612.003/6–1647
The Ambassador in Mexico (Thurston) to the Secretary of State
No. 3905
Sir: I have the honor to refer to the Department’s confidential airgram A–474 of June 2, 1947,69 regarding the present exchange situation in Mexico.
An answer to the Mexican note of April 2370 must be expedited or [Page 777] this country will undoubtedly be forced to take unilateral action to reduce the drain on its exchange reserves, as indicated by the following figures:
Gold and Foreign Exchange Reserves
(millions of U. S. dollars)
| Date | Total | Legal Reserve | Int’l Mon. Fund | Balance |
| 1/31/47 | 259. 6 | 143. 4 | ---- | 116. 2 |
| 2/28/47 | 245. 1 | 142. 5 | ---- | 102. 6 |
| 3/31/47 | 233. 4 | 142. 0 | 22. 5 | 68. 9 |
| 4/30/47 | 222. 6 | 140. 3 | 22. 5 | 59. 8 |
| 5/31/47 | 214. 6 | 140. 3* | 22. 5 | 51. 8 |
A study of the foregoing table shows that Mexico only had 51.8 million dollars on May 31, 1947 immediately available for international commercial transactions. This small amount will be quickly exhausted if measures are not taken to conserve it. The possibility of reducing the legal reserve should be discounted since it is believed that such action would create so much lack of confidence in the stability of the peso as to cause a flight of capital from this country. Likewise, the use of either the International Monetary Fund or the stabilization credit extended by the United States Treasury could only be viewed with approval if the present situation were patently temporary in character. Unfortunately, there is no such evidence and the Embassy is strongly of the opinion that, for the present at least, our actions should be predicated on the assumption that Mexico is facing a rather long period of exchange disequilibrium. It would be foolish to encourage Mexico to have recourse to either the Fund or the Stabilization Agreement and to create an obligation repayable at a later time when the United States will be in the position of desiring to stimulate its exports to this country. Hence, any sound appraisal of the situation, in the opinion of the Embassy, conclusively establishes the fact that the soundest long-range policy is for Mexico to restrict imports of non-essential items and to institute measures to this end with the least possible delay.
The Embassy agrees with the Department that quantitative restrictions are the measures to be favored in the present emergency because tariffs, unless prohibitory, would not stem the present drain on exchange reserves and because quantitative restrictions are contemplated not only in the trade agreement, but also in the draft charter of the International Trade Organization. In agreeing, the Embassy wishes to go on record in stating its belief that quantitative restrictions, whether in the form of quotas or import licenses, are far greater obstacles to international trade than reasonable tariffs and that such restrictions should be condoned only when temporary and the objective [Page 778] sought is exchange equilibrium. They should never be agreed to for any other purposes, especially when used for the protection of domestic industry.
The insincerity of the Mexican memorandum should not blind the Department to the need for decision with regard to the two immediate problems which are facing Mexico, i.e., the conservation of exchange and the protection of domestic industry. The Department has apparently reached a satisfactory decision with respect to the former, but it is equally important to lay down policy with respect to the latter. Our Government can let events take their course which will probably result in many unwise and prohibitory duties being imposed in Mexico or it can realistically face the problem and stand more than an even chance of influencing Mexican tariff policy along conservative lines. If it is the policy of the United States Government to promote the sound industrialization of Latin America, the necessary corollary to that policy must also be accepted, i.e., reasonable tariff protection. Mexico must not only revise its tariffs on products manufactured in Mexico because of the lower ad valorem equivalent of its present specific duties, but also because of the greater diversity of local production. The Embassy is confident that if it were authorized to informally discuss the problem with the Mexican authorities that it could greatly influence both the timing and extent of such increases and effectively combat the unreasonable and prohibitive tariffs which the powerful Chamber of Manufacturing Industries are promoting. Furthermore, the Embassy might also be successful in destroying the present import license system and the bureaucratic organization which is administering it and obtain acceptance of the principle that quantitative restrictions be limited to protection of the exchange value of the peso and have such measures administered by the Bank of Mexico, an institution far less subject to undue influence than any direct bureaucratic organization of the Mexican Government.
There is a third problem which will become increasingly important in coming months and that is the revenue aspect of tariffs. Revenues from export taxes are decreasing and revenues from import duties will become relatively more important in the fiscal situation. There is much logic in the position of the Mexican Minister of Finance that imports should shoulder their just burden of taxation which, with rising price levels and specific duties, is not the case today. However, if a satisfactory solution were found for the first two major problems, consideration of the third might be postponed until a more appropriate time.
The Embassy fully concurs with the Department that duties on [Page 779] items in Schedule I of the Trade Agreement cannot be changed until formal negotiations have been concluded.
Respectfully yours,
Counselor for Economic Affairs