Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

CH–1. Despatch from the Chargé in Chile (Belton) to the Department of State¹

No. 957.

Santiago, March 21, 1958

REF

• Embdesp. 864, February 28, 1958;² Embdesp. 874, March 4, 1958;³ Embdesp. 952, March 20, 1958.⁴

SUBJECT

• Embassy Views on Problems Resulting from an Increase in U.S. Copper Import Tax

The Embassy already has submitted press criticisms regarding the proposed increase in the United States copper import tax, and a note from the Minister of Foreign Affairs expressing concern about this proposal. The Embassy naturally also is concerned about the proposal and foresees any such import tax causing serious problems in United States-Chilean relations. The following are some of the major problems envisaged.

With copper being Chile’s most important single export, and with the production of about 90 percent of that copper being under the control of two very large American companies, the issue of “copper” always is a major factor in United States-Chilean relations. Because the industry is so important to Chile and because it is almost completely foreign-owned, copper problems are extremely susceptible to local political exploitation. Added to these permanent factors is the complication that 1958 is a Presidential election year in Chile. Moreover, 1958 is going to be a very difficult year for Chile because of drastic drops in tax income and foreign exchange receipts from the copper industry as a result of the low international price of copper (see below for a discussion of this point).

Considering the current precarious status of the Chilean economy, the application of any import tax by the United States on Chile’s leading export will have a deadly psychological effect locally. The imposition and increasing of the import tax will be even more serious. The Embassy believes that the United States import tax will become a local political issue which will be exploited to extremes with little regard for economic facts (such as that in 1956 only 34.4 percent of Chile’s “great mining” copper actually was sold in the United States, and in 1957 only 14.7 percent). The average Chilean is not acquainted with the latest statistics of the copper trade, and if all he hears and sees is that the United States is impeding the sale of Chilean copper in the United States, that is what he will believe.

There can be no doubt that the important leftist political parties of Chile will be glad to have such an issue handed to them, on a copper platter so to speak, and also that these parties will utilize the issue as widely and loudly as possible. The Presidential campaign thus far has centered primarily or personalities, so that a new issue will be most welcome by those left-wing parties who can make use of it to whip up, and capitalize on, anti-United States sentiment within the country.

The Embassy already has expressed its concern over the possibility of an extreme-left victory in September, particularly if economic conditions worsen here. Therefore, the Embassy believes that the proposed United States copper import tax of 4 cents cannot possibly help in the achievement of United States objectives in Chile but could seriously endanger them if the tax issue were to be instrumental in electing a far-left President.

The second serious problem envisaged by the Embassy is that if the United States increases its protection against copper imports, it will become much more difficult to maintain Chile’s cooperation in maintaining embargoes against shipment of strategic materials to the Soviet Bloc. If the United States, by raising import taxes, in effect indicates that Chilean copper is unwelcome within its territory, Chilean cooperation on the embargo policy undoubtedly will be subjected to great pressure and might well be abandoned. Certainly United States moral suasion for maintenance of the cooperation policy would have a hollow ring. There has been a great deal of talk in recent years of “trade, not aid” in United States foreign policy. In the eyes of Chileans, if we cannot grant Chile more aid, the least we can do is let them trade. But, if Chile must seek new markets for copper displaced from the United States market, where can this copper go? It cannot go into the Western European market. That market already is surfeited and suppliers, including Chile, have cut back production. Where then, is there another market?

The siren song of sales to the Sino-Soviet sphere long has been heard in Chile, despite the obvious lack of practical results from previous attempts to sell large quantities of copper. The Embassy already has reported the increasing amount of local attention being devoted to possible Bloc sales of copper wire (see Embdesp. 845, February 21, 1958⁵), and the press criticisms submitted (Embdesp. 874, March 4, 1958) make frequent reference to free trade in all forms of copper. It may well be that the Soviet Bloc really does not need Chilean copper, and would not buy substantial amounts. But if a United States import tax of 4 cents is placed on copper, the already growing pressure in favor of unlimited sales to the Bloc could well become an irresistible avalanche. A more serious possibility is that even if the Soviet Bloc does not urgently need additional copper, it might well decide that 1958 is the key moment for substantially increasing Chilean-Soviet trade relations. This would present obvious political as well as economic problems for the United States. The Bloc might seize this as a golden opportunity to acquire political ties with Chile at a relatively cheap price through purchase of copper even if above its own immediate needs.

The final point which the Embassy feels must be given weight in considering possible repercussions from the increase of the copper import tax to 4 cents is in reference to the two American copper companies doing business here with a combined total investment in the neighborhood of US$600 million. Because of this “Yanqui” foreign-capital nature of Chile’s copper mining industry, there is a great deal of unfriendliness in Chile towards the companies. Only after laborious efforts, in which this Embassy played a significant role, was a new arrangement arrived at between the Chilean Government and the American companies, in the form of the New Copper Law, No. 11,828 of May 5, 1955. This law established new tax rates for the companies and did away with discriminatory exchange rates, previous treatment accorded the companies having reached near-confiscation levels. The law also returned control of copper sales to the companies. In return for this new deal from the Government, the American companies particularly Anaconda, began large new investment programs aimed at increasing copper production.

