825.2542/3–3152

Draft Position Paper Prepared in the Department of State 1

secret

Departmental Position Concerning Chilean Copper Negotiations

Problem

The Department member of the team designated to negotiate with Chile has been asked what course it [sic] recommends.

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Discussion

1.
Chile has asked for renegotiation of the agreement under which 80 percent of the production of the large mines remains under control of the companies and the remaining 20 percent is controlled by the Chilean Government. The agreement had no explicit time period, but it is agreed that Chile could unilaterally renounce it after one year (mid-May) without violating its spirit.
2.
Chile is in a strong bargaining position:
(a)
Although the world free price for copper has weakened lately, it is still substantially over 27½ cents.
(b)
We depend on Chilean copper to provide some 15 to 20 percent of the supply on which our second and third quarter CMP allocations are based. We could not forego Chilean imports without serious impact on the defense effort and our basic economy. In fact, we are in serious need of increased supplies.
(c)
Chile might not be able to sell more than its 20 percent at prices much above 27½ cents but it could obtain more governmental revenue by seizing what is left of the companies’ profits, either by tax action or outright expropriation. The present government is unlikely to take drastic action along these lines, but the legislature is quite capable of doing so.
3.
The next move is up to the United States. Mr. Larson agreed to “think it over” and call the next meeting. We are not likely to obtain any advantage by delay:
(a)
The present level of deliveries is unsatisfactory.
(b)
Only a month and a half remains before Chile could renounce the present agreement with a clear conscience.
(c)
Further delay is likely to arouse indignation and increase the likelihood of punitive action by the legislature.
4.
We are forced to choose among several alternatives, none of them attractive.

Two theoretical alternatives can be rejected without serious consideration. The first—holding firm with no concession to Chile—is impracticable in the light of the strong Chilean bargaining position mentioned above and our need for increased copper supplies. At the opposite extreme there would be the possibility of the United States offering a long term contract which would support Chile’s copper price for some time to come. In view of some indications that the world price is weakening, this might be sufficiently attractive to Chile to persuade them to settle for 27½ cents, or possibly even lower. On the other hand, if world free prices should go below 27½ cents, the United States Government would be incurring a very expensive liability. None of the usual arguments for long term contracts, such as their usefulness in stimulating additional production, is particularly applicable. The United States would do better to seek a solution which would not [Page 674]prevent the world price from declining to the United States domestic price level whenever supply and demand will permit.

If these two alternatives are eliminated, the three principal courses worth further exploration are:

Alternative A

Buy some additional copper from Chile (say 10 percent of the large line production) at a price well above 27½ cents.

Alternative B

In exchange for Chilean agreement to permit the companies to dispose of 90 percent of their production, revise the price in the agreement upward with the understanding Chile would sell all her copper at that price.

Alternative C

Same as alternative B but permit Chile to sell the remaining 10 percent and the small mine production at higher prices.

Appraisal of Alternatives

Alternative A has the possible advantage of postponing an increase in the price of copper being sold by other countries at 27½ cents. But it seems unlikely that this advantage would be more than temporary. Its two principal disadvantages are that it would require Government purchase, at a loss, and that it would improve the bargaining position of Chile in the sale of its remaining copper and add to the economic difficulties of Chile’s European customers.

Alternative B would have the disadvantage of immediately raising the price of the remaining 27½ cent copper in the world. On the other hand, it would leave market forces free to bring that price down as supply improves or demand slackens. It would not require United States Government purchase, at a loss to the Government. It would ease the problem of Chile’s European customers.

Alternative C would avoid United States Government purchase but might retard the effect of supply and demand in reducing world prices and would transfer the burden to Chile’s European customers.

If the total cost to the United States taxpayers and consumers were the same for all three alternatives, alternative B would clearly seem to be the best. It would probably establish a single price outside the United States. It would make it possible for Chile to place its entire production under international allocation. It would eliminate a cause of friction between the United States and other customers of Chile. It would make it unnecessary for the United States Government to purchase foreign copper and would probably best protect the future position of the companies by reestablishing their right to maintain their normal commercial outlets.

It is impossible, however, to determine the respective costs of the three alternatives except by negotiation.

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Recommendation

That the United States proceed with negotiations to determine which alternative would cost United States consumers or the United States Government the most, and then decide which alternative, if any, is acceptable.

In sounding out the Chileans, the following position should be made clear:

(1)
We would not necessarily accept any increase but want to learn more precisely the price Chile would demand under specified conditions.
(2)
Under all three alternatives the following conditions would apply:
(a)
Chile would pass the tax legislation promised last spring.
(b)
Chile would agree not to withhold any of the “backlog” now owed by the companies.
(3)
In addition, the following conditions would apply to the specified alternatives:
  • Alternative A. Chile would not object to the sale by American companies of any part of their 90 percent to their traditional customers.
  • Alternative B. Chile would place all production under IMC allocation.
  • Alternative C. Same as alternative A.

No final decision on the three alternatives should be made until the negotiators are convinced they have obtained the best Chilean offer on each. Nevertheless, it should not be assumed that the decision as to which alternative we should accept should be based entirely on the average price of Chilean exports to the United States. It may be that the advantage of avoiding cost to the taxpayer and the other advantages of alternative B would argue in favor of its selection even though the average price were somewhat higher than for either of the other alternatives.

  1. Drafted by Deputy Director of the Office of International Materials Policy Evans.