611.2531/312a
The Acting Secretary of State to the Ambassador in Chile ( Armour )
Sir: Reference is made to preliminary discussions which have been proceeding for several months on the question of an exchange [Page 451] article for use in a possible trade agreement between the United States and Chile, and in particular to your despatch no. 237 of August 31, 1938 enclosing a letter and memorandum from the Chilean Under Secretary of Commerce on trade and exchange difficulties between his country and the United States. The Department has also received a despatch from the Embassy at London, dated August 24, 1938, as well as your despatch no. 247 of September 7, 1938,47 on the question of an exchange article in an Anglo-Chilean commercial agreement.
As you are aware, the Department has for some time been giving close study to the question of an exchange article for Chile, not only in connection with a possible trade agreement with that country, but also in relation to the article on the same subject which might be included in future agreements with certain other countries. Closely related also, and more fundamental, has been the question of this Government’s basic position with respect to exchange control measures, trade carried on under clearing agreements, and special currencies. This study has now been completed.
On the basis of the study, a proposal on exchange control has been made in the form of a draft article for use in a possible trade agreement with Chile. There is enclosed herewith, for presentation to the Chilean officials, a copy of this proposal which should be substituted for reference no. 11 of the “standard” general provisions enclosed with the Department’s instruction no. 296 of January 5, 1938. In drafting the proposal, this Government has taken fully into account and has given the most sympathetic consideration to the position of the Chilean Government set forth in the memorandum48 enclosed with your despatch no. 237 referred to above, particularly the contention that exchange difficulties in Chile are the result of forces beyond the control of that Government, and that the measures that have been adopted to meet those difficulties, to the extent that they result in situations unfavorable to American commerce, represent merely that Government’s effort to protect the economy of the country in view of the types of trading methods which have been forced upon Chile by certain European nations. It is believed that the enclosed proposal is better adapted to the Chilean situation than is reference no. 11 of the “standard” general provisions.
The enclosed proposal deals with both allocations and rates of exchange in respect of imports from the other country and provides generally for fair and equitable exchange treatment for the nationals and commerce of the other country. This general pledge covers, therefore, treatment with respect to remittances on investments and other non-commercial items, as well as for trade transactions.
[Page 452]Sub-paragraph (a) provides for most-favored-nation treatment, on a like article basis, with respect to any prohibitions, restrictions, conditions, delays, taxes or surcharges which may be imposed in connection with payments for imports. The words “Without prejudice to the provisions of sub-paragraph (c) of this Article” have been included in sub-paragraph (a) for the purpose of removing any possibility of conflict with the provisions of sub-paragraph (c), which covers any system of exchange allocations by countries or by articles. To illustrate, if a system of exchange allocations by countries were to be established by either Government, thus involving the provisions of sub-paragraph (c), a fair share would have to be set aside to cover imports from the other country. It might happen, however, that imports from such other country had been so large as to result in demands for an amount of exchange greater than that to which imports from that country would be entitled by the proportional system provided for in sub-paragraph (c). At the same time, imports from a third country might not have been so large as to result in the exhaustion of its exchange quota, and a situation might result whereby exchange to pay for imports of a certain article would be granted for imports of that article from the third country, while imports of the like article from the other country party to the Agreement were being denied exchange on the grounds that its total exchange quota under (c) had been exhausted. In such a case, if the words quoted above were omitted, the question would arise whether the provisions of sub-paragraph (a) or those of sub-paragraph (c) should apply. By including those words, this difficulty would not arise, as the provisions of subparagraph (c) would then clearly be applicable to the situation.
In addition to the foregoing explanations of our interpretation of sub-paragraph (a) it should be pointed out to the Chilean officials that in the event that a restriction, condition or prohibition were imposed upon or in connection with payments for imports of an article or articles from the United States, a similar restriction, condition or prohibition would be simultaneously imposed upon or in connection with payments for imports of the like or similar article or articles from all other countries, including countries from which the article or articles might be imported on a compensation basis or against payment effected by clearing.
