561.321D1 Advisory Committee/1–142

The Department of State to the Canadian Legation

Memorandum

It is pointed out in Mr. Mahoney’s letter to Mr. Hawkins of January 1, 1942, concerning the proposed Cotton Agreement between the Governments of Brazil, Canada, and the United States that the Commodity Prices Stabilization Corporation recently established in Canada in connection with government control of prices will probably become the sole Canadian buyer of cotton from abroad.

In that connection, it is further noted in the letter that paragraph 1, Article IV of the Trade Agreement between Canada and the United States of November 17, 1938 provides in effect that should either Government establish a foreign purchasing monopoly in respect of any commodity the purchases thereof shall be influenced solely by considerations of fair and equitable treatment, namely, considerations such as price, quality, marketability and terms of sale which would ordinarily be taken into account by a private commercial enterprise interested solely in purchasing such commodity on the most favorable terms. It is stated in the letter that the same provision is contained [Page 568] in Canada’s trade agreements with Brazil and Haiti and that, in accordance with most-favored-nation obligations, it is applicable also to the Belgian Congo and may be applicable to Peru, in view of a proposed most-favored-nation agreement with that country.

In so far as Canada’s obligations to Brazil and the United States in respect of the monopoly provisions under reference are concerned, attention is called to the fact that the proposed cotton agreement is intended to preclude competition in the Canadian market between United States and Brazilian cotton and that, therefore, considerations determining the most favorable terms on which cotton might be obtained, which are required under the monopoly provisions to be taken into account, will not in practice be applicable under conditions of the proposed agreement. Furthermore, since it may be presumed that the basis on which the United States and Brazil agree to share the Canadian market for their cotton is considered by them fair and equitable, no question arises concerning Canada’s obligations under the monopoly provisions included in Canada’s trade agreements with those two countries.

As to Canada’s obligations to Haiti under the monopoly provisions in question and to other countries by reason of most-favored-nation commitments, it may be pointed out that the proposed cotton agreement imposes no restrictions whatever on Canadian purchases of cotton from sources other than the United States and Brazil nor does it reserve any part of the Canadian cotton market to these two countries. It provides in this connection under paragraph 1 merely the basis upon which the United States and Brazil shall participate in supplying Canada’s requirements for their cotton. The extent to which each of them may participate in supplying such requirements is determined with reference to a basic estimate thereof of 540,000 bales. Provision is made for such changes from time to time in the estimate as may be necessary. In the present circumstances, the estimate may possibly be determined by the purchasing program of the Canadian Commodity Prices Stabilization Corporation. In view of this possibility, the operation of the agreement may be considerably facilitated.

The considerations set forth above would seem to indicate clearly that the proposed agreement would not conflict with the monopoly provisions in question. In order, however, that there might be no basis for possible misinterpretation of the agreement in this regard, the following changes therein might be desirable:

(a)
Paragraph 1: For the proviso in the last sentence substitute, “provided that Brazil’s share shall not be greater than the amount by which such estimate exceeds 250,000 bales of 478 pounds net weight”.
(b)
Paragraph 2: For the phrase, “the quantity of cotton which it is permitted to supply in accordance with the provisions of the foregoing paragraph”, substitute, “its agreed share”.

One of the advantages to Canada of the proposed cotton agreement arises in connection with the price provisions of paragraph 4 thereof and the possibility taken into account in paragraphs, of a shortage of shipping. It may be noted that even though Brazil should not be able to supply Canada with cotton because of such a shortage, the United States would nevertheless be obligated under the agreement to maintain the prices of cotton exported to Canada at the Brazilian level.