825.2542/8–2853

The Acting Secretary of State to the Director of the Office of Defense Mobilization (Flemming)1

secret

My Dear Mr. Flemming : I refer to your letter of August 28, 1953,2 addressed to the Secretary of State expressing the consensus of the Defense Mobilization Board that it was in the national interest to purchase up to 100,000 tons of copper at the market price prevailing at the time of delivery provided that Chile agreed not to sell copper to the Soviet bloc and that it “should agree to eliminate present economic practices which jeopardize American interests in that country and render it an unstable source of US copper supply”.

During the months which have elapsed protracted negotiations have been conducted between the United States Government and the Government of Chile concerning the conditions under which the United States would be willing to purchase for the United States stockpile 100,000 tons of Chilean copper. Simultaneously, but independently, the Government of Chile carried on negotiations in Santiago, Chile, with the representatives of the two United States owned Chilean copper companies. The latter negotiations have culminated in preparation of the attached bill3 to be submitted to the special session of the Chilean Congress when it convenes on March 2. Though the bill is not as favorable a solution of the problem as the Department would have desired, it does embody the essentials of the principles which were put forward by the United States negotiators. If enacted in its present form, the bill will tax income rather than production, provide a non-discriminatory exchange rate, eliminate the price differential which now goes to the Chilean Government, make copper available to United States consumers at market prices, and repeal the present laws which place control of sales under the Chilean Government instead of the American producers. Although the basic tax rate of 75% is very high, it represents a considerable reduction for the American companies whose total taxes now range between 84 and 94%.

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It is the consensus of observers most familiar with Chilean economic and political problems, including our Ambassador in Chile, that this is the best bill obtainable under prevailing conditions and that this is the strategic time for the United States to purchase the accumulated copper. It is our judgment that in this way we will have derived the maximum advantage inherent in United States willingness to purchase the copper stocks, and any effort on our part to force further concessions, or delay the purchase, would be likely to operate against the best interests of the United States and of the American producing companies. Should we further postpone purchase of the copper, it is almost certain that the bill will either not be enacted or that seriously damaging amendments would be passed. Chile’s copper problem and its general economic situation would undoubtedly take a sharp turn for the worse and cause renewed agitation for nationalization of the American-owned mines and for sales of copper to the Soviet bloc. If the Government should be overthrown in the ensuing economic crisis, many Chileans would blame the United States. There would be much anti-US sympathy for Chile in Latin America and the Communists would be provided with a powerful propaganda weapon.

I do not wish to contend that all the arguments are in favor of the immediate purchase of the copper. The unfavorable aspects of the proposed legislation are recognized; it is impossible to give absolute assurances that the bill will be enacted in its present form; the Congressional debates are likely to produce strong anti-US propaganda from the opponents of the measure, and we cannot be sure that the Government will not be overthrown in the near future despite our actions. Unfortunately there is no agreement between the two American producers on what the United States should do at this time. On February 19 the Board of Directors of the Kennecott Copper Corporation rejected the legislation as unsatisfactory and inadequate from that Company’s point of view. However, this Company has not taken a stand with regard to the United States course of action. It neither approves nor disapproves the United States purchase of surplus stocks. The President of Kennecott has indicated informally that he will not pass judgment on the decision of our Government. On the other hand, the Chairman of the Board4 and the President of the Anaconda Copper Mining Company—whose production in Chile is by far the largest—traveled to Washington on February 23 for the express purpose of urging the Department of State negotiators to make the purchase at once in order to facilitate passage of the bill.5

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It is my opinion that Chile’s action to date, though it is still to be completed, constitutes agreement to the maximum degree feasible, in view of the balance of authority between the executive and legislative branches of the Chilean Government, for purposes of eliminating the present economic practices toward which the Defense Mobilization Board directed its authorization of August 28. The proposed legislation has received the unanimous endorsement of the Chilean President and the Cabinet. In addition, the President has the power to veto specific provisions in the law and has promised to use the veto against any undesirable amendments which may be introduced by the Chilean Congress. The Chilean Senate, in advance consultation with the Administration, recommended this type of legislation. Chile has consistently abstained from copper shipments to the Soviet bloc and has also reassured the United States that it will institute the recommended IC/DV system designed to strengthen safeguards against the shipment of strategic copper to the Soviet bloc. The bill itself by returning control of copper sales to the American companies would also greatly improve the possibility of preventing sales to the Soviet bloc in the future.

In the long-range interests of the United States and of the American companies concerned, I recommend that the purchase of 100,000 tons of copper for the strategic stockpile be completed at once at the prevailing market price of 30 cents per pound delivered in the United States. Since the bill will probably be presented to the Chilean Congress on March 2, it would be most desirable that the General Services Administration be authorized to sign a contract with the American producing companies immediately.

Sincerely,

Walter B. Smith
  1. Drafted by Mr. Atwood.
  2. Ante, p. 723.
  3. No attachment was found with the source text.
  4. Cornelius Kelly.
  5. A memorandum of conversation between officials of the Anaconda Copper Mining Company and the U.S. negotiators, dated Feb. 23, 1954, is in file 825.2542/2–2354.