The New Copper Law never has been accepted by large sectors of the Chilean public and political body, on the time-worn but still very popular basis that it was a “sell out” of Chile’s natural resources to foreign interests. The Law has come under increasing attack since mid-1957, when copper prices continued their unchecked decline and rumors began circulating about a possible reduction in production. Now, with prices still lower and Government income from the tax levied on the companies’ profits down greatly, criticism of the New Law is increasing.

The grim realities of Chile’s reduced income from copper sales may be seen in recent statistics. In 1956, Chile received a total of US$370,100,000 in hard currency exchange. Of this, the large copper industry contributed US$196,420,000, or 53 percent of the total. Of the total copper payments, US$128,610,000 was in the form of income tax payments to the Government. In 1957, Chile received a total of US$313,200,000 in hard currencies, with the copper industry providing $143,044,000, or 46 percent of the total. Of the total copper payments, only US$73,602,000 consisted of income tax to the Government. For 1958, the two American companies estimate that their total contribution in foreign exchange to the Chilean economy will be about US$109 million, of which only US$31,622,000 will be income tax paid to the Government. The Embassy estimates that the $109 million will constitute 46.5 percent of hard currency receipts for 1958.

If the imposition of a 4 cent duty by the United States on copper imports aggravates Chile’s loss of income (or if people here think it has, which is the same in political effect), the Embassy believes that political pressure will increase for a modification of the New Copper Law in order to get more money for the Government. In fact, the Embassy understands on a very confidential basis that such a proposal already has been made in a paper prepared by the Department of Studies of the Central Bank. Taking into consideration the catastrophic drop which has occurred already in Chile’s hard currency receipts, action by the United States which results in cutting, or is interpreted as cutting, Chile’s dollar income still further is bound to give rise to widespread anti-American feelings. This would come at a time when the feeling in Chile already is that the United States is not as sympathetic as it should be towards Chile’s current financial difficulties and is not helping Chile to the degree which Chile would expect on the basis of the United States’ expression of interest in the well-being of the Chilean economy.

Modification of the New Copper Law could result in higher tax rates on copper earnings, discriminatory exchange rates, or both, plus the Government’s taking over control of sales of copper, as was the cast from 1952 to mid-1955. After all the difficulties encountered in obtaining the present Law and the very serious problems which existed for the United States copper interests in Chile, any change in the Law would be a serious setback to United States objectives in Chile.

The Embassy assumes that there is general agreement that the long-term strategic interests of the United States will be served best if Chile is developed as a dependable source of large amounts of copper. The American companies’ production dropped sharply in the years of unfavorable tax and exchange treatment, and important expansion programs were delayed. The effect of serious changes in the New Copper Law could well be that the companies, particularly Anaconda, might have to re-examine their long-range investment programs in Chile, the result being a decrease in Chile’s actual and potential copper production.

In conclusion, the Embassy wishes to add its strong belief that the increase in the United States copper import tax will also raise serious side problems in Chilean-United States relations. It could, for example, seriously affect or preclude passage of certain pending projects, such as the modification of the General Electrical Services Law to permit the American and Foreign Power Company to obtain a higher profit rate and enable it to carry out a large investment program, and the Government bill to permit private and foreign capital to develop Chilean petroleum resources.

The Embassy hopes that consideration can be given to means other than a copper import tax to provide relief to American copper producers, including possibly measures which have been suggested in other quarters, such as an outright subsidy or increased stockpile purchases. Such measures naturally would require the expenditure of United States funds, but at least the expense would not include damaging relations of the United States with a country in which we have high political, economic, and strategic stakes.⁶

William Belton
Charge d’Affaires a.i.

1. Source: Department of State, Central Files, 411.256/3–2158. Confidential. The U.S. Ambassador in Chile, Cecil B. Lyon, left his post on February 25, 1957; his successor, Walter Howe, who was appointed on April 22, 1958, presented his credentials on June 1, 1958.
2. The referenced despatch from Santiago, enclosed a translation of the note from the Chilean Foreign Office, dated February 25, 1958, expressing the Chilean Government’s concern with respect to the bill, S. 2998, then before the U.S. Senate, which proposed a copper import tax of 4 cents a pound. (411.254/2–2858)
3. This despatch from Santiago transmitted a summary of local press criticism during January and February of the copper import tax proposal. (411.256/3–458)
4. This despatch from Santiago summarized continuing press criticism of the proposed tax. (411.256/3–2058)
5. Not printed; 460.259/2–2158.
6. The Department responded in instr. A-210 to Santiago, April 11, 1958, that the Embassy should not undertake a detailed reply to the Foreign Minister’s note of February 25 concerning the proposed copper import tax, but rather should state that the observations made had been noted and that the Department would make every effort to assure they were given full consideration as regards any tariff action. The Department further stated that it generally agreed with the Embassy’s views regarding the problems that would arise in the event S. 2998 were enacted.
   The Department also commented on the bill, S. 3234, to repeal the current suspension of import duties on copper. Without congressional action, the suspension would terminate on June 30, 1958, at which time a duty of 1.7 cents a pound would be reimposed. The Department did not propose to press for continuance of the duty suspension after June 30, since “there is reason to believe such action would be defeated and the strength of its position against the major tariff proposal thereby weakened.” (411.256/3–2158)
   The bills were not enacted and the suspension was terminated as scheduled.