611.2531/216

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

No. 747

Sir: I have the honor to refer to the statement made by Señor Pereira37 of the Chilean Embassy, during a conference held in the Department on October 21st with officials of the Division of American Republics, to the effect that the Chilean Government took the view that foreign exchange provisions would more properly be the subject of negotiation for a trade agreement than for a modus vivendi. It is understood that the Department has been disposed, on the other hand, to feel that an exchange clause might well be included in a modus vivendi, if such an instrument is concluded prior to the entry into permanent effect (at present set for November 19, 1937) of the Franco-Chilean commercial treaty; since otherwise most-favored-nation clauses respecting tariff rates and import quotas might be rendered nugatory by Chilean exchange manipulations.

The Chilean Foreign Office has now reached the opinion that the inclusion of an exchange clause in the modus vivendi would be advantageous. The Commercial Attaché of the Embassy, who has handled the negotiations, has stressed informally the argument that the signature of an international agreement (a modus vivendi) pledging Chile to adopt a favorable course on exchange would strengthen the hands of the Foreign Office in dealing with the Exchange Control Commission. It has repeatedly been true that the Chilean Foreign [Page 410] Office has been disposed to recognize the justice of American complaints with regard to exchange, and yet has been unable to secure appropriate action here. The Commercial Attaché feels that an exchange clause engaging Chile’s word will to some extent create legal rights and responsibilities on the part of the Foreign Office which will be helpful; and the Foreign Office appears to be rather caught with this possibility.

It is possible, as Ambassador Philip stated in my telegram No. 69 of the 2nd instant, that the Foreign Office might even go so far as to approve a more satisfactory clause than that furnished in the Ambassador’s telegram No. 65 of October 29, 10 p.m. The Commercial Attaché has drafted a clause which he feels might be secured, or serve as a basis for Chilean concessions, as follows:

“The Government of Chile undertakes to accord, within the limits fixed by the actual amount of exchange available, the most favorable possible treatment with respect to rates of exchange, and taxes and surcharges on exchange transactions, in connection with payments for or payments necessary and incidental to the importation of articles the growth, produce or manufacture of the United States and, in no case, will place any commodity or group of commodities the growth, produce or manufacture of the United States in an artificially adverse position in respect to a similar commodity or group of commodities the growth, produce or manufacture of any third country nor impose exchange control measures involving the use of exchange at rates higher than those which would be set by the free supply and demand of the market.”

The last portion might be effective in guarding against the recurrence of measures such as the lavadero gold scheme in connection with the purchase of the so-called luxury articles from the United States.

I should personally see no harm in the incorporation of some such provision in a modus vivendi signed on or just before the 19th instant if the intended Franco-Chilean exchange of ratifications is carried out at that time. While the language of the first part of the undertaking is indefinite, and the word “artificial” in the second stipulation is objectionable, there is no question but that a good deal of protection might be secured; and the Foreign Office would certainly be gaining a weapon, perhaps as satisfactory as is possible without new legislation, against the Exchange Control Commission. If the Department should so decide and should issue a telegraphic instruction to the Embassy, it might be feasible at the end of next week to push through either the foregoing proposal or one somewhat weaker. It would certainly be impossible to secure anything stronger.

On the other hand, there are adverse considerations. With such a provision once in existence, the Foreign Office might be less disposed [Page 411] than at present to feel a sense of urgency in connection with negotiations for a general commercial treaty. If the Foreign Office proved able to utilize the clause successfully against the Exchange Control Commission, it might also gradually become reluctant to modify a situation under which for the first time it would enjoy a measure of actual authority in exchange matters. The goal of our negotiations, I believe, should be a modification of the entire exchange control system here; and there is a strong probability that the objectionable Law No. 510738 will in fact be thrown into the legislative melting pot within the next few weeks or months. If our position remains unprotected, and our causes for complaint quite unadjusted, we may be in a better position to influence the trend of the new legal enactments to be framed.

This will particularly be true if we are at that time in the course actively of negotiating a general treaty, as we would then have definite advantages to offer Chile, in return for exchange reforms. The adjustment of the exchange situation may be thought of as logically forming a part of a general settlement,—a view which the English have held.

In this connection I may advert officially to the idea which I have been advocating orally and informally for some months past that a definitive and fundamental rearrangement of our economic relations with Chile should in some way recognize the latter’s special disabilities in regard to exchange. The Chilean point of view expressed in the Foreign Office Memorandum transmitted with the Embassy’s despatch No. 261 of July 15, 1936,39 and again in Señor García’s informal memorandum of October 4, 1937, is based upon convictions so deep and genuine that some cognizance of them will be necessary if a broad and amicable economic understanding is to be reached. Due to temporary circumstances in the Embassy this week it has not been possible to prepare an adequate discussion of this point for the present airmail; but the general factors are of course well known to the Department. If the Department should find feasible some acceptance of Chile’s belief that the uncompromising tactics of her Continental customers force her, however reluctantly, to resort to protection for her monetary unit in relation to ours, (in line with our policy of sympathy and good will in Latin America), there is a fair likelihood that a Hull treaty, involving a general reform of the exchange control system here, might become practicable. On the contrary supposition, the immediate negotiation of the best possible [Page 412] exchange clause, and the probability that any modus vivendi which may now be forthcoming will remain the basis of our commercial relations for a protracted period, should be definitely contemplated.

Respectfully yours,

Wesley Frost
  1. C. Manuel Pereira, First Secretary of the Chilean Embassy.
  2. Chile, Boletin de Leyes y Decretos del Gobierno, April 1932 (Santiago, 1932) vol. 101, p. 659.
  3. Foreign Relations, 1936, vol. v, p. 355.