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

No. 1550

Sir: I have received your despatch No. 1535, dated September 6, 1933, in which you reviewed the increasingly prejudicial situation now confronting American trade in Chile as a result of continuing diversion of available foreign exchange in that country to the nationals of those countries having so-called compensation agreements with Chile. I take this opportunity to commend you for your able and effective presentation of this situation.

I have not been unmindful of the discriminatory treatment accorded American interests in Chile, which you have described, and have been seriously preoccupied by it. Studies which have been made in the Department of the whole system of compensation agreements, however, convince me that the fundamental objection entertained by this Government to such agreements which it regards as obstacles in the way of recovery from the present world depression, is sound. From the viewpoint of broad general policy, moreover, American trade and investment capital throughout the world stand to lose far more from the application by this Government of the compensation agreement idea than they could gain by its adoption.

I share your view, however, that something should be done immediately for the interests concerned. Accordingly, unless you perceive some objection thereto, you may approach the Chilean Government and suggest that, pending the opportunity to institute negotiations [Page 138] for a reciprocal trade agreement similar to those projected by the United States with certain other Latin American countries, and under which the United States in exchange for tariff concessions by Chile would undertake principally to retain Chilean nitrate and iodine on the free list, a provisional agreement in regard to the allotment of exchange be concluded. It seems probable that the Chilean Government would be unwilling to grant more favorable foreign exchange treatment unless this Government were prepared to deal with the underlying trade factors upon which the supply of foreign exchange depends. The provisional agreement would expressly state, therefore, that it is concluded pending the opportunity to negotiate a definitive trade agreement, and that the provisional agreement should remain in force until the definitive trade agreement shall have been concluded, subject to the right of termination by either party on 30 days’ notice.

The provisional agreement above referred to should supplement the existing agreement of September 28, 1931. The present agreement merely provides for most-favored-nation treatment. The proposed supplementary agreement should interpret this obligation as being applicable to the allotment of foreign exchange. If the new agreement has the effect merely of placing such a construction upon an existing obligation Chile will be in a better position to answer the representations of third countries whose interests might be affected.

It would be necessary, of course, to define precisely what constitutes most-favored-nation treatment as applied to exchange control. Three possible bases suggest themselves upon which exchange might be allotted, in accordance with the most-favored-nation formula.

(1) The allotment of the same absolute amount of exchange to each exporting country.

The objection to this basis is that the need for foreign exchange varies for each country according to the amount of its customary exports to Chile (as well as of course the amount of funds due to the nationals of various countries as service on Chilean bonds). The allotment of the same amount of exchange to a country whose customary exports to Chile are large, as that allotted to a country whose exports are small, would more than meet the requirements of the latter while resulting in serious hardship to exporters of the former. The same argument applies in the case of the allotment of exchange in connection with payments due on the bonded debt, a subject which will not arise until such time as that service is resumed.

(2) The allotment of exchange on the basis of Chile’s exports to each country.

Under this criterion the United States would be allotted an amount of exchange constituting a percentage of Chile’s total exports to the [Page 139] United States, which percentage would not be less than the corresponding percentage granted to any other country. Thus, if the exchange allotted Great Britain, for example, were 80 per cent, of Chile’s exports to Great Britain, the United States would be allotted exchange equal to 80 per cent, of Chile’s exports to the United States.

The objections to this criterion are the same as that mentioned under (1) above. Moreover, the effect of making the amount of exchange allotted to each country dependent upon Chile’s exports to that country would tend to force the balancing of trade between Chile and each foreign country, and, by impeding triangular trade, would tend to reduce its total amount. Since Chile has at present a favorable balance of trade with the United States, this country would tend to benefit more than others from the use of this criterion. But such a criterion seems to us unsound in principle and its adoption, though possibly resulting in relative benefit to the United States in the case of Chile, would work to its serious disadvantage in trade with other countries, as for example, Argentina.

(3) The allotment of exchange in proportion to Chile’s customary imports from each country.

Under this criterion each exporting country would receive a share of the available exchange proportionate to the share of Chile’s imports which it would normally supply. This criterion is subject to neither of the objections mentioned under criteria (1) and (2). The exchange made available in payment for imports from each country would under this plan be proportionate to the needs of each. The effect moreover would be to promote rather than to discourage triangular trade since there would be no tendency under such a plan to force a balancing of trade between Chile and each foreign country separately.

Accordingly, if Chile agrees in principle to the proposal to make the most-favored-nation clause applicable to the allotment of foreign exchange, the share of the total available exchange to be allotted to the United States would be equal to a percentage of Chile’s imports from the United States in a representative period. It is suggested that the four-year period 1928–1931, inclusive, be used for this purpose since it includes two years of prosperous business conditions and two years of depression. Of the total importations into Chile during the four-year period under reference the United States supplied 32.5%. The provisional agreement, therefore, should provide that 32.5% of the exchange currently available be allotted to the United States. Under this agreement Chile would accept the obligation of making available to all American interests that proportion of the total available exchange.

