283. Telegram From the Ambassador to Chile (Dungan) to the President’s Special Assistant for National Security Affairs (Bundy)1

131545Z. Eyes Only for McGeorge Bundy from Ambassador. Ref: CAP 65695.2

Understand generally impact copper price rise and effect on US economy and problems caused by increase following on heels aluminum roll-back. Request urgently some backup data on inflation effect in order make convincing case here if this course is directed. Taken as given the question of inflationary impact copper price rise, I wonder whether you have bought too easily the assertion that Phelps & Anaconda price increases necessitated by Chilean action. In other words, there are two ways in which US economy could be protected: (1) force roll-back in Chilean price increase as you suggest or (2) force American companies to absorb raw material price increase. Here are some factors which suggest course number two.
Pure copper bars put on board ship Antofagasta at cost of 14½ cents per pound—copper sold in US at 38 cents and on LME at 65 cents per pound. Somebody makes a hell of a profit.
Chilean copper represents only 13 percent American consumption. According 1963 Bureau Mines figures Chilean imports to US 228,000 tons out of consumption 1,744,000 tons. Therefore, theoretically Chilean price rise need have minor inflationary impact in US. Chileans believe that substantial amounts Chilean copper now being bought US companies 38 cents going into London market at 65 cents.
USG has held off antitrust suit US companies at our request pending outcome copper legislation. Suggest you consult findings Department of Justice regarding price and market control in copper before [Page 619] we embark on what I consider to be a suicidal course in terms of American foreign policy.
I mention the above among other elements which should be considered before the decision is made to force Chile to back down on its recent price increase. I am not an expert on copper prices and marketing, but I know enough to lead me to question whether forcing Chile to back down is the only or best method to pursue in order to keep prices to US copper consumers within non-inflationary limits.

I am certain that you have already given thorough consideration to inevitable adverse political effects of course suggested reftel. Political effects not only in Chile but through the LDC’s. Nevertheless, I feel I must state my own opinion before we embark on this course.

Carrot-stick combination listed might succeed in forcing GOC rollback. The cost to the Frei government and to the extent that it represents the hope of democracy and the Alliance for Progress in Latin America would be incalculable. Recent increase to 38 cents strongly supported by all political parties including the conservatives and public opinion. Lagarrigue3 now struggling against increasing pressure to push price to 40 cents in view of tight market apparently continuing well into the future. In other words, to force Frei government to a rollback might very well bring the government down or so weaken it as to make it difficult or impossible to pursue the reform program on which it is embarked.

Substitution question is not paramount in Chilean minds. Their research shows very tight supply for immediate future and increase markets in developing countries as means of meeting long range marketing problems. Moreover Chileans believe that substantial sales in London market over relatively long period at high prices plus long term prospective tight supply has probably already caused whatever substitution is likely to occur. In other words, the substitution has or is occurring without any price benefits redounding to Chile.

However the overriding consideration in your suggestion is whether we are going to confirm in the minds, not only of Chileans, but all the world the Marxist propaganda line that our only interest is in protecting the profit situation of our American companies. I realize completely that there is a large and critical American self-interest involved here. I have no doubt that it is important to maintain stable prices in primary metal in the American market. The central political question is who will pay the piper. Reftel clearly says that in every case where a price is to be paid it will be paid by the producing country to the advantage of the American entrepreneur.

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I respectfully suggest that most serious consideration be given to the very long-run adverse political effects that course suggested in reftel will have for the United States. I also respectfully suggest that the course suggested is political suicide for the US in the developing world and particularly Latin America.

If after your meeting today you conclude a Chilean roll-back is the only solution I will put together your imposing arsenal of sticks and not so imposing supply of carrots and make a deal. It can be done, I believe. But the price will be atrocious and I strongly recommend that every other course be explored before we resort to the one suggested reftel. There is also a very real possibility that Frei as a matter of principle and practical politics will consider this suggestion beyond the pale.

I shall stand by for instructions. If you decide that the pitch should be [made] I will try to do it today or tomorrow when I have lunch with Frei.

Incidentally, the copper veto has not yet been released.4 I would not be at all surprised to see the whole Chileanization scheme scrapped in face of proposal in reftel and we would end up with marketing monopoly if not outright nationalization. It probably would be economic suicide for Chile but I think they might risk it.

  1. Source: Johnson Library, White House Central File, Confidential File, Oversized Attachments, December 1965. Secret; Eyes Only. Repeated to the Department of State.
  2. Document 282.
  3. Javier Lagarrigue, head of the Chilean Copper Department.
  4. Reference is to Frei’s program to manage the copper industry, which was approved by the Chilean Congress on November 3. Frei subsequently modified the proposal by presidential veto.