Foreign Relations of the United States, 1969–1976, Volume E–10, Documents on American Republics, 1969–1972

270. Memorandum from the Executive Secretary of the Department of State (Eliot) to the President’s Assistant for National Security Affairs (Kissinger)¹ ²

Washington, August 23, 1969

Subject:

• Dominican Republic Sugar Quota

In your memorandum of July 22, 1969, you asked for background information and the Department’s views concerning Dominican Republic President Balaguer’s request for a permanent sugar quota of 700,000 tons.

Essence of Problem

Under the existing Sugar Act the basic Dominican quota is established at 7.56% of sugar imported into the United States from foreign countries other than the Philippines. (Brazil has the same quota, and Mexico’s is slightly larger.) The actual shipping entitlement which this quota represents depends on the overall total level at which the U.S. Department of Agriculture estimates U.S. consumption needs for the calendar year. In 1968 the Dominican Republic actually shipped 707,030 tons (227,324 under its basic quota, 244,777 as its legislatively assigned share of the Cuban quota, and 234,929 tons as its share of deficit reallocations, including a special allocation).

What the Dominicans are asking for, in essence, is guaranteed access to the U.S. market at about the 1968 level. This would be impossible without Congressional amendment of the Sugar Act which is not slated for revision until 1971.

Importance of Sugar to Dominican Economy

The Dominican Republic’s economy is over-dependent on sugar. Its production has averaged some 850,000 tons since 1960, and exports of this one product account for 60% of its foreign exchange receipts. The industry is highly centralized. Twelve state-owned sugar mills account for 60% of the production. One mill, Central Romana, which accounts for about 32% of the production, is owned by U.S. interests. The remaining 8% is privately owned by a single Dominican firm. Combined, these mills employ approximately 10% of the entire Dominican labor force. The state-owned mills, in particular, have been relatively inefficient, high-cost producers, dependent on access to the sheltered U.S. market to cover their costs. Understandably, Dominican access to the U.S. market has become the most important aspect of U.S.-Dominican political relations.

Current U.S. Policy

Our policy in affording access to this market for Dominican sugar has been to provide a large enough market to assure economic and political stability, but to encourage diversification of agriculture and industry and thus reduce the country’s dependence on a single product which is subject to wide price fluctuations in the world market. Nor do we believe it is in the Dominican Republic’s best interests, nor in the best interest of our relations with that country, for the Dominican Republic to be so dependent on export of this single product to the U.S. Starting in 1966, in the aftermath of the civil war and in view of the extraordinary need for rehabilitation resources, we have, during each year since, recommended that “special deficit allocations” be given to the Dominican Republic, under the President’s discretionary authority under the Sugar Act to depart from the statutory formula for reallocation of deficits. We have, however, reduced the amount of the special allocation each year, in an effort to wean the country away from over-reliance on sugar—and on the U.S. market. We have also reached an understanding with the Dominican Government each year that a share of the proceeds of the special allocation will be utilized for rationalizing the government-owned sugar complex, to make it competitive on world markets. The first special allocation, in 1966, was for 123,000 tons, with the objective of providing a market here for about 600,000 tons. The special allocation has been reduced in each succeeding year, with this objective in mind. The 600,000 ton goal was substantially exceeded in 1968 (and has been again in 1969) because a large deficit in domestic beet production in 1968 and the unforeseen growth in the size of the Puerto Rican deficit resulted in larger deficit allocations to all Western Hemisphere suppliers, including the Dominican Republic, than had been anticipated.

Future Quota Problems

The Dominican basic quota amounts to only about one-third of its recent marketings in the U.S. Two-thirds of its allocations are thus on a contingent basis. If Cuba were again to become eligible, the Dominican Republic would, under the terms of the present Act, lose one-third; if the Puerto Rican deficit should be sharply reduced, or should be reassigned to other domestic suppliers, another third would disappear. While resumption of relations with Cuba may be remote, there is a real danger that when the Sugar Act comes up for renewal, domestic beet and cane growers will request that domestic deficits (Puerto Rico) be assigned to domestic producers—as was the case prior to the Act of 1965. The Florida cane growers have been under acreage restrictions for two years and are carrying large surplus stocks. Beet acreage was increased sharply this year, and the cut-back on wheat acreage for 1970 will bring renewed pressure for authorization to plant more sugar beets. If domestic interests should be successful in having the deficit provisions revised in their favor, following the present quota pattern would yield the Dominican Republic a total entitlement of only about 500,000 tons, and there would remain the possibility of a further reduction on resumption of relations with Cuba. The Dominican economy would have great difficulty in adjusting to a cut of this magnitude until the price of sugar on the world market rises well above the present level of 3.25 cents a pound (compared with 6.5 cents net for sales in the U.S.).

