The Ambassador in Chile ( Culbertson ) to the Secretary of State

No. 1461

Sir: Amplifying my telegram No. 67, May 12, 4 p.m., I have the honor to submit certain additional suggestions in regard to the negotiation of a commercial convention. They are based on the policy of conciliation and equitable treatment which has characterized in the past the approach of this mission to Chile-American problems. They are an attempt to remove certain of the problems from the region of sentiment and give them reality. I am convinced that in order to obtain action by the Chilean Government we must make it appear that Chile will gain something or lose something, if it refuses to proceed with the negotiations. The proposed agreement covers four points, important in themselves and more important as precedents, if established:

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I. Reasons Behind our Proposal

An agreement with Chile on trade matters is most urgent from our point of view. It is also timely as respect to the situation here. There is a favorable atmosphere at the Foreign Office. Cruchaga’s influence is gaining in the government and his position as Foreign Minister and his genuine friendliness to the United States afford us an unusual opportunity to seek solutions to many of our problems. The announcement of the Argentine’s decision to send a treaty commission to the United States, the World Economic Conference22 and other discussions have aroused interest in international treaty relations. The country appears to be in a receptive mood and the recognition of the bad influence which excessive tariffs and other trade restrictions exercise against a return to better conditions is gaining ground.
The need for some adjustment is urgent because of the increasing damage to our commerce resulting from the various Chilean compensation agreements and from the exchange policy of the Central Bank. Not only are we not sharing advantages granted to others in the releasing of frozen credits but trade which normally belongs to the United States is being diverted, as a result of compensation agreements, to our trade rivals. The recent “Roca Agreement” between the Argentine and Great Britain giving British commerce relief in the matter of frozen credits has increased the impatience of American business men that they are not benefiting by similar protection and advantages.

II. Scope of Proposal

We feel it wise to limit the immediate object of the proposed convention to those matters which are urgent and on which there is already a degree of agreement with the Chilean Government. Therefore, our recommendation is to treat the situation in the simplest possible way which appears to us to be by means of a convention, supplemented by a protocol setting up the mechanics of the plan.

III. Points to be Negotiated

As suggested in our telegram No. 67, we feel that the convention should include the following points:

A) Unconditional most-favored-nation treatment.

We have this treatment now in the modus Vivendi which can be terminated on two weeks notice. An important aspect of this section will be the exemptions. It will give an opportunity to make our position clear with reference to the Chilean conception (rather academic) [Page 125] that special arrangements with all Latin America should be excepted from Chile’s pledge of most-favored-nation treatment. We should take this occasion to repeat our positive opposition to this unsound regional conception, based merely on the historical bonds with Latin and mother countries—Spain and Portugal. Whether we will concede exception of all border countries (and claim the same for ourselves) is the chief practical question to be determined.

B) Nitrate duty free and unrestricted.

This proposal merely reaffirms the status quo. With all other countries limiting or preventing the importation of Chilean nitrate this provision will appeal strongly in Chile. At the same time it is sound policy for the United States. Nitrate is Chile’s most important article of foreign trade and its chief concern is to keep a market open for this export. It is with this object primarily in mind that Chilean trade policy is being reoriented on the basis of seeking reciprocal arrangements by mutual concessions while maintaining the principle of the most-favored-nation. As regards our own attitude, press despatches have given us reason to believe that the President has or will seek broad powers to commit the United States to concessions of this character. These commitments in the proposed convention would be virtually limited to an agreement not to place restrictions on trade. Our money market is closed to all practical purposes to Chile and there is little other than tariff concessions that we can offer as inducements to persuade Chile to accord fair treatment to our commerce. During the course of the negotiations, Chile must be made to realize that we may have to modify our conciliatory attitude and resort to harsher measures should our trade continue to be imposed upon. The idea of a three year period suggested for the duration of the assurance concerning imports of nitrate into the United States has already appeared in various legislative proposals, presumably because it is felt that in view of the continuing economic crisis throughout the world that at least three years will be necessary to work out more normal economic relations.

In view of the urgency of the situation we feel that, to avoid delay, our agreement with Chile should be drafted in a form which can be made effective by simple executive action. For this reason, in the event that the Executive is not given powers by Congress sufficiently broad to allow him to enter into direct tariff adjustments with foreign countries, the article dealing with the assurances regarding nitrate importations might be worded to avoid an affirmative commitment. This might be accomplished by phrasing the article to include merely an affirmation on the part of Chile to grant the concessions we seek, so long as we maintain the present status of sodium nitrate on the free list without quota or other restrictions.

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C) Release of Frozen Credits and Allocation of Exchange.

These objectives are the chief purpose of this proposal. In this matter we are merely asking the same treatment which Chile has already granted to certain other countries. We are entitled to this treatment as a matter of international practice without making any concession in return. The dual disadvantage to our commerce from the cutting off of exchange and the diversion of trade must be relieved. It is the duty of our diplomacy to make every contribution we can to this end. The study which the Commercial Attaché has made and which is enclosed herewith24 emphasizes the fact that even though the proposal may not make available important sums for the liquidation of our frozen credits it is essential to come to some arrangement which will stop the continuous flow of our normal trade here to other countries working under compensation arrangements and thus maintain a fair volume of our commerce with Chile.

