825.2542/9–3053

Memorandum by the Director of the Office of South American Affairs (Atwood) to the Director of the Office of Defense Mobilization (Flemming)

secret

Three formal meetings were held with the representatives of the Chilean Government on September 21, 23, and 28.1 A formal meeting with representatives of Anaconda and Kennecott copper companies was held on September 24.2

The United States position as developed in the meetings with the Chileans emphasized that US agreement to purchase Chilean copper at the market price prevailing at the time of delivery was based on the condition that the Chilean Government: (1) agree to adequate measures to prevent sales of copper to the Soviet bloc; (2) agree to work out mutually satisfactory arrangements with the American producers which would not jeopardize their investments and would assure the availability of Chilean copper to the United States; and (3) agree to approve the sale of copper from current production at market prices.

These conditions were spelled out in detail and the point was emphasized that Chile had indicated on its own accord the decision to take these actions at the time the proposal was made to the United States regarding the purchase of surplus Chilean copper.

The Chilean representatives agreed that Chile had intended to do the things outlined since they were required to strengthen the Chilean economy. However, during the two-week period which MacKenna spent in Chile awaiting instructions from his Government, the political atmosphere in Chile had worsened and the “Commies” were embarrassing the Chilean Government to such an extent that it could not agree to have any “conditions” attached to the United States purchase. To be able to justify a sale to the United States rather than to accept better offers from the USSR and others, Chile would have to receive a “few cents” more per pound than the market price (it was later indicated that 32 cents was the figure the Chileans were thinking of).

If the United States could agree to this overprice, Chile would agree to: (1) prevent sales to the Soviet bloc by taking administrative action without publicity; (2) permit the current production of copper to be sold at market prices but under existing procedures; and (3) work out a mutually satisfactory arrangement for a copper-contract law with the copper companies as soon as politically possible following the purchase of 100,000 tons for the stockpile.

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The US reply to the “new” Chilean proposal and the Chilean “political” justification for the drastic changes requested was firm, perhaps a little rough, and limited to the original US position. Stress was placed on the necessity of a competitive market price for Chilean copper if Chilean production and sales were to continue and on the complete lack of any sound justification for the US to consider paying more than the market price. Obvious reasons for no sales of free world copper to the Soviet bloc were repeated and no doubt was left that adoption by Chile of procedures to prevent such sales would be a sine qua non of any agreement. The desire for a mutually satisfactory settlement with the US copper companies was placed in its perspective, i.e. as a part of the need for a stable, productive and balanced economy in Chile.

The Chileans, apparently recognizing that their request for an overprice would be resisted, countered by asking for an agreement to extend loans as a means of supporting the Chilean Government in its difficult decision not to sell to the bloc. The Chileans were informed of the difficulties involved in obtaining possible loans. A balance of payments loan was described as currently out of the question and furthermore not in line with the objectives of the negotiation. Any request for a development loan would, of course, have to be considered on the regular bases with which the Chilean representatives were fully cognizant. The final decision would have to be made by the Bank and the NAC, based on the soundness of the project submitted. In any event, a development loan would not be considered as a “substitute” for the extra price requested on the copper purchase.

Probable Final Chilean Negotiating Position Under Current Conditions

As a result of the arguments submitted by the US negotiating team, tacit agreement has been reached that the stockpile sale will be made at market price (30 cents). On its part, Chile will agree to take administrative action, without publicity, to prevent sales to the Soviet bloc by adoption of the IC/DV procedure.3 It will announce publicly, after the US purchase of 100,000 tons of accumulated copper for the US stockpile, that the next step required to strengthen the copper industry and enable Chile to sell at competitive prices will be a new arrangement with the US copper producing companies re taxes and exchange rates. Chile will agree, after the US purchase, to have Chilean copper sold at the competitive market price under existing Chilean procedures. In short, they will substantially meet all our conditions except the one for a mutually satisfactory arrangement with the American companies prior to consummation of the transaction.

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It is not believed possible that the Chilean negotiators, under instructions from the present Chilean Cabinet and in view of the political atmosphere in Chile, could agree to a new contract law with the American producers as a prerequisite to the stockpile sale. We are currently exploring with them the possibility of having Chile take unilateral action on taxes and the exchange rate, leaving the negotiation with the companies and the passage of a contract law to a later stage.

Advantages of an Agreement and Risks of No Agreement Under Current Conditions

An agreement under present conditions without a change in the current status of the American companies would have only limited value. At the most, the US would obtain a Chilean reaffirmation, although secret, not to sell copper to the Soviet bloc, and current production would be sold at market prices. Such an agreement (under current conditions) would have little or no value to the US copper companies and would not succeed in having the Chilean Government face up to the facts of life and reorient its extremist, socialistic economic and political policies which are associated with anti-US demagogery and increasingly unsatisfactory relations. The risks of an unproductive agreement as well as the risks of failure to reach agreement must however be faced—Such risks include continued government policies favoring government ownership of industry and government control or ownership of trade, transportation, communications, and agriculture.

With regard to the risk of nationalization, the US copper companies, with over one-half billion invested in Chile, are willing to take the risk resulting from a break-down in the negotiations. They will not give their approval to an agreement which does not improve their relationship with Chile and would go along without protest only if it were determined that the US national interest would be really served by such an agreement.

With regard to the political advantage of an agreement under current conditions, it is hard to see how much can be achieved unless the agreement is productive in reorienting Chilean government policies. This is not likely to occur as long as the present Cabinet remains in control. An unproductive agreement or no agreement seem to carry about equal risks.

With regard to the value of the secret reaffirmation not to sell to the bloc, it must be measured in the light of previous Chilean Government actions. (a) The Chilean Government signed and ratified a Mutual Assistance Agreement which contains a promise that Chile will take measures to regulate commerce with nations which menace the security of the Continent. (b) During negotiations the Chilean Ambassador showed the US negotiators a telegram4 from the Foreign Minister of Chile which stated that the President of Chile and his Cabinet had [Page 727]determined that regardless of the derogation of the Chilean decrees halting sales to the bloc, no sales of copper would be made to the Soviet bloc. Although this message was sent during negotiations, the Ambassador said it was not contingent on an agreement being reached.

The opinion of the US copper companies, based on reports which they consider very reliable, is it is practically certain that Chile did not receive an acceptable offer from the USSR and there is little chance of any appreciable sale to the bloc. However, there are conflicting reports. The negotiating team believes that the risk of sales to the bloc remains ever present, despite Chilean promises and assurances.

Under conditions currently existing in Chile and barring determination by the President to orient the Cabinet away from the extreme popular Socialist and Commie slant, there does remain a risk that an overt sale may still be made to the Soviet bloc. The best insurance against such sales would be the sale of Chile’s full current production through the American producers at market prices and the purchase of the present accumulation by the US Government. A new accumulation of unsold copper or a sharp price depression would increase the risks regardless of what the US does with respect to the 100,000 tons now under discussion.

Pending instructions from you we intend to continue negotiations with the Chileans with the object of attempting to work our some acceptable formula along the lines of getting the Chilean Government to take action with respect to the companies without necessarily involving direct Chilean-Company negotiations to which the Chileans seriously object at this time.

  1. Minutes of each of the formal meetings between the U.S. and Chilean representatives, and extensive related documentation, are in file 825.2542 for 1953.
  2. A memorandum of conversation at the referenced meeting, dated Sept. 24, 1953, is in file 825.2542/9–2453.
  3. For information concerning the Import Certificate/Delivery Verification (IC/DV) procedure, see the Department’s circular airgram, dated Apr. 16, 1952, p. 186.
  4. Not further identified.