Memorandum by the Assistant Secretary of State for Inter-American Affairs (Miller) to the Assistant Secretary of State for Economic Affairs (Thorp)2
Problem: To forestall a sharp price rise in Chilean copper and prevent diversion of Chilean copper for non-defense purposes.
The Chilean Government is presently confronted with a rising tide of opposition extremely critical of the Government’s failure to obtain higher prices for copper and for its failure to carry out development programs long promised by the Government to increase production and raise standards of living in Chile. The attack on the Chilean Government is by extreme nationalists, leftwingers and communist sympathizers and has a strong anti-U.S. bias. In addition there has been a build up of considerable anti-U.S. feeling in conservative and middle class circles based primarily on the handling of the copper question. Most Chileans view the reimposition of the copper tax3 as an unfriendly act on the part of the U.S. which had no economic justification. At the present time the position of the government coalition is precarious and it may be overthrown for failure to halt inflation and secure a higher price for copper which would help balance the budget and aid industrial development.
The Government of Chile has cooperated fully with the U.S. and with American copper companies in holding the price of copper at 24½ cents in spite of a general rise in other raw material prices during the last year. The Chilean Government has also cooperated in preventing copper from being diverted to countries behind the Iron Curtain. Increased pressure has developed during the last six months to allow Chilean copper to be sold to neighboring countries and certain western European companies at prices ranging from 30 to 40 cents per pound. With the price freeze now in effect in the U.S. the pressure to divert copper to markets paying higher prices will increase. Pressure to raise the ceiling price in the U.S. will also develop, although the Chilean Government has indicated that it appreciates the desire of U.S. to hold the line.
A fairly obvious way to stop diversion of Chilean copper and to obtain maximum quantities for the U.S. is to raise the price and enter [Page 1240]into centralized government purchasing. There are, however, at least two convincing arguments against such action.
- The cost of raising the price one cent per pound on Chilean copper imported into the U.S. is approximately eight million dollars per year. If the price on copper produced in the U.S. is also raised one cent per pound, the additional cost is approximately eighteen million dollars per year.
- A modest rise in the price of copper (one to three cents per pound) will not of itself offset the attacks on the Chilean Government and hence will not facilitate all out cooperation with the U.S. which is essential in time of emergency.
The national interest of the U.S. requires that the price of Chilean copper be held to 24½ cents per pound or very close to it, and of greater importance, requires that every pound of copper that can be produced in Chile be utilized in the war effort. This means all out cooperation on the part of the Chilean Government to (1) facilitate production without interruption from strikes or disorders; (2) ensure full use of transportation facilities, port facilities and shipping space; (3) take security measures to protect copper production and transportation facilities from sabotage; (4) institute internal regulations to guarantee the most efficient use of copper by Chilean companies and to prevent diversions to the Soviet Area or to other countries for nonessential purposes.
In order to facilitate all out cooperation between Chile and the U.S. it is necessary to consider the overall problem facing the Chilean Government. This involves a careful analysis of the scope and objectives of the development program which the Chilean Government has been and is engaged upon. Briefly stated, the Chilean Government plans to break the country’s previous dependence on two export commodities, nitrate and copper, whose fluctuating prices tended to produce either a feast or famine and both of these extremes led toward inflation. This dependence is to be broken by a diversification of industrial production and a growth in commercial transactions. One outstanding product of this new program is the recent opening of the steel mill in Huachipato whose entire estimated production for 1951 (over 200,000 tons) has already been sold. Another example designed to decrease dependence on imported materials, was the establishment of a staple fibre plant near San Antonio to help build up a Chilean textile industry.
Although the Chileans have made considerable progress in the past decade they are still far from a balanced economy and feel that it is essential for political and social reasons that they drive ahead with their program of economic development. If the Government were to accept a freeze on the price of copper without the right to divert considerable quantities to higher priced markets and at the same time abandon its development program it would probably lose effective support very quickly. This program cannot be accomplished without [Page 1241]the investment or loan of foreign capital. While the Chileans have had great success with the Eximbank, the essential projects before the IBRD for almost four years were not approved because of the Bank’s feeling that Chile had failed to combat inflation effectively. The Chileans’ reply is that they are painfully aware of the problem of inflation and have taken such measures as were considered possible but that the most effective solution is to be found in increased production and that loans are needed in order to achieve effective results rapidly. They also point out that Chile has not defaulted on debts, and because of continued prospects for dollar income, their balance of payments position will be relatively strong. Chile also feels and has stated that the development program is geared to dovetail as closely as possible with the U.S. defense mobilization program.
