Foreign Relations of the United States, 1952–1954, The American Republics, Volume IV

411.006/4–142

Memorandum by the Assistant Secretary of State for Economic Affairs ( Thorp ) to the Secretary of State ¹

confidential

[ Washington ,] April 1, 1952.

Subject:

• Treasury’s Proposal to Impose Countervailing Duties on Argentine and Uruguayan Wool Tops

Problem

Section 303 of the Tariff Act of 1930,² the countervailing duty law, provides that the Secretary of the Treasury shall impose an additional duty on imports of any dutiable products upon which any country “… shall pay or bestow, directly or indirectly, any bounty or grant upon the manufacture or production or export …”

Treasury now proposes to apply the provisions of the law to a fairly extensive group of new cases. Initially, the Treasury would apply countervailing duties to wool top exports from Argentina and Uruguay, on the grounds that exporters are receiving a bounty through the operation of a system of multiple exchange rates. Simultaneously, or perhaps shortly thereafter, all other products moving from these countries at the same or more favorable rates would be subjected to countervailing duties. This would probably be followed by an examination of the various multiple exchange rate and export retention schemes in effect around the world, to determine the extent to which countervailing duties should be applied to these.

If the Treasury were to apply this new policy with restraint, its initial effects would be principally in Latin America; as nearly as we can judge, about nine countries would be involved, and the affected trade would amount to over $100,000,000. If the Treasury extended the approach to any degree, a considerably larger number of countries, and about twice as much trade, would be involved.

We recognize that the interpretation of the statute is Treasury’s primary responsibility under the law. However, the interpretation Treasury now proposes adopting, an interpretation which would declare the use of multiple exchange rates in most cases to involve a bounty, is not clearly required by the law. The foreign policy implications of Treasury’s proposal are so extensive as to justify intervention by the Secretary and, if need be, by the President.

Recommendation

1. It is recommended that you discuss the problem with Secretary Snyder, making the following arguments against Treasury’s proposed action. (For amplification, see the latter part of the “Discussion”, beginning at page 4, which has been numbered to parallel the paragraphs below.)

a. The action will profoundly disturb relations with a good many countries, particularly those in Latin America. It will increase our difficulties in obtaining their scarce materials and conflict with our objective of encouraging the development of sound processing industries.

b. The action is not an appropriate way of forcing other countries to adopt unitary rates. Our representative in the International Monetary Fund could press the case more constructively and with less “big-stick” appearance.

c. There is room for genuine doubt whether a subsidy does exist in the wool tops cases. Treasury found that none existed a year ago, though the rates were the same then. The rate structures of Argentina and Uruguay are such that these governments are making a profit on the resale of the dollars they buy from the wool-top exporters, which hardly indicates that a bounty is being paid these exporters.

d. This action will not ease the passage of the Customs Simplification Bill in its present form, as Treasury assumes. On the contrary, it is likely to kill the provisions of the bill which circumscribe the circumstances in which countervailing duties can be applied.

2. If Secretary Snyder does not agree to refrain from action in the wool tops cases on the grounds outlined above, it is recommended that you suggest both of the following steps.

a. The President should be consulted immediately on the problem with a view to obtaining the adoption of the course set out in paragraph b.

b. The Administration should approach Congressional leaders and should explain that Treasury is not prepared to impose countervailing duties in the wool tops case in view of the possibility of real doubt that a subsidy in fact exists, within the meaning of the law as it is now phrased; that Congress may wish to give a clearer indication of its intent in connection with the consideration of the Customs Simplification Act; and, if so, that Treasury and State would like to testify on the implications of the various possible policies which might be adopted.

Discussion

There are various devices which the courts, at one time or another, have ruled to be within the purview of the countervailing duty law since its prototype was first enacted in 1897. Nevertheless, Treasury has made very little use of the law, and in recent years, at least, has only applied the law in response to specific substantial complaints.

There are a good many governmental measures in effect around the world which, intentionally or not, may affect the volume and composition of countries’ exports. Multiple export rates, whereby the stated local currency return per dollar of exchange earned varies according to the class of transaction, is one of these measures. Attached hereto as an Annex³ is a table showing the countries employing multiple rate systems; also shown are countries employing other systems which might be said by those desiring to impose countervailing duties to have analogous effects to a multiple rate system.

