Foreign Relations of the United States, 1955–1957, Foreign Aid and Economic Defense Policy, Volume X

249. Memorandum From the Deputy Assistant Secretary of State for Economic Affairs (Kalijarvi) to the Under Secretary of State (Herter)¹

Washington, April 20, 1957.

SUBJECT

• Selective Tariff on Petroleum

You have asked for comments on the question of a selective tariff on petroleum, as a device to deal with the problems of oil imports as related to national security. Senator O’Mahoney² has recently suggested that there be a tariff on petroleum high enough to discourage imports of oil from sources where the cost of production is low.

Presumably, a selective tariff would be directed primarily against Middle East sources where the cost of production is the lowest in comparison with the United States. Such a selective tariff could be couched in geographical terms, or it could be based on varying rates for oil of differing gravities. This latter would be a more adroit way of discriminating against Middle East oil, which is mostly high gravity, in an effort to favor Venezuelan oil, an important portion of which is low gravity.

The Department has had ample experience with selective tariffs and has studied this particular problem on other occasions in recent years. During the 30’s and 40’s, for instance, we had in effect a tariff quota which permitted a given amount of imports to enter the country at one rate, with a higher rate applied on the excess over this quota. Since the negotiation of a Venezuelan Trade Agreement in 1952, we have had a tariff which differentiates according to the gravity of the oil: higher gravity oils pay 10½ cents per barrel, lower gravity oils, 5¼ cents per barrel. These duties are, of course, applied to oil from all sources, by reason of our Most Favored Nation principle. Tariffs at these rates do not have any discernible effect on the flow of oil imports, because in ad valorem terms they are insignificant. A tariff high enough to affect the rate of flow of imports would have to be in the neighborhood of a dollar a barrel.

The tariff could be raised by either of two methods. The President could increase it under the authority of Section 7 of the Trade Agreements Extension Act of 1955, although this would probably be challenged in the courts as an invasion of the prerogative of Congress to make tariffs. Alternatively, the Administration could ask for new legislation to raise the tariff. The adoption of such measures, either by the President or by legislation, would probably lead to the abrogation of our trade agreement with Venezuela, our FCN treaty with Iran,³ and possibly a number of other international commitments.

The only countries against which we assess a selectively higher tariff are the countries of the Soviet Bloc, by virtue of denying MFN treatment. The proposal for a tariff on petroleum selectively applied on a geographic basis to the Middle East would single out Saudi Arabia, Iran, Iraq, and Kuwait for more severe treatment than we accord to the USSR and satellites.

If selectivity in tariff treatment were achieved by a tariff containing gravity provisions, this would favor Venezuela, but would not get around the problem of Canada, where oils are also of substantially high gravity.

No selective tariff could in effect exempt Venezuela and Canada, two of our best markets for exports, from its application. Such a tariff would enormously complicate our relations with these two countries, both economically and politically.

We feel that we are well enough informed on the implications of the proposal to suggest that no further study of it is deserved. You are no doubt aware of the fact that we have suggested to Mr. Murphy, in connection with his representation of the Department on the President’s Energy Supplies and Resources Policy Committee, that the Committee re-examine the entire basis for its February 1955 recommendation that imports should not exceed a fixed percentage of domestic production.

1. Source: Department of State, Central Files, 411.006/4–2057. Confidential. Drafted by Willis C. Armstrong, Albert E. Pappano, and Rutherford. Sent through Dillon.
2. Joseph C. O’Mahoney. (D.–Wyoming)
3. Reference is to the Treaty of Amity, Economic Relations and Consular Rights with Iran, signed at Tehran August 15, 1955, and entered into force June 16, 1957; for text, see 20 UST 899.