Foreign Relations of the United States: Diplomatic Papers, 1942, The American Republics, Volume VI

611.1231/445½

Memorandum of Conversation, by Mr. John M. Leddy of the Division of Commercial Policy and Agreements

[ Washington ,] October 8, 1942.

Participants:	Sr. Dr. Héctor Calzado, Attaché, Mexican Embassy
	Messrs. Fowler and Leddy, TA

Dr. Calzado came in by request to receive a memorandum and enclosures dated October 8, 1942, setting forth the counterproposals of this Government with regard to the general provisions and Schedules I, II and III of the proposed trade agreement with Mexico. Mention was made to him of the desirability of early conclusion of the agreement, to which it was hoped the Mexican Government could now see its way clear.

[Annex]³³

Memorandum

Reference is made to the negotiations between the Governments of the United States of America and the United Mexican States looking toward conclusion of a mutually beneficial trade agreement.

It will be recalled that public notice of intention to negotiate a trade agreement was issued on April 4, 1942. Subsequently, the representatives of the Mexican Government were handed a preliminary draft text of the general provisions proposed for inclusion in the agreement (memorandum dated May 26), a definitive list of the concessions requested of Mexico by the United States (memorandum dated July 20³⁴), and a partial list of the concessions offered to Mexico by the United States (memorandum dated July 27³⁴ and supplementary list transmitted on July 29³⁴). In a memorandum dated July 6 the Mexican Government set forth its views regarding the general provisions suggested by the United States, and regarding the general scope of the concessions which it anticipated each country would grant on products of the other. On the basis of these documents conversations between representatives of the two Governments took place in Washington in July and August, during the course of which tentative agreement was reached on all points of substance with the exception of certain of the concessions in both schedules. It was agreed that discussions regarding the definitive text would be begun as soon as the Government of the United States might be in a position to present a complete list of the concessions it is prepared to offer, including a concession on petroleum.

The Government of the United States is now in a position to present such a list. Accordingly, there are enclosed 1) a draft text³⁴ of the general provisions of the proposed agreement incorporating all changes in the text of May 26 which were agreed upon ad referendum during the conversations under reference, together with certain other minor changes indicated below; 2) a complete list³⁵ of the concessions which the United States is prepared to offer to Mexico, indicating present and proposed tariff and tax treatment; and 3) a complete list³⁵ of the concessions which the United States seeks in return for the concessions it is willing to grant.

General Provisions

No comment is believed necessary in regard to the preamble and Articles I, IV, V, VI, VII, IX, X, XI, XII, XIV, XV, XVI, and XVIII of the general provisions.

With respect to Article II, providing for national treatment on internal taxes, the representatives of the United States have pointed out that, apart from the question raised by the twenty-first amendment to the Constitution referred to below, pertinent federal and State laws in the United States provide such treatment at the present time except in respect of the federal internal revenue tax on alcohol for industrial use, from which the domestic product alone is exempt under Section 3070 of the Internal Revenue Code.³⁶ It was explained that efforts are now being made to secure legislation which would remove this tax discrimination, and it was tentatively agreed that, under the circumstances, it would seem desirable to avoid inclusion in the agreement of provisions specifically exempting industrial alcohol from the applicable provisions of Article II and that an explanatory memorandum to the Mexican Government would serve in lieu thereof. Such a memorandum is enclosed.

With regard to internal charges imposed in Mexico, which are understood to be higher on imported than on domestic articles in the case of federal internal taxes or fees on tobacco products, pharmaceutical products, packaged foods and beverages, and possibly also certain other products, the representatives of the Mexican Government have pointed out that since the trade agreement would have the status of a treaty in Mexico, the provisions of Article II would override prior laws inconsistent therewith. It was agreed, however, that since it would seem desirable to remove such federal internal tax differentials as exist between imported and domestic articles before the agreement comes into force, the Mexican representatives would explore this possibility with the appropriate officials of their Government. With respect to internal taxes imposed by the States of the Mexican Union, it is understood that the States are prohibited by the Constitution from enacting discriminatory tax legislation.

Article III of the general provisions, relating to quotas in general, incorporates the clarifying language in respect of tariff quotas which was drawn up at the request of the Mexican representatives (paragraph 3). In addition, a sentence has been added to paragraph 2 providing for prior consultation between the two Governments with regard to the share which the Government of either country may allot to the other country in allocating quotas on any product in which that country has an important interest. It is believed that this sentence meets the views of the Mexican Government on the subject of quota allocation as set forth in its memorandum dated July 6.

