The Ambassador in Brazil (Caffery) to the Secretary of State

No. 831

Sir: I have the honor to inform the Department that Dr. J. Barbosa Carneiro, Chief of the Commercial Section of the Foreign Office [Page 396] and Executive Director of the Federal Foreign Trade Council, informed the Embassy a few days ago that he is in receipt of a report stating that American firms are increasing exports of cotton to Germany and that this business is being conducted on the basis of compensation trade. While Dr. Barbosa Carneiro was informed that the Embassy had no information on this subject, he was reminded of the policy of the United States Government with respect to trade with Germany, which has been clearly stated in recent correspondence from the Department. He pointed out that the report was circulating in Brazil and that it was responsible for the recent increase in the number of applications for permits to resume the exportation of Brazilian cotton to Germany on a compensation mark basis. (The Department will recall that exportation of cotton to Germany on a compensation basis has been prohibited by the Brazilian Government for several months. See Embassy’s 134, June 2, 8 p.m.) Dr. Barbosa Carneiro added that he has telegraphed the Brazilian Embassy in Berlin, requesting detailed information regarding the present movement of cotton from the United States to Germany.

He then alluded to the compensation arrangement with Germany, which expired last year, but which has been extended for an indefinite period by a verbal understanding between the two countries. He feels that Brazil should negotiate a new agreement with Germany, but in his opinion the Germans will definitely refuse to accept a clause providing that no direct or indirect subsidies shall be granted, and in his opinion it will be difficult for Brazil to complete a new pact with Germany if Brazil continues to insist upon the inclusion of such a clause. Dr. Barbosa Carneiro was of course informed that this point is of special importance to our Government. He emphasized that the Germans are constantly bringing pressure to bear on the Government through their contacts in Brazil to conclude a new agreement. He stated that the Germans know the weak points of the Brazilian Government and are capitalizing on them.

Respectfully yours,

For the Ambassador:
R. M. Scotten

Counselor of Embassy

[The Brazilian-German clearing agreement of June 6, 1936, which was renewed by notes signed June 6, 1937, and thereafter extended by verbal agreement, was again renewed by notes exchanged in January 1939. The agreement was discontinued by Brazil on December 12, 1939 (632.6231/349, 392).]