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

ETA–6. Memorandum from the Assistant Secretaries of State for Economic Affairs (Mann) and Inter-American Affairs (Rubottom) to the Secretary of State¹

Washington, April 10, 1958

SUBJECT

• Review of Latin American Economic Policy

You have asked for a review of our economic policies toward Latin America, with particular reference to commodity problem and to the Soviet economic offensive. Following an intensive re-examination we have prepared the following brief summary of the principal current facets of our economic relations with Latin America. We should like the opportunity of reviewing these matters with you as we share your concern at certain aspects of our economic relations with Latin America, and believe that the short review which follows represents the beginnings of some new directions which could ultimately improve these relations substantially.

Commodities and Trade:

The economies of many Latin American countries, and their balance of payments, depend upon the export markets for primary products. Coffee, copper, oil, lead and zinc are important export industries which are in difficulty. Our traditional aversion to international commodity agreements, [illegible in the original] international discussions of commodity problems which might imply a willingness to [illegible in the original] participating in such agreements, has given an impression of lack of sympathy for the economic problems of countries dependent upon primary products. It is important that the U.S. take steps to [illegible in the original] this impression. In the case of coffee, and lead and zinc, recommendations have been made that we seek agreement within the Government for the U.S. to participate in the multilateral examination of [illegible in the original] and demand trends in these commodities. This should have important psychological and political advantages, and might in the long-run promote [illegible in the original] readjustment between supply and demand.

In the case of lead and zinc we are also exploring within the Government various measures for assisting the domestic industry, including [illegible in the original] payments to producers. In the case of coffee, the producing countries have withheld substantial stocks from the market; current prices are still well above producers’ break-even points and should probably come down still further so as to reduce the incentive for expanding production. Unless and until there is a [illegible in the original] price break, Latin American pressures for such extreme [illegible in the original] import [illegible in the original] should, we think, be resisted, although we will continue to examine the legal and other questions involved [illegible in the original] to be prepared to set quickly in case of emergency. The long term question of whether commodity stabilization agreements are desirable in the case of these commodities is [illegible in the original] that can be reviewed in the light of future developments and of the results of our participation in the above mentioned international study groups.

Oil and copper present somewhat different problems. As you know, we have successfully resisted the imposition of mandatory controls over oil imports. Our consultations with Venezuela and Canada prior to the recent strengthening of the voluntary control system increased their understanding of our problem. In the case of copper our current information is that the Department may be able successfully to oppose the pending bills to increase the tax on imported copper. Recently the price of copper has been relatively stable and two of the three largest U.S. producers also produce in foreign countries.

It should be emphasized, however, that if the markets for these commodities deteriorate further we may have to consider additional measures. We shall watch this situation closely and make further recommendations as circumstances warrant.

Since the very cornerstone of our economic relations with Latin America is trade, it is imperative that the U.S. refrain from imposing undue restrictions upon our own imports. The extension of the Trade Agreements Act as requested by the Administration will have very beneficial effects on evidence of our intentions, provided it is not accompanied by increased resort to restrictive measures affecting individual commodities.

Financial Assistance:

Although the needs for development capitol in Latin America are enormous, their immediate financial problems are closely related to the commodity problems discussed above. Thus, Brazil, Chile and Colombia are pressing so for what amounts to balance of payments assistance to tide them through periods of depressed commodity prices. It is necessary that we respond to those situations, while [illegible in the original] the same time maintaining pressure, through the International Monetary Fund, for needed internal reforms and endeavor to encourage policies which will help stabilize their economies. The United States is prepared, in principle, to extend financial assistance to these three countries and dimensions are, or soon will be, underway with their representatives regarding specific amounts and related matters.

It should be emphasized that balance of payments assistance to Latin America and other areas is a temporary expedient which results in no additional economic development, and has little lasting effect except as countries take advantage of it to improve their own economic policies. Neither the Export-Import Bank nor the Development Loan Fund are designed to extend this kind of assistance. The International Monetary Fund is equipped to do so although tin resources would have to be enlarged to enable it to become fully effective. We believe the U.S. should consider a further subscription to the end of something like 41 billion which, on the basis of the original subscriptions, would be matched by 2 billion from other countries of which $500 million would be in gold and dollars. We would like to explore this within the U.S. Government and perhaps submit a specific recommendation at a later date.