Other Views

Our Embassy in Santo Domingo has strongly recommended a 700,000 ton permanent “quota” (see enclosure). During the 1969 country review of the Dominican Republic the subcommittee of the Inter-American Committee for the Alliance for Progress (CIAP), while indicating awareness of the interests of other Latin American sugar-producing members, recommended that the U.S. import from the Dominican Republic not less than it did in 1968, i.e., 700,000 tons.

Department’s Views

The Dominican sugar issue should be broken down into two periods, 1970 and 1971 during the life of the existing Sugar Act, and 1972 and beyond under the new Act. In addition, the interrelationships between the two periods, i.e., the effect of the first on the second, should be considered.

In 1970 and 1971, in accordance with a decision this spring of the Interdepartmental Group (IG) and depending on the political situation in the Dominican Republic, the Department plans to request modest but declining special allocations (from deficits) for the Dominican Republic. It is, of course, difficult to predict total Dominican Republic entitlements during these two years in view of the imponderables of shortfalls in other countries and U.S. market conditions.

When the Act comes up for revision in 1971, we believe it most unlikely that the new Act that would emerge would result in a Dominican Republic total entitlement in excess of approximately 600,000 tons per annum, in the context of total U.S. consumption requirements reasonable to project over the life of the new Sugar Act. This figure would have to emerge as the result of three factors, i.e., the Dominican Republic’s basic quota, its share of any quota earmarked for Cuba in the new Act, and its share in any deficit reallocation. At this point, it is much too early to be able to anticipate how these basic factors would be treated in the new Act. It should be borne in mind that any increase in the Dominican Republic’s basic percentage quota will, of necessity, be at the expense of other suppliers, including Latin American countries as well as the English-speaking Caribbean. There are already many requests for increased quotas from other Latin American countries as well as from friendly countries in other parts of the world. When the Congress—which jealously guards what it considers its prerogative of assigning sugar quotas—sits down to work out the new Sugar Act, we can anticipate a swarm of lobbyists representing just about every friendly sugar producer in the world descending upon the Congress and also upon the Executive in search of favored treatment for their clients.

For all of the reasons noted, we believe it would not be desirable to encourage the Dominicans in their aspirations for a total entitlement which would imply sugar exports to the United States in excess of 600,000 tons per annum, which was roughly the level of exports in 1966 and 1967. Their objective should, rather, be further diversification of their economy, and increased efforts to improve the efficiency of existing plantations.

Theodore L. Eliot, Jr.

Enclosure

Memorandum

undated

Memorandum Concerning Issues Stressed by President Balaguer to Governor Rockefeller

1. “A permanent sugar quota of 700 thousand tons.”

The official memorandum or “White Paper” prepared by the Dominican Government for the Rockefeller Mission stated that an assured U.S. sugar quota, growing gradually to one million tons annually, is necessary to provide the base for satisfactory Dominican economic growth. President Balaguer, according to Mr. Kissinger’s memorandum, indicated to Governor Rockefeller that an assured permanent quota of 700 thousand tons per year would help stabilize the economic, social and political situation in the Dominican Republic.

It is the view of this Mission that President Balaguer’s phrase constituted an understatement; that unless the Dominican Republic can sell a quantity of sugar that closely approaches 700 thousand tons annually during the next several years, economic, social and political stability in the country are likely to be adversely and seriously affected.

Our view is based upon the effects which a substantial shortfall in sugar sales (below 700,000 tons) to the U.S. would have upon export receipts and the measures that the authorities would then be constrained to take to meet the balance of payments problems which would promptly loom large. In part, our view is also conditioned by the fact that the government’s revenues, and its ability to continue investment programs, would suffer severely from a loss of U.S. sugar sales and any action taken to reduce imports and relieve pressures on the balance of payments. Finally, unless a combination of U.S. and rest-of-world quota sugar sales provides markets for 800–850 thousand tons in 1970 and 1971, the Dominican sugar industry will have to build stocks or cut back production. Stockpiling would quickly have adverse effects on industry and government finances, while cutting back production would have adverse effects on direct employment, an already critical social problem, and on sugar industry purchases of goods and services from the remainder of the economy, with a resulting impediment to the growth of investments, employment and production in other sectors.

In 1967 and 1968, exports of sugar and sugar derivatives earned $92–94 million in foreign exchange, primarily because the U.S. purchased nearly all the Dominican production available for export at premium prices. Sugar export receipts in 1969 should total nearly $100 million for the same reason. Though other export receipts are slowly growing, it is these large receipts, together with direct foreign assistance, primarily, that have allowed the financing of a level of imports that has supported economic rehabilitation following civil war, and some growth of the economy despite drought. Unless the Dominican Republic can add to the $13–14 million realizable in 1970 from the sale of its International Sugar Agreement quota (understood to be 105,000 tons) and the $9–11 million normally received from sales of sugar derivatives—approximately $90 million in foreign exchange (700,000 tons @ 6.5 cents per lb., f.o.b.) from the sale of sugar within the U.S. quota, consideration will have to be given to measures which would protect the balance of payments.

