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There is strong feeling in the United States against relinquishing the Canadian market. Logically, by reason of location, and historically, the United States has been the source of supply for Canadian cotton mills. During the decade 1929–1939 the United States supplied almost 98 percent of Canada's imports of raw cotton. In 1939–40 American cotton supplied 92 percent of total consumption. In 1940-41 Brazil supplied more than half of the Canadian market but prior to that year Brazil had supplied less than 2 percent of Canada's cotton imports.

In view of the fact that assistance to domestic cotton producers has temporarily upset normal price relationships between American and foreign growths the subsidy on exports is the natural concomitant of the program of domestic assistance. It is directed toward the maintenance of the status quo in export markets, and cannot be looked upon as undercutting or unfair competition, since it is designed to bring about a situation as nearly as possible like that which would have obtained had there been no government support of domestic prices. For this reason any competitive advantage which may have been enjoyed by other producers before the subsidy was put into effect should be considered by them as a windfall resulting from temporary maladjustment between the domestic and foreign aspects of this Government's cotton program. The short period during which American cotton was deprived of its competitive position in Canada cannot be regarded as having created a special privilege for other growths.

The retention of customary markets is especially important in view of the very heavy carry-over and the extremely low level of exports last year. American exports in 1940–41 were 82 percent below the 1939-40 level, while Brazilian exports increased 38 percent. At best, exports of American cotton this season will not materially exceed 1.1 million bales. And carry-over has risen from 4.4 million bales in 1937–38 to about 12 million bales at the beginning of the current season.

It is recognized that other producers face a serious problem in finding outlets for their cotton under war conditions, and an equitable solution is sincerely desired. In the case of the Canadian market, demand has increased from an annual average of about 270,000 bales for the decade 1929–38 to about 500,000 bales in 1940-41, and it is expected to exceed this during the current year. This Government is prepared to share equitably with other producers any increases in demand resulting from the war but the Department of Agriculture insists that pending the conclusion of a world cotton agreement the proposed division of the Canadian market must be on a year to year basis. The Brazilian Government may be assured that we shall welcome Mr. Dantas for the proposed discussions and that on our part there will be the greatest good will to attain a practicable solution acceptable to both governments.

Another factor which may be mentioned is the present acute shortage of shipping space. The war effort of this country and of all countries with a stake in the defense of democracy make it imperative to utilize available tonnage to the maximum efficiency. If cotton can be supplied to Canadian mills overland, valuable cargo space is freed for the transportation of material essential to the defense program, in which Brazil has a vital stake. While there is no intention to advance the shipping argument in behalf of the cotton subsidy policy, this is an example of questions raised by the authorities in charge of shipping routes and cargo space allocations when assigning tonnage to Brazilian-United States trade.

For your own information only, it is understood that the Surplus Marketing Administration expects to increase the subsidy as necessary to meet any fall in the price of Brazilian cotton.

HULL

561.321D1 Advisory Committee/79: Telegram

The Ambassador in Brazil (Caffery) to the Secretary of State

RIO DE JANEIRO, October 31, 1941–4 p. m.

[Received 7:05 p. m.] 1622. Department's 1045, October 29, 10 p. m. Ministry of Foreign Affairs and Dantas informed. Embassy's 1564, October 23, 5 p. m.24 The Brazilian Government

5 is expected to announce shortly 25 that it will make advances against cotton of the 1941-42 São Paulo crop at approximately 15 milreis per arroba (15 kilograms) on seed cotton equivalent to type 5, or at 50 milreis per arroba on type 5 lint cotton.

It is expected that the advances will be for 6 months' periods with renewal privileges and will be subject to deductions at time of granting for interest, warehousing and insurances charges, which are equivalent to about 2 milreis 500 reis to 3 milreis per arroba on lint cotton. The advances will probably be graduated in accordance with distance from São Paulo of storage points.

No financial assistance beyond that now accorded (see Embassy's telegram No. 601, June 6, 1941 24 is likely to be granted on stocks remaining from 1940-41 crop as they have now passed beyond farmers' hands.

* Not printed.

25 The announcement made to the press on November 2 was transmitted to the Department in the Ambassador's telegram No. 1650, November 3, 10 p. m. (561.321D1 Advisory Committee/81).

As reported in Embassy's telegram 1564 the Government is understood to have been reluctant to engage in financing measures with respect to the new crop without some form of crop control but reluctance of merchants and other private sources of credit to finance farmers in face of uncertain export outlook for next season will apparently make foregoing assistance necessary.

CAFFERY

561.321D1 Advisory Committee/85

The Minister in Canada (Moffat) to the Secretary of State

No. 2182

OTTAWA, November 15, 1941.

[Received November 17.] SIR: I have the honor to refer to the Department's air mail instruction No. 629 of September 16, 1941, and to subsequent telephonic conversations with the Department on the basis of which I communicated to the appropriate Canadian authorities the substance of the Department's telegram of September 6 [15] 26 to the Embassy at Rio de Janeiro regarding the provision which was being made in the cotton program of the United States for the exportation of cotton to Canada.

I have received no reply in writing to my note addressed to the Under Secretary of State.

