611.2231/241
The Secretary of State to the Minister in Ecuador (Long)
Sir: Reference is made to the Legation’s telegram no. 58, June 1, 5 p.m., 1938,14 and previous telegrams and despatches on the subject of the trade-agreement negotiations, and particularly to the changes in the General Provisions suggested by Dr. Banda and to the new complete import control recently established by the Ecuadoran Government.
With regard to the changes in the General Provisions suggested by Dr. Banda and outlined in despatch no. 704 of May 23, 1938 from Consul General McDonough,14 the Department feels that the former does not fully understand the general objectives sought through these provisions. Therefore, before discussing the individual changes requested, you may find it desirable to emphasize that the two-fold purpose of the General Provisions is to safeguard the reciprocal concessions which may be granted and to insure reciprocal equality of treatment in respect of all forms of trade and payments control. You might find it desirable also to reiterate that your Government is not seeking concessions which Ecuador would find it difficult to accord. However, there are certain provisions to safeguard whatever concessions are exchanged and to insure non-discriminatory treatment which your Government regards as essential in any trade agreement.
Consideration has been accorded to the suggestion made by Dr. Banda for the inclusion of a proviso in Article 2 reading as follows: “Provided that this provision shall not affect the internal taxes or port charges which either high contracting party may impose in the future”. Dr. Banda states that by this suggestion he is endeavoring to prevent the binding of port charges and especially of the surcharge on imports now collected in lieu of a former sales tax, namely, the surcharge of 5 percent ad valorem on dutiable articles and of 1 percent on articles on the free list. The purpose of the second sentence of Article 2 is to insure that concessions in respect of ordinary import [Page 521] duties will not be nullified by increases in other charges incidental to importation. Since the surcharge on imports collected in lieu of the former sales tax is exclusively an import charge, it would be bound against increase by the sentence under reference. Accordingly, the Department must insist that no change be made in this Article which would weaken its purpose. As concerns the port charges, however, the Department does not construe this provision to apply to charges, such as port charges, to cover the cost of services rendered.
Due note has been taken of the change suggested in Article 6 involving the deletion of the words “national origin or” and the word “other”. The reason for this suggestion is to accord to the municipalities of Ecuador the right to levy taxes on imported liquors. This Article is designed to insure that, after clearance through customs, merchandise imported from the other country will not be discriminated against by taxes other or higher than those applicable to like domestic merchandise. It covers all products and it is regarded as one of the necessary safeguards of the ordinary duty concessions. Inasmuch as the deletions suggested would leave the way open for the imposition on all imported goods, after entry through the customs, of higher internal taxes than those imposed on like products of national origin and would nullify the purpose of the Article, they cannot be accepted. However, the Department would be disposed to give consideration to the inclusion of a provision permitting the municipalities of Ecuador to levy taxes on imported liquors.
With regard to the change requested in Article 7 so as to permit Ecuador’s requiring the payment of import duties in terms of dollars, the Department believes that a satisfactory formula can be devised to meet the wishes of Dr. Banda. However, it is thought that this question might be deferred until a decision is reached with respect to the more important matter of the import control measure.
Dr. Banda has suggested the omission of Article 8 as he considers that it would be inconsistent with the existence of the present complete control of imports into Ecuador. Apparently what Dr. Banda has in mind is the possibility of import quotas being established in connection with the existing import control system. Since Article 8 refers solely to schedule articles, Ecuador would be free to impose quantitative restrictions with respect to all others. As concerns schedule articles the Department regards as essential that duty concessions be not nullified by quantitative restrictions. This is the general purpose of the Article. However, it is recognized in the Article that it might be necessary to impose restrictions under certain specified conditions including the condition of an emergency situation calling for action such as “to maintain the exchange value of the currency of the country”. Therefore, and particularly in view of the relatively [Page 522] few articles that would be included in the schedule, this Article would seem to provide reasonable flexibility to take care of emergencies that might arise.
Dr. Banda has suggested the deletion of paragraph 2 of Article 9 on the grounds that it would prevent Ecuador’s maintaining its present complete control of imports. Apparently the import control decree envisages the regulation of imports and payments therefor by means of permits which will be issued to importers, more or less arbitrarily, on a day-to-day basis, and taking into consideration the balance of trade of the country supplying the merchandise for which application is made as well as the availability of exchange. The Department fails to see how, under such a system, it would be possible to determine that it was being applied in a non-discriminatory manner, and that the United States was receiving an equitable share of the total exchange available. Experience with former control systems in Ecuador would indicate that during periods of exchange sufficiency the United States has received an equitable share of the availabilities. However, it is not unlikely that in the event of exchange stringency discriminations of various kinds might arise under the new import control system. Paragraph 2 of Article 9 was worked out for the very purpose of guarding against the uncertainties and arbitrary features inherent in systems of import control such as that recently established in Ecuador, in view of which the Department cannot agree to its omission. Moreover, this provision, to which we attach great importance, is included in our trade agreements with other countries. If we should enter into an agreement with Ecuador permitting imports from the United States to be controlled without any global quotas being established, effective for at least three months, we would thereby weaken our position to insist upon the inclusion of such a provision in trade agreements with other countries. Naturally, the three months’ period mentioned in this paragraph refers to the minimum period during which a quota will be in force and not to an advance notice of three months.
In discussing with Dr. Banda the changes proposed by him and the Department’s minimum requirements, you should assure him that the Department has given most careful and sympathetic considerations to his suggestions as well as to the problems created by Ecuador’s present difficult exchange situation. If it should develop that the Ecuadoran Government is not now in a position to agree to these provisions, the Department would then have to give consideration to suspending the negotiations until a more propitious time.
I would add for your confidential information that the Department would prefer to have no trade agreement with Ecuador rather than to have one which would fail to improve our position, would contain [Page 523] inadequate assurances against discriminations arising under arbitrary import and exchange control systems, and would weaken our position in dealing with other governments.
Very truly yours,