It will be noted that sub-paragraph (b) relates only to rates of exchange controlled by either Government. This means that this Government would be prepared to accept the existing exchange system in Chile, under which, because of factors of supply and demand, the exchange rates for certain currencies which are not controlled by the Chilean Government, may prove more, or less, favorable for imports paid for in such currencies than for imports to be covered by dollar [Page 453] exchange at the controlled rate, that is, at present, the fixed export draft rate. In view of the Chilean Government’s declarations regarding the abolition of exchange control measures affecting the transfer of payments for articles the growth, produce or manufacture of the United States, it should be pointed out to the Chilean authorities that, pending the abolition of such measures and with particular reference to the assurances in paragraph 3, sub-paragraph (b) of the modus vivendi of January 6, 1938, this Government would expect the Chilean Government to continue to “avoid exchange control measures involving the use of exchange at rates higher than those which would be set by the free supply and demand of the market”. We interpret these assurances as implying that the Chilean Government intends to avoid the application of any differential rate, such as the former “lavadero” rate, to the importation of certain products from the United States.
Sub-paragraph (c) of the enclosed proposal is intended to afford protection for the other country’s trade if either Government should allocate exchange by countries or articles, by providing that exchange shall be allocated upon the basis of the proportion of total merchandise imports, or of total imports of particular articles, as the case may be, which such other country supplied in a previous representative period. This sub-paragraph also provides that any special trade factors which may exist shall be taken into account in making exchange allocations on the foregoing basis; that the minimum period for which allocations may be made shall not be less than three months; and that the exchange allocated to the other country shall be made available in such a manner as to facilitate its full utilization during the period for which the allocation is made. It is believed that these latter provisions are self-explanatory.
Sub-paragraph (d) provides for non-discriminatory treatment in the application of exchange control as between the nationals of the United States or Chile and the nationals of any third country.
In presenting the enclosed exchange proposal to the Chilean Government, you may mention that while your Government is naturally hopeful that it will be accepted, it does not consider that such acceptance would in itself clear the way for trade-agreement negotiations. The Department believes it of importance that substantial agreement be reached on all other questions of importance which might arise during the course of negotiations, before public notice is given of intention to negotiate a trade agreement with Chile. Accordingly, you may, in your discretion, discuss with the Chilean authorities other questions related to the general provisions, in order that as complete agreement as possible may be reached during the present preliminary discussions. Should the Chilean officials express any objections to the substance of the enclosed exchange proposal, you should report these promptly to the Department.
[Page 454]Reference is made to the Embassy’s despatch no. 930 of March 24, 1938.49 It is noted from that despatch that the Chilean Government was provisionally prepared to accept without question or modification, references 1 to 6, inclusive, and references 16 to 21, inclusive, of the “standard” general provisions. This understanding should be confirmed, and at the same time the Chilean officials should be informed that unless the Chilean Government is particularly desirous of having the “third-country” Article, reference no. 19, included in an agreement, this Government would prefer to eliminate it from further consideration.
You will have noted that the proposed new exchange article does not include an “escape” clause similar to the last paragraph of reference no. 11 of the standard general provisions. In view of the effort which has been made to meet the views of the Chilean Government in regard to the exchange article, it is considered essential that reference no. 18 of the general provisions, which would apply to the entire trade agreement, be broadened and strengthened, particularly with a view to providing the greatest possible protection for the concessions to be included in the schedules of the proposed trade agreement. Accordingly, the substance of the last paragraph of reference no. 11 (with which the Chilean Government is already familiar) has been incorporated in a revised draft of reference no. 18, duplicate copies of which are enclosed. In discussing this revised draft with the Chilean authorities you should stress the fact that its provisions are reciprocal.
With respect to the Chilean observation regarding reference no. 7, on dutiable value, you should stress the fact that the provisions of that Article are intended to offer the very stability of appraisal methods apparently desired by the Chilean Government. You should request a detailed explanation of the assurances desired by the Chilean Government, in addition to those already embodied in the present draft provision.
