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

No. 423

Sir: Supplementing this Embassy’s despatch No. 415 of July 27, treating of the conference which was held with the Minister of Finance on the subject of discrimination against American trade, I now have the honor to submit the following analysis of Mr. Ross’ statement and recommendations thereon.

There has recently been a substantial increase in demand for exchange in excess of the increase in availabilities.…

. . . . . . . . . . . . . .

The Chilean exchange situation, therefore, may be summarized by stating that while there is no crisis with regard to availabilities, there [Page 407]is no large surplus and the increasing demands on exchange, if continued at this same rate, might create a definite shortage by the end of the year. In other words, the statement of the Minister of Finance to the effect that he was taking precautionary measures since a shortage of exchange due to the increase in the demand for imported goods might develop, is not unreasonable.

Having reached the conclusion that the Minister’s presentation of the exchange situation is substantially accurate, it does not necessarily follow that because it is feasible and convenient for him to save at the expense of American products we should acquiesce in such a procedure. As has been noted, the ratio of increase of American products has been only slightly greater than the ratio of increase of Chile’s total importations. Assuming that there is a necessity for Chile’s restrictive measure on imports, there appears to be no logical reason why the brunt of these economies should be born[e] almost entirely by American products. From the Chilean point of view it is awkward to attempt restrictions against countries whose status regarding exchange is clearly provided for in the terms of compensation treaties. The very situation which has now arisen was feared by the Embassy when it was pointed out at the time an exchange agreement was contemplated that the liberal treatment accorded our commerce was a matter of expediency on the part of the Minister of Finance and would only continue as long as it suited his financial policies. Lacking a definite signed agreement the present measures affecting American trade only represent a departure from what might be termed an informal unilateral engagement on the part of the Chilean Government to treat American commerce with liberality. We may point out that this represents such a departure and complain about it, but we are not in a position to invoke the breaking of a formal international engagement. The question naturally arises at this point as to whether there is now an appropriate occasion to begin negotiations looking to the conclusion of a commercial treaty which will regularize a satisfactory status for our commerce. In the Embassy’s opinion the answer to this question depends on whether such a treaty can be made broad enough to include very specific provisions guaranteeing American commerce equitable treatment in exchange matter.

Tariff concessions, important and desirable as they may be, are of secondary importance as a factor entering into our present trade with Chile. The studies which have been made by the Commercial Attaché indicate very clearly that even were tariffs reduced in large proportions on expensive American products such as automobiles, radios, typewriting machines and other important American imports, the ultimate price at which they would be sold to the consumer would not be affected nearly as much as by a comparatively slight increase in [Page 408]the value of the peso. Although the peso has improved from its low position to the present rate of about 25 to the dollar, even at this figure American goods in terms of the purchasing power in pesos of the Chilean buyers are extremely high. Also our commercial relations with Chile have a distinctive character, in that there is a tremendous disproportion between the value of our current trade and the value of our capital investments in Chile. Our current business is now running at the rate of about $15,000,000 a year, whereas it will be remembered that our total investments in Chile in 1929 were estimated, in a careful study prepared at this Embassy by Mr. Joseph Flack, at over $1,000,000,000.

As of assistance to the Department in considering the desirability of a commercial treaty with Chile, the main points for and against such a procedure might be summarized as follows. First, there would be a great advantage in placing our commercial relations on the basis of a formal international agreement. The present status of these relations whereby fair treatment to our commerce is made to depend on the policy of the Minister of Finance, is obviously none too satisfactory; but in the Embassy’s opinion should the present Government be overturned, an event which must always be considered, these relations would be still more unsatisfactory. A change of Government, should it come, would arise from pressure from the Liberal or “Left” groups rather than from Conservative groups, and we could not anticipate that the new Government would be more friendly to the United States. Quite the contrary, we would probably have a period of more intense nationalism and hasty and ill-advised attacks against foreign interests. Under such conditions, lacking the protection of a formal treaty, our commerce would have much the same uphill fight as it had several years ago. As a possible factor against entering into a commercial treaty it must be pointed out that it is hard to say how any treaty could be negotiated which might not run contrary in some respects to the Department’s traditional philosophy with regard to most-favored-nation treatment. Under the compensation system, as the Department is well aware, some countries having compensation treaties are liquidating over a slow time schedule their frozen credits at special rates. It is not believed that Chile could be forced into according our commerce similar rates unless we are prepared to enter into some type of compensatory or blockage arrangement. But compensation is inconsistent with our stand for liberalizing international trade. In short, the possibility of a satisfactory exchange arrangement as a part of a commercial treaty still leaves us between the horns of the dilemma of either accepting compensation or admitting the obtention on the part of other countries of exchange rates for liquidating frozen credits more favorable than those accorded to the United States.