The attached annex4 contains a detailed description of six of the projects included in the development program for which the Chilean Government requires financial assistance from outside sources. In addition to these projects the Chilean Government has carried on extensive development projects in the fields of agriculture, fishing and industry which have been financed without recourse to financial assistance from outside sources.
The development program for which Chile requires outside financial assistance includes the following major projects:
- Expansion of Steel Mill: Purchase and installation of additional equipment, primarily a 750 ton Mixer, will eliminate production bottlenecks and enormously increase the capacity of the mill with an investment of about eight million dollars and 253,000,000 Chilean pesos.
- Modernization of Coal Mines: To avoid huge coal deficits by 1956, Chile must start now to increase production in the Schwager and Lota coal mines and to seek additional deposits. Cost—about eleven million dollars and 1,068,000,000 Chilean pesos.
- Cellulose and Paper Plants: Chile now imports cellulose and newsprint though it has excellent forest resources. It can set up a cellulose mill (Kraft pulp plant) and a newsprint paper mill which will make the country self-sufficient at a cost of eleven million dollars and 400,000,000 Chilean pesos.
- Irrigation: Two particular irrigation projects are under study which would increase the total available arable land and improve other land now under cultivation. The Rio Elquf and Nilahue Valley projects can be begun with about three million dollars and eventually may require a total of thirteen million dollars, with peso costs of more than 600,000,000.
- Power: Two new generating units at Los Cipreses and La Isla, 30,000 KW each, can be installed for approximately three and one-half million dollars and 234 million pesos. A power plant at Lake Calaf-quen can be built for the Temuco–Valdivia area, with ultimate capacity of 72,000 KW at a cost of U.S. $4.2 million and 144,000,000 pesos. A power house with a 10,000 KVA generator can be built on the [Page 1242]Mostazal River for $1,050,000 U.S. and 76,000,000 Chilean pesos. Total cost for all projects U.S. $8,750,000 and 454,000,000 Chilean pesos.
- Nitrates: A request will probably be received within the next few months for a dollar loan to the nitrate industry to modernize production methods in the province of Tarapacá. This will enable Chile to increase production while decreasing costs, thus putting Chilean natural nitrates in a more favorable position to compete with synthetics in the world market. Estimated size of the loan, approximately fifteen million dolllars, but this figure is only approximate. The Chilean industries are now conducting lengthy, detailed studies of their needs.
It is recommended that the problem of holding the price on Chilean copper and preventing its diversion, in excess of the national needs of Chile, be discussed as an integral part of Chile’s overall development problems.
Specifically it is recommended that:
- The Eximbank give active consideration to (a) the extension of credit to Chile to cover the steel mill project,5 the cellulose project and the coal mines project. These projects contemplate a loan totalling approximately thirty million dollars. (b) A “line of credit” of thirty million dollars be granted to Chile by the Eximbank under which she can present over a period of several years specific loan requests for hydroelectric projects, nitrate projects and irrigation and agricultural production projects.
- Immediate consideration be given to arrangements fo a long term (five to eight years) contract to purchase Chilean copper at 24½ cents per pound and prevent diversion to the Soviet Area and for purposes not essential to the defense effort.
- Action be continued to have the two cent duty on imported copper removed.
- Files of Assistant Secretary of State for Inter-American Affairs Edward G. Miller, Jr., for the years 1949–1953.↩
- Source text is an unsigned copy; original not found in Department of State files.↩
- Reference is to the United States excise tax on imported copper. After having been suspended since 1947, the tax was reimposed on July 1, 1950. For further information, see the Policy Statement for Chile, infra.↩
- Not found with the source text.↩
- See the editorial note, p. 1284.↩