632.6231/240: Telegram
The Secretary of State to the Ambassador in Brazil (Caffery)
54. Your telegrams Nos. 116 and 117, September 4 and September 5.33 The Department has read with interest the proposed Brazilian note to Germany with regard to the extension of the German-Brazilian trade arrangement. The Department notes with gratification that the Brazilian Government will receive from the German Government assurances that no article of German manufacture destined for importation into Brazil will be subsidized by the German Government. When you discuss this with the Brazilian Government the Department believes it will be useful for you to bring out clearly the fact that this protection against subsidy as phrased in the agreement could easily be nullified by special and indirect arrangements. It therefore hopes that the Brazilian Government will make clear to the German authorities its understanding that circumventing measures will not be employed. The Department understands that the maintenance of close watch on this point will be one of the duties of the Joint Committees.
With reference to point 934 of the proposed note, the Department would welcome assurances that this article will not operate to increase [Page 343] compensation trade in a way that will dislocate trade carried on in free currencies. In case Brazilian exports to Germany should exceed the latter’s exports to Brazil and Brazil, under this article, should act to restore the balance by reducing the quotas of Brazilian export products which may be sold for verrechnung marks such action would be in consonance with the Brazilian Government’s assurance that it intends to regulate compensation trade in order “to prevent the dislocation of trade with the countries carried out in free currencies and on a basis of equality”. If, on the other hand, the measures taken to restore equilibrium were the artificial stimulation of Brazilian purchases of German goods through some action by the Brazilian Government such as lowering the exchange value of the verrechnung mark by action of the Banco do Brasil or by Government purchases or Government influencing of private purchases of German goods, such a solution would dislocate trade with free currency countries.
In case German exports to Brazil should exceed Brazilian exports to Germany, it would seem that Brazil would be in a favorable position to induce Germany to cease trading with Brazil on a compensation basis (through verrechnung marks) and abandon or lighten her exchange and quantitative restrictions on imports from Brazil since the only alternatives would apparently be for Brazil either to block payments for imports from Germany which were in excess of Brazilian exports to that country or to apply quantitative restrictions on imports from Germany in order to bring the compensation trade into balance.
Souza Costa talked with Aranha by telephone yesterday and assured him of his determination to adopt whatever measures are necessary to put into effect the assurances exchanged here. Please express to Souza Costa the Department’s appreciation of his frank and cooperative attitude.
The Department hopes within the near future to communicate suggestions with regard to the establishment of the joint committees referred to in the Brazilian note to this Government of July 15 [14].