The Secretary of State to the Minister in Yugoslavia (Lane)

No. 55

Sir: With reference to the Department’s telegram 10, May 13, 7 p.m., and to the Legation’s telegram 67, May 21, 7 p.m.,13 concerning the possibility of concluding a modus vivendi between the United States and Yugoslavia, there is enclosed herewith the new draft modus vivendi14 which you may submit to the Yugoslav Government under cover of an appropriate note of transmission.

The new draft modus vivendi, which embodies the same principles of policy as contained in the text of the draft which was proposed to the Yugoslav Government through its Minister here in December 1936, is designed to secure, for the trade between the United States and Yugoslavia, mutual equality of treatment in respect of all forms of trade control measures. The following observations may be useful in the clarification of those provisions of the new modus vivendi which are designed specifically to accomplish this objective.

Article I embodies the general most-favored-nation clause and except for the addition of the word “taxation” after the word “sale” in the seventh line, and the deletion of the phrase “Accordingly, it is understood that” at the beginning, the Article is identical with paragraph 2 of the proposed draft of December 1936. The provisions of this Article are designed primarily to assure to each country equality of treatment with third countries in the application and administration of customs duties and other charges imposed on or in connection with the importation or exportation of merchandise.

The provisions of Article II are designed to insure, as nearly as possible, the equivalent of most-favored-nation treatment with respect to the importation of goods subject to quantitative restrictions. The provisions of this Article differ in certain respects from and are somewhat more flexible than the corresponding provisions of the modus vivendi previously proposed to the Yugoslav Government.

The first section of the Article provides for a generally-recognized application of the most-favored-nation principle, in the broadest [Page 694]possible terms, to quantitative restrictions and is essentially the same as paragraph 4 of the draft of December 1936. The second section of the Article is intended to prevent quantitative restrictions from being administered by either Government as an instrument for diverting or canalizing trade at the expense of the other country and provides, at the option of the country which imposes the restriction, for two alternative methods of procedure. The first method, which is described in subparagraph (a), would, in effect, involve the imposition of a global quota on imports from all sources without any restriction on the share of this quota which may be supplied by the other country or any third country. The second method, which is provided in sub-paragraph (b), involves the allotment of shares among the various exporting countries and provides that the share allotted to the other country party to the agreement shall be equivalent to the proportion of the total importation supplied by the other country in a previous representative period. The paragraph differs from paragraph 3 of the proposed modus vivendi of December 1936 in setting forth in addition certain other factors which should also be taken into account in such allocation.

The provisions of Article III approach the problem of exchange control in a different manner from that contained in paragraph 3 of the proposed draft of December 1936, which dealt with exchange control and quotas together. Article III provides that exchange shall be available without restriction, at the most favorable rate with respect to both products and countries, in payment for all goods permitted to be imported from the other country subsequent to the effective date of the modus vivendi. Its purpose is to prevent the accumulation of blocked balances in connection with such products as are actually imported from the other country. It means that exchange control shall not be used for the purpose of controlling, directly or indirectly, the volume of goods imported from the other country. Any quantitative regulation of imports from the other country must be in accordance with the provisions of Article II. In effect, the new exchange provision transfers the full burden of insuring nondiscriminatory treatment with respect to both quantitative restrictions and exchange control measures to the quota article.

The first paragraph of Article IV is designed to insure to the other country a fair and equitable share of the market if the government of one country establishes or maintains a monopoly for the importation or sale of a particular commodity or grants exclusive privileges to an agency to import or sell a particular commodity. Its purpose is to guard against arbitrary diversion of trade by monopolies on other than purely economic grounds.

The second paragraph provides for most-favored-nation treatment with respect to government purchases generally, but does not prevent [Page 695]either Government from giving preference to its own nationals with respect to such purchases.

Your attention is called to the fact that the provisions of Article III and of the first paragraph of Article IV were included in the annex to the temporary commercial arrangement concluded between the United States and Italy on December 16, 1937, a copy of which is enclosed.

You will note that Article V contains the usual reservations with respect to the trade of the United States with its outlying possessions and with Cuba but omits any reference to possible Danubian preferences. It is assumed that the Yugoslav officials may wish to have included a reservation in respect of those commodities which are now subject to preferences accorded by Yugoslavia to Czechoslovakia, Hungary, Rumania, or Bulgaria. You are authorized to accept a provision containing such a reservation somewhat along the following lines:

The advantages now accorded or which may hereafter be accorded by the Kingdom of Yugoslavia to Czechoslovakia, Hungary, Rumania, or Bulgaria for the purpose of closer mutual economic cooperation between the Danubian countries, in respect of those commodities benefiting from special advantages now accorded by the Kingdom of Yugoslavia to such countries, shall be excepted from the provisions of this Agreement.

The above proposal is essentially the same as the Danubian preference provision contained in paragraph 4 of Article XIV of the trade agreement with Czechoslovakia.15

If the text of the new modus vivendi contains passages that are obscure to you or provisions which in your opinion should be altered, you should withhold action and consult with the Department by telegraph. Immediately upon presenting the new modus vivendi to the Yugoslav Government you should inform the Department of your action by telegram.

There are enclosed,16 for your information, a table giving the value of imports for consumption into the United States from Yugoslavia in 1936 of products with respect to which benefits of trade-agreement concessions are now being extended to Yugoslavia (Table II); a table giving the imports for consumption into the United States from Yugoslavia in 1936 of products with respect to which concessions may be granted in agreements under negotiation with Turkey, the United Kingdom, or Canada (Table III); a table summarizing the first two (Table I); and a table giving the commodities imported for consumption into the United States in 1936 of which Yugoslavia was first, [Page 696]second, third, or fourth supplier (Table IV). There is enclosed also a copy of a memorandum of conversation of May 21 with the Yugoslav Minister here,17 parts of which may be of use to you in your discussions with the Yugoslav authorities.

Very truly yours,

For the Secretary of State:
Francis B. Sayre
  1. Latter not printed.
  2. Not printed.
  3. See pp. 223 ff.
  4. Enclosed tables not printed.
  5. Not printed.