FOREIGN-EXCHANGE SYSTEM OF URUGUAY

The exchange-control system of Uruguay is similar to that of neighboring Argentina in its historical development, purposes, and effects. It was introduced in 1931 when all exchange operations were placed under the control of the Bank of the Republic. From 1934 to September 1949 three rates were in effect. The kinds of transactions to which they were applicable varied from time to time, but after 1937 the general pattern consisted of one rate for basic exports, a higher one for essential imports, and a still higher free rate for other permitted transactions. The free rate was, and remains, subject to stabilization by the Bank of the Republic by means of its intervention in the buying and selling of foreign exchange.

After the United Kingdom and Argentina had devalued their currencies, Urnguay, in October 1949, rearranged its system of exchange control by introducing additional special rates for both exports and imports of favored commodities and limiting the free rate to noncommercial transactions. No further modification of exchange rates has been made since that time. The basic rate was not altered at the time of sterling devaluation, and exportation of primary products such as wool, meat, and grains was continued at the basic rate. However, from time to time Uruguay has shifted some minor exports from one buying-rate category to another-apparently in relation to changes in the world market or to an aggravated accumulation of stocks.

As shown in table 8, wool has remained at all times subject to the basic rate of 1.519 pesos to the dollar. When Uruguayan combing mills, in 1947, first found themselves in a position to export tops, they were granted a special rate of 1.78, later increased to 1.88 pesos, representing an advantage of 17 and 24 percent, respectively, over the basic rate. The granting of these higher rates for wool top was subject to approval of individual applications for each transaction. The applicable rate for wool tops was increased to 2.35 pesos in October 1949 and remained at that figure until April 1952, when issuance of export permits for wool tops was temporarily suspended in order to permit a study of the equitableness of the rate, which is 55 percent higher than the basic rate, though still somewhat below the free rate, quoted in February 1952 at 2.59 pesos to the dollar. TABLE 8.—Uruguayan exchange rates applicable to exports of wool and wool tops, compared with basic and free rates

1 Exceptions could be made to favor manufacturers upon individual application. However, Uruguay's car acity to export wool tops before 1947 was negligible.

2 From 1942.

3 Individual application required to receive this rate.

4 Introduced after September 1947 and effective for all exports of wool top in September 1949 (last month before sterling devaluation).

Source: Comriled by U. S. Tariff Commission from U. S. Foreign Service reports and statistics of the International Monetary Fund.

Analogous products.-The concession by Uruguay of preferential exchange rates to wool tops has a parallel in the case of linseed oil and byproducts, and canned meats, all manufactures of basic products of the country, the exports of which were negotiated at the basic rate. Linseed oil, cake, and meal have usually benefited by the intermediate rate (1.78). In addition, an export subsidy on a weight basis was paid after the partial devaluation of the peso in October 1949. Canned meats are exported at the most favorable commercial rate (2.35 pesos to the dollar). These are produced mainly by branches of American and British firms for export to the United States and the United

Kingdom.1 Fresh and frozen meat, though subject to the basic rate, required a direct subsidy payment, after sterling devaluation in October 1949, in order to enable Uruguay to continue exports to the United Kingdom at the prices specified in the contract with that country.

Like Argentina, Uruguay exports flour at the basic rate, the same as applies to wheat.

POSSIBILITY OF AN INCREASE IN IMPORTS OF WOOL TOPS FROM FRANCE

The French Government, in February 1952, took measures to stimulate the export of manufactured goods. One measure, consisting of two decrees, provided for a rebate of certain production charges and taxes when goods are exported. The rebate reportedly approximates 14 percent of the cost of production. Since the issuance of these decrees, which are applicable to wool tops as well as to other manufactured articles, there have been offerings of substantial quantities of French tops in the United States at prices comparable to those of Uruguayan tops and substantially below those of domestic tops. Most of the French tops are made from Australian wool, which is generally superior to South American wools.

The production of wool tops in France, which is greater than the combined production of Argentina and Uruguay, decreased 28 percent in 1951 as compared with 1950, from 165 million pounds to 119 million pounds, and exports also decreased 28 percent, from 32 to 23 million pounds. The decrease in production and exports was general throughout the textile industry, and was largely responsible for the Government's decision to stimulate exports.

EFFECTS OF INCREASED IMPORTS OF SOUTH AMERICAN TOPS ON DOMESTIC

TOP MARKET

The increased imports of South American wool tops, at prices usually substantially below those of domestic tops of comparable grades, have had a particularly depressing effect on the United States market because they came at a time when the demand for tops was markedly declining due to a prolonged slump in the worsted trade. Government purchases have been comparatively small over the past year, and civilian demand has favored woolens rather than worsteds.

