810.24/377a
The Secretary of State to Diplomatic Representatives in the American Republics and to Certain Consular Officers28
The Secretary of State refers to the Department’s circular instruction of April 15, 1943 (File No. 810.24/216D), entitled “Projects Under Decentralization”29 and to Export News Letter of August 13, 194330 in which the current situation regarding projects was considered.
Under the decentralization program the Country Agency and the Embassy each have the responsibility of passing upon all local projects as such projects are initially implemented through the issuance of Import Recommendations which are subject to approval or disapproval on the basis of end-use of the materials covered. Therefore, as far as the United States Government is concerned, the Embassy is the first agency to evaluate a project in order to determine whether it is worthy of support. If a project is approved both by the Country Agency and by the Embassy, the required documentation is sent to Washington and is subsequently reviewed by the Department, by the Office of Economic Warfare, and, finally, by the War Production Board before a project is fully approved and the necessary materials are allowed production for export.
[Page 128]Such a preliminary evaluation of projects by the Embassies in the other American republics appears essential as the interest in the establishment of new enterprises continues unabated and many of those under consideration are inherently unsound. Not infrequently those who initiate projects seek the advice of the Embassy during the initial planning stages. Thus, an opportunity is presented for preliminary review and for tactfully dissuading promoters if a project is unsound from an economic point of view. Yet another opportunity for review and an expression of opinion is afforded the Embassy when action is taken on Import Recommendations. If the Country Agency has approved one or more Import Recommendations covering a project and the Embassy doubts the wisdom of such action, the Country Agency may be influenced to reconsider its action. If, after consultation with officers of the Embassy, the Country Agency still wishes to approve the project, all documentation including Import Recommendations may be allowed to come forward but the latter may be given “limited approval”. When this is done a detailed justification of the Embassy’s position should accompany the Import Recommendations. Thereby the Department will be forewarned and will not support the project in the Office of Economic Warfare and the War Production Board unless unusual circumstances unknown to the Embassy dictate otherwise.
Interest in worthy projects in the other American republics should be encouraged, even though the materials and equipment needed to carry them forward may not be available at present. However, it is undesirable, in any manner to encourage the establishment or the expansion of industries for which a country is ill-adapted or projects which are too ambitious in view of a country’s probable needs or its ability to finance without undue strain on its balance of payments.
The procedure to be followed by the missions, therefore, should be as follows: (1) to encourage the planning of projects; (2) to welcome the opportunity of discussing projects either with private concerns or with government entities; (3) to evaluate all projects in order to determine the relative urgency of those which are approved; (4) to support those which are economically sound and are considered highly urgent through the approval of Import Recommendations and through communications to the Department; (5) to support other meritorious projects in principle even though the degree of urgency which they possess is not considered sufficiently great to permit the use of strategic materials for them at present; (6) and, finally, to point out to the sponsors of economically sound but non-urgent projects which require strategic materials that the supply situation will probably not permit their implementation at this time, and, therefore, that these projects must be postponed until after the war or at least until greater supplies of the needed materials or equipment become available. However, it should again be stressed that this necessary [Page 129] postponement of indeterminate length should not discourage the planning of projects, even to the preparation of detailed lists of needed materials and specifications for equipment. The projects for which requirements have been fully determined and for which financing has been arranged will be in a most favorable position should the supply situation improve unexpectedly. The Embassy should, furthermore, inform the Department on all projects which have been planned, whether considered urgent or otherwise. Through the accumulation of data some idea may be secured for purposes of post-war planning on the extent of the projected economic development in the other American republics.
Not infrequently it is suggested by the promoter, the Embassy, or, perhaps, the Country Agency that required material for a project be taken from the quarterly estimates of supply for general requirements. It is often possible to do so if a project is small and, more particularly, if the work of construction is to be spread over many quarters. More often than otherwise, however, the use of quarterly supply estimates to meet the requirements of large projects should be discouraged. The supply estimates do not include quantities for such projects, but rather the amounts needed for continuing activities in the general economy of a country. Such activities are highly necessary and should not be discontinued for the lack of necessary materials. When continuing activities are relegated to the background in the apportionment of supply estimates, the economy of a nation is likely to suffer. Furthermore, not infrequently the use of quarterly supply estimates for large projects is simply a forerunner to a request for additional quantities in subsequent quarters which cannot be granted in view of the supply situation in the United States.
In the evaluation of projects, officers of the Embassy should be guided by the basic policy of this Government that no encouragement should be given to the expansion of, or the creation of new, industries in the other American republics which are so unsuited to their economies that they can only be maintained by exhorbitant customs barriers with consequent injury to consumers in the nation concerned and injury to more efficient producers in other nations. Obviously this policy is diametrically opposed to encouragement of uneconomic self-sufficiency, which still has many adherents abroad. Therefore, in the evaluation of industrial projects the first question is whether a project gains its support from a policy of self-sufficiency or from the temporary stringencies occasioned by the difficulties encountered in obtaining imports from highly industrialized areas of the world. If a project does have its roots in a policy of uneconomic self-sufficiency it is entirely adverse to our own accepted policy and should be tactfully discouraged by the Embassy but not necessarily disapproved. Nor should projects whose only justification is the scarcity of supply [Page 130] of products customarily imported be encouraged where such industries at the termination of the war would have little chance of competing effectively against imports other than under newly created or heightened tariff protection.
There are many other criteria which may be used in the evaluation of projects among them the availability within a nation of the necessary raw materials, skilled labor, and power; the availability of capital at least to the extent of the costs in the national currency; the probability that a project will (a) decrease the need for foreign exchange in sufficient amount to permit repayment of foreign funds invested in the project (if any) and service charges, or (b) increase the supply of foreign exchange through the exportation of goods in sufficient amount to do likewise. Perhaps the most important single criteria is the relationship between the optimum size of the producing unit and the present or potential demand of the national market. Some products can be produced in small volume at very reasonable unit cost, while others are subject to greatly decreased unit cost with an increase in volume. Minimum cost per unit may not be attained until output is extremely large. Because of low purchasing power the demand in most of the other American republics, other than for subsistence items, is relatively small and not sufficiently great to permit-production of many products at low cost. Unless there is a reasonable alignment between the optimum size of the producing unit and the national demand, production should not be undertaken, at least unless export demand is well assured. Therefore, projects in which the optimum size of the producing unit is large should be closely scrutinized by the Embassy before approval is given and, particularly so, if the promoters are depending upon exportation to neighboring republics in order to attain low costs and thus successfully compete against importations from the United States or European suppliers.
While the difficulty of applying these criteria to specific cases is clearly recognized, nevertheless our Embassies have been given the responsibility for an initial screening of projects and should, in each instance, make as thorough a study as pressure for prompt action and the availability of personnel permit. A thorough study of a project, even though such a study occasions delay, is considered definitely preferable to hasty action which in turn may necessitate numerous inquiries from the Department on specific questions. Furthermore, our Embassies must also be relied upon to interpret to other nations the underlying philosophy of our accepted commercial policy, in particular as that policy relates to industrialization of the other American republics. While the direct control of industrial expansion does not rest in the hands of the United States Government nor its representatives abroad, nevertheless it may be possible to avert the creation of uneconomic enterprises through utilization of the means provided by [Page 131] the numerous contacts of the Embassies with government officials and leaders in the business community for influencing future decisions.