812.6363/6389½
The British Embassy to the Department of State
Aide-Mémoire
His Majesty’s Ambassador duly reported to the Foreign Office the substance of his conversation on November 14th with the Under Secretary of State, on the subject of the dispute between the Mexican Government and the oil companies. Lord Lothian informed the Foreign Office that as a result of his interview with Mr. Sumner Welles he understood the present position to be that President Cárdenas had expressed his readiness to resume negotiations with the oil companies on the broadest lines, and that the United States authorities felt, and President Cárdenas was understood to agree, that if the companies were unwilling to embark on such negotiations, or if the negotiations were unsuccessful, the dispute should be referred to arbitration in order to decide:
- (a)
- the rights and properties of the companies in respect of which compensation was payable and the value which should be placed on these
- (b)
- in what manner and at what time the awarded compensation was to be paid.
His Majesty’s Government in the United Kingdom have given most careful consideration to these latest developments in the situation. They fully appreciate the anxiety of the United States Government to bring about an early settlement of the oil dispute and would themselves be the first to welcome such a settlement if it could be achieved on reasonable terms. They have also taken into account the decision reached by the Mexican Supreme Court on December 2nd, which they consider to be merely the last step in what has been a policy of spoliation under the guise of law. This decision, however, ends all possibility of the companies obtaining just redress by invoking the legal methods open to them in Mexico.
His Majesty’s Government are convinced that it is only possible to reach an honest solution of the Mexican oil question by standing firmly on a clear principle. Where disputes, like that which has arisen in Mexico, arise between a sovereign state and foreign companies exploiting natural resources within it there are only two bases on [Page 717] which a successful solution can rest. The first is by the expropriation of the rights and properties of the foreign companies at a fair valuation and in return for prompt, effective and adequate payment of compensation. This method, however, is only possible in the case of an economically developed state, which is solvent, and can therefore pay cash or its equivalent for what it expropriates. The second is by an arrangement whereby the foreign company is granted a long lease of the asset on agreed terms which on the one side will provide for proper labour conditions and royalties and on the other will enable the companies to make reasonable profits and recoup themselves for the capital outlay in discovery, equipment and development. In this [those?] countries in which the state is unwilling or unable to pay full compensation for expropriation, this is the basis upon which the development of natural assets is now taking place all over the world with satisfactory results and with due regard to the sovereign rights of the countries concerned.
It is quite clear that the first principle is inapplicable in the case of Mexico today. The Mexican Government has long been in default on its external debt. It has not the credit upon which it could borrow the sums which any impartial tribunal would award as the value of rights and properties of the oil companies if they were expropriated. It has not the means with which to pay prompt, effective and adequate compensation. Nor is there the least likelihood of its being able to manage the seized oil wells in such a way that it could pay fair wages to labour, fair interest on an impartial valuation of the companies’ properties including the amortization of the capital within a reasonable time, and obtain any revenue for the Mexican State as well. His Majesty’s Government, therefore, feel bound to maintain the attitude which they have consistently adopted against the policy of expropriation. The grounds for this attitude were fully set out in His Majesty’s Embassy’s aide-mémoire of March 25th, 1938,59 and it was made clear on several occasions—notably in the conversations between Sir Ronald Lindsay and the Under Secretary of State on May 6th, 1938, between Mr. Mallet and Mr. Duggan on October 11th 1938, and between Mr. Mallet and Mr. Welles on January 6th—that His Majesty’s Government had in no way departed from their original standpoint. This fact was confirmed once again by His Majesty’s Ambassador in his interview with the Secretary of State on September 20th. His Majesty’s Government were glad to note that the United States Government themselves enunciated the same principle in their communication of July 21st, 1938, to the Mexican Government60 regarding the agrarian expropriations and that as recently as [Page 718] August 14th last Mr. Sumner Welles in his statement to the press61 declared that the United States Government insisted that the Mexican Government should make prompt and effective compensation to the oil companies if the expropriation was to be regarded as valid.
His Majesty’s Government feel unable to agree to the proposal to submit the question of the value of the rights and properties to be expropriated and the method and time of payment to arbitration. In view of the foregoing considerations as to the financial condition of Mexico it is clear that when the arbitral award has been given the Mexican Government will still in fact be unable to pay compensation in any reasonable time. If the proposal about arbitration were adopted the position, after the award had been given, would be just as it is today, with the Mexican Government operating the wells and unable to pay adequate, prompt and effective compensation, and with all the present bitterness and controversy unremoved.
Nor are His Majesty’s Government convinced that the inclusion in the suggested terms of reference to arbitration of the question of time and method of payment of compensation would afford any safeguard against Mexico’s example being followed elsewhere. On the contrary they are persuaded that to proceed on such a basis in view of Mexico’s known financial condition would inevitably be followed by most undesirable repercussions in other actual and potential oil producing countries not merely in Latin America but elsewhere and would moreover react adversely upon the contractual relations of United States and British nationals with foreign governments in other spheres of commercial activity. His Majesty’s Government have frequently made it clear in the past that they are bound to pay most serious consideration to the bearing of the Mexican dispute upon other countries and to take into account the world wide strategic issues involved. More than ever now when the maintenance of their established national oil companies not merely in Latin America but also in Iran and Iraq is a vital interest from the standpoint of national defence are His Majesty’s Government concerned to refrain from any move in regard to Mexico which could be interpreted elsewhere as a sign that they had weakened on the point of principle involved.
In view of all these considerations His Majesty’s Government are convinced that the only justifiable course and the only course which is likely to produce a final and stable settlement within a reasonable time, is to stand squarely on the principle that inasmuch as Mexico is unable to produce prompt, effective and adequate compensation the only basis for settlement is that the operation of the properties should be returned to the companies on a sufficiently long lease and upon agreed terms as to labour conditions and royalties. The operation [Page 719] of the industry by people of specialist experience, who are concerned with efficiency and not politics, and who are able to provide, from time to time, the fresh capital necessary for the development and maintenance of the industry, is, in fact, the only way in which today Mexico can obtain the revenue of which she is in need, labour can obtain reasonable conditions and the legitimate rights of the oil companies be secured. The restoration to the companies of full control over the operation and management of their oil properties is the inescapable condition of any sound solution. Once that principle is accepted, there are many ways in which the other aspects of the problem can be solved.
His Majesty’s Government venture to hope that the United States Government shares this view.
Proposals on these lines—sometimes referred to as the Five Points—were made to the Mexican Government through Mr. Richberg in March last and for some time it seemed probable that they would be accepted by President Cárdenas as an acceptable basis for negotiations. The equipment of the oil industry in Mexico is deteriorating for want of new capital. The foreign sale of Mexican oil is increasingly difficult owing to the war and for other reasons. The real obstacle in the way is not that the Five Point proposals are unfair or unjust to Mexico—they constitute indeed, the only solution which will economically benefit Mexico and be conformable with her national honour. It lies in the main in the present internal political conditions in Mexico itself, and these, like the political conditions in all countries, are fluid and not unresponsive to considerations of reason and justice and of national advantage, if consistently pressed.
It is therefore still the hope of His Majesty’s Government that time, the economic facts, and patient adherence to sound basic principles, will end in the dispute being settled to the satisfaction of both parties and it is their understanding that the companies are ready at any time to renew discussions on the basis of the proposals mentioned above. In the meantime, however, His Majesty’s Government would strongly deprecate any solution which would have the appearance of a surrender to force majeure and, as the matter stands, they earnestly trust that the United States Government will appreciate the reasons which dictate their inability to depart from their present policy.
- Not printed.↩
- Foreign Relations, 1938, vol. v, p. 674.↩
- Ante, p. 697.↩