• THE SECRETARY OF TME TREASURY WASHINGTON MEMORANDUN FOR TIIE PRESIDENT I belie ve it is now appropriate for me to acquaint you with the difficulties the Treasut'y is encountering in administ e ring the embar go on Cuban imports These difficulties resul t from t he inadequate statutory basis for t he embar go the present aut horiry is the Foreign Assistance Ac t of 1961 which au t horizes us to control trade between the Unit ed States and Cuba but does not enable us co con t rol imports of goods manufacture d in third count t'ics from Cuban raw mate rials 'fhe use of the Foreign Assistance Act also gives rise to problems of varying magnitude relatin g t o the adminis t ration and enforcement of the embargo These difficulties could be greatly minimized by strengt hening t he Regulations t hrough an amendment issued under the 'trading with the Ene my Act This would give us ample authorit y co control imports fro r third coun t ries of goods manufactured with Cuban component s At the momenc the import problem which is at the forefront is that of cigars manufactured in third countries with Cuban tobacco We know that Cuban cigars are bein g made in the Canary Islands and in Mexico and these cigars are being imported into t he United States For example in the last two weeks some 146 000 cigars made of Cuban tobacco were imported from the f at'l Y Tslf1 nd1S Jn all of 196l only J0 500 cigars Wt rf 5 m ortf'd from t ha t area Similarly in the last two weeks some 50 000 cigars apparently made of Cuban t obacco were impor ted from Mexico while t he 1961 import total from Mexico was only 6 000 In both of these cases t here is an American financial in t eres t in t he foreign firms While t hese increased imports may not be entirely t he resul t of t he embargo i t seems clear that they are in large part attribut able co it In addition a Jamaican entreprene ur has circularized several American cigar manufacturers offering t o estab l ish cigar making facili t ies in Jamaica for the American firms However the import problem is no t limi t ed co cigars We have been asked by int erested tobacco merchants how the embargo affects imports of Cuban leaf tobacco which has undergone various - 2 - degrees of processing outside of Cuba It may well be chat some of these tobacco products are not within the scope of the present embargo We have also had inquiries about the effect of the embargo on imports of Cuban i ineapple canned in third countries and other commodities will undoubtedly come to the forefront as tin e passes As indicated abo e• the import problem is not lin1itcd co a particular country • Canada Accordingly even if the Canadians were disposed to be cooperative their assistance would not solve the Jamaican Ca n ary Islands Mexican etc •• problems nor would it solve the problem of controlling commodities other than cigars Congress is growing restive nbout the cigar problem Senators Holland and Smathers have been pressing the White House and tbe Treasury for action Representative Cramer r ade a speech on the House floor on Marcb 12 1962 criticizing the Administration for permitting th c se loopholes to exist Hr Cramer also introduced a bill H R 10665 to prohibit the interstate shipment of articles consisting wholly or partly of Cuban product•• The City Council of Tampa has passed a resolution protesting the situation and the Cigar Manufacturers Association o f America has been circularizing Congressmen with a call for Congressional action The difficulty is compounded by the problem of answering inqui r1 es The attached letter front Hr Feldman to Senator Holland says that it i s the Administration's intent to act promptly if it develops that cigars made with Cuban tobacco at'e being i mported thus frustrating the objectives of the cmbst'go However a statement of firm u s policy to watch i mports and prevent frustrction of the objectives of the present embargo does not meet the problem because the inquiries received froni importers have to do with articular shipments and not with general policy 1 or example wh e n tbe Treasury Departnlent receives inquiries as to whether particular imports pending at Customs will be admltted it is obliged to state that such imports cannot be excluded under existing law and regulations Thus while t he policy s t atement may discourage substantlal capital investment in third countries to provide new sources of cigars containing Cuban tobac co it cannot prevent the daily irritation that comes from admitting cigars legally entitled to entry - 3 - If you decide co meet the third country import problem by invoking the Trading wit h the Enemy Ace you may also wiah to consider whether a t t he eame time tbe Act ebould be invoked to control t he obvioue and significa nt loophole• which inhere in the export embargo by virtue of cbe foreign subsidiary prob lem American firm• are now free to fill Cuban r equireme nts wicb goods manufactured by their foreign subsidiar ies since COQ Orce can only control e q orts of o s origin goods There ia a ttached a memorandum l i eting a number of ahip nents from Canada to Cuba by companiee which appea r to be Amer ican aubaidiariee Al though the 1tom1 on the lie t are noc en acegicu within the NATO definitions of a tra ccgic 1telll8 many of them are raw materials and eeae ntial epare parta for Amorican-produced machinery which mi ght otherwise break down for lack of parte While we do not have eimilar dat a available for other countries t here is undoubtedly a parallel problem ae illustrated by t ho face that we have had a number of inquiries f rom American firm• aa to che effect o f che embargo on trade with Cuba by their foreign subsidiaries If action ia to be t aken to meet theae problems I rccoaamend t ha t auch action be not piecemeal but eufficiently broad to enabl e ua to contr ol foreseeable problem Tbore ere three different t ypes of action which could be cakcn under the Trading wi th t he Enemy Ac t aut hority 1 We could prohibit imports solely of tobacco product• tAu cigars Thie would deal with cha moe t pressing problem a t hand but there would stil l be the likelihood tha t additional actions would be needed from time to time co cover such i tel UI aa canned pineapple or whatever else may ar iae This action could if desired be extended to purchases of Cuban products by o s eubaidiaries l n ot her foreign count ries 2 We could prohibit imports not only of t obacco produc t• but also of all good• containing a significant a nount of Cuban raw materials 'Chia would be sufficien t to enable us to cont rol fully all aspec ts of t he import problem 'rhie action could aleo be extended to subs idiaries if so desired 3 We could prohibit all financial and cOl lllercial trans• actions with Cuba by Amer icans or by Amer ican subsidiaries in f oreign councriee Thia would enable us to control Cuban earn· ings of dollar• from dividends pen11iona and other r emi tta nces from the United St acee It would also enable ua to cont rol tbu oncire import problem and would enable ua t o control expor ts to Cuba by American subsidiaries abroad•• well as by u s companiese - 4 From the standpoint of the responsibilities of the Treasury Department I would recommend the third alternative above because it is the most effective control · Both logic and the experience of the past month demonstrate the difficulties that arise as loopholes are spotted in the embargo regulations However there is the question of the sensitivity of affected third countries particularly Canada All to the weight that should be given this problem as against the image of firm and effective purpose to conduct an effective Cuban embargo by the United States l would defer to the Department of State 1 would however call your attention to one misconception that has grown up in past consideration of this problem It has been apparent to us that objections to invoking the Trading with the Enemy Act have come at least in part from the belief that to do ao involves declaring Cuba or those dealing with Cuba to be enemies I should empha• size that this is in no sense the case The power of the Secretary of the Treasury to invoke the Trading with the Enemy Act ln thia situation stems from the existing emergency involving the Communist conspiracy which baa existed since 1950 Actions to meet the threat posed by the Colllllunist conspiracy may be taken agalnst friends and enemies alike without the necessity of distinguishing between them As the alternative draft regulations previously submitted to Mr Feldman show all that is needed is to publish amended regulations under the authority granted by the Trading with the Enemy Act in addition to those which have already been issued under the limited authority granted by the Foreign Assistance Act Whatever concc ssions you may determine to make with regard to the sensitivity of Canada and other third countries 1 would recommend that as a minimum the Trading with the Enemy Act be invoked to prohibit imports of products from friendly countries which contain Cuban co111ponents Douglas Dillon Attac biL c nt 2