Sales of domestic tops have been very slow during the first quarter of 1952 because many buyers, noting a steady decline in prices over the past several months, have stayed out of the market in anticipation of further declines. Other buyers, in a natural effort to procure their needs at as low a cost as possible, have used the lower quotations on South American tops as a basis for determining what they will pay, and domestic top producers have found themselves unable to meet such prices without substantially undercutting their cost plus normal mark-up. In some cases the price of the South American tops has been under the domestic producers' cost of production for comparable grades. Several top dealers in the United States, whose normal function consists of buying wool and combing it on their own machinery or having it combed on commission, have purchased large quantities of South American tops because its duty-paid price has been low enough to afford them a profit without the necessity of performing the processing operations. Some of the large worsted manufacturing concerns in the United States, which have considerable combing machinery of their own, have also found it expedient to buy substantial quantities of South American tops.

The price advantage of the wool tops from South America results from the application of preferential exchange rates, and so long as these rates remain unchanged the tops will find a ready market in the United States. Domestic tops are preferred in this market, however, and if the worsted business should experience a material upturn, the adverse effects of the lower-priced South American tops would be less.

Senator O'MAHONEY. Let me briefly quote one or two of the facts which appear in this report of the Tariff Commission. First, the domestic production of wool tops in 1952 was about 1111⁄2 million pounds less than it was in January 1951.

1 The United States excludes fresh meat from Uruguay and Argentina under quarantine regulations.

2 Foreign Service dispatch No. 2633, dated April 4, 1952, from the American Embassy, Paris, France.

The CHAIRMAN. That is our production?

Senator O'MAHONEY. Our production. It was cut down 112 million pounds.

The CHAIRMAN. Yes.

Senator O'MAHONEY. Now, while that was going on, the importation of wool tops from South America was increasing very rapidly. In 1950 from Argentina, 2,659,000 pounds of wool tops; from Uruguay, 1,319,000. From January to June 1951, Argentina sent in 3,744,000; Uruguay, 2,466,000. Between July and December 1951, Argentina sent in 202,000 pounds; Uruguay, 3,681,000.

In the whole of 1951, the total importation from Argentina and Uruguay combined was over 7,563,000 pounds of wool tops, and during this time the preferential duty or the preferential rate of exchange was allowed, so that on the factual basis, there can be no doubt whatever that the result of the preferential exchange was to provide a bounty to the manufacturers of wool tops in South America.

Let me read this from the Tariff Commission report:

Argentina's wool-textile industry more than doubled its output during and following World War II, becoming largely self-sufficient, and in the case of wool tops shifting to an export basis. The Argentine industry now uses almost all of the Argentine wools of 64s and finer, amounting to about 30,000,000 pounds annually, clean basis. In addition, it uses perhaps a third or about 30,000,000 pounds, clean basis, of the production of wools finer than 56s but not finer than 64s. Argentine wool exports consist of that portion of the medium wools between 56s and 64s which are not used domestically, and of the wools coarser than 56s, relatively little of which are used in Argentina. Most of the Argentine exports of wool tops have been of the grades between 56s and 64s.

In Argentina, in contrast to the United States and European industries, there are few, if any, companies engaged exclusively in making wool tops. Production of tops in Argentina is largely by so-called integrated mills which perform all of the processes in converting raw wool to worsted cloth. The production of tops for export is done largely by these mills which run their combing machinery extra shifts for that purpose. The tops are produced primarily on French combs, and generally have been of a quality nearly as good as comparable grades of United States tops.

During most of the years 1946 through 1949 Argentina exported small quantities of wool tops, but in 1950 and in early 1951, following establishment of the 50-percent higher preferential exchange rate for wool tops as compared to wool, exports moved in large volume. In the spring of 1951, when world wool and the top prices began a sharp decline, the Argentine Government established price floors below which wool could not be sold in the home market or exported. These floors were above the world prices, and as a consequence there has been relatively little combing wool or wool tops exported from Argentina since May 1951. Of course, that was stimulated later on by this preferential rate of exchange.

Now, before you in this bill as it came from the House there is a sentence which is clearly designed to give a Secretary of the Treasury discretionary power. This is on page 3 of the bill before you, beginning with line 2:

Such countervailing duty shall be imposed only if the Secretary of the Treasury shall determine, after such investigation as he deems necessary

You see, there is a limitation.

The CHAIRMAN. Yes.

Senator O'MAHONEY. This changes the whole concept of the law: as he deems necessary, that an industry in the United States is being or is likely to be injured, or is prevented or retarded from being established, by reason of the importation into the United States of articles or merchandise of the class or kind in respect of which the bounty or grant is paid or bestowed.

The next sentence is:

The exemption of any exported article or merchandise from a duty or tax imposed on like articles or merchandise when destined for consumption in the country or origin or exportation, or the refunding of such a duty or tax, shall not be deemed to constitute a payment or bestowal of a bounty or grant within the meaning of this section.

