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

No. 395

Sir: Referring to the Department’s telegram No. 41 of June 21, 7 p.m., 1935, on the subject of discrimination against American trade, to which this Embassy made a preliminary reply in its telegram No. 68 of June 28, [24] 4 p.m., 1935, I now have the honor to submit the following report.

Before considering the new developments which have arisen recently to disturb American-Chilean trade relations, it may be well to review in a few words the situation which has existed for over a year with regard to our commerce. As the Department may recall, as the result of long negotiations, although no definite written agreement was entered into, the Chilean Government in March, 1934, gave certain definite assurances which removed on most points the de facto discrimination under which American commerce had been laboring. It promised: first, that importers of American products would be free to obtain the exchange necessary to finance such imports either in the export draft market or from any other available sources (although not stated expressly this referred to the obtention of funds in the bootleg market); second, that exchange would be authorized at the current export draft rate for the repatriation of American credits frozen in Chile; third, that the Chilean Government would not make available exchange from its blocked nitrate accounts to finance the current business of other countries at rates lower than the prevailing current export draft rate; and fourth, that fair solutions would be found for certain miscellaneous outstanding problems such as the question of the retirement funds of Americans, satisfactory arrangements for the reexportation of American merchandise sent to Chile on consignment, the satisfactory liquidation of any remaining foreign currency deposits and other problems of this nature. On one point the Chilean Government did not remove entirely de facto discrimination; namely, the supplying of exchange for the liquidation of American frozen credits at the official rate as was the case in connection with countries having compensation treaties. This the Chilean Government did not find possible to do because of its system of compensation treaties.

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The treatment accorded American commerce and American interests in accordance with these assurances has been reasonably satisfactory. It has been possible for importers to purchase freely export drafts and exchange has been authorized for the transfer of other types of American funds, although in some cases the authorization by the Exchange Control Commission was delayed following the exigencies of the exchange situation. Furthermore, the problems under the fourth point mentioned above during this time more or less adjusted themselves. A reasonably fair solution was reached concerning the retirement fund cases, foreign currency deposit accounts were entirely cleared up and with a good deal of patience and hard work oh the part of the Embassy it has been possible to obtain the re-exportation of American merchandise sent to Chile on consignment. The situation with regard to the supplying of exchange for current business of other countries at rates below the prevailing commercial rate has not been quite so satisfactory. Although extremely difficult to prove, the Embassy has been aware that on several occasions the Minister of Finance has made available for the purchase of merchandise from other countries, exchange from nitrate accounts at rates below prevailing quotations. The first transaction of this sort which came to the attention of the Embassy was in the case of the purchase of certain German railway equipment which occurred during the fall of 1934. Apparently discrimination of this kind also occurred in certain orders placed for cement; and, as reported in the Embassy’s telegram under reference, the Minister of Finance at one time contemplated supplying exchange to Denmark at a preferential rate to finance the purchase of Danish machinery for the Melon Cement Company. Subsequently this plan was abandoned. The problem presented by this type of discrimination is extremely complicated and as it is beyond the scope of this despatch, it will be made the subject of a separate report.

The relatively satisfactory situation with regard to exchange treatment was changed a short time ago when, without warning, requests for the importation of automobiles, automobile accessories, tires and radios were refused by the Exchange Control Commission. A few weeks prior to these restrictions on imports, the Commission had also held up authorizations for the granting of exchange for the transfer of dollar frozen credits. While the Embassy was aware of this restrictive policy with regard to American frozen credits, at the time no great significance was attached to it since from time to time, in order to preserve an orderly market in Chilean exchange, the Ministry of Finance has temporarily held up transactions of this nature.

