611.2531/286a: Telegram
The Acting Secretary of State to the Chargé in Chile (Frost)
35. The Department has given long and earnest consideration to the exchange article proposed by Chile. Fully realizing the difficulties which Chile feels it must overcome in order to accord equality of treatment to the United States, a determined effort was made to utilize the proposal at least as a basis to work out a mutually satisfactory formula. Notwithstanding the sympathetic approach thus accorded the Chilean suggestion, the Department has reluctantly reached the conclusion that the principle incorporated therein of excepting discriminatory practices arising from compensation trade is so at variance with the policies and established practices of this Government that the proposal must be considered as wholly unacceptable. [Page 447] Therefore the Department must insist upon an exchange article the bare minimum of which would provide for satisfactory conditions as concerns rates and allocations of exchange when compared with the treatment granted any third country, particularly compensation countries.
The Chilean proposal in our view falls far short of what we could consistently accept since it would permit not only of a continuation but also of an extension of the arbitrary diversion of Chilean exports from their natural channels, which condition is directly responsible for the discriminations complained of in the past, namely discriminating rates of exchange quota or exchange limitations applied primarily against American products and arbitrary purchases of goods in compensation countries in order to utilize accumulated blocked balances. These practices without being carried in the past to the extremes possible in the future have been the cause of grave concern to this Government. A formal agreement not providing assurances in respect of these practices could be interpreted only as a sanction thereof by this Government to which you may inform the authorities the Department cannot agree.
The views of this Government on bilateral trade balancing are too well known to necessitate restatement here. The Department is confident that Chile also must realize fully the ultimate adverse effects upon its own economy should all countries apply this principle. The realization of this, it is felt, should animate the Government of Chile to seek its gradual, if not immediate, withdrawal from a system so detrimental to the present and future development of world trade.
The Department is now drafting for discussion with the Chilean authorities a proposal which while constituting a substantial recession from the original proposal is in line with the views expressed above. Any indication of what further Chile could offer to meet these views either immediately or gradually would be welcome.