Now, that is another attempt by law to reverse the present rule. I have not had the opportunity to examine all of the cases, but I have been given to understand, and I understand, that the courts have, without variation, held that such an exemption or such a refunding is a bounty or a grant. So here we have an explicit request to reverse that rule.

Mr. Chairman, it seems to me that since and if America is going to carry the burden which it has assumed and which has been thrust upon us it must remain economically sound. We should be very, very slow to permit the plain law of Congress, designed to support American industry, to be weakened by inaction on the part of an executive branch of the Government or to be weakened by changes of the law which grant discretionary authority.

There are two ways in which this thing can be corrected. One of them is the method which is suggested in the bill that Senator Mundt has introduced, which is S. 2668. The committee will decide what is the proper method to follow.

Under this bill, section 303 of the Tariff Act is amended by adding a sentence reading as follows:

The extension to the exports of any merchandise in a processed or partially. processed form of a more favorable rate of exchange than is extended to exporters of such merchandise in a raw or unprocessed form shall be deemed to constitute a payment or bestowal of a bounty or grant in respect of such merchandise in processed or partially processed form within the meaning of this section. Now, that, of course, is clearly logical. If any country exporting any commodity into the United States grants a preferential rate of exchange on the processed form of that commodity as compared with the raw form, it is clearly a subsidy, a bounty or a grant. It is a device intended to stimulate the processing of the commodity.

Now, the other way which could be followed would be to strike the whole section from the bill; that is to say, strike all of section 2 (c), and that method could be supported by the argument that since section 303 is clear as it now stands, and does clearly and explicitly require the imposition of a countervailing duty when a bounty or grant is made by the exporting country, and since it is easily ascertainable when such a multiple rate of exchange operates as a bounty, it is not necessary to change the law. The law as it now stands requires the Treasury Department to impose the countervailing duty.

The CHAIRMAN. I think that was the original intent and purpose. I remember having something to do with the Tariff Act of 1930. We were here and spent the entire summer here, and I remember definitely this particular point. It was intended to do that.

Senator O'MAHONEY. I do not know how language could have been more clear, Senator.

The CHAIRMAN. Well, I am advised here by the expert that the Treasury contends that 71/2 pesos is nearer the true value than the 5 pesos per dollar on raw wool.

Senator O'MAHONEY. That is obviously attempting to judge the propriety of the action of another government. It is none of our

business what the other government does. Why should we say that the rate is

The CHAIRMAN. Well, they probably follow that up with the contention that they are, therefore, imposing a tax of about two and a half pesos on the raw.

Senator O'MAHONEY. Yes, of course, that is their contention.
The CHAIRMAN. Yes.

Senator O'MAHONEY. But where you have the preferential rate granted to a particular commodity, and you find, as a result of that rate, a marked increase of the exportation of the preferred commodity into the United States and, at the same time, you find the production of that competing commodity in the United States cut almost in half, you know that American industry is being penalized because of reasons which may be very persuasive when you look at it from the point of view of the International Monetary Fund. But those reasons to me are rendered nugatory when we realize that we cannot afford to undermine the capacity of American industry to pay the costs of the enterprise in which we are engaged.

The CHAIRMAN. Undoubtedly the effect of this multiple exchange rate is to give the advantage or to express it in other terms, bounty, while it is not technically a bounty, it undoubtedly has the effect of giving the preference and advantage to the exporter from, say, Argentina or any other country where that multiple rate is fixed.

Senator O'MAHONEY. That is right. I do not think there is any doubt about it, and I do not think it is our business to attempt to weigh the motives or the purposes or the bad judgment, perhaps, of any other government which may do this, but once we allow this matter to hang in abeyance, once we say, "Well, the language of our law is clear but we are not going to enforce it," then we are going to invite similar action by other countries.

The information which comes to me now indicates that French wool tops will be coming into this country. In this report of the Tariff Commission I find this very interesting fact reported. Argentina, when it found that its wool exports were going into Sweden and, because of the preferential rate of exchange, were reexported by Sweden into the United States-Sweden reexported them because the preferential rate of exchange was so great that Sweden could make dollars, because it was a soft currency country, could make dollars in the United States by taking advantage of that.

Well, immediately that Argentina discovered it, it stopped the exportation to Sweden. In other words, the plan is to get into the market of the United States in order to get American dollars, and when countries are doing that, are necessarily weakening our own economy, I think it is incumbent upon us to do everything we can to protect our own economy from such undermining when the law is clear.

The CHAIRMAN. The Treasury has taken a pretty wide excursion to try to arrive at the true value of these foreign currencies, particularly in the case of the franc at this moment. It could be awfully hardthe fluctuation is so great-almost from day to day, there is a fluctuation, as a matter of fact.

Senator O'MAHONEY. Why, certainly, what may be the true value today may be utterly different from it tomorrow; and I think our own safety is obtained by clinging to our own standards.

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