In trying to determine whether a system of multiple rates results in a bounty to particular commodities, there is always room for an honest difference of views. One of the difficulties boils down to the fact that there must be an arbitrary judgment as to what is the “true” rate of exchange, and in what direction the particular multiple rate deviates from the true rate. What Treasury now proposes is apparently to adopt as the “true rate”, the rate at which the bulk of a country’s exports move, and to consider that any more favorable rate constitutes a bounty in the amount of the difference.

As the attached table indicates, over half of our imports from Argentina would be affected by this ruling, as would substantial proportions of our imports from other principal Latin American countries.

The following comments amplify the arguments which it is suggested be used against the proposed Treasury action.

a. Treasury’s action will profoundly disturb our relations with many countries, particularly Latin America where there is already dissatisfaction concerning failure of the United States to allocate adequate quantities of scarce materials, high prices of United States exports, and low prices which the United States is willing to pay for the strategic and critical materials which we need from these countries. These countries may well react in a stiffer attitude in our negotiations with them to obtain critical materials. Moreover, greater obstacles to sales to the United States will strengthen the hands of elements in those countries favoring sale of strategic materials to the Soviet Union, which is in some known cases offering higher prices than United States importers; these offers have so far been turned down under export restrictions maintained at our urging. For example, the Communists in Uruguay are asserting that Uruguayan wool, which would sell in the United States for only 23¢ per pound, could be sold to the Soviet Union for 40¢ per pound. Although Uruguayan wool exports to the United States are down about 85 percent, none has been sold to the U.S.S.R. in line with a policy of not exporting to the Soviet bloc. If, as a result of pressure, the action is extended by analogy to the dollar retention and related export schemes of Europe and Middle and Near Eastern countries, its effects will be even worse. It will significantly reduce the dollar-earning capacity of the countries affected, increasing the need for direct financial assistance, and aggravating the dollar shortages which have been a major factor in developing the multiple rate systems. In fact, some of the incentive schemes which would give rise to countervailing duties under Treasury’s new interpretation of the law, were urged on those countries by ECA.

b. In view of the fact that the United States favors unitary exchange rates and deplores resort to multiple exchange rate practices, the proposed measures will be widely interpreted as an attempt on our part to force other countries to abandon multiple rate systems and to adopt unitary exchange rates. Since most important trading countries in the world, including the United States, are members of the International Monetary Fund, the constructive policy for the United States would be increased efforts to exert appropriate pressure in the Fund to persuade members with multiple rate systems to simplify their rate structures.

c. There is genuine doubt, in the wool tops cases, whether a subsidy does result from the practices in question. Argentina is pursuing a general policy of discouraging agriculture, and has adopted export rates on agricultural products which are consistent with this objective; moreover, like other South American countries, Argentina has long relied upon export taxes on basic products as a source of revenue; both the proceeds of wool tops exports and of raw wool exports are a source of profit to the Argentine Government in that the dollars purchased from these exporters are resold, on the average, for more than the Government has paid for them.

In Argentina the present rates on wool tops have been in effect more than a year; in Uruguay for more than two years; some of the multiple rate situations which would now become the basis for countervailing duties have existed for much longer. Treasury previously found, in December 1950, that this same wool tops situation results in no bounty.

d. As to Treasury’s contention that if action is not taken the Customs Simplification Bill will be jeopardized, we believe that the proposed Treasury action is no less prejudicial to the bill. The Customs Simplification Bill, as passed by the House, amends the countervailing duty law to require that injury be shown as a condition to the imposition of duties. Our feeling is that it will be impossible to secure this amendment if the effect would be to remove a basis for acting under the law with respect to a class of cases on which Treasury had recently acted. To be sure, if Treasury withholds its decision or refuses to impose the wool-tops duties, serious risks still would exist; but it might then be possible for the Administration either to propose or to accept as a further amendment to the law some reasonable definition of the cases in which multiple rates will be considered to bestow bounties, which definition might then be added to the law along with the insertion of the injury test.

1. Drafted by Director of the Office of Regional American Affairs Cale; Deputy Director of the Office of Economic Defense and Trade Policy Vernon; the Assistant Chief for Exchange Rates, Monetary Affairs Staff, Matilda L. Milne; and Mrs. Margaret Hardy Potter of the Commercial Policy Staff.
2. Public Law 361, approved June 17, 1930; for text, see 46 Stat. 590.
3. Not printed.