Latin Americans persistently contend that existing sources of public capital are inadequate. Our experience, however, in that there is a dearth of well planned and engineered projects eligible for financing, but no dearth of financial resources. The Export-Import Bank has recently accelerated its activities in Latin America, and with the additional lending authority it is now seeking should be in a position to meet all reasonable requirements. The level of International Bank lending in Latin America has been low, although recently the Bank has been somewhat more active in that area. We will continue our efforts to induce an increased volume and broader range of loans to Latin America—including increased financial and technical assistance to national development financing agencies. An encouraging factor is that the first investments of the International Finance Corporation have been in private enterprises in Latin America.

We now have the Development Loan Fund which can consider projects in Latin America for which other financing is unavailable, and will be in even better position to do so if the additional resources it is now seeking are forthcoming. One problem in Latin America has been that some countries, for a variety of reasons, have tended to exceed their borrowing capacity. In these situations they should have access to the Development Loan Fund within limits imposed by its criteria and world-wide commitments, since the Fund can accept repayment in local currencies.

For some years the Latin American countries have agitated for the establishment of an Inter-American Development Bank. At the Buenos Aires Economic Conference last summer, a resolution was adopted calling for a study of the desirability of establishing such a bank. We feel that the United States should actively participate in this study, without any commitment as regards our ultimate participation in the bank. Although the United States has opposed its establishment, we may wish to reconsider our position as a result of the further study if sentiment develops in favor of an institution which is truly international in character, i.e., on the capital contributing as well as capital receiving aids.

Regional Integration

Various proposals for economic and customs unions in Latin America have been considered from time to time, and the Latin American countries have observed very closely the developments in Europe toward regional economic integration. However, circumstances in Latin America are quite different from those in Western Europe, as Latin American economies are not generally complementary and the volume of trade between them is quite small. Nevertheless, there is considerable scope for regional groupings which would provide larger markets and would combine the special circumstances, talents and resources of two or more countries.

An example is provided by Salvador and Honduras, where the excess population and capital of Salvador could be useful in developing the resources of Honduras. If a true common market or free trade area between these two countries could be achieved it might serve as an example and stimulant to others. The principal obstacles are Honduras’ fear of domination by Salvador and the adjustment that a few, small industries in both countries would have to make. These might be overcome, with some political risk to us, if the U.S. actively supported such an arrangement and helped them devise practicable solutions to specific economic problems; some financial assistance from us might also be necessary. We think the potentialities of such an experiment would justify an effort on our part.

Soviet Bloc Trade

Although Soviet bloc trade missions have been active in Latin America, there have as yet been no Soviet bloc approaches of the magnitude and nature of their approaches in other areas such as Syria, Egypt, Ceylon, India, and Indonesia. We shall, however, continue to watch this situation closely, and endeavor to evaluate the precise scale and objectives of the Soviet bloc economic offensive in Latin America. Meanwhile, the United States should not oppose the expansion of trade in non-strategic commodities with the Soviet bloc. We should, however, try to make countries which engage or contemplate engaging in trade with the Soviet bloc aware of the political and economic pitfalls associated with certain aspects of such trade, with particular attention on the risks of economic dependence and political penetration.

The unsatisfactory condition of certain primary commodity markets has increased the vulnerability of Latin America to Soviet bloc offers to take such commodities. If the Soviet economic offensive in Latin America is expanded significantly, particularly in [illegible in the original] fields such as petroleum development, we may wish to consider other countermeasures. Our policy against financial assistance for petroleum development because private capital is available if allowed to enter, gives the Soviet bloc a field which it may exploit. Failing such exploitation, the present does not appear a propitious time for changes in this policy. Should it be possible to make limited changes in the future without generating reactions in the U.S. which would endanger other important elements of U.S. foreign economic policy, we should be prepared to consider certain types of petroleum loans such as exporter credits and loans for transport, storage, refining and marketing facilities. However, should the Bloc show that it can enter this field in an effective manner or otherwise exploit this situation, we will wish to review the need for changes in this policy on an emergency basis, as, for example, recommending that the Export-Import Bank extend credits to United States exporters of petroleum equipment, including refineries and pipelines. Only if it later becomes necessary would we wish to reconsider financing petroleum exploration and development by foreign governments.

1. Source: Department of State, Rubottom Files, Lot 60 D 553, “Economic 1958.” Confidential. This memorandum was sent through Dillon. It was drafted by Mann and Harry R. Turkel of the Office of Inter-American Regional Economic Affairs. A hand-written notation on the source text indicates that Rubottom signed it and passed it on to the Bureau of Economic Affairs on April 11.