411.3131/1–551

The Officer in Charge of North and West Coast Affairs (Krieg) to Mr. Richard N. Johnson, Assistant to Mr. Averell Harriman, Special Assistant to the President

confidential

Dear Mr. Johnson: At the end of our recent telephone conversation, you suggested that I might supply you with background information regarding the connection between the Venezuelan Trade Agreement and the continued availability of Venezuelean petroleum and iron ore. In order to save time, I have not had this letter cleared with all the necessary divisions of this Department, so I must ask that you consider it as my own view rather than an official statement of policy.

[Page 1043]

In 1939, the United States negotiated a Trade Agreement with Venezuela which provided, among other things, that the Internal Revenue tax on imported petroleum would be reduced from 21 cents to 10½ cents per barrel on that portion of petroleum imports which did not exceed 5% of domestic refinery throughput for the preceding calendar year.

In 1942, a Trade Agreement was concluded with Mexico (effective in 1943) which provided for the reduction of the import tax to 10½ cents per barrel on all petroleum imported into this country without any limitation whatsoever. Both the Mexican and Venezuelan agreements cover crude petroleum, topped crude, fuel oil and gas oil.

Since the end of World War II, the Mexican Government felt itself unable to continue in force all the concessions which had been granted to the United States in the Trade Agreement, and for a period of two years or more this Government agreed not to insist upon compliance with all the provisions of the Trade Agreement. By last spring, however, it was felt that if the Mexicans could not comply with the agreement, it should be terminated, and such termination was agreed to by the Mexican and United States Governments to be effective December 31, 1950.

During the life of the Mexican agreement, all petroleum entered this country at 10½ cents a barrel in accordance with our policy of generalizing reductions in tariff and import taxes to all countries which have not been found to be discriminating against the United States exports. Now that the agreement is about to end, the tariff quota provision of the Venezuelan agreement will again become effective. As soon as the Venezuelans learned that the Mexican agreement was to be terminated, they requested that we consider negotiating a new trade agreement with them which would continue in effect the 10½ cent rate on all petroleum imports. The Department indicated that there were a number of obstacles in the way of such renegotiation. In the first place, it has been our policy not to renegotiate bilateral trade agreements except within the framework of the General Agreement on Tariffs and Trade.1 Furthermore, a negotiation centering around oil was felt to be politically dangerous in view of the efforts which had been made last spring in Congress to place quantitative restrictions as well as drastically increased taxes on imported petroleum. The Trade [Page 1044] Agreements Act is coming up for renewal in the new Congress, and it was feared that opposition to the renewal might be substantially increased by negotiating on oil, very possibly to the point where the measure would fail of enactment. These considerations were explained to the Venezuelans, and it was pointed out to them that we could not give any commitment to negotiate at a later date since, should such a commitment become known, it would be justifiably resented by Congress with probable disastrous results with the renewal of the Trade Agreements Act.

The Venezuelans replied that, although they understood our difficult position, they too were under great pressure from domestic interests to terminate the Agreement and increase protection on domestic manufacturers, and that unless they could be assured that we would negotiate in the near future, they would reluctantly be compelled to suggest terminating the Agreement.

We have learned unofficially that the Venezuelans’ pride has been offended because we granted to Mexico in 1942 more favorable treatment than we had been willing to grant Venezuela in 1939, despite the fact that Mexico had expropriated the foreign-owned petroleum industry whereas Venezuela had always welcomed foreign capital. They were doubly offended that we were not now willing to renegotiate the agreement, especially in view of the international emergency which, in their opinion, should greatly facilitate the granting of the concessions they desire. As a matter of fact, in spite of the emergency, Texas production is still cut-back 300,000 barrels per day from the high point it reached last September so that it may be anticipated that there will be considerable political opposition to a reduction in the tax even though it can not be shown that this will actually result in any increased quantities being shipped into the American market.

The question therefore resolves itself into a matter of politics, not economics. I and my colleagues feel that it is extremely important that we retain the good will and cooperation of Venezuela. There has long been a strong undercurrent of feeling in that country in favor of the nationalization of the petroleum industry, even though it is generally recognized that its operation by the Venezuelan Government would be less efficient than under foreign management. The Venezuelans resent the fact that their major resource is being drained away by foreigners and that foreigners in this way control the economic destiny of their country. It may be expected that the companies engaged in extracting iron ore will encounter the same feeling.2

[Page 1045]

Since 1945, no new concessions for the exploitation of petroleum have been granted by the Venezuelan Government. In order to insure an adequate supply for present and future emergencies, our Government feels that a vigorous program of exploration and exploitation should be carried on constantly. In order to obtain the cooperation of the Venezuelan Government in granting new concessions, in expediting the work of the steel companies, and in retarding the trend toward nationalization, we feel it desirable to do everything we possibly can to show the Venezuelans that we are genuinely cooperating with them, that we are not discriminating against Venezuela in favor of Mexico or any other country, and that we do take their political necessities into consideration in shaping our policy.

