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NEGOTIATING A RECIPROCAL TRADE AGREEMENT

WITH AN UNDERDEVELOPED COUNTRY:

GUATEMALA AS A CASE STUDY

KENNETH J. GRIEB

tive departments was essential. Assistant Secretary of State Francis B. Sayre headed both groups. Initial planning was conducted in the interdepartmental committee to assure representatives of domestic producers ample opportunity to scrutinize projected concessions. After the preliminary survey, an interdepartmental “country committee" was established to prepare a detailed analysis of trade between the two nations. Regularly accredited diplomats, acting under Sayre's direction, conducted the negotiations.3

The diplomats -soon discovered a considerable gap between theory and practice. Concluding an agreement between an industrial nation and an agricultural country proved far more difficult than the theorists had anticipated. Negotiations with nations having one-crop economies or few marketable products presented formidable obstacles. The situation was complicated by the harsh realities of existing trade patterns, tariff policies, and internal needs of the respective states. Nations which exchanged

substantial trade had invariably adjusted duties to the demands of their domestic markets. Frequently, industry's need for raw materials rather than protectionism governed tariff policy, particularly in cases of commerce between industrial and agricultural states. In these circumstances, existing trade patterns rendered reciprocal concessions difficult.

Dealing in generalities and stressing the ultimate benefits of increased trade, theorists often failed to take cognizance of local peculiarities. They frequently overlooked the dependence of most Latin American governments on revenues derived from import and export duties. This dependence precluded significant tariff concessions, for the politically powerful classes could hardly be expected to reform their entire tax structure and abandon historic policies merely to stimulate trade. The importance of tariff revenues meant that a Latin government which significantly reduced duties would assure its own eventual bankruptcy and downfall. Such regimes were understandably reluctant to commit suicide in search of an economic millennium. Government leaders confronting this revenue pattern could not understand how a larger market for their products could stimulate economic growth if the government lacked funds to

3 Pratt, Cordell Hull, pp. 113-115; Francis B. Sayre, Glad Adventure (New York, 1957), pp. 172-173; Sayre, The Way Forward: The American Trade Agreements Program (New York, 1939), pp. 89-92; John D. Larkin, Trade Agreements: A Study in Democratic Methods (New York, 1940), pp. 48-49, 53-54.

construct the transport facilities and utilities essential to opening new areas and expanding production. In the eyes of such officials, these immediate disadvantages outweighed potential long-range benefits.

Consequently, American diplomats found the governments of underdeveloped countries, particularly in Latin America, reluctant to grant significant tariff concessions. Increased trade would yield greater benefits to the United States than to the underdeveloped nations, for an industrial economy can respond more readily to the stimulus of increased markets. Leaders of underdeveloped nations were skeptical of the theoretical benefits extolled by the Americans, and tariff talks proved lengthy and frustrating for both parties. Negotiations with Guatemala exemplified the difficulties.

General Jorge Ubico, coming to power in Guatemala in 1931 and confronting the world depression, had proclaimed economic development as one of his principal objectives. By adopting firm measures, Ubico maintained the value of the currency. He eliminated unsound financial institutions through bank holidays and inspections, steps similar to Roosevelt's in the United States. Ubico launched an extensive program of public works which emphasized construction of roads and bridges, clearly indicating the government's determination to develop isolated areas of the country and thereby expand trade. Ubico also increased the effectiveness of his economic program by bringing honesty and efficiency to the government of Guatemala. Such measures earned the confidence of the business and wealthy classes, assuring support from the politically powerful elements of the population. Harsh restrictions kept the peons subservient. In early 1933 the American military attaché commented: “The economic depression which would seriously affect the stability of almost any administration in Guatemala has, if anything, strengthened the Ubico government. Even his most pronounced enemies openly admit

that Ubico is absolutely honest and that no other man could pull Guatemala through as Ubico can." 4 Thus Ubico's policies saved Guatemala from the depression-bred political and economic chaos that characterized many Latin American republics. With this record of stability and economic development, Guatemala seemed a fertile field for a commercial pact.

