436. Memorandum Prepared in the Bureau of Foreign Commerce, Department of Commerce1

OPERATION OF THE REVISED UNITED STATES–PHILIPPINE TRADE AGREEMENT

The deterioration in United States-Philippine relations, which became apparent late last year, continues unabated, with the Revised Trade Agreement of 19552 retaining the spotlight as a major target for Philippine criticism and adverse actions. Certain Philippine Congressmen and businessmen have been increasingly suggesting that the agreement should be again revised, or possibly even abrogated. Reflecting the growing “Filipino-First” movement, they are especially expressing dissatisfaction with the provisions giving Americans national treatment in the natural resource and utility areas (the so-called “parity” fields covered by Article VI) and in carrying on general business activities (Article VII).

With the exception of the tariff provisions of the revised agreement, which represent the chief concessions made by the United States in the negotiation of the revision, the other major portions of [Page 920] the agreement have not been operating satisfactorily. They have, in fact, been subject to either actual violation by the Philippine Government through overt or more subtle actions, or to threatened violation. These acts, moreover, must be viewed against the background of an increasingly nationalistic government policy in which protectionism, limitations on profit remittances, and restrictions on the entry of new foreign investment, are all contributing to an atmosphere which is apparently more anti-foreign and anti-American than has been the case for a number of years, although the traditional good will toward Americans of the mass of Filipinos has in no sense been dissipated. The country’s continuing balance of payments and fiscal problems, coupled with the present attitude of Philippine Government officials, indicate that our difficulties under the revised trade agreement are not going to diminish.

There is given below a summary of the principal problems which have arisen under the revised trade agreement since it went into effect on January 1, 1956.

A. Art. I, Par. 7: Special Import Tax and Exchange Tax

Special Import Tax

Under the revised agreement, the Philippines agreed to replace its 17-percent tax on all sales of foreign exchange with a special import tax applicable only to commodity imports. The import tax, to begin at a rate no higher than 17 percent for 1956, was to be thereafter reduced by 10 percent of the initial rate annually until completely eliminated on January 1, 1966. An escape clause, however, provides that if in any year revenue from both the tax and duties on U.S. goods falls below the 1955 revenue from the exchange tax on U.S. imports, the Philippines need not reduce the tax rate for the next year and, if necessary to restore revenue to the 1955 level, can raise the tax to any previous rate set forth in the schedule contained in Paragraph 7 of Article I, the highest of which is shown as 90 percent of the initial rate (which would be 15.3 percent).

Faced with a shortfall in 1958 revenue, Philippine Customs increased the tax for 1959 back to the initial rate of 17 percent. The U.S. Government had virtually no advance warning, our Embassy having only learned about the Philippine intention in the final week of 1958 when Embassy officials queried the Customs Commissioner regarding the tax for 1959.

Aside from the technical consideration that the U.S. doubts such an increase is necessary to restore the revenue level (since in 1959 the duty rates on U.S. imports have been raised from 25 percent to 50 percent of regular duties in accordance with the trade agreement), there is the legal violation resulting from the tax being raised above [Page 921] the highest rate provided for in the schedule. The Philippine Government’s justification is that in its implementing legislation (Republic Act No. 1394), the schedule starts at 17 percent, but the U.S. holds that in case of such conflict the trade agreement must govern. The matter has been discussed by our Ambassador with President Garcia and other high Philippine officials, and the U.S. position was set forth in a memorandum sent to the Secretary of Foreign Affairs under cover of a note from Ambassador Bohlen on January 2.3

Although the Philippine action originally was presumably taken on the basis of the domestic legislation and the need for additional revenue, in a later conversation with Ambassador Bohlen, President Garcia revealed that he intended to hold to his position on the special import tax as a bargaining lever to obtain U.S. permission to impose a foreign exchange tax. The Ambassador pointed out that the two were entirely separate matters which must each be decided on its own merits, and any attempt to bargain as between them would have unfortunate effects in Washington. The President nevertheless said the tax would continue to be collected at the 17-percent rate until the exchange tax was resolved to the Philippines’ satisfaction. Consequently, the tax is being collected at 17 percent, but the President has delayed announcing the new rate in an official proclamation, as required by the Philippine law.

Foreign Exchange Tax

In his budget message to the Philippine Congress in February, President Garcia recommended a 25-percent tax on sales of foreign exchange, as an anti-inflationary device to both restrain demand for imports and raise revenue for the Government. This tax represents the key feature of the “stabilization” program of Central Bank Governor Cuaderno who, like the President, is opposed to devaluation of the peso at this time.

In the revision of the trade agreement, the abolition of the 17-percent exchange tax (in order to free invisibles such as profit remittances from this additional burden) was one of the principal selling points used by the U.S. Executive in obtaining support for the revision from American businessmen and the U.S. Congress (another being a more specific spelling out of the national treatment guarantee). A side exchange of notes at the time the revised agreement was signed made it clear that an exchange tax was not to be reimposed during the life of the agreement.

