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

No. 1582

Sir: I have the honor to refer to the Department’s instruction No. 1550 of November 1, 1933, enclosing a draft proposal for working out an agreement to give the United States most-favored-nation treatment in allotment of exchange.

Needless to say, the Embassy was most gratified to receive this instruction which should place us in a position to force the Chilean Government to afford adequate relief to our long-suffering and patient business interests which have been discriminated against by virtue of compensation treaties and placed under serious disadvantages by the nationalistic attitude adopted by the Chilean Government.

In my opinion, the broad principles on which the Department’s draft agreement is based should provide a practical basis on which an arrangement satisfactory to our commercial interests in Chile can be worked out. Since the Embassy’s recommendations made in its despatch No. 1535 of September 6, 1933, international monetary conditions have greatly changed and Chile’s exchange policies have been modified to some extent, so that in certain respects the problem of negotiating a feasible accord has been much simplified, whereas other aspects of the problem may make it desirable for us, as a practical matter, to make some modifications in our proposal.

As stated in my telegram No. 105 of November 15, 7 p.m.,30 after giving the Department’s instruction careful study, I discussed the proposal, on the 15th, with Mr. Vergara, the Undersecretary of Foreign Affairs and the officer directing negotiations in these matters. [Page 143] Mr. Vergara’s general reaction was not hostile and he readily admitted the fairness of our commerce being given as much consideration as was being accorded to other countries. It was apparent, however, that he was greatly impressed with many difficulties and he immediately advanced certain objections, some of which merely involved matters embarrassing or difficult for Chile and which may be disregarded as valid arguments, and others which, in my opinion, do represent certain practical considerations which we will have to take into account. Mr. Vergara’s first reaction was that all of Chile’s imports had so drastically declined, that under the four-year basis we proposed, we would receive a disproportionate amount of the available exchange; that our basis involved three good years and one bad. He added that while he did not have available statistics on the matter, he was afraid that if exchange were granted us on the 32.5% basis, it would preempt such a large share of all the exchange as to raise serious difficulties with other countries; that our proposal might require an entire readjustment of Chile’s international economic relations, necessitating a revision of existing compensation treaties and the laws governing the control of exchange and foreign commerce. He was perturbed at the possibility that our plan would result in a scaling down of Chile’s European markets and said that it would be necessary for him to go over the question very carefully, particularly from the statistical angle, as the idea of basing an arrangement on imports was, to him at least, both original and disturbing. Mr. Vergara also expressed considerable doubt as to the manner in which the frozen credit liquidations at arbitrarily low rates equivalent to those given the European countries could be applied in the case of American credits unless the nitrate industry were required to return to Chile a portion of the funds derived from the sale of nitrates in the United States. Without commenting concerning the nitrate interests involved I, of course, countered this statement with the reply that we were entitled to most-favored-nation treatment, a principle which Chile had admitted and that the problem of giving us such treatment was Chile’s and not ours. Our conversation ended with the understanding that Mr. Vergara would discuss the matter in a very short time again, after he had had an opportunity of looking into the necessary statistics and getting a clear idea of the various factors involved.

As a result of my conversation I feel that in spite of the various objections which the Foreign Office has raised, we have made real progress and it is apparent to the Chilean Government that some definite and practical relief will have to be afforded to our business. I am not inclined to take too seriously all of the difficulties on which Mr. Vergara laid so much stress.

While I share the Department’s opinion that from our point of view, imports represent a sounder basis for the allotment of exchange [Page 144] than blocked exports, Chile’s external economy is so tied up in the compensation system that regardless of good will it will be a difficult problem for the Government to find or control an appreciable amount of exchange at official rates for our needs.

As matters stand now Chile’s exchange is largely earmarked through blockage arrangements. The chief sources from which Chile can obtain exchange for the liquidation of frozen commercial credits at rates equivalent to those accorded countries having compensation agreements are: the copper companies (see enclosure No. 331), small returns from iron ore and miscellaneous agricultural exports. As Chile’s currency has appreciated exports have become less profitable so that while the Government originally required agriculturists to turn over to it 20% of the sales value abroad at official rates, the amount has now been reduced to a nominal figure of 1% or 2% in most cases.

Export drafts cancel themselves since the Government is now permitting importers to acquire drafts against corresponding exports at the free market rate. While facilitating imports it does not constitute a source of exchange to the Government. Gold extraction is advantageous to the Government but does not create exchange at official rates since the Government must pay for gold at rates commensurate with the value of the peso measured in terms of gold currency countries.

In short Chile has placed itself in a position where it can only accord us most-favored-nation treatment on exchange matters by a revision of the entire compensation system which has been built up with other countries or by balancing in some form the exchange accorded us against its exports to the United States. The first expedient will be difficult since to adopt it would jeopardize Chile’s European markets, and the alternative has, among others, the disadvantage from our point of view of subjecting our copper and nitrate industries to bear the brunt of furnishing this special exchange in addition to the sacrifices which these industries are called upon to make in connection with compensation arrangements. No matter what form the agreement takes, it will be difficult to prevent Chile from looking to the proceeds of nitrate sales in the United States to supply the exchange.

In view of the changed conditions since our original recommendations which have eased the strain on our current business needs, I am somewhat inclined to feel that as our negotiations develop, instead of insisting on according us a percentage of exchange at the most-favored-nation rate for the needs of all our commerce including both frozen credits and current needs, we may find it desirable to ask for [Page 145] preferential exchange to take care of our frozen credits and obtain a formal agreement that our current business be allowed to finance its needs in the export draft market freely without any restrictions. Current business has adjusted itself fairly well to present exchange levels which, at around 25 pesos to the dollar or less, represent in my opinion a fair equilibrium between import costs, business expenses incurred in pesos, and selling price in Chile. In addition to the above concessions we should, I think, use the present favorable situation to obtain definite assurances in regard to the other problems which present such difficulties. Among these, for example, are the re-export of consignment merchandise, debenture interests and dividends on investments, amounts due insurance companies, interest and commission due banks (but not capital). It is possible the Department intended to comprise these items in the scope of the agreement but as this type of credit has not been included in agreements which Chile has made with other countries it will be essential for us to have at the outset a clear understanding on these categories which are of such special concern to the United States.

In my discussions I have of course not voiced or hinted at any of the difficulties which I foresee nor have I admitted any of the objections which the Chileans have advanced, and I shall continue to press for the obtention of exchange on the basis suggested by the Department until I have received the Department’s additional views in the light of this despatch.

In my discussions I have not deemed it desirable to raise the question of the possible imposition of nitrate duties in the United States. The Chilean Government realizes at last that it has a responsibility to make an arrangement to afford fair treatment to our business interests and it is now a question of the form that this will take. As the British are now also pressing for a gentlemen’s agreement on exchange the Chilean Government is now forced to consider giving satisfaction to its two most important markets. This will act as a strong lever to make Chile weigh the advantages of modifying its commercial relations with the smaller markets in order to save the bigger.

Respectfully yours,

R. Henry Norweb
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