The Executive Director of the Bureau of Supplies, Foreign Economic Administration (Scheuer)31 to the Assistant Secretary of State (Clayton)

Dear Will: On February 3rd, Mr. Crowley wrote you in connection with the subsidization of Chilean copper and pointed out the desirability of examining all subsidies very closely before renewing any of them in future negotiations. He mentioned that it would be necessary to consider certain contracts in this connection, including those for the purchase of Chilean nitrates, and urged that no political decision be made to renew these contracts at subsidy prices before a very careful examination of the whole body of assistance which Chile is receiving from the United States in the fields of public purchase, Lend Lease, and other benefits.

The nitrate purchase contract will expire June 30th of this year. As I believe you know, this contract for the past three years has involved an outright subsidy by United States Government agencies totalling about $17,000,000. While we have never felt that a subsidy of this nature and amount was necessary on procurement grounds, the Department of State has on two separate occasions asked that we meet the demands of the Chilean sales company without attempting to negotiate a lower price.

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Our most recent study of the Chilean nitrate purchase arrangement shows that the revenue of the Chilean Government derived from our nitrate purchases is greater than our total subsidy. There is also convincing evidence that the producing companies could absorb the entire subsidy in a lower price and still be able to continue their operations. The fact that we must refer to indirect evidence rather than exact knowledge results from the extremely complicated interrelationship of the companies affiliated with the nitrate sales monopoly and the refusal of the monopoly, as reported by its American sales subsidiary, to open the company’s books for our inspection. This is the only case within the scope of our operations where we have paid to a foreign enterprise a subsidy running into millions of dollars without the privilege of examining its books and without exact knowledge of its operating costs.

As you know, Congress is examining the whole question of government purchases involving subsidies, and we are being required to justify such subsidies on procurement grounds. In the case of Chilean nitrates we shall certainly not be able to justify as essential continued purchases at present prices, and we shall not be able to justify any subsidy unless the Chilean Sales Corporation and the producing companies can prove the necessity for a subsidy by a full disclosure of their costs.

We believe that the subsidy can be eliminated in the 1945–46 nitrate year simply by turning the trade back to private channels. However, we recognize that Resolution XXI of Mexico City32 may obligate us to discuss the matter with the Chilean Government if they feel that this action would have a serious effect on their economy. It is our feeling that if the Chilean Government wants such a discussion and if continued public purchase should be decided upon, the Chilean Government should become a party to any new contract between the U.S.C.C.33 and the Chilean Nitrate Sales Corporation. Furthermore, the revenue derived by both the producing companies and the Chilean Government should be taken into account. Under these circumstances we would also want to include in the discussion consideration of the other economic benefits that are being extended to Chile by the United States and to the economic problems facing the United States as well as Chile. I am sure you will agree that this would be in harmony [Page 799] with the letter as well as the spirit of Resolution XXI of the Mexico City Conference.

This is, of course, a preliminary statement of our views. Arthur Gardiner34 and I will be very glad to discuss the matter further with you or any of your people, and I think it would be well to arrange for such a discussion soon. In the meantime I am sure you will agree that no commitments should be made to the Chileans regarding our future purchases of nitrates.

Sincerely yours,

Sidney H. Scheuer
  1. Mr. Scheuer was also Executive Vice President of the United States Commercial Company.
  2. For text of this Resolution concerning economic adjustment of the Hemisphere during the transition period which was to begin with the end of the war in Europe, see Pan American Union, Final Act of the Inter-American Conference on Problems of War and Peace, Mexico City, February-March, 1945 (Washington, 1945), p. 61.
  3. United States Commercial Company.
  4. Director of the Foreign Procurement and Development Branch, Bureau of Supplies, Foreign Economic Administration.