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In addition to provisions for the allotment of exchange to pay for past and future imports from the United States it is believed that the proposed provisional agreement should contain a stipulation whereby in the allotment of exchange, precedence would be given to the liquidation of funds deposited in the Caja de Retiro. These obligations of the Caja de Retiro are relatively small and it is obviously desirable on humanitarian grounds to return them as soon as possible to the persons entitled thereto, many of whom are in straitened if not desperate circumstances. It is understood that disbursements are being made currently by the Caja de Retiro to Chilean nationals. If this understanding is correct you should state emphatically to the Chilean Government that this Government perceives no justification for discrimination against foreign nationals in a matter of this nature. If the Chilean Government should say that it is impossible to make additional disbursements because of the state of the Caja’s funds, you may suggest that that Government advance to the Caja the necessary money required to make these payments which are urgently needed by American citizens. In this connection I realize that the provision concerning the Caja de Retiro in the attached agreement is different in character from the agreement as a whole which deals otherwise with most-favored-nation treatment. If the Chilean Government, therefore, should object to its inclusion in the attached agreement, you may agree to its adjustment in a separate exchange of notes.

There is enclosed a draft of a provisional agreement embodying the provisions outlined above. I desire that you study the draft carefully and if you are satisfied that it represents a feasible basis for dealing with the question presented, you may submit it to the Chilean Government. If you have any doubts concerning the expediency of this procedure or any suggestions concerning the provisions of the attached draft agreement, you should at once communicate them to the Department.

In the event that the Chilean Government refuses to adjust this matter by means of the contemplated provisional agreement you are authorized to make strong representations to the Chilean Government regarding the treatment of American interests in the allotment of foreign exchange and, unless you perceive objection thereto, to request that on the basis of Chile’s imports from the United States in the four-year period, 1928–1931, inclusive, not less than 32.5% of the exchange currently available be allotted to American and other interests. You may also request that precedence be given to the liquidation of funds deposited in the Caja de Retiro. You should also request that you be informed at regular intervals of the amount of foreign exchange allotted to the various national and foreign interests by [Page 141] the Chilean Exchange Control Commission, as well as of the amounts blocked in favor of other nations by so-called Compensation Agreements.

It is evident that on the basis of any of the criteria outlined above, the United States is being subjected to discriminatory treatment. The United States Government believes it only fair that the Chilean Government should recognize that fact and cease discriminating against American interests. Should such discrimination not cease, this Government will be forced to consider taking appropriate steps to protect its interests.

Very truly yours,

Cordell Hull

Draft of Provisional Agreement Between the United States and Chile Concerning the Allotment of Foreign Exchange, Supplementing the Provisional Agreement of September 28, 193129a

Referring to the provisional agreement concluded between the Governments of the United States and Chile by notes exchanged September 28, 1931, providing for most-favored-nation treatment in commercial matters, it is understood and agreed that the most-favored-nation clause is applicable to the allotment of foreign exchange under the system of foreign exchange control now or hereafter maintained by the Government of Chile.

Accordingly, the foreign exchange allotted by the Government of Chile for use in payment of present or future obligations created by importations of merchandise from the United States and of demands for foreign exchange by American citizens and interests in Chile, shall not be less than thirty-two and one-half per centum of the total foreign exchange created by Chile’s international transactions, including sums blocked by foreign governments as a result of compensation agreements, during each quarter of the calendar year, the said thirty-two and one-half per centum being the proportion of the imports of foreign merchandise into Chile obtained from the United States during the four-year period 1928, 192’9, 1930, and 1931.

At the end of each quarter of the calendar year the Government of the United States will be informed of the amounts of foreign exchange allotted during that quarter to the various national and foreign interests by the Chilean Exchange Control Commission as well as of amounts retained abroad under compensation agreements.

The Chilean Government will take the necessary steps to have released the funds which have been deposited by American citizens in [Page 142] the Caja de Retiro, and, in allotting foreign exchange, will give precedence to persons entitled to the receipt of those funds.

It is understood that negotiations will be instituted as soon as practicable with a view to concluding a mutually beneficial trade agreement between the two countries. In the meantime, and pending the conclusion of the trade agreement, it is understood that the Chilean Government will not enact any measures which would have the effect of putting the trade of the United States in a more disadvantageous position than it is at present and that the United States will continue to admit Chilean nitrate and iodine free of duty.

The present provisional agreement shall remain in force pending the conclusion of the aforesaid trade agreement, subject to the right of either Government to terminate the present agreement on 30 days’ notice.

  1. For correspondence concerning the provisional agreement of September 28, 1931, see Foreign Relations, 1931, vol. i, pp. 919 ff.