To be of much value the concession by Chile on the matter of exchange must be made immediately available. It would greatly lessen its usefulness if it had to await formal ratification before being put into effect. This would not seem to offer any serious difficulty judging from the procedure established in the modus vivendi with Germany by which the agreement became operative on a definite date in lieu of ratification. With respect to this provision we may well have to take into account in some way the special situation existing in Chile arising out of the fact that it is American interests backed by American banks that produce and control the bulk of Chile’s exports to the United States. We cannot hope, therefore, to withhold the entire proceeds of Chile’s sales in the United States and in fairness we should be prepared to make some concession by a certain percentage to be made available to those American interests. The situation might be met by a proviso as follows:

“provided that in the case of exchange created by the exportation of copper, iron ore, nitrate and iodine, the amount of foreign exchange made available for American commerce shall not exceed the percentage of their costs in Chile which the sales in the United States hold to their total world sales.”

D) Partial Resumption Foreign Debt Service.

This idea was suggested by the Finance Minister in a letter to the President (see enclosure No. 1 to despatch No. 1443 of April 29th)24 and his recent statement on the budget (see despatch No. 1450, May 9, 1933)24 referring to the importance of taking some measures promptly to support Chile’s credit. These declarations may be nothing more than a gesture at this time but an opportunity is afforded to assist in [Page 127] the materialization of this gesture by incorporating the idea in a convention. Such a step seems highly desirable since it would help keep this obligation before the public and lessen the chance of ultimate repudiation. I recommend we take it seriously.

E) Agreement to Negotiation Permanent Commercial Treaty.

In my opinion an attempt at this time to negotiate a complete commercial agreement will not be successful and we will gain nothing at all. For this reason, already explained, the convention now proposed should be limited to most urgent matters and it will be necessary to negotiate a further agreement providing a solution for other pending but less pressing problems. However, if we negotiate successfully the limited agreement on urgent matters we will prepare the way for an additional and more comprehensive agreement. And such agreement will or should develop naturally after the World Economic Conference.

The instructions to the Chilean delegates to the World Economic Conference (my telegram No. 66, May 12, 11 a.m.)25 indicate that Chile will cooperate with you in making world trade freer. Time, however, will pass before the ultimate goal is reached. The present Chilean Government, for example, is not disposed to give up exchange control. And many other countries will give up only gradually their nationalistic policies. The World Conference will adopt some definite reforms and it will establish many tendencies toward better world economic relations. These tendencies we must encourage and reduce to treaties. In the meantime we must be practical and protect our interests in every way not inconsistent with the ultimate objective. It is at this point that my proposed convention fits in.

In addition to the matters normally embodied in a commercial treaty my despatches have made it clear that there are many other special points on which an understanding is necessary. Among these may be mentioned the problem of national treatment, retirement funds, reexport, taxation, and tariff rates. As Chile is a high tariff country probably the most important phase to be taken up will be the question of reciprocal tariff treatment. In connection with this point it is important to consider the special tariff relations between Chile and the United States. Whereas a very large proportion of Chilean exports enter the United States duty free, over 90% of our exports to Chile are taxed, many of them very heavily. It is apparent therefore that we have much to gain and little to lose by tariff adjustments. Our maximum concession in this respect would seem to be a lowering of the duty on copper. It is my understanding that this would not in fact involve an appreciable loss of revenue to our Government since Chilean copper exported to the United States after refining is reexported on a 99% drawback.

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IV. Mechanics of the Convention

As previously stated it is our idea that a protocol will be provided to take care of the mechanics of the convention. In view of the altered situation in the United States and the distress of our commerce it is our feeling that public opinion is prepared to accept the use by the Executive of broader powers in adjusting trade relations. Therefore, there would no longer appear to be an insuperable difficulty to accomplish the blocking and allocation of funds by executive action operating through the medium of an already existing government agency. Possibly the simplest means would be through the New York agency of the Department of Commerce since the bulk of Chile’s exports enter New York where the proper accounting and control and cooperation with the customs could be worked out. With this agency could be filed all pending claims and the appropriate allocations could be made based thereon. The Embassy fully realizes the scheme may present legal and procedural difficulties, difficulties which must surely yield if they are met with the same flexibility with which we are meeting the new situation created in our world trade and our critical domestic problems. Our problem in Chile requires at this stage affirmative action by our Government and if it is approached with this in view legal difficulties should be made to conform to the realities of the situation.

It is realized that it may be possible that some new international policies may emerge as a result of the London Economic Conference which will serve to destroy compensation agreements and other special blocking arrangements. It seems very doubtful, however, given the difficult financial situation existing in Chile, if that country of her own accord will liberalize her exchange restrictions even though convinced of the soundness of such a procedure in theory. Awaiting normal times is no solution since when such times arrive, there will be nothing left to distribute to American creditors, in view of Chile’s vitally impaired situation. It may of course appear that Chile does not have sufficient importance to warrant the somewhat special treatment which would result from the proposed commercial convention. However, if we are able to evolve practical policy with Chile which will relieve the difficulties of American business such a policy may well serve as a guide to our approach towards similar problems throughout South America whose importance if temporarily dimmed cannot be indefinitely ignored by the United States.

In proposing an arrangement by which a portion of Chile’s export sales in the United States can be made available for American trade we realize that the procedure involved will not be easy or simple. However, world conditions have changed and changed rapidly and [Page 129] we can no longer rely on the placid course of our traditional diplomacy to solve the difficult problems confronting us in Chile.

Respectfully yours,

W. S. Culbertson
  1. See vol. i, pp. 452 ff.
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