Foreign Relations of the United States, 1955–1957, American Republics: Multilateral; Mexico; Caribbean, Volume VI

208. Memorandum for the Files, by the Ambassador in Mexico (White)¹

Mexico City, June 10, 1955.

SUBJECT

• Call on the Minister of Finance, Señor Carrillo Flores

I called this morning on the Minister of Finance, Señor Antonio Carrillo Flores. I gave him first the messages from his friends in the United States, Messrs. Burgess, Overby, Holland, Garner, and General Edgerton. He was pleased on getting these messages.

I then reminded him that before I left he had asked me to look into which institution he should deal with in connection with the proposed railways rehabilitation loan; the World Bank or the Export Import Bank. I told him that I had done so and had discussed it in the Department, at the Treasury with Mr. Burgess and Mr. Overby, and with Mr. Garner of the World Bank, and General Edgerton of the Export Import Bank. General Edgerton authorized me to tell him that there is no reason why he should not take it up with the World Bank and to assure him that if they would do so the friendly disposition of the Export Import Bank toward Mexico would not be affected in the slightest degree. The Treasury officials had felt that the World Bank is perhaps the most appropriate institution because this type of financing falls more clearly within the scope of what the World Bank was set up for. The Department had the same view and Mr. Garner had expressed his readiness to go ahead with an investigation of the railroad situation in Mexico with a view to determining what is required and on what basis the Bank could enter into the project.

Mr. Carrillo expressed his appreciation on my bringing him this information. He said that he had been somewhat concerned in the matter because Senator Amorós has sent a representative to Washington to discuss another matter of financing, which, on inquiry from me he confirmed was for the rehabilitation in the United States of diesel locomotives now out of service, and this representative had been queried by officials of the Export Import Bank—not General Edgerton—as to why they were taking the major financing to the other institution. He then asked me if I would tell him unofficially and informally and as a friend, what I would do in the circumstances. I told him that I would open negotiations with the World Bank. Mr. Carrillo said he would report this at once to the President because the President was concerned that they should do nothing that would upset their relationship with either institution.

Mr. Carrillo then asked me what I thought personally is the function of the Export Import Bank in the Mexican situation. I told him that it was set up primarily to finance exports from the United States abroad in cases where commercial banking institutions were unwilling or unable to do so. Mr. Carrillo said he understood that that was the basis on which the Bank was set up but that there was talk at the Rio Conference² last year that the scope of the Bank’s activities was being enlarged and that it would be in a position to finance other than exports. He said that he had just had a long talk, before I came in, with Mr. Chavez, the Minister of Hydraulic Resources, regarding obtaining funds for irrigation purposes. This work is very important to Mexico but Mexico does not have the resources to meet this situation and, hence, Mr. Chavez had discussed with him the possibility of getting funds from the Export Import Bank. Mr. Carrillo, in reply to inquiry from me, said that there is no construction machinery or material from the United States involved in this. This has to do with the El Fuerte project in northern Sinaloa near the Sonora boundary. I told the Minister that this was the first I had heard of this project, that it had not come up during the time I was in Washington, and that I was, therefore, unable to express an opinion in the matter.

I told the Minister that I had discussed the matter of a double taxation agreement while in Washington and had been told by Secretary Overby that the Treasury is perfectly willing to enter into negotiations on this matter and that any immediate delay is a purely mechanical one due to lack of personnel. I told him that Mr. Sauer, whom he knows quite well, who was working on these matters in the Treasury, has left the Treasury and gone back to the Export Import Bank. This leaves the Treasury shorthanded and also negotiations are presently proceeding with Colombia and Cuba and for that reason they would be unable to take on any new negotiations until the early autumn. They could probably do so in about October in Mexico, or perhaps a bit earlier if the negotiations are held in Washington. Mr. Carrillo expressed his appreciation on getting this information and asked if I could get for him, when concluded, copies of the arrangements come to with Colombia and Cuba. I told him that I would write to Washington regarding this.

I told Mr. Carrillo that Mr. Holland had asked me to say that he felt it would be advantageous to PEMEX to sell natural gas to the United States. I said it was our understanding that a contract was under consideration with a Texas company and that this agreement, if consummated, would net PEMEX over ten million dollars yearly. I said that this would seem to be very advantageous to Mexico with its necessity to get dollars and especially to PEMEX and would relieve by that much the demands of PEMEX on the national treasury. I pointed out that natural gas does not do Mexico much good in the ground and that also certain of it is, in my understanding, lost into the air and that it would seem to be a very advantageous thing for Mexico.

Mr. Carrillo said he fully agreed and had supported this project and that he understands that the negotiations have gotten to the point where there is only one matter still not agreed upon, namely, who shall be the arbiter in case of a dispute between PEMEX and the American company. Mr. Carrillo said he would report this to the President and see if the matter cannot be pushed to a conclusion.