Ubico's well-known friendship for the United States further enhanced prospects of negotiating a reciprocal trade agreement. The Guatemalan president was extremely pro-American, and his foreign policy was closely attuned to American desires." This friendship for the United States did not indicate subservience, however, for Ubico sought American commercial concessions and aid in return. He endeavored to influence American policy within the Central American isthmus by seeking support for his local objectives as compensation for cooperation elsewhere.

Extensive United States economic interests in Guatemala and the volume of trade between the two nations also seemed to augur well for the talks. Many American firms, such as International Railways of Central America, United Fruit Company, W. R. Grace and Company, and Pan American Airways, had considerable investments in Guatemala. Ubico exhibited a marked preference for Americans in awarding economic concessions, as indicated by his agreements with United Fruit and Pan American Airways to construct port facilities. An American banker, Willis Dearborn Howe, served as financial adviser to the Ministry of Finance and the Central Bank of Guatemala. The United States was the principal market and supplier for the Guatemalan economy, purchasing 34 percent of Guatemala's exports and furnishing 51 percent of its imports. Germany was the only potential trade competitor, also receiving 34 percent of Guatemalan exports; but since German products comprised only 12.5 percent of Guatemalan imports, the European state represented principally a market for Guatemalan coffee. No other nation approached the American figures. Guatemalan trade amounted to $5.9 million in 1933, only a fraction of the potential which in the predepression period from 1925 to 1929 had consistently exceeded $24 million annually.

4 William McCafferty, chargé in Guatemala, to Henry L. Stimson, Aug. 4, 1931, Decimal File 814.00 / 1075, General Records of the Department of State, Record Group 59, National Archives Building (hereafter cited only by Decimal File number); McCafferty to Stimson, Sept. 30, 1931, 814.11 General Conditions 46; George K. Donald, consul in Guatemala, to Stimson, July 8, 1932, 814.00/1095; Edward Lawton, chargé in Guatemala, to Hull, Mar. 6, 1933, 814.516: 303; Sheldon Whitehouse to Stimson, Oct. 8, 1932, 814.00 1099; Major Arthur Harris, military attaché in Guatemala, to War Department, Aug. 11, 1932, 814.00 / 1097, and Jan. 25, 1933, 814.00/1104.

5 Whitehouse to Stimson, June 30, 1931, 710.G/34; Lawton to Hull, Sept. 30, 1933, 710.G 242; Harris to War Department, Jan. 25, 1933, 814.00/1105.

Despite the auspicious factors, however, preliminary exchanges revealed serious difficulties. Ubico, anxious for the prestige of inaugurating the program, responded to the 1933 announcement of preliminary talks with several Latin American nations and to American inquiries by indicating a desire to begin negotiations at once. The Guatemalan government wanted expanded markets and credits in return for the broad tariff concessions sought by American negotiators.? Washington was unwilling to extend credit at that stage of the depression. Furthermore, the United States considered the question extraneous to the trade discussions. By adopting this stand, American negotiators refused to recognize the domestic consequences of tariff reduction in

Guatemala. Since tariffs provided the bulk of the government's revenue, some source of credit was essential to compensate for the reduced income. The two issues were intimately connected. Because of the potential loss of revenue, the Guatemalan government was reluctant to grant concessions on its principal imports-the very products the Americans desired to include in the agreement. The basic attitudes of the two nations, it was apparent at the outset, clashed.

Existing trade patterns further complicated the negotiations. While the bulk of Guatemalan imports came from the United States, the commodities involved were so diverse that no product accounted for a significant percentage of the total volume. Small transactions made up some 42 percent of the imports. This factor compelled the United States to request tariff cuts on many items to encompass any substantial portion of the trade. Yet such concessions would constitute a general tariff reductionthe very policy Guatemala could not afford.