With respect to the Chilean observation regarding reference no. 8, it is deemed essential that items included in schedules of concessions be protected generally against the imposition of quantitative restrictions. The absence of any such protection would, of course, permit the serious impairment or nullification of any of the duty reductions or bindings in an agreement, and would even permit imports of the products in question to be placed in a considerably less favorable position than that existing prior to the agreement. Other Governments with which trade agreements have been concluded have agreed to include provisions similar to reference no. 8 for protection against import prohibitions or restrictions on products on which concessions have been granted, and it is believed that the absence of such protection in any [Page 455] agreement which may be negotiated with Chile would not only render unstable the concessions to be secured, but also set a most undesirable precedent.
There are enclosed copies of simplified versions of the two quota articles which may be substituted for reference nos. 8 and 9 in your further discussions with the Chilean officials. If this substitution is made, you should also substitute the enclosed revised draft of reference no. 12, the most-favored-nation article. The first paragraph of this revised draft is identical with reference no. 12 of the standard general provisions and the second paragraph, which has been added, is considered essential in view of the simplified form of the enclosed revised draft of reference no. 9.
In connection with reference no. 12 and the Chilean observation thereon, the Department is unable to see any substantive difference between the language used in Article X of the Costa Rican agreement50 and that used in reference no. 12 of the “standard” general provisions. As a matter of style, the Department much prefers the language of the “standard” provisions. The Department does not understand the meaning of the phrase in the pertinent portion of your despatch under reference which reads “supplemented by the last clause in the standard provisions draft”. What might be considered as the last clause in the “standard” provisions draft is included in Article X of the Costa Rican agreement.
The Department will await the views of the Nitrate Sales Corporation regarding reference number 10 and further word from the Chilean officials regarding reference numbers 13 and 14.
The request of the Chilean Government with respect to reference number 15 is one to which the Department has already given consideration, and in this connection reference is made to instruction no. 351 of April 14, 1938.
With regard to the question of a Mixed Chilean-American Commission, the establishment of which would, according to the Embassy’s despatch no. 930 of March 24, 1938, be expected by the Chileans in connection with the conclusion of a trade agreement, reference is made to telegram no. 23 of March 16, 1938. If the Chilean officials raise this question again, you may give them the substance of that telegram.
In the course of your discussions with the Chilean authorities regarding a possible trade agreement, you should point out to them, if you have not already done so, that, under the requirements of the Trade Agreements Act, public notice of intention to negotiate a trade agreement must be given in the United States before definitive negotiations [Page 456] may be undertaken with any country. The preliminary public announcement referred to on page 3 of the Department’s instruction no. 296 of January 5, 1938 is not required by law and this announcement is no longer made. This Government will be prepared to discuss with the Chilean Government the time when the required public notice might be given in the case of the proposed trade agreement between the United States and Chile as soon as agreement in principle has been reached in respect of the general provisions. The Chilean Government doubtless will appreciate, therefore, the desirability of expediting, as much as possible, consideration of the remaining problems in connection with those provisions.
In order further to expedite this matter, an interdepartmental “Country Committee” has been established, in accordance with the usual procedure, for the purpose of giving careful consideration to the products involved in the trade between the two countries. As you know, this Government will expect the Chilean Government to consider the relaxation of its trade barriers in respect of the products of which the United States is the principal or an important supplier of Chilean imports. The American Government will be prepared, of course, to give similar consideration, within the limitations of the Trade Agreements Act, to the products of which Chile is the principal or an important supplier of this country’s imports.
It is hoped that the Chilean Government will indicate at an early date its acceptance in principle not only of the enclosed proposal on the exchange article but also of the remaining articles of the draft general provisions. You may, therefore, inform the Chilean authorities at an appropriate time that a “Country Committee” has been established for the purpose indicated in the foregoing paragraph. It would seem desirable to suggest, in this connection, that the Chilean Government prepare a list of products of which Chile is the principal or an important supplier of United States imports and on which concessions would be desired in the proposed trade agreement.
Very truly yours,