Article VIII is the same as the text agreed upon during the conversations under reference, except that a sentence has been added to the second paragraph to meet the request of the Mexican representatives that, although the concession on any product included in Schedule III of the agreement may be withdrawn or modified pursuant to the provisions of paragraph 2 of Article VIII, the rate of duty on such product would not in any event, so long as the agreement remains in force, exceed the rate of duty imposed thereon on the day of the signature of the agreement.

Article XIII, relating to freedom of transit, is a new Article proposed for inclusion in the agreement at the suggestion of the representatives of the Mexican Government. In this connection, the Government of the United States desires to make clear that the provisions of this Article would of course in no way affect transit regulations imposed by the Government of either country for sanitary purposes but, like other provisions of the agreement, would be subject to the provisions of Article XVII exempting such regulations, together with certain other measures, from the scope of the agreement.

Article XVII, relating to measures customarily exempted from the scope of commercial treaties and agreements, is the same as the text of May 26 except that paragraph 2, subjecting certain provisions of the agreement to the constitutional limitations on the authority of the Federal Government of the United States, has been omitted as unnecessary. It was agreed during the conversations under reference that all of the provisions of the agreement would naturally be understood as being subject to constitutional limitations on the authority of both Governments, and that, accordingly, it would be sufficient if the Mexican Government were provided with an explanatory memorandum outlining the special situation in the United States regarding potentially discriminatory State taxes on distilled spirits which the deleted paragraph was originally intended to cover. Such a memorandum is enclosed.

Concessions offered by the United States (Schedules II and III)

The concessions now offered by the Government of the United States in draft Schedules II and III are of course closely related to, and contingent upon, the concessions now requested of the Mexican Government in draft Schedule I and agreement on the general provisions.

Specific comment regarding the concessions in Schedules II and III now offered by the United States would appear to be required only in the case of petroleum, cattle, beer, and the items with respect to which the representatives of the Mexican Government have requested concessions greater than those set forth in the lists dated July 27 and July 29 (turpentine, garlic, pineapples in bulk, tomatoes and peppers).

With reference to petroleum, Mexico is offered in its own right the maximum reduction in the rate of import tax under Section 3422 of the Internal Revenue Code, from ½ cent per gallon to ¼ cent Per gallon, without limitation as to the quantity which may enter at the reduced rate of tax from Mexico or any other source. Such petroleum would also be bound free of customs duty under paragraph 1710 of Schedule II of the proposed agreement.

With regard to cattle, the concession offered provides for a rate of duty of 1½ cents per pound on light, medium-weight and heavy cattle, without limitation as to the quantity permitted to enter at that rate, for the duration of the war. Thereafter, upon a finding by the President of the United States that the abnormal situation in respect of cattle and meats has terminated, the amounts permitted to be entered at the rate of 1½ cents per pound in any calendar year would be limited to 100,000 head of light cattle, 400,000 head of medium-weight cattle and 225,000 head of heavy cattle, imports in excess of these amounts to be dutiable at 2½ cents per pound. In the event that the Government of Canada should, pursuant to the provisions of its trade agreement with the United States, request the allocation among sources of supply of the tariff quotas contemplated in respect of light and heavy cattle, the Government of the United States would consult with the Government of Mexico, pursuant to the provisions of Article III referred to above and included in the enclosed draft text, with regard to the shares of such quotas to be allotted to Mexico.

In connection with the proposed concession on beer (paragraph 805), there is enclosed a memorandum prepared at the request of the Mexican representatives which outlines the situation in the United States with regard to the federal internal tax on this product.

The further concessions requested by the Mexican representatives on turpentine (paragraph 90), garlic (paragraph 770) and pineapples in bulk (first item, paragraph 747) are now offered.

With regard to tomatoes in their natural state (paragraph 772), the original offer of the United States provided for a reduction in duty from 3 cents per pound to 2¼ cents per pound during the months of December, January and February and to 2½ cents per pound during the remaining months of the year. The present offer is a reduction in duty to 1½ cents per pound throughout the year for the duration of the war, following which, and upon determination by the President of the United States that the abnormal situation in respect of tomatoes has terminated, the rate of duty would be 2¼ cents per pound, also on a yearly basis.

It has not been considered feasible to accede to the request of the Mexican representatives that the rate of duty on peppers in their natural state (paragraph 774) be reduced from 2½ cents per pound to 1¼ cents per pound, rather than to 1½ cents per pound as originally offered by the United States.