American concessions to Guatemala proved to be the principal difficulty, however. Two products accounted for the overwhelming portion of the Central American nation's exports-coffee and bananas. Because of the demand for these products in the United States, both were already on the free list. Consequently, American officials were unable to offer sufficient compensation for the concessions they desired. Only concessions on coffee and bananas would have any significant impact on the Guatemalan economy. Decreasing tariffs on commodities that constituted only a minute portion of Guatemalan exports or cutting duties on the products of embryonic industries would have no immediate effect. The Guatemalan government, aware of this problem, requested credits in return for tariff reforms. After refusing to consider credits, American negotiators discovered, to their consternation, that they had nothing significant to offer Guatemala.

6 Whitehouse to Stimson, Dec. 30, 1930, 814.00 / 1038, and June 1, 1931, 814.1561/37; Latin American Division memo, June 20, 1931, 814.1561/38; McCafferty to Stimson, Oct. 3, 1931, 814.01 A/16; Matthew E. Hanna, minister in Guatemala, to Hull, July 27, 1934, 611.1431/55, and Nov. 26, 1934, 611.1431/82.

7 Lawton to Hull, July 31, 1933, 814.00 General Conditions/68, Sept. 9, 1933, 611,1431/44, and Sept. 30, 1933, 710.G/242.

8 Hanna to Hull, July 27, 1934, 611.1431/55; Lester H. Woolsey to Sayre, Feb. 15, 1934, 611.1431/6. 10 Hanna to Hull, Sept. 5, 1934, 611.1431/70; Sayre to Hanna, Oct. 2, 1934, 611.1431/70; Hanna to Hull, Oct. 30, 1934, 611.1431/77; Sayre to Hanna, Oct. 24, 1934, 611.1431/77; Hanna to Hull, Dec. 22, 1934, 611.1431/84; 0. Gaylord Marsh, consul general in Guatemala, to Hull, Feb. 4, 1935, 811.114 Guatemala/67; Sumner Welles to Hanna, Apr. 5, 1935, 611.1431/97A; Hull to Hanna, Apr. 5, 1935, 811.114 Guatemala/74.

Once credits were excluded from the discussions, Guatemala sought a larger American market for its coffee through an import quota. A disproportionately large quota would stimulate coffee production by guaranteeing greater access to the high prices obtainable in the American market. A quota would also increase trade between the two countries. Guatemala exported more than twice as much coffee to Germany as to the United States, but a market quota would reverse the pattern. Because the Guatemalan economy depended so heavily on profits from coffee exports, a quota would have been a meaningful American concession. But the United States was unwilling to consider the proposal in the talks. Establishing a quota, the Americans said, would require multilateral discussions; one could not be negotiated with Guatemala exclusively.

Still searching for other compensation, Guatemala shifted efforts to minor products and negative gains. Chicle, the Guatemalan export third in importance, became the next focal point of discussion. This commodity was also admitted to the United States duty free, precluding a tariff concession. Noting that the United States had repeatedly asked Guatemala to curtail liquor smuggling from Puerto Barrios, Guatemalan Foreign Minister Alfredo Skinner Klee pledged that his government would take appropriate steps in return for American measures to prevent the smuggling of Guatemalan chicle through British Honduras. Closing the American market to contraband chicle, Skinner Klee observed, would increase Guatemalan revenues by ensuring payment of the chicle export tax, thus partially offsetting the loss of income from the tariff reductions. The request placed the United States in a difficult posi

tion, since Puerto Barrios bootleggers were a major source of illicit liquor shipments to Gulf ports. Yet American diplomats could not devise ways to stop contraband chicle. In desperation, Skinner Klee proposed the United States impose an import duty on chicle and then exempt Guatemala from it. This would not alter the free entry of Guatemalan chicle into the United States, but it might render smuggling unprofitable and thus aid Guatemala to recover lost revenue. Assistant Secretary of State Sayre, however, replied that such a step was impossible since Congress had authorized the president only to negotiate agreements reducing tariffs, not to impose new duties. The State Department had no counterproposal and instead instructed Minister Matthew Hanna to ask the Guatemalan government to suggest methods for suppressing smuggling. Skinner Klee proposed that the United States require certificates of origin for chicle shipments since no chicle was grown in British Honduras, the principal center of the smuggling. The United States agreed to consider this suggestion, but Guatemala withdrew the proposal when the minister of finance concluded it would be ineffective.10 Guatemalan efforts to devise an alternative method of curtailing chicle smuggling proved futile.

