporting that the Acting Minister of Foreign Affairs has asked the views of this Government with respect to the renewal of the Brazilian-German Compensation Arrangement.
Please say to the Acting Minister for Foreign Affairs that this Government appreciates his request for its views in connection with the renewal of the Brazilian-German Compensation Agreement. This Government believes the cause of liberal commercial policy which both Governments desire to promote is greatly strengthened by such consultation and cooperation.
At the outset this Government desires again to emphasize that it does not seek special protection for American exports from any ordinary competition. The trade agreement between the United States and Brazil is predicated upon and depends for its full validity upon the conduct of trade with all countries on regular lines of economic interchange. The United States in no way wishes to seek a limitation of German-Brazilian trade so long as it is based on these principles and does not subject the trade of other countries such as the United States to exceptional and uneconomic competition. On the contrary, it welcomes the expansion of Brazilian commerce with other countries on a sound economic basis and accordingly hopes that Brazil will endeavor to conclude a trade agreement with Germany based on the liberal principles which Brazil and this Government desire to pursue.
This Government has from time to time in recent months brought to the attention of the Brazilian Government the competitive disadvantages to which American trade is subjected by the type of compensation arrangement that has been in force between Brazil and Germany. It has forced a displacement of the trade of the United States and other countries in Brazil, placing at a disadvantage those countries which have arranged their trade relations with Brazil on liberal lines. This result, which tends to follow from the use of blocked currencies which stimulates trade diversion, has been greatly [Page 324] accentuated by the arbitrary system employed by Germany with respect to its exports which disorganizes and renders almost completely uncertain the competition with which American exporters find themselves faced.
As a result of conversations held between officers of the two Governments in Rio in December 1936, the United States Government felt that it had reason to hope that the Brazilian Government felt that its own best interests would be served by the elimination of the artificial and illiberal elements in its trade relations with Germany.
The forthcoming negotiations offer the opportunity of establishing trade relations with Germany along the sound and advantageous lines of liberal policy which have not yet been realized.
By the liberal customs treatment accorded to Brazilian products, Brazil has been enabled to maintain a large and needed export balance with the steadily expanding American market. If, however, American trade continues to be displaced by special and compensated trade, it is plain that the trade agreement with Brazil, assuring the continuance of this liberal treatment, will incur continued criticism in the United States.
The United States Government has taken action which has resulted in the elimination of these arbitrary elements in its trade with Germany. On June 4, 1936, the Treasury Department of this Government held that export bounties or grants were being paid by the German Government on certain articles of export and that importations of such articles in this country were therefore subject to the countervailing duties prescribed in Section 303 of the Tariff Act of 1930.17
As a result of this act the German Government agreed that after August 2, 1936,18 it would take measures to insure that no scrip or bond procedure would be allowed, no public or private bounty or subsidy would be paid, and that the use of no German currency other than free gold exchange marks or inland marks would be permitted in connection with direct or indirect exports of German merchandise to the United States.
Recognizing that when normal exchange facilities are restricted there may be some justification for private barter transactions, the position of the Treasury Department above cited has been held not to apply to certain types of such transactions carried through directly by the original shipper of American products to Germany provided no subsidy or price discount is allowed upon the German exports.
[Page 325]It is to be noted that Germany does not apply the principle of compensation and does not use blocked marks in its trade with Panama, Cuba, the Philippine Islands, China, Siam, Egypt, the Sudan, British India, and the Straits Settlements.
The fact that in its trade with this and other countries Germany has made exceptions to its regime of compensation trade through the use of blocked marks in payment for German imports and to its practice of paying export bounties leads this Government to make the suggestion that, in place of the present arrangement between Germany and Brazil, there be concluded a trade agreement on liberal lines, providing for merchandise payments in free currencies including reciprocal reductions of tariffs and quantitative restrictions, and especially providing for the elimination of blocked mark and subsidy procedures. This Government understands that the reason invoked for Germany’s policy of compensation trade is the lack of foreign exchange with which to make needed purchases abroad. It would seem that this situation does not obtain as regards commerce between Brazil and Germany since quite apart from such gains as may be due to the system of direct export subsidies there appears to be a regular and apparently substantial demand for German products in Brazil.
It is recognized that the Brazilian Government would probably desire to supplement such an agreement with specific undertakings by Germany as to the treatment to be accorded to Brazilian goods under quota and exchange arrangements if it proved impossible to secure an agreement from Germany that no exchange or quantitative restrictions would be imposed on imports from Brazil. In view of the balance of trade between the two countries, this should not prove difficult to obtain.
Further, it is felt that both in its own permanent trade interests and in behalf of the maintenance of equitable competitive conditions in Brazil for the trade of all countries, the Brazilian Government should in such a trade agreement seek to discourage subsidized imports, particularly in those lines which are customarily supplied to Brazil by other countries. One method of accomplishing this would be to obtain, as did the United States for its imports, a promise by Germany not to employ its various subsidy procedures on exports to Brazil. Another method would be the imposition of additional duties on subsidized goods in amounts sufficient to offset the subsidies paid or bestowed. Restrictions upon subsidized imports do not prevent private compensation arrangements upon such terms as may be mutually satisfactory but they do assure that there will be less arbitrary interference by governments with the terms of individual trade transactions [Page 326] and that international trade will tend to move more in accord with the lines of natural economic advantage.
Such a trade agreement including reciprocal reductions of tariff barriers tending to expand trade between the two countries would, in the opinion of this Government, not only be of advantage to both Germany and Brazil, but of decisive effect in the efforts being made to improve international trade and relations.
You may leave with the Acting Minister of Foreign Affairs an aide-mémoire of the preceding observations with respect to the renewal of the Brazilian-German Agreement.
Very truly yours,
- 46 Stat. 590, 687.↩
- See Foreign Relations, 1936, vol. ii, pp. 210 ff.↩