For example, should the Dominican quota in the U.S. market be only 600 thousand tons, with receipts from that source reaching only $77–78 million, Dominican officials would be forced to seek an offset to the approximate anticipated shortfall of $12–13 million of sugar earnings in the form of additional foreign assistance loans or by taking measures (prohibit certain imports or establish import quotas) to restrict imports more then they are restricted now. Should the shortfall persist into 1971 and/or be greater than that cited in the example above, the Dominican Government might be faced with a choice between extremely severe direct controls on imports or forced devaluation of the peso. These alternatives, except that of securing more foreign assistance, would be economically and politically unsettling in that they would tend to create scarcities of consumer goods, limit raw material supplies for industry, upset investment plans, raise price levels and reduce employment opportunities.

When 700 thousand tons of sugar are sold in the U.S., the Dominican Government generates about $8 million from sugar export taxes, which are levied most heavily on “U.S. special quota” sugar sales and sugar sold to the U.S. in excess of the basic initial U.S. quota as a result of deficit allocations. If the U.S. quota for 1970 were only 600 thousand tons, these taxes would be unlikely to exceed $5 million. Moreover, sugar industry income tax payments would decline substantially.

In addition, any measure taken to mitigate balance of payments problems, again excepting new foreign borrowing, would also have serious adverse effects on government revenues. Import duties constitute about 50 percent of government tax revenues and are equivalent to 46 percent of the total value of imports. Because many “essential” imports are taxed at low rates or not at all, the incidence of duty rates on goods which would be made subject to quotas or prohibited is very high. If steps were taken to reduce imports by $10–12 million (as is implicit in the example given) the tax loss to the government could easily reach $5 million. Thus, the direct and indirect revenue loss, were the U.S. quota to reach only 600 thousand tons rather than 700 thousand tons, might be on the order of $12 million; equivalent to a third of the revenues the central government devotes to investment and to 16–20 percent of all public sector investment made by the central government from its own and borrowed funds. A reduction in public sector economic activity of this magnitude would certainly increase unemployment and create substantial economic and social malaise disturbing to political stability.

Dominican sugar production in 1969 is falling short of the production target set early in the year (955,000 tons) because of excessive rains during the main harvest season, and is now expected to approach, but not exceed, 900 thousand tons. The rains and the shortened cutting season, however, will provide that ample cane in good condition will be available for a large harvest in 1970. That harvest may well reach one million tons. With cultivation and harvesting practices improving constantly, future harvests may again move toward the level of 1.2 million tons attained in 1960. Even if production does not rise so rapidly, disposition of Dominican sugar is likely to be a serious problem and to depend heavily on possible sales in the U.S. The table which follows, with projections (approximate order of magnitude) in thousands of short tons, is illustrative:

		1970	1971	1972
Production		1,000	1,050	1,100
Distribution
Domestic Consumption		155	165	175
World Market Quota		105	140	180
U.S. Market or to Stockpile		740	745	745

Though the building of a reasonable stock, perhaps to a level of 100 thousand tons, over two or three years, should not be burdensome and is needed to provide some insurance against nature’s adverse whims, if the Dominican sugar industry were forced to hold several times that quantity it would be unprepared to assume the financial burden represented either by frozen working capital or carrying charges on the bank credit needed to support such sugar holdings. The government might assist, but only at the risk of reducing its investment program. The only alternative would be to cut production in the years following the stock increase, but such a reduction in sugar sector activity would bring about recession in much of the private sector.

Given the delicate balance existing throughout the Dominican political fabric today, which we expect will continue into 1970 and beyond, the economic and social warp and woof appear unable to stand the severe strains which any abrupt or large reduction in sales of sugar to the U.S. would bring. This conclusion, it appears to us, holds whether or not the new government taking office in mid-1970 seeks to embark upon a bold, well-planned development drive with the help of international lending agencies or whether it seeks to deal timidly and piecemeal with the most pressing social problems, in the present Balaguer style, and remains satisfied with slow growth of the economy. In either case, sugar earnings likely will remain a keystone to the successful survival of any government in office and, it is for this reason that the Mission has urged, in the recently submitted Country Field Submission (CFS), that the U.S. executive branch take all possible steps to assure the Dominican Republic a 700 thousand ton share of the U.S. market while present sugar legislation is in force and begin studies now to determine what its recommendation to Congress shall he in this regard when new legislation is considered.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 783, Country Files, Latin America, Dominican Republic, Vol. I. Confidential. Attached as an enclosure and published is a memorandum detailing the issues raised by Balaguer during meetings with Governor Nelson Rockefeller. Eliot’s memorandum was written in response to a July 22 memorandum from Kissinger to Walsh. (Ibid.)
2. During Governor Rockefeller’s June visit to the Dominican Republic, President Balaguer requested that the United States provide his country with an increased permanent sugar quota. Eliot indicated that the Dominicans should not be encouraged to pursue such an increase. Instead, the Department of State suggested that the Dominicans work to diversify their economy while increasing efficiency on existing plantations.