Thus far only two comments have been made to me in connection with the United States program. The first was a mild expression of regret that no sooner had Canada found a way of getting some dollar exchange (the Department will recall that Canada and Brazil had come to an agreement whereby Brazil would sell back to Canada for sterling one-half the American dollars spent by Canadians for Brazilian cotton purchases) than the American Government found itself obliged to take measures that in effect dried up this method of obtaining hard currency.

The second observation was to the effect that Canada had no particular objection provided the new American program did not result in raising the price of cotton to Canada. This angle has assumed particular importance since the Government has placed a ceiling on all prices; henceforth if the price of an imported component of an article rises the Canadian Government will have to take measures, either by way of tax remission, duty remission, or even Government purchase with subsequent re-sale to the manufacturer at a loss, in order to keep the price of the finished article from rising. Respectfully yours,

PIERREPONT MOFFAT

26 Telegram No. 804, p. 136.

561.321D1 Advisory Committee/94 Memorandum of Telephone Conversation, by the Chief of the Division

of Commercial Policy and Agreements (Hawkins)

[WASHINGTON,] November 28, 1941. I phoned Mr. Wheeler 28 this morning regarding the status of the cotton discussions with Brazil with particular reference to Mr. Carr's memorandum of November 27 on the procedural aspects.29

I told Mr. Wheeler that I felt considerably disturbed about the manner in which these discussions are being handled; that obviously the Department of State is much concerned in any international negotiations of this sort which have a bearing on other questions coming within its responsibilities. I said further that any such agreement, before it could be made effective, would have to be approved by this Department; and that in order to obtain such approval it is essential that this Division participate closely in the formulation of such agreements. Mr. Wheeler replied that he understood this fully; that the draft which Dr. Dantas telegraphed to his Government was merely in the nature of a report on the present status of the discussions and that the Department of Agriculture still has questions to raise in regard to that draft. He said that the plan was to discuss the substance of the proposed agreement with us at the appropriate stage and see whether we fully agreed with it.

I also said that obviously the Canadian Government would have to be consulted in regard to any proposals on this subject and its acquiescence would have to be obtained. I asked whether Dr. Dantas also understood this. Mr. Wheeler replied in the affirmative.

Mr. Wheeler said that his present plan was to send Dr. Norris, who is the officer of the Department of Agriculture principally concerned with the discussions, over to see us, at which time the substance of the proposed arrangement can be gone into exhaustively and questions of procedure, including the form which any agreement might take and the manner and time for consultation with the Canadians would be gone into. I told Mr. Wheeler that as soon as we in this Division reach conclusions regarding a substance and procedure which we think are tenable, we would then take the matter up with other interested Divisions and officers of the Department.

28

Leslie A. Wheeler, Director of Foreign Agricultural Relations, Department of Agriculture.

Memorandum not found in Department files. Robert McDill Carr was Assistant Chief of the Division of Commercial Policy and Agreements.

29

[Annex)

Tentative Draft Agreement for Sharing the Canadian Cotton Market

(1) The Governments of the United States of America and the United States of Brazil will regulate the annual exports of raw cotton from their respective countries to the Dominion of Canada on the basis of an estimated total annual Canadian requirement of Upland cotton of 258,120,000 pounds, or 540,000 bales of 478 pounds net weight, of which the United States will export 129,060,000 pounds, or 270,000 bales of 478 pounds net weight and Brazil will export 129,060,000 pounds, or 270,000 bales of 478 pounds net weight. At least 90 days prior to the expiration of each marketing year, as provided in this agreement, the Joint Cotton Committee shall review the estimate of the total Canadian requirement of Upland cotton and make such revision as it deems necessary. In the event the revised estimate exceeds 258,120,000 pounds or 540,000 bales of 478 pounds net, the additional quantity shall be shared equally between the United States and Brazil. In the event the estimate is less than 258,120,000 pounds, or 540,000 bales of 478 pounds net weight, the reduction shall be shared equally between the two countries, provided that the share of the United States shall not be reduced below a quantity of 119,500,000 pounds, or 250,000 bales of 478 pounds net weight.

If the Joint Committee determines that the importation of cotton into Canada from countries outside this agreement is in such volume as to affect materially the agreement, then it shall notify the Governments of Brazil and the United States and the two Governments may re-examine the situation with a view to taking such joint measures as they deem necessary.

(2) During the life of this agreement the Government of the United States will adjust the export payment on cotton exported to Canada to such a degree as to maintain a difference of not more than one cent (1) and not less than one half (42) cent per pound between the spot price of Brazilian (São Paulo official Type 5. 28/29 M. M.) cotton at São Paulo, plus the cost of delivery and handling charges to Montreal and the price of released Commodity Credit Corpt Middling 15/16 inch cotton at Memphis, Tennessee, plus the cost of delivery and handling charges to Montreal. If the difference between the price of Brazilian cotton and United States cotton, as defined above, becomes less than one half (12) cent per pound, the United States Government will withdraw the export payment on cotton exports to Canada.

It is understood that the rate of exchange used in converting the price of Brazilian cotton to U. S. cents per pound shall be the export rate of exchange established by the Bank of Brazil for exporting cotton.

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