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Ambassador Bohlen has on several occasions informed the Philippine President that reimposition of an exchange tax would be a major violation of the trade agreement. Nevertheless, President Garcia has persisted in telling Philippine Congressional leaders the contrary, in an effort to push through the Congress the pending exchange tax bill. The adamant position of the Philippine Administration is reflected in the reception given the special IMF mission which went to Manila in March to discuss a Philippine stabilization program. Because the mission was not prepared to immediately accept the Garcia–Cuaderno program, including the exchange tax, it apparently left the country without being able to substantively discuss possible alternative measures.

On April 23, arising out of a suggestion made to President Garcia by Ambassador Bohlen, Ambassador Romulo called on Under Secretary of State Dillon to “seek the aid and advice of the United States” on the exchange tax. He presented an aide-mémoire4 which outlined the Philippine intention to impose a 25-percent “premium” on sales of foreign exchange and stated the view that this would not violate the revised trade agreement. The result of the meeting was that Ambassador Romulo agreed to a proposal made by Mr. Dillon and said he will ask that a Philippine expert—possibly Budget Director Aytona—be sent to Washington to lead discussions with U.S. officials, in an effort to seek the objectives which President Garcia has in mind with respect to the exchange tax, but in a manner which would avoid the legal obstacles posed by the tax as now formulated. Mr. Dillon pointed out, however, that should such consultations be held, the U.S. would wish to mention other problems related to the trade agreement.

B. Art. Ill, Par. 3: Prior Consultation Regarding Trade Restrictions

Article III is not a strong provision, but it affords the only formal protection we have against Philippine trade restrictions, in the form of a commitment of non-discrimination and an obligation for prior consultation. During the three years of the revised agreement’s operation the United States has, in its view, demonstrated discretion and moderation regarding prior consultation (Par. 3). While the Philippine Central Bank has taken numerous restrictive actions where, under the agreement, the Philippine Government might have appropriately consulted with the United States, in no instance did the Philippines discuss the restrictions prior to their institution. The United States has made representations in only three cases of major significance—two concerning import restrictions (CKD parts for assembly of U.S. cars and U.S. movies) and one concerning export restrictions (sea shells for button manufacture). All of these involved the absence of prior consultation, [Page 923] and one (cars) also involved what the affected American industry considered to be discrimination, although in light of the wording in the trade agreement (which is similar to GATT phraseology) the U.S. could not actually charge that technical discrimination was present.

There have been some 14 notes and aides-mémoire exchanged on this subject between our Embassy and the Philippine Department of Foreign Affairs, with the dates extending from March 1956 to August 1958. Although the limitation on U.S. movies was subsequently lifted, protests regarding all three items were answered by the Philippines only after long delay and never to our satisfaction. The replies either ignored our charge that the consultation provision had been violated or else offered the excuse that the urgency of the circumstances did not allow time for prior consultation. Because of these difficulties, the Embassy indefinitely delayed protesting regarding other important restrictions (such as on textile imports), pending some working arrangement for prior consultation.

In a note of August 5, 1958,5 the Embassy finally suggested that after arrangements for implementing prior consultation have been agreed to within the Philippine Government, Embassy officers and appropriate Philippine officials should then meet to discuss details of carrying out these procedures. A few days later the Department of Foreign Affairs replied by note, stating that it was making arrangements for a meeting and “will be pleased to inform the Embassy soon of the exact date the said meeting will take place.” The written record on this aspect of the trade agreement ends here—over 8 months ago— with the prior consultation provision of the agreement remaining completely inoperative.

C. Art. VII: National Treatment Regarding Business Activities

Raw Material Material Import Allocations for U.S. Firms

The Embassy has received reports that the Central Bank is discriminating against U.S.-owned manufacturing firms in the Philippines with respect to exchange allocations for imports of raw materials. In only one instance so far, however, has there been available sufficient detailed information to support a formal protest. As a test case, therefore, an aide-mémoire was delivered on February 3, 1959, concerning exchange allocations for the Reynolds Philippines Corporation (51 percent owned by the American aluminum firm) which produces aluminum sheet and foil from imported pig.6

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The Embassy pointed out that Reynolds, which began operations in 1955, had its raw material import quota cut in 1957 and further reduced in 1958, while allocations for a new mill inaugurated in 1957 to manufacture competing GI roofing sheets had its quota considerably increased from 1957 to 1958 to a level much higher than that for Reynolds. Moreover, the dollar-saving aspect of the Reynolds production is nearly three times as great as that for the GI sheets (which are manufactured by an influential Filipino family). The Embassy questioned whether this treatment is “in accordance with the letter and spirit of Article VII of the revised trade agreement.” No reply has yet been received, and although Reynolds officials were successful in obtaining a promise directly from President Garcia that a large part of the increased quota they sought would be granted, the Central Bank only allowed a small additional allocation in the first quarter.