I then told the Minister that there are misgivings in Washington regarding the present investment policy of Mexico and the question of private ownership versus Government ownership. I told the Minister that I felt I did not need to explain to him that one of the primary objectives of the Communists in all Latin America is to break down the economies of the countries and that they feel that this objective can be advanced by having as many enterprises as possible taken over and run by the Government because they know that they will not be as effectively administered as if in private hands. This will all become a burden on the national treasuries and impair their economies. They are, of course, opposed to American investments in these countries as part of their general anti-American activities.

I pointed out to the Minister how disastrous had been Government administration of the railways in the United States during World War I. As a result, the railroads were promptly turned back to private management after the War and in World War II the railroads were left under private management with vastly better results then in the First World War.

I gave examples of my personal knowledge of the inefficient management of the Spanish railways and telegraphs by the Government, and also alluded to the fact that socialism had pretty well wrecked the British economy and just recently the British electorate had shown very good judgment in voting against a return to that system.

I said that since my return I had read an editorial in Excelsior stating that the solution of the power shortage in the Bajio region of Mexico is one that should be tackled by private interest in that region and that they should not look to the national treasury to do the job. I said that I felt pretty well convinced that had the power companies in recent years been given proper returns on their investments by rates that would not only provide for that but for plowing some profits back into the industry, there would have been no difficulty in getting private capital to put in the plant as necessary to prevent this power shortage.

Mr. Carrillo at once said that it is the policy of the Government to support private enterprise and that the Government has gone so far as to turn over the control of the Government-owned power installations at Chapala to local private interests. He sent for correspondence and showed me a letter he had signed by eight or ten leading citizens in that district saying they would accept to become directors of the company, being the majority of the board, and that they would raise locally twenty-two and a half million pesos for one part of this work, and two and a half million for another, for a total of twenty-five million pesos.

I told the Minister that this was very welcome news to me and I thought they were on the right track. I said the important thing now, if this policy is going through to success, is to convince the Mexican capitalists that from now on they will get wholehearted Government support in the form of proper rates and a minimum of harassment in conducting these enterprises. Because this has not existed in the past there has been a reluctance of Mexicans to invest in enterprises in Mexico, and hence, their money has gone abroad. What he has told me is very encouraging and I hope that it will be followed out effectively all down the line so that minor officials, who have considerable authority in many important matters connected with such enterprises, will not throw monkey wrenches in through harassing restrictions.

I told the Minister that while he and certain others understand the requirements of private enterprise I had a feeling that there is a considerable segment in Mexico, including a number in the Government, who do not appreciate that these enterprises cannot be set up and then just administered. First of all they need able management and rates which will permit them to pay a just return on the capital involved, and also a chance to have earnings that can be plowed back into the industry for maintenance and other very necessary purposes and to attract new capital for necessary expansion. Mexico’s is an expanding economy and as soon as people get confidence that they can go ahead with these private enterprises on a sound basis the capital will come in and the country should boom. I pointed out that the A.T.&T. in the United States has put in somewhere in the order of five billion dollars into expanding their plant and operations since the war. Just recently they have been financing a new debenture issue of some $660,000,000. In countries with an expanding economy these utilities, and railroads are among them, need constantly new capital to keep up with the demands and provide the services required. The A.T.&T. has been able to attract this vast amount of private capital because the regulatory bodies in the United States have permitted it rates so that it can continue paying its $9 a year dividend, which is what attracts new capital and also have something to put back into the business both for maintenance, depreciation and expansion.

The failure of Mexico to do so in the past has limited the growth of these companies and brought about power shortages, and the possibility to meet the growing demand for telephone and power service. I also told the Minister that I am trying to get some figures to show just what the American railroads have done in this respect since the war. All the large successful corporations in the United States, in whatever field of endeavor, put back a considerable amount of their earnings into expansion, modernization of equipment, maintenance, etc., and that is the reason our economy has gone ahead.

The Minister agreed with the above, thought that American companies in Mexico were expanding. I told him that that is the case. Their problem is to convince Mexican capital that it can safely and profitably invest in enterprises that will help Mexico’s economy. He said a number of Mexican enterprises are expanding. I said that that is, of course, very gratifying but that there is much more needed to put the Mexican economy on a sound basis.

As to any hostility to American capital, he said he did not know of such and I said that while I could not tell him a specific incident because it had escaped my mind, I understood that in a recent case a project was brought practically to completion when the Ministry of Economia vetoed any American capital coming into it. I also cited the Olin–Mathieson case³ where they were asked to take a minority interest. He said he understood that the Mathieson people were agreeable to that. I said I had not come in to discuss their matter at this time with the Minister; that I understood that they had in mind that the majority capital would be private capital and not Government capital. I said I could not see why the Government would want to get into the fertilizer business. He said it was his understanding that the Government was encouraging setting up of some smaller plants such as the one in collaboration with the Montecatini interests at Monclova⁴ and also some other smaller ones and that it was his understanding that there would be no Government capital in those enterprises. I said that that was all to the good but that it was my understanding that the Government was insisting on participation in the Olin–Mathieson project. The Minister said he would discuss this matter with the President.

