On December 31 the Government of Venezuela officially informed us of its
intention to terminate the US-Venezuelan Reciprocal Trade Agreement, the
denunciation to become effective six months from that date. While both
nations consider the trade agreement obsolete and while the impact on
bilateral trade is expected to be small, denunciation raises the legal
and policy issue of whether or not the concessional rate on certain oil
imports into the United States should be increased to the statutory
rate.
The attached memorandum provides information regarding the present status
of the Trade Agreement and the initial implications which its
termination will have for our trade relations with Venezuela. We will
keep you informed of our additional analysis as well as the actions
which the Department, in consultations with other agencies, will propose
for dealing with the problems posed by Venezuela’s intention to denounce
the Trade Agreement.
Attachment
Memorandum
Washington,
undated
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DENUNCIATION OF US-VENEZUELAN RECIPROCAL TRADE
AGREEMENT
On December 31 the Government of Venezuela officially informed us of
its intention to terminate the US-Venezuelan Reciprocal Trade
Agreement, the denunciation to become effective six months from that
date. While both nations consider the Trade Agreement obsolete and
while the impact on bilateral trade is expected to be small,
denunciation raises the legal and policy issue of whether or not the
concessional rate on certain oil imports into the United States
should be increased to the statutory rate.
Background:
The Reciprocal Trade Agreement with Venezuela was signed in November
1939 and later revised in August 1952. It provides for reciprocal
and unconditional most-favored-nation treatment (Articles IX and X).
However, Article XV provides that this treatment will not apply in
cases where certain benefits are given in order to facilitate border
traffic, customs union or a free trade zone.
Tariff concessions granted are included in two lists. List I includes
the concessions granted to the United States by Venezuela and List
II the ones granted to Venezuela by the United States. List I covers
some 619 items, accounting in 1969 for some 50% of US-Venezuelan
trade. List II contains US bindings on certain petroleum products,
iron ore, coffee and cocoa. An “escape clause,” added in 1952,
provides that either of the two countries can suspend, lift or amend
concrete concessions or obligations while the Agreement is in
effect, in case any of these threatens or injures national industry
or security.
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Since 1959 the Agreement has had little effective meaning in the
significant trade relations between the two countries. (Two-way
annual trade amounts to $2 billion.) On the one hand, the United
States imposed oil quota restrictions in March 1959 and granted
special “overland” access to Canada in 1962. On the other hand,
Venezuela in July 1959 imposed an import substitution system of
licensing and quotas which virtually nullified the effects of tariff
concessions on goods on List I.
During the State Visit of President Caldera in June, 1970 and in Washington discussions
in June, 1971 between two Venezuelan Cabinet Ministers and high US
officials, Venezuela indicated a strong desire to revise the
Agreement so that she could raise (or lower) tariff rates in
anticipation of Latin American Free Trade Area (LAFTA) and Andean Group negotiations,
eliminate a cumbersome import licensing procedure, and convert from
specific to ad valorem tariff rates. In these latter meetings, the
United States agreed to further discussions at the technical level.
The timing and place for the technical talks were to be determined
through the respective embassies. Subsequently, on August 26, 1971,
the Trade Staff Committee agreed to a position (TSC Document 71–98)
for use by the US delegation to these technical talks if and when
the Venezuelans requested that they be held. We heard nothing
further from the Venezuelans on this matter until the
denunciation.
We are still studying the implications of the Venezuelan action and
the policy options open to us. Subject to further study, our
conclusions are as follows with respect to its effects on Venezuelan
exports to the United States and US exports to Venezuela.
Venezuelan Exports to the United States
All US concessions granted to Venezuela by virtue of the Trade
Agreement have been superseded by tariff
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concessions granted in the GATT except for two concessions covering
crude oil. Thus, Venezuela is assured of maintaining present
treatment for all other exports to the United States upon
termination of the bilateral. However, by virtue of the
denunciation, the rate of duty on the two concessions might be
raised to the statutory level; i.e., from 5.25 and 10.5 to 21 cents
per barrel. (The question of whether the duty must be raised or
whether the increase is discretionary is being studied by the Office
of the Legal Advisor.) If the duty were increased, the cost of
Venezuela’s 1970 shipments would have been raised by an estimated
$57.2 million. The question as to who would pay the extra duty and
whether petroleum imports from Venezuela would be affected cannot be
answered with certainty. Nevertheless, it is clear that it would
decrease the value of oil import tickets.
US Exports to Venezuela
The benefits to the United States from Venezuelan concessions have
been decreasing over the years. While total US exports to Venezuela
have been increasing, trade in concession items subject to
restrictions has declined sharply since 1958. The ultimate impact on
our exports will not be known until Venezuela adopts new tariff
rates.
Policy Issues
The following issues are currently being discussed within the
Department and with other agencies:
- 1.
- Is it in our interest to ask Venezuela to modify its intention
to denounce the entire Agreement, agreeing to maintain the
general clauses with MFN protection for US exports and the
concessional rate for Venezuelan petroleum crude exports?
- 2.
- Is it in our interest to maintain the present tariff rates on
crude petroleum or to raise them to the statutory rate?
- 3.
- What alternative bases can we explore with Venezuela in order
to promote our future trade interests?