In view of the apparent change in policy towards our trade on the part of the Chilean Government, I discussed the matter in an informal and friendly manner with Señor Vergara, the Under Secretary for [Page 402] Foreign Affairs, who has been in continuous charge of exchange matters in the Foreign Office. It was pointed out that the restrictive measures appeared to represent a departure from the liberal policy which Chile had been pursuing with regard to our trade, and that the Embassy naturally felt a keen interest concerning any policies which might adversely affect American trade and was most anxious to have a full explanation of this situation in order that an accurate report might be sent to Washington. Confirming this conversation, a letter dated June 28, 1935 (copy enclosed)8 was left with the Under Secretary on the subject of restrictions on imports and subsequently, at his request, after it had been possible to obtain the necessary data, a memorandum (copy enclosed)8 pointing out certain specific cases in which exchange had been refused for the transfer of American frozen credits. In reply to these inquiries Señor Vergara stated very definitely that there was no intention on the part of the Chilean Government to change its policy with regard to its treatment of American commerce, that the refusal to grant import licenses was due to the fact that the Ministry of Finance was rather worried about the exchange situation and was anxiotis at all costs to keep the peso from dropping too greatly in terms of dollars, and to create a reserve of dollar exchange; and that the restrictions were not limited to the United States but applied to all countries. He added that he would reply in more detail in writing to the Embassy’s communication. With regard to the question of frozen credits, he added that he would have to look into the matter carefully with the Minister of Finance as he was not familiar with this phase of the situation.

Yesterday the Under Secretary asked me to call on him and informed me that he was glad to state that the import restrictions on all pending orders for automobiles, tires and radios had been lifted. He added, however, that the Minister of Finance was determined to keep a brake on requests for dollar exchange and that to accomplish this purpose the number of authorizations for the products mentioned above would be limited during any one month.

Although the check placed on imports affects chiefly the United States, it also touches Germany which sells automobiles in this market, Great Britain which sells a limited number of tires, and Holland which sells radios. The missions of these countries have discussed the matter with the Foreign Office and for the time being at least have accepted the explanation which the Chilean Government has given for the necessity for these measures.

In analyzing the course of Chilean exchange the Embassy was first struck by the fact that there has been no great decline in the value of the peso. In April the bootleg rate was about 25 and by the end of [Page 403] June had risen to 26.60. This rise was apparently caused in a perfectly natural way due to the increased demand for imports, particularly automobiles and other semi-luxury articles; increased need for dollars and pounds for tourists’ purposes, the Chileans beginning to travel abroad again; and a greater demand for dollar exchange to purchase American securities in the New York stock market. During this period, however, the export draft rate has been virtually stationary, varying only between 24.02 and 24.12. In view of the relatively stable exchange situation, the Embassy at first felt there might be some ulterior motives back of the restrictions affecting dollar exchange, but after studying the question and discussing it with other interested missions, it is now inclined to accept the explanation offered by the Foreign Office as being the true one. Although it is not a matter of public knowledge, it has been learned that the Minister of Finance contemplates meeting dollar and sterling payments greatly in excess of those which Chile has been paying during the past few years. It is understood he plans to settle certain international debts long in arrears, such as Chile’s quota to the League of Nations, amounting to about Swiss Fes. 700,000; substantial sterling payments as part of Chile’s dues to the International Postal Union; and other international payments of a similar character such as the dues in arrears which Chile owes in The Hague Court of International Justice. In addition the adjustments which have been made on Chile’s short term indebtedness will require approximately $1,500,000 during the next year and of course if some form of payment on Chile’s long term external debt is accepted, this will require substantial sums of sterling and dollar exchange. In theory at least an estimate of the total amount needed to meet service charges on this score would be approximately $4,500,000, although it seems extremely doubtful whether a satisfactory arrangement will be worked out with American creditors. It is reasonable to suppose, therefore, that the Finance Minister is trying to build up a reserve of exchange and furthermore is anxious that the rate shall not be too high against the peso.

For the moment our problem appears to have passed any acute state since, as stated above, the Foreign Office has given assurances that the restrictions have been lifted on imports for the time being at least, and there appears to be no great urgency on the question of the transfer of American frozen credits which have been whittled down to approximately 60,000,000 pesos from an estimated $20,000,000 in 1933. Pending the more detailed explanation which the Foreign Office has promised to give and which should include a statement of the intention with regard to the problem of American frozen credits, the Embassy is inclined to feel that the matter may be allowed to rest for the moment. The Foreign Office is under no illusions as to the earnestness with which the American Government views any measures [Page 404] which might represent a return to the old policy of de facto discrimination against our trade which we so vigorously protested in the past, and it is believed will make an effort to prevent the Minister of Finance from allowing the trade relations between the two countries to drift into such a situation.

Respectfully yours,

Winthrop R. Scott
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