611.2531/235
The Chargé in Chile (Frost) to the Secretary of State
[Received December 28.]
Sir: Adverting to the current negotiations for a Chilean-American modus vivendi, and particularly to the exchange problem, I have the honor to report that the delays in connection with the interpretation of Item 3 b of the draft may possibly prove to have had at least the advantage of clearing the way for a more rapid definitive exchange settlement in a subsequent trade agreement. The crux of the exchange difficulty seems to have become the acceptance by Chile of [Page 425] the principle that the exercise of control, when needed, by import quotas based upon previous trade will be practicable and will avoid overt differentiation in treatment between the countries with which Chile has economic relations.
The Under Secretary of Commerce feels that the imposition of such quotas, while it might safeguard the peso, would prevent Chile from recourse to the compensation countries for needed articles which she could readily pay for in the blocked currencies she holds. I have pointed out to him that such situations would only be temporary, and the hardship for Chile would be far less than that which would be caused to the United States by Chile’s turning over American lines of trade to countries which have been using shock tactics against Chile in the matter of exchange. I have mentioned that neither the United States nor any other country can be expected to sign a formal agreement conceding the right of Chile to differentiate openly against its merchants. The probability which has existed that exchange availabilities would be relatively abundant during the next few months, and the possibility that a Chilean-American trade agreement might in the meantime enable Chile to increase her dollar availabilities by increasing to some extent her sale of products in the United States, have also been pointed out. If this reasoning should be successful in overcoming Señor García’s fear that the use of quotas might exclude from Chile goods from Europe which she would be in a position to pay for (and also might lead to sharp difficulties with Europe), a long step would have been taken toward a Hull agreement.
In the contrary event, i. e. if the Foreign Office should refuse to make the minor sacrifice of occasionally foregoing recourse to European goods, for the sake of granting equality of treatment to the North American partner who has sustained many losses through faith in Chile’s economic future, there may be difficulty in concluding either the modus vivendi or a trade accord. In order to expedite the reaching of decisions in the case of such a refusal on Chile’s part, unlikely as this has seemed, it may be well to raise with the Department at this time the question of the attitude and action which might become advisable.
The Department will recall that in my telegram No. 69 of November 2, 1937 the view was expressed that if a really advantageous exchange clause could not be secured in the modus vivendi I would not shrink from signing a brief last-minute agreement containing nothing more than most-favored-nation clauses on tariff rates and import quotas. This view was based, however, upon the assumption that the securing of a suitable exchange clause would ultimately be possible through negotiations and offers in connection with a Hull trade agreement. [Page 426] It naturally will not hold good if Chile’s recalcitrancy with regard to even a temporary exchange settlement is found to be so rigid as to render a permanent settlement through a trade agreement quite improbable. The prospects for a provisional adjustment on exchange in the modus vivendi, which have appeared rather good, have been based in part on the absence of Don Gustavo Ross from Chile and in part upon the apparent comprehension and good-will displayed by Don Desiderio García. If it now eventuates that the latter, despite his protestations, is firmly opposed to the sole mode of protecting the peso which could give us equality of treatment, namely the use of import quotas, an active doubt arises as to whether a brief modus vivendi without an exchange clause should be signed at all.
The signing of such a modus vivendi on the one hand, would indicate our abandonment of hope for a satisfactory exchange settlement, and therefore our abandonment of hope for the conclusion of a Hull agreement. It would also foreshadow the indefinite continuation of the frictions and recriminations which have marked Chile’s relations with us for the past year, and which are by no means free of unpleasantness for her. In this way it might even generate a revulsion of Chilean official feeling which would turn out to be of aid in finally securing exchange protection for us and a trade agreement for Chile.
On the other hand the signing of such a modus vivendi would at once give Chile exemption from the penalties invocable under Section 338 the United States Customs Tariff,47 and from the withholding of the American tariff concessions made in the Hull agreements. Chile would grant us, it is true, the special tariff rates contained in the Franco-Chilean Commercial Treaty; but these affect only some $330, 000 of our shipments to her. It might be more advantageous for the United States to suffer the loss of these special rates, and retain the right to utilize the sanctions provided by our legislators against tariff discrimination, than to secure the rates and surrender our weapons for securing permanent satisfaction in the far more important exchange matter. It would be of relatively small benefit to us to protect this unimportant amount of trade against tariff discrimination, if in order to do so we should sacrifice the possibility of exchange safeguards which would vitally affect our entire trade to Chile.
On the basis of these considerations it would be possible to contemplate a policy of not signing any modus vivendi if García and his associates should prove obdurate as to Item 3 b of the present draft (a course on his part which might indicate the impracticability of ever [Page 427] reaching an exchange settlement on which a Hull agreement could be based). If Chile thereupon, after exchanging the ratifications of her treaty with France, should proceed to impose higher duties on certain American goods than those imposed on the same goods from France and other favored nations, the United States would retain the right to act under Section 338; or to add Chile to the list, now composed solely of Germany and Australia, of the countries to which the tariff concessions contained in our various Hull agreements are not extended. While relatively few of the concessions as yet granted by these agreements are of practical importance to Chile, it is likely that some of those to be granted in our forthcoming trade agreements with England and other countries would be so (or indeed might be made with this purpose in mind). Moreover Chile would presumably not relish the stigma of being denominated one of the three nations in the world found culpable by the United States of the type of discrimination which the Buenos Aires accords condemned. Our position, therefore, if we decline to sign any modus vivendi, as a result of Chilean obstinacy on the exchange clause, might in the long run bring her to a fairer and more tractable spirit. This would be far from certain, however, and a condition of tariff hostility might result in which even a recourse to an American duty on nitrate (which would in itself present many difficulties) would prove unavailing.
The foregoing possibilities have for several months been in my thoughts and have not been mentioned to the Department because it has seemed gratuitous to envisage developments so undesirable until circumstances should compel this. Confidence has been felt that by the display of sympathy and by the offer of the inducements which a Hull agreement could contain, a full adjustment would become feasible. As stated at the outset of this despatch, we may still entertain strong hopes for an amicable arrangement. Nevertheless, Chile’s action in deliberately withdrawing $4,000,000 of American exchange from the availabilities for financing American trade, in order to spend it in buying European-made naval cruisers, (reported in my telegram of today’s date, No. 9848), coupled with the apathy or antagonism shown by Señor García in connection with the import quota aspect of the exchange clause in the modus vivendi, may perhaps be regarded as modifying the prospects. The possibility of refraining entirely from the signature of a modus vivendi might therefore now be worthy of at least cursory attention,—always with the hope that this attention will prove to have been unnecessary.
Respectfully,