In the meantime, Guatemalan tariff concessions continued to be a problem in the negotiations. The government rejected the initial American proposals because, Skinner Klee observed, they would reduce Guatemalan government revenues by a disastrous 30 percent. Hanna reported that the minister of hacienda and the director of customs were “quite friendly and desire to continue

9 Hanna to Hull, July 24, 1934, 611.1431/54.

to co-operate," but they thought "Guatemala should not agree to material reduction of customs receipts at this time without some immediate and direct compensating advantage." Ubico and Skinner Klee maintained that any substantial reduction of customs revenues would imperil the future of the nation. The foreign minister recognized that it would be difficult for the United States to grant compensating tariff concessions, since already 99 percent of Guatemalan exports were admitted duty free, and he reiterated that only a guaranteed market and price for Guatemalan coffee "might compensate for a reasonable sacrifice by Guatemala." Hanna reported: “The present attitude is that Guatemala can gain little or nothing from the agreement if the United States can find no way to help her market her coffee at a profit." 11

With the negotiations clearly deadlocked, the Latin American Division of the State Department and the economic analysts split. Sayre dismissed the Guatemalan complaint against tariff reduction, contending that the resulting increase in trade would produce greater revenue from lower duties on a larger volume of goods. Such an argument seemed perfectly sound to the economists. Members of the Latin American Division, who had a greater understanding of the dependence of Latin governments on trade revenues, viewed the Guatemalan arguments more sympathetically. Willard L. Beaulac, assistant chief of the division, informed the Trade Agreements Committee that Sayre's argument was “not strong." Noting that Guatemalan purchasing power abroad depended exclusively on the price of coffee, Beaulac claimed increased trade in other commodities would have no appreciable effect. He also stressed that long-term benefits stemming from increased trade

would not compensate for the immediate loss of revenue. 12

By the spring of 1935 State Department officials finally began to realize that no broad concessions based on economic objectives could be negotiated; only a narrow agreement encompassing minor adjustments and assurances dictated by political expedience was possible. Edward G. Trueblood of the Latin American Division thought "Guatemala could be persuaded in the course of negotiations to grant us a small list of relatively minor concessions, but there seems little prospect of working out an important agreement.” He concluded: "We can apparently only offer Guatemala ... the binding on the free list of coffee, bananas and chicle.” American bargaining power was clearly reduced to a bare minimum, and the Guatemalan government could be expected neither to greet such terms with enthusiasm nor to offer significant concessions in return. American diplomats even argued that Guatemala, under the most-favored-nation clause, could anticipate benefits from subsequent trade agreements with other countries and hence should endeavor to “contribute to the overall success of the entire program.” In other words, Guatemala would gain political prestige if not economic benefit from the agreement. This was a far cry from the original objectives of both countries. Secretary of State Cordell Hull on June 6, 1935, telegraphed for Hanna's "personal recommendations," commenting "there appears to be nothing more we can offer." 13 Thus the department decided to negotiate for whatever terms were acceptable to the Guatemalan government. Concluding an agreement had become an end in itself.

11 Sayre to Hanna, Jan. 29, 1935, 611.1431/87A; Hanna to Hull, Apr. 30, 1935, 611.1431/102, May 2, 1935, 611.1431/103, May 7, 1935, 611.1431/105, June 4, 1935, 611.1431/111, and June 4, 1935, 611.1431/114.

12 Sayre to Hanna, May 21, 1935, 611.1431/108A; Willard L. Beaulac to Edwin Wilson, chief of the Latin American Division, May 18, 1935, 611.1431/109.

13 Edward G. Trueblood to Wilson, May 23, 1935, 611.1431/115; Beaulac to Wilson, May 18, 1935, 611.1431/109; Hull to Hanna, June 6, 1935, 611.1431 /111.

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