Import Quotas for U.S. Trading Firms

It appears that some U.S. trading firms have had their general import quotas reduced, over the past year or two, somewhat more than their Filipino counterparts, but the discrimination cannot be readily proven. Often, too, it is more a matter of selected Filipinos being treated better than other Filipinos and Americans because of the influence (political and/or financial) which they bring to bear.

With respect to decontrolled commodities (a limited number of essential food-stuffs and drugs), however, the discrimination is now open. For the second quarter of 1959, the Central Bank is continuing to permit Filipinos to import freely all decontrolled commodities (except wheat flour), while restricting Americans to their 1957 or 1958 quarterly levels (whichever is lower) and non-American aliens to 50 percent of such levels. (This represents a tightening for American importers who were free of any limitation in the first quarter but is a relaxation for non-American aliens who in the first quarter were excluded from trading in decontrolled items.) Although Americans in the current quarter are therefore to be treated better than other alien importers, national treatment requires identical treatment with Filipinos. In the case of wheat flour imports, discrimination is also present but on a slightly different basis. (For controlled commodities—covering the bulk of imports—non-American alien importers had their quotas reduced by 50 percent in the first quarter, which were scheduled to drop to 25 percent in the second and third quarters with all quotas for non-American aliens to be eliminated in the fourth quarter, thus forcing these traders out of business. The policy for the second and later quarters is now being reconsidered and may be modified. In any event, this is an instance where Article VII has served to restrain the Philippines from taking an adverse action against Americans.)

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Tax Treatment

The Philippine special import tax law provides a tax exemption for “vessels or ships of any kind or nature intended for Philippine registry, sixty percent of the ownership of which belongs exclusively to Filipinos.” In early April of this year, the Philippine Secretary of Finance decided that a U.S.-owned Manila firm which has recently purchased a surplus U.S. Navy barge was liable to payment of the special import tax. He took the position that Article VII of the revised agreement only offers Americans an equal opportunity to engage in any type of business activity and does not extend to equal tax treatment.

In the U.S. view, if the trade agreement phrase “not to discriminate in any manner” has any meaning at all, it most certainly would cover tax treatment which could well be the area of greatest importance to businessmen. If the Secretary’s decision is allowed to stand, the way would be opened for a complete dismantling of the significance of Article VII. The reasoning could just as logically be expanded to include foreign exchange allocation policy which together with tax treatment comprise the primary means whereby American businessmen could be forced out of operation, if that should be the Philippine desire.

Bill to Curb Foreign Banks

As on several previous occasions, a bill has been introduced in the current Philippine Congress to prohibit foreign banks from accepting new deposits, although the banks would be permitted to retain existing deposits. Insofar as the branches of the Bank of America and the First National City Bank of New York are concerned, the bill—if passed—would violate the national treatment guarantee of the trade agreement.

“Filipino-First” Policy

The Philippine National Economic Council, in August 1958, made public a new policy which would grant preference to investment proposals and requests for foreign exchange submitted by Filipinos. Later the NEC tightened the conditions for joint investment ventures in a resolution stipulating that “the equity participation of aliens in the capitalization of joint venture enterprises shall not be more than 40 percent.” Concurrently, the Central Bank announced that for the fourth quarter of 1958 it would not allocate exchange for the establishment of new industries unless they were (1) dollar-producing industries or (2) wholly Filippino-owned and highly essential dollar-saving industries utilizing at least 90 percent domestically available raw materials.

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This overall policy, popularly termed “Filipino-First” as now applied to various facets of Philippine economic life, has been gaining powerful support. And although certain U.S. officials have received some verbal assurances that Americans would be excluded from its provisions by virtue of Articles VI and VII of the trade agreement, in light of the recent record, these assurances cannot be assured to have much validity.

  1. Source: Department of State, SPA Files: Lot 64 D 391, Laurel–Langley Agreement. Confidential. A typed notation indicates that this memorandum was drafted by the Far Eastern Division of the Bureau of Foreign Commerce.
  2. For text, see 6 UST (pt. 3) 2981. The agreement is known by the names of its two negotiators: José P. Laurel, Sr., Philippine Senator, and James M. Langley, Special Representative of the United States.
  3. The note was transmitted in despatch 462 from Manila, January 7. (Department of State, Central Files, 496.116/1–759)
  4. Not printed. (Ibid., 896.131/4–2359)
  5. Not found in Department of State files.
  6. The aide-mémoire of February 3 has not been found; however, telegraphic communications on the subject for 1958 and 1959 are in Department of State, Central File 896.131.