Concessions requested by the United States (Schedule I)

The enclosed list³⁷ of the concessions in Schedule I now requested of Mexico by the United States, which has been formulated in the light of the discussions in Washington between the representatives of the two Governments and in the light of the concessions now offered contingently in Schedules II and III, is believed to be self-explanatory.

Washington , October 8, 1942.

[Sub-Annex 1]³⁸

Memorandum

Reference is made to the request of the representatives of the Government of the United Mexican States, in connection with the tariff concession on ale, porter, stout and beer which the Government of the United States of America has offered to grant in Schedule II of the proposed trade agreement between the two countries, for an explanation of the existing internal tax situation in the United States in respect of these articles.

Section 3150 of the United States Internal Revenue Code provides for an internal revenue tax of $6.00 per barrel of 31 gallons “on all beer, lager beer, ale, porter, and other similar fermented liquor, containing one-half of one per centum, or more, of alcohol, brewed or manufactured and sold, or removed for consumption or sale, within the United States.” The Congress of the United States is now considering legislation which would increase this tax.

While it will be noted from the quoted portions of the law given above that the internal-revenue tax on ale, porter, stout and beer at present applies only to such articles produced within the United States, and is not imposed on such articles when imported from Mexico or other foreign countries, the provisions of Article IX of the proposed trade agreement, relating to compensating taxes, would permit the extension of this tax, or any increased tax which might be enacted, to the like imported articles.

Washington , October 8, 1942.

[Sub-Annex 2]³⁹

Memorandum

During the course of the negotiations of the proposed trade agreement with Mexico, it was pointed out to the representatives of the Government of the United Mexican States that under the twenty-first amendment to the Constitution of the United States broad powers have been granted to the several States of the Union for the regulation of trade in alcoholic beverages.

While the Department of State is unaware of any actual cases in which a State of the Union has enacted legislation discriminating against alcoholic beverages imported from Mexico or any other foreign country as such, certain States have enacted legislation imposing differential taxes or other special requirements applicable to distilled spirits the product of areas, including other States of the Union, beyond the borders of the States concerned. It is possible that such legislation would be upheld by the courts as valid under the twenty-first amendment to the Constitution.

It was pointed out to the Mexican representatives that, with regard to this matter as in the case of any other, the provisions of the trade agreement would of course be subject to the constitutional limitations on the authority of the Governments of the respective countries.

Washington , October 8, 1942.

[Sub-Annex 3]⁴⁰

Memorandum

Reference is made to the conversations between representatives of the Governments of the United States of America and the United Mexican States, in connection with the proposed trade agreement between the two countries, to the internal tax treatment of imported alcohol for industrial use under existing laws of the United States.

During the course of these conversations, it was pointed out that existing laws of the United States impose an internal-revenue tax of $4.00 per proof gallon on alcohol, whether produced in the United States or imported from any foreign country, and that consideration is being given by the Congress, in connection with the pending tax bill, to an increase in this tax; also, that while existing laws authorize the withdrawal from bond without the payment of internal-revenue tax of domestic alcohol for industrial use which has been denatured under government supervision and meeting the requirements prescribed by the Treasury Department, there is no similar provision for the exemption from the tax of imported alcohol for denaturation and use for industrial purposes.

Article II of the proposed trade agreement provides that products of either country imported into the other country shall be exempt from any internal tax or charge other or higher than that applicable to like domestic products. The intent of these provisions is to assure for American exports to Mexico, and reciprocally for imports from Mexico into the United States, that whatever tariff or tax differential there may be between imported products and like domestic products will be measured by the customs duty on the imported product.

As a result of considerations advanced by representatives of the Treasury Department and the Department of State, the Senate Committee on Finance has decided to recommend that the pending tax bill include provisions which would place imported alcohol for denaturation and use for industrial purposes on the same basis, with respect to internal-revenue taxes and exemptions, as domestic alcohol. In the event that such provisions should, for unforeseen reasons, fail to become law, the Department of State would renew its efforts at an appropriate time.

Washington , October 8, 1942.

33. Filed separately under 611.1231/484c.
34. Not printed.
34. Not printed.
34. Not printed.
34. Not printed.
35. Not attached to file copy.
35. Not attached to file copy.
36. Stat. 355.
37. Not attached to file copy.
38. Filed separately under 611.1231/484a.
39. Filed separately under 611.1231/484b.
40. Filed separately under 611.1231/484d.