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Returning to the more immediate question of what action should be taken with regard to the policy which has been put into effect of restricting American imports, the Embassy is inclined to feel that the soundest procedure would be to accept for the moment at least Mr. Ross’ explanation that these restrictions are of a temporary character and that they will be lifted as soon as it is possible to do so. On the other hand, it is believed that it should be made clear that the United States is not willing to acquiesce for a protracted length of time in restrictions which affect primarily our commerce and are, therefore, in the nature of a de facto discrimination. For this purpose, should the Department approve this procedure, there is appended a suggested draft of note to be left with the Foreign Office.

As of possible interest to the Department’s consideration of this matter, it may be stated that none of the countries affected, namely England, Germany and Holland, have made anything in the nature of a formal protest concerning the Chilean restrictions. As far as is known the mission of the Netherlands has not discussed the question, presumably because this mission is now awaiting the arrival of a new Chargé d’Affaires. The British Chargé discussed the matter in an informal and friendly manner with Mr. Ross and informs me that the discussion was limited to obtaining explanation of the reasons behind the Chilean policy. The German Minister informs me that he also has had several informal conversations at the Foreign Office on the subject, but that for the time being no further action is being taken by his Government.

It is requested that the Embassy receive by cable or air mail the Department’s instructions as to its further procedure in the matter. The recent action of the Minister of Finance with regard to American trade has raised the issue again of our trade relations with Chile, the question having reached a stage where the Embassy should have for its guidance the Department’s considered position, not only with respect to the specific questions which are now being dealt with, but with regard to broader questions touching our trade relations with Chile, and in particular with respect to the Department’s wishes and views concerning the possibility or desirability of negotiating a formal trade treaty with Chile.

Respectfully yours,

Winthrop R. Scott

Suggested Draft for a Note to the Foreign Office

Excellency: I have the honor to refer to the measures adopted by the Chilean Government several weeks ago with a view to restricting authorizations for the purchase of export drafts for certain purposes. [Page 410]It is noted that for the moment the Chilean Government is not permitting the purchase of such drafts for the transfer of American frozen credits, including in this category bank collections awaiting remittance to the United States; and is restricting the purchase of export drafts to cover the importation of automobiles, automobile parts, automotive accessories, tires and other rubber goods, radios and spare parts for radios. As Your Excellency will recall, these measures have been viewed with some concern and have been the subject of several conversations with the Foreign Office and of a conference held on July 24th with the Minister of Finance, the President of the Exchange Control Commission, and members of the Foreign Office. At this conference the Minister of Finance very kindly set forth a clear exposition of Chile’s policy, stating that because of a great increase in the demand for certain imported articles, particularly those against which the measures under discussion have been taken, there was such a drain on Chilean exchange resources that unless a check were placed on these demands a serious shortage of exchange would occur. Assurances were given that while an exact period could not be set for the duration of these measures, it was hoped and believed that they would be maintained only for a relatively short time. It was stated furthermore that the Chilean Government desired to continue to treat American commerce with liberality, but that the measures which have been adopted for the temporary restriction of imports were impelled by motives of a really national necessity.

Acting under instructions from my Government, I have the honor to inform Your Excellency that the American Government has noted the explanations which have impelled the Chilean Government to depart temporarily from the policy which it has been pursuing heretofore of granting to American commerce freedom from exchange control, quotas or other special restrictions in view of the reciprocally liberal treatment which is afforded Chilean commerce in the United States. While noting in the friendliest spirit the explanation given for the measures under discussion, it should be made clear that the American Government would not acquiesce in a policy of affecting savings in exchange availabilities indefinitely or for a long period at the expense of restricting commerce in articles so preponderantly of American origin; nor could it accept a policy which would tend to block indefinitely the transfer of American frozen credits. From the assurances given, the American Government has every confidence that no such policy is contemplated.

In closing let me express my thanks for the frank and cooperative manner in which Your Excellency and the Minister of Finance have always been ready to discuss matters affecting the commerce of our two countries.

I avail myself [etc.]