611.2231/490½
The Commercial Attaché in Ecuador ( Tewksbury ) to the Chief of the Division of Commercial Policy and Agreements ( Hawkins )
[Received December 8.]
Dear Hawkins: This acknowledges your air mail letter of November 5, which for some reason did not reach us until November 18.
I have discussed the contents of your letter with Mr. Long and while we both agree that if possible some solution other than the discarding of Schedules I and II of the Trade Agreement would be desirable, it does not appear that the suggested alternative contained in your letter could be adopted.
The entire proposal involving a change in the Trade Agreement arose from the fact that the Ecuadoran Congress, in the fall of 1940, approved a law providing various new taxes for specific waterworks projects. As you will recall, these taxes involve, among other things, an additional ad valorem tax of 5½ per cent and customs [Page 308] surcharges, totaling 7 per cent. As you say, Mr. Illingworth estimates that the new taxes represent an increase in the amount of duty to be paid of about 20 per cent.
The law was passed specifically for the purpose of providing funds for waterworks projects throughout the country. Furthermore, the taxes established in the law were allocated for specific individual projects. For instance, the law provided that the revenues of the 5½ per cent ad valorem tax were to be divided as follows:
- ¾ per cent for the water supply for Quito;
- ¾ per cent for the water supply for Guayaquil;
- 4 per cent to be divided equally among the 15 Provinces, not including Pichincha or Guayas.
The 7 per cent customs surcharge was to be divided as follows:
- 2½ per cent for the water supply for Quito;
- 2½ per cent for the water supply for Guayaquil;
- 1 per cent for the water supply for Portoveijo;
- 1 per cent for the water supply for Cuenca.
Various additional provisions are made in the law regarding the application of taxes collected.
In view of the fact that the law is not directly connected with disturbed world conditions, it appears doubtful if the proposal, as outlined in your letter could be used. Since the taxes were imposed for the purpose of obtaining badly needed water supply systems throughout the country, it is very doubtful if there was any intention of making these taxes temporary. To carry out the waterworks projects which are needed will require many years of application of the taxes provided in the measure.
In order to follow some procedure such as you outline, it would apparently be necessary for the President to abrogate the legislative decree, which would unquestionably cause very strenuous opposition. The water situation in both Quito and Guayaquil is very serious and early action is essential. Since July, there have been but few days when water has been available throughout the day in Quito. As illustrative of the seriousness of the situation, the entire city of Quito has been without water, except for a few hours in the middle of the night, for two days and nights during the present week. Such water as was obtainable was the color of strong coffee. If the President, under his emergency powers, should abrogate the waterworks law, even in an effort to save the Trade Agreement, the reaction would doubtless be far more violent than the outcry which arose during this last complete failure.
If you can think of any method by which Ecuador could be authorized to collect the taxes provided in the waterworks law on products [Page 309] listed in Schedule I and still retain both Schedules I and II in force, I am sure that the Minister of Finance, as well as the Foreign Office, would be only too glad to cooperate. The Minister of Finance feels that the inability to collect the waterworks tax on Schedule I products is definitely against the interests of Ecuador, and there is probably no question but that he would ultimately prefer to abrogate the entire Agreement rather than lose these essential added revenues.
We have today sent a telegram (No. 472 of Nov. 26, 11 p.m.14) at the request of the Minister of Foreign Affairs, suggesting an early exchange of the notes, a draft of which was sent with the Department’s instruction no. 663 of September 24, 1941.15
Very sincerely yours,
- Missing from Department files.↩
- The two approaches to the problem, that indicated in the draft of note (p. 305), and that proposed by Harry C. Hawkins in his communication of November 5 (p. 306) were reconciled in the notes as exchanged on March 2, 1942; see Department of State Bulletin, March 7, 1942, pp. 221–222.↩