611.2231/382

The Secretary of State to the Minister in Ecuador (Long)

No. 112

Sir: Reference is made to your despatch no. 420 of April 5, 1939,24 enclosing a copy of an Ecuadoran law enacted March 3, 1939 dealing with the determination of export values of crude petroleum, mineral earth and gold bullion and specie and providing for the basing of quotas for imports from individual countries upon the value of Ecuadoran exports to such nations.

The possible effects of this law upon United States trade relations with Ecuador and on the operation of the trade agreement, naturally are of concern to the Department. There is enclosed a note which you are requested to hand to the Foreign Minister at an early opportunity, which sets forth this Government’s position on the broad question involved.

While making it clear to the Minister that your Government cannot accept the validity of the bilateral, country by country, trade balance theory of the law under reference, you may wish to point out that even on the basis of that questionable theory, the law is open to a number, of objections. For example, the specified percentages of the export values of mineral earth and crude petroleum which the law would permit to be included for the purposes of calculating Ecuador’s balance of trade with individual countries, would appear to be considerably less than the actual proportion of the export value of those products which returns to Ecuador. Regarding mineral earth, you might point out that the Ecuadoran Government imposes an export tax of 12 percent of the value of the shipments of that commodity. Under the new law, this would leave a balance of only 8 percent as the estimate by that Government of the value of exports of mineral earth which return to Ecuador to cover all the production costs of that commodity in the country. You might cite any recent data, such as that included with your despatch no. 447 of April 19, 1938 [1939],24 which you believe to be reliable, which you may be able to secure to show the actual percentage of the value of exports of mineral earth returned to Ecuador in recent years from exports of that product.

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With regard to crude petroleum you might also endeavor to secure reliable information from local sources with which to support any statements you may make to the Foreign Minister showing that the estimate of 15 percent would appear to be much less than the proportion of the value of exports of that product from Ecuador which actually returns to the country.

The law would also appear to be deficient in that it apparently fails to take into account invisible credit items such as investments of foreign capital, expenditures of tourists in Ecuador, and so forth. It is the Department’s understanding that new capital investments in the country are considerable, particularly in the case of the United States in mining enterprises.

Supplementing recent instructions on the general question of Ecuadoran import restrictions since the effective date of the trade agreement, you should inform the Foreign Minister that while it is a matter of increasing concern to your Government that the Ecuadoran Government has up to the present time not modified the control system in respect of imports from the United States so as to bring it into conformity with the provisions of Articles VII and VIII of the agreement, your Government views with sympathy and understanding the economic and financial problems with which the Government of Ecuador is faced and recognizes that in times of exchange stringency it may be necessary to restrict the total amount of imports so as to keep that amount within the actual exchange availabilities. However, any necessary restrictions need not be applied on a bilateral balancing basis, which is unsound economically and inherently discriminatory. They can be imposed on a non-discriminatory basis, in accordance with the provisions of the trade agreement and the broad principles of commercial policy endorsed repeatedly by conferences of the American States and by other nations pursuing liberal trade policies.

Please keep the Department fully informed of any pertinent developments.

Very truly yours,

For the Secretary of State:
Francis B. Sayre
[Enclosure]

Note To Be Presented to the Ecuadoran Minister for Foreign Affairs (Tobar Donoso)

Excellency: At the request of my Government, I desire to bring to the attention of Your Excellency’s Government the concern of the Government of the United States with respect to the possible effects upon the commercial relations between the United States and Ecuador, with particular reference to the provisions of the trade [Page 614] agreement between our Governments signed August 6, 1938, of the law enacted by the Ecuadoran Congress on February 25, 1939 and approved by the President on March 3, 1939, dealing with the method of determining the export values of crude petroleum, mineral earth and gold bullion and specie and providing for the basing of quotas for imports from individual countries upon the value of Ecuadoran exports to such nations.

With respect to the relation of that law to the trade agreement, the arbitrary elimination from the value of exports from Ecuador to the United States, for the purpose of computing such value, of mineral earth and crude petroleum except for the percentages indicated, would undoubtedly have the effect, in accordance with the terms of Article 4 of the law under reference, of necessitating import control measures on the part of Ecuador to reduce imports from the United States. It may be pointed out that no provisions exist in the trade agreement which would permit restrictions to be imposed upon imports from the United States for the reasons set forth in the law. Such restrictions of imports from the United States would therefore appear to contravene the provisions of the trade agreement. The method by which the Government of Ecuador might, if necessary, restrict imports from the United States, is set forth in Articles VII and VIII.

Further with respect to the relation of the Ecuadoran law under reference to the trade agreement, it would appear that if a portion or all the value of certain exports to the United States were eliminated from commercial statistics for purposes of calculating the balance of trade between Ecuador and the United States, those statistics might reveal an import balance for Ecuador. The question therefore arises as to whether Your Excellency’s Government would in accordance with the provisions of existing legislation, increase customs duties on all imports from the United States (unless such legislation may be presumed to have been superseded by the new law). It is evident that if such action were taken, there would result a clear contravention of the provisions of Article I of the agreement in so far as products included in Schedule I are concerned, and a contravention of the provisions of Article XI of the agreement with respect to all other articles imported into Ecuador from the United States unless import duties were also increased to the same extent upon like articles imported from all other countries.

From the foregoing, it will be clear to Your Excellency why my Government views with great concern the possible effect of the law under reference on the trade agreement between our countries. My Government strongly hopes that the legislation referred to may be amended at an early date, and before its provisions have become effective in respect of the trade between the United States and Ecuador, in [Page 615] order to take into account the terms of the trade agreement of August 6, 1938.

From the above considerations with respect to the relation between the law of March 3, 1939 and the trade agreement, it is equally clear that the effectuation of that law would have a most unfortunate effect on the general trade relations between the United States and Ecuador, and in the opinion of my Government might well lead to demands by various affected interests in the United States for retaliatory action by my Government.

Further, with respect to the provisions of article 4 of the law under reference, which would in effect place Ecuadoran foreign trade upon a bilateral trade balancing basis, my Government cannot but feel that this represents a complete departure from the broad policies espoused by the United States and other countries in recent years for the freeing of world trade from such restrictive and inherently discriminatory measures. In the carrying out of these broad policies my Government has continued to hope for the support of Your Excellency’s Government in giving effect to the declarations adopted at recent Pan American Conferences, through the trade agreement between our Governments concluded on August 6, 1938, and otherwise.

Accept [etc.]

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