In the course of this conversation I also mentioned that the new rates for the Tampico Power Company had been all agreed to and then at the last minute had been vetoed by the Ministry of Economia. Mr. Carrillo Flores said that this was purely because the President did not want rate increases just prior to the elections on July 3, but that immediately after the elections the rates will be granted. He said he had explained this situation to both Mr. Matson of American and Foreign Power, and Mr. Draper of Mex Light, and he thought they understood the situation.

I asked the Minister if he could tell me of any new developments in connection with the mining industry. He said that the difficulty there, of course, is taxation and he needs these revenues to balance his budget. However, he has recently suggested to the mining industry that the export taxes be used as an offset to their income taxes when they can show that this keeps them from making adequate profits. He said this would have a double benefit to the companies because they get offset from the United States Treasury for income taxes paid in Mexico and that they will also be able to use the export taxes to offset their income taxes in Mexico. He said that the mining industry was not very enthusiastic about this; they want the export tax repealed. He again stressed his need for revenues. I asked if this measure was to be made effective and he said it will be submitted to the Congress when it meets in September.

The Minister made the observation that the mining companies, nevertheless, are making money. I told him it was my understanding that this is being done at the expense of the economy and resources of Mexico because to make ends meet they have to mine just the higher grade ores and pass by the lower grade ores. I said I have been informed that when that is done it is rare, if ever, that those low grade ores are ever recovered. It is too expensive to do so and more expensive after the higher grade ores have been taken out than it would be to take out the lower grade ores initially and that this means that this part of the ore resources of Mexico are being dissipated and the ores will be exhausted at an earlier date. The Minister had no comment on this phase of the matter.

Finally, I told the Minister that Mexico’s import restrictions are causing considerable uneasiness in the United States. Higher duties are put on, quotas are put on, and also in some cases there is an outright prohibition of importation. I said that we fully appreciate the necessity for Mexico to conserve its dollar outgo and that measures to that effect are necessary, but it seemed often to be done in a way that appeared arbitrary and sometimes against the best interests of Mexico because restrictions are put on importation of certain products which are not produced in Mexico and which are necessary to Mexico’s economy. Often they are told to take inferior substitutes made locally which do not meet the situation. Cartons for the wet packing of frozen shrimp is one case. What is produced locally does not stand up under these conditions and it might very well affect the export of shrimp. Also, certain pumps have been excluded because other types of pumps are made in Mexico, but these other types often do not fit the requirements and, hence, industry is handicapped.

I emphasized again that we appreciate fully their need to husband their dollar resources, but I was wondering if it cannot be done in a little different way. I said that while we have not in practice been protesting all these measures, the Mexicans are very active in protesting any threat of raising taxes on Mexican products, such as lead and zinc, and asking for higher quotas on sugar and plywood, etc. I said that in Mexico an exporter from the United States often hears of these restrictive measures only after the decrees have been published. In the United States we follow a system of public hearings so that everybody affected can present their case. If they make a good case they often get what they want. Sometimes they don’t, but they at least have the feeling that they have had their day in Court and have been heard and have expressed their point of view. I said that only today I read in the Excelsior that the Mexicans were asking for a hearing on the matter of sugar quotas. They had also done so in the case of plywood, and I understand that the Tariff Commission, after hearing all parties and investigating the situation, had come to the conclusion that it would not be necessary for it to recommend more stringent quotas on plywood. Despite the fact that Mexico denounced our trade agreement some time ago, and, therefore, really has no standing in asking for the benefits of our system, they have been granted a hearing in a number of cases and they have certainly not been bashful in advancing both to Government officials and publicly in the press any grievances they think they may have. I said that what I should like to suggest would be that some such arrangement be instituted here by which these people could be heard in advance and not be confronted with a fait accompli. I said if they did not feel they could hold such public hearings, another possibility would be for the matter to be discussed quite unofficially and informally with the Economic Section of the Embassy. There would be no publicity about it, but it might be possible to work out procedures which would accomplish what the Mexicans want of conserving their dollar exchange and at the same time not penalize unduly certain exporters from the United States.

The Minister said that while this matter is really one under the jurisdiction of the Department of Economia, he would be glad to discuss the matter with the President. I told the Minister I was very happy that he would do this and added that certain Americans who had had dealings with Economia had the feeling that they had two strikes against them to begin with because of hostility there against American enterprise.

1. Source: Department of State, Central Files, 812.00/6–1055. Confidential.
2. The Meeting of Ministers of Finance or Economy of the American Republics as the Fourth Extraordinary Meeting of the Inter-American Economic and Social Council (commonly called the Rio Economic Conference) was held at Quitandinha, Brazil, November 22–December 2, 1954. For documentation, see Foreign Relations, 1952–1954, vol. iv, pp. 313 ff.
3. The Olin–Mathieson Co. proposed the construction of a fertilizer plant in the Tehuantepec area.
4. The Montecatini organization planned to build an ammonium phosphate plant at Monclova.