The Chargé in Chile (Norweb) to the Secretary of State

No. 1535

Sir: I have the honor to call to the Department’s attention the following item which appeared in the morning papers:

French-Chilean Compensations.

“Paris, Sept. 4 (Havas). It is said that Chile has placed an order for 12 locomotives with the firm of Blanc Misseron in the north of France.

“This order would be the first application of the import plan connected with the system of compensations proclaimed by M. Daladier in a recent note upon import licenses.

“It is well to add that Chile was the first country of South America to conclude an agreement of economic cooperation with France, a country which has imported nitrate for many years. (Special)

The transaction referred to above has not yet been consummated but this threatened inroad on our trade in a field in which we are almost as predominant as in the automotive industry brings dramatically to the front the losing fight which our business is waging in Chile against countries having the assistance of compensation agreements.

[Page 133]

The Embassy has kept the Department currently informed concerning the possibilities of working out some arrangement which would bring relief to our business in Chile. As we have been able to watch these agreements in actual operation, certain facts stand out more and more clearly:

The effect of these agreements is gradually to divert from us a larger percentage of our trade than was originally considered possible.
After a year of negotiation, it is apparent that the Chilean Government, on the basis of most-favored-nation treatment, is not disposed to do anything towards’ relieving our commerce unless it is obliged to do so through a hint on our part that ultimately measures of protection will have to be taken by the United States.
Our diplomacy is now in a weak position to bring effective pressure to correct the situation.

As things stand, the Chilean Government fully admits our right to receive treatment equal or equivalent to that it accords to other countries. Furthermore, it avows its willingness to enter into a compensation agreement and it even invites us to set forth our desires on this subject in a form which may serve as a basis for negotiation. However, as we have advanced no definite or specific proposal and since for over a year the Chilean Government has not been willing unilaterally to undertake to set aside exchange for our needs, the entire question has not risen beyond the level of the admission of general principles by both parties. Some months ago the Government invited us in writing to enter into an agreement. More recently, however, it has shown little interest in the problem aside from suggesting that a solution might possibly be found in connection with the negotiation of a permanent commercial treaty. In a measure this change may be attributed to the pique felt here that Washington is working on agreements with Colombia and the Argentine27 before taking up the suggestions made by Chile for a formal commercial treaty.

The Embassy fully appreciates the distaste with which the Department views the principle of compensation agreements. It seemed at one time as though there might be some hope that liberal world opinion might be marshalled in sufficient strength to create a sentiment in the leading commercial powers which would force the liberalizing or cutting down of trade barriers. It is clear, however, that unfortunately such has not been the case and that to further oppose this world tendency is merely to swim against a current too strong for any one nation to divert. As far as Chile is concerned, it is apparent that whatever lip service foreign nations are giving to the idea of doing away with trade barriers, in actual practice they are intrenching [Page 134] themselves more and more in special arrangements which facilitate their trade and repatriate their frozen assets. To-day France, Belgium, Sweden, Spain, Czechoslovakia, Germany, Italy, and Holland have either entered into compensation agreements or are about to conclude arrangements of this nature. England too which heretofore has been as skeptical of the soundness of compensation agreements as has the United States now has definitely joined the others. Only yesterday, I understand, the Foreign Office received a formal demand that in the matter of foreign exchange, Great Britain be given not less favorable treatment than that accorded to other countries, adding significantly, that to this end the British authorities were prepared to set aside a proportionate share of the proceeds from the sale of Chilean products in the United Kingdom.

As each new nation is added to the list our equity in Chilean business becomes less. The Department may find it unpalatable to negotiate an arrangement of this sort but it must be frankly pointed out that our policy can no longer remain negative. Without some definite agreement this Embassy is not in a position to do anything tangible toward relieving American interests in Chile or even toward preserving trade which is normally ours. On the other hand, should it be decided in Washington to take a positive position, there is every indication that the Chilean Government would fully meet our desires and even that the scope of the agreement could be widened beyond commercial credits to include some measure of relief for our utility companies, for the liquidation of the retirement funds of Americans, for foreign currency bank deposits and perhaps even bank advances. Moreover, if we could offer any prospects of an improved market for Chilean goods in the United States, to that extent we would unquestionably be in a position to secure a larger share of the Chilean market. This idea of enlarging the scope of compensation agreements to provide for freer exchange of goods has, we understand, already been included in the agreement under negotiation with Italy. At the latter’s insistence, provision has been made that the sacks for shipping nitrate to Italy shall be bought in that country and both sacks and the nitrate transported on Italian vessels. Chile hopes to sell as much as 400,000 tons of nitrate within the next year in the United States and it would go far to prevent any action on our part which would jeopardize this lucrative market. Nitrate sales of this volume we estimate would make available some $3,500,000 for compensation purposes.

It would be an understatement to say that American business in Chile is getting restive. It would be nearer the truth to say that it is about to explode and is becoming deeply resentful of inaction. Policy must be determined, of course, in Washington but this Embassy would [Page 135] be delinquent did it not endeavor to give the Department clearly and objectively the benefit of its close-range view of the situation in Chile. The Department will not be in a position later on to escape the censure of American business which sees with increasing bitterness the nationals of other countries being afforded relief by their respective governments. Furthermore, at a time when we are making such heroic efforts to maintain prices and increase business in the United States we should take such steps as are clearly indicated to increase or maintain our foreign business. To do so would appear thoroughly consistent with the internal measures we are now taking for the economic rehabilitation of the United States.

As of assistance to the Department, there is enclosed a timely study of this problem which Mr. Bohan, the Commercial Attaché, has prepared in conjunction with the Embassy.28 This study has been worked up not only with a view to suggesting a solution but, through the presentation of the actual trade figures, to show the effects which the whole series of compensation agreements is having on Chilean commerce.

As a further enclosure to this despatch there is transmitted a copy of a memorandum of a conversation held recently between members of the British Embassy and the President of the Chilean Exchange Control Commission28 on the subject of the discrimination and other disadvantages to British commerce arising out of the unfair tactics of the Control Commission.

Respectfully yours,

R. Henry Norweb
  1. See post, pp. 217 ff., and vol. iv, pp. 642 ff.
  2. Not printed.
  3. Not printed.