611.2531/279
The Chargé in Chile (Frost) to the Secretary of State
[Received March 29.]
Sir: I have the honor to refer to my telegram No. 34 of March 21, 7 p.m., 1938 with regard to the exchange clause suggested by the Chilean Foreign Office in connection with the proposed Chilean-American Trade Agreement.
The Chilean position is based upon the necessity of maintaining Chile’s compensation agreements in order to keep open European markets, and upon the necessity of maintaining an exchange control system in order to stabilize the peso against extreme and harmful fluctuations or depreciations. The British Government is understood to have recognized these two necessities; and both myself and the Commercial Attaché, as the Department is aware, are rather disposed likewise to feel that they might well receive a degree of recognition.
The proposed clause guarantees most favored nation treatment and a supply and demand exchange rate. It merely specifies that the depreciation in the exchange value here of the blocked currencies, which is due to a supply of those currencies created intentionally by Germany and other powers, does not constitute a discrimination on Chile’s part; and this, from some standpoints, may be taken to be the actual fact.
The British Embassy has for the past month made the exchange clause the crucial point of its negotiations, an attitude entirely different from that which it maintained up until the middle of February. This was due to conversations resulting from the Department’s Instruction No. 312, of January 31, 1938. The British took the exchange clause in our modus vivendi as a starting point and was then instructed, as the result of the attitude of the British Board of Trade, to insist also upon an absolute guaranty of most favored nation treatment. The Chileans were willing to concede a most favored nation pledge with the British on condition that the latter in turn should admit that the low value of the blocked currencies here does not constitute discrimination. This point had been carefully discussed between myself and the British Embassy and the conclusion had been reached that the quotations on the blocked mark here are in reality fixed by demand and supply and could not be altered by Chile even if an attempt were made to legislate against aski currency. The compensation agreements [Page 443] have had no success in promoting imports into Chile, except possibly in the case of Germany. Accordingly the British Embassy accepted the Chilean stipulations.
The negotiations were hastened to a conclusion by the fact that don Agustin Edwards, Chilean Ambassador to England, who has been on leave in Chile with the express purpose of activating the general treaty settlement which has been under discussion since early last autumn, was about to depart for his post. It so happened that the British Commercial Secretary was leaving by the same boat (S.S. Orduña, sailing on yesterday’s date); and this furnished an added incentive. The British clause was completed on the 19th instant, and its substance telegraphed to London. On the 18th Señor García had submitted a draft of it to me, and on the 21st he suggested that I work it over with him. This was done yesterday afternoon and I telegraphed the result to the Department last evening. There are enclosed herewith the copies both of our proposed clause32 and of the British clause,33 in Spanish and English.
As the Department would assume, I earnestly hope that the Chilean offer can receive serious and favorable consideration. I do not believe that Chile can afford to cancel her compensation agreements; as this step would cause very important trade losses, despite the fact that the Germans could and probably would continue to do a good deal of business here on a compensation basis (just as they are doing in New York to some extent with aski marks.) Señor Gazitúa has made estimates indicating that Chile would lose from 40 to 60 percent of her trade with Germany.
Referring to the Department’s telegram No. 24, of March 19, 12 noon, 1938,33 I may say that it will probably be highly desirable, or even necessary, to arrange for the existence of a Mixed Chilean-American Commission similar to the recent Brazilian-American Mixed Commission, in order to make a full success of our trade agreement negotiations. On this condition, and if the Chilean exchange clause offer is found acceptable, it will probably be possible within a very few weeks to reach an understanding with Chile on the basis of which a trade agreement could be negotiated. Several points remain to be cleared up, but the difficulties are minor. On the other hand if the exchange solution now suggested is not in its broad lines acceptable there might be some question as to the value of pursuing discussions on other phases of the proposed accord.
Not devoid of relevance in this connection is the fact that the British are now to negotiate with Chile on the various matters which in our case will be dealt with in a general treaty of amity and commerce. [Page 444] They are endeavoring to secure national treatment in Chile for their commercial and banking firms, national treatment in Chilean waters for their steamships, etc. If the Department should find the proposed exchange clause to be substantially acceptable, and if in consequence the stage of announcing the intention to negotiate a trade agreement should shortly be reached, this Embassy could then turn to the negotiation of a general treaty and have the advantage of working synchronously with the British on the questions indicated above. To my mind this would on the whole be advantageous, as the United States and England would be more likely to induce a liberal attitude on Chile’s part which would contribute to the propagation of the Hull policies in Latin America.
Respectfully,