Over and above the particular reasons mentioned above for maintaining good relations with Venezuela, we are, as you know, preparing for a meeting of the Foreign Ministers of all the American Republics; the purpose of which, in broad outline, is to secure their cooperation in the defense effort. In view of the serious threats to our security which the country is now facing, we feel it more important than ever to maintain and increase hemispheric solidarity. We are going to need the assistance of all the Latin American countries even more than we did in the last war, and it is therefore especially important that the Venezuelan Government should be convinced of our desire to reciprocate their cooperation before the Foreign Minister comes up to Washington.

For these reasons, every effort has been and is being made to find a way out of this dilemma. The idea of a statement to the Venezuelans indicating that while the time was not appropriate for negotiations now, we would keep the matter under continuous consideration, has been rejected by the Inter-Departmental Trade Agreement Committee.3 At the time this is being written, serious thought is being given to grasping the nettle and sounding out key members of Congress to ascertain their reaction to a negotiation for the possible amendment of [Page 1046] the Venezuelan Trade Agreement.4 After their views have been obtained, a decision will be made whether to give notice of public hearings on a possible reduction of the tax on imported petroleum to 10½ cents.

When we were talking the other day, I mentioned the possibility that the President might have powers under the emergency to reduce or suspend import duties and taxes on items required for the defense effort. The prevailing opinion around here now is that the President does not have such power, and some tentative drafts of legislation have been prepared for submission to Congress which would authorize him to take such action. We do not think the chances are this will be favorably acted upon by Congress in time to satisfy the Venezuelans. Furthermore, it may be difficult to allege that oil is in short supply because, for the moment, supplies are adequate. What we are worried about is the future, not the immediate situation.

I hope that I may have the pleasure of discussing this question with you again, and that you will not hesitate to let me know if you desire any further information.

Sincerely yours,

William L. Krieg
  1. However, in telegram 188 to Caracas, November 22, the Department had said in part: “Prelim discussion matter Nov 16 by [Trade Agreement] Comite strongly reemphasized US inability give any commitment re modification existing agreement or be party tacit understanding this p[oin]t. However sense of discussion on US policy re bilaterals outside GATT was that policy wld not stand in way of amending TA with Ven to permit reduction in duties on both sides on limited nr products. This latter re policy on bilaterals shld not be made known to Ven. TAC has taken position that almost any statement that might be made to Ven, even along above lines, wld almost inevitably be subject to interpretation as commitment negotiate if used by Vens to explain acceptance return to 1939 agreement position.” (411.3131/11–1950)
  2. Mr. Thomas C. Mann, Deputy Assistant Secretary of State for Inter-American Affairs, had emphasized the relationship of oil and iron ore issues in a meeting of December 22, 1950, at which Mr. Miller, Willard L. Thorp, Assistant Secretary of State for Economic Affairs, and a number of other officials had been present. Mr. Mann had mentioned that a secret poll conducted by Standard Oil Company of New Jersey had indicated 70 percent of Venezuelans desired petroleum to be nationalized. One might expect similar resentment against foreign companies which were beginning the exploitation of iron ore. Everything possible should be done to convince the Venezuelans the United States desired to cooperate with them. Sr. Gomez Ruiz had clearly indicated that the key to Venezuelan cooperation at the forthcoming Foreign Ministers meeting lay in the Trade Agreement. Messages from Ambassador Armour that had stressed the importance of the Trade Agreement to relations with Venezuela should be taken at their full weight. (Memorandum of conversation by Mr. Kreig, 411.3131/12–2250)

    Documentation concerning the Fourth Meeting of American Ministers of Foreign Affairs, held in Washington March 26 to April 7, 1951, will appear in a forthcoming volume of Foreign Relations.

  3. At a meeting held in Torquay, England on December 21. TAC was sitting at Torquay in connection with the Third Round of Tariff Negotiations under GATT, then being conducted at Torquay.
  4. This decision had been taken at the meeting mentioned in footnote 2.