285. Memorandum by the Under Secretary of State for Economic Affairs (Mann)1

Our views on the Chilean export of the copper problem follow:

You should know that we have a telegram from our embassy in Zambia2 reporting that President Kaunda believes that the British measures against Southern Rhodesia are deficient; and that if the rebellion is not nipped in 3 months, the Rhodesian rebels can consolidate their positions and begin winning sufficient international support to make the unilateral declaration of independence irreversible. Kaunda believes that active participation by Zambia in the sanctions program is indispensable if the program is to succeed. He says Zambia cannot be the channel for sustaining the Smith regime. Kaunda, therefore, requests the British and us to provide contingency and economic assistance so as to permit Zambia to impose a total boycott on all Rhodesian imports, including coal.

George Ball and I believe this poses even more serious problems than last month’s Chilean price increase. We are sending a cable,3 copy of which will be repeated to you, which will in essence point out that Katanga and Rhodesia supply 25% of the world’s supply of copper and if this were taken off the market, not only would a world shortage and sky-rocketing prices result, but the British would lose a large amount [Page 625]of foreign exchange (British have spoken to George Ball about 200,000,000 pounds), which they have asked if we could replace. We have replied to the British in the negative, given our balance of payments situation. We are saying to Kaunda that Zambian sanctions against Southern Rhodesia would hurt Southern Rhodesia less than counter-sanctions against Zambia by Southern Rhodesia would hurt Zambia, since: (a) railroad through which Zambian copper now moves to sea passes through Southern Rhodesia and we are not certain of time it would take or the cost to ship Zambian copper by other means; (b) Zambia is dependent on Rhodesia for coal. Telegram presumably will say that we are not prepared to pick up large checks either for Zambia or for the British if Zambia engages in sanctions campaign against Southern Rhodesia. Also, Zambia may have in mind military and other actions in addition to economic sanctions.

On the Chile side of the copper problem, we think an effort should be made to get Frei to agree: (a) to rollback copper price from 38¢ to 36¢ contingent on U.S. industry taking the lead and, (b) regardless of Frei’s willingness to do a rollback, to agree to resist pressures which Dungan reports already exist for additional price rises. Avoidance of additional price increases in view of the uncertain Zambian situation is even more important than the rollback.

In approaching Frei, we should not push our case to the breaking point since Chile’s ability to reverse its position on the agreement reached with the copper companies and Chile’s ability to expropriate the copper mines, gives Frei real leverage in the precise area which is of most concern to us at this time.

Ball, Solomon and I agree that the most effective way to approach Frei would be to emphasize the following point:

1.
A 38¢ price level—and even more so if price levels increase— will result in substitution of aluminum for copper. This conflicts with the plans of the Chilean government already publicly announced to increase copper production from 600,000 to 1,000,000 metric tons by 1970. The United States is, itself, a large copper producer and we believe maximum revenue from industry will be gained by paying attention to volume as well as to price.
2.
Not only in order to maximize the return from the copper mining industry but also in order to prevent inflationary price increases consistent with actions which the U.S. government has already taken with regard to aluminum, the U.S. government would be prepared to sell from its stockpile. We should not commit ourselves at this time to sell, or to sell at any particular price level, but should leave the impression in Frei’s mind that we will probably sell from our strategic stockpile if the price remains at 38¢. The experts tell us that the President has the authority to sell from the 775,000-ton stockpile by making [Page 626]a determination that the national security justifies such action. There would, however, almost certainly be sharp criticism of this action on the ground that a security stockpile was being used to support price policy.
3.
Inflationary price rises in the U.S. set off by copper will have an adverse impact on the U.S. competitive position and hence on U.S. balance of payments position. This would, of course, affect the ability of the U.S. to finance its AID program. We, therefore, think that Frei should cooperate with us in maintaining a reasonable price level in copper. If the Chilean government can cooperate with us, we would be prepared to finance through the Exim Bank, the purchase of 2 jet aircraft valued around $15 million and to make a program loan at an $80 million level. This would help cushion the loss of $16 million which would result from a 2¢ rollback in the price of Chilean copper.
4.
The U.S. will undertake at the earliest opportunity within the GATT framework to eliminate the present U.S. tariff of 1.7¢ a pound on imported copper (this has some, but only limited, attraction for Chile because Kennecott and Anaconda, under an agreement with the Chilean government, currently absorb this tax so that Chilean government revenues would not be currently affected. However, this has some attraction for Chile since it does remove one trade barrier and presumably increases their ability to extract additional concessions from the companies).

We have considered, but do not yet have final opinions, on the following additional aspects of the problem:

1.
Increase of production. Our present information from industry sources is that it would take 12 to 18 months to increase production either here or abroad.
2.
U.S. government procurement. We will try this afternoon to get some figures or information on this from other U.S. government agencies and will report later.
3.
Possibility of postponement or substituting uses of copper. Our first information is that the substitution of aluminum for copper in underground cables and in some automobile parts, such as radiators, is not yet technically and economically feasible. It may be in the future. We need more time to report on this.
4.
Suggestions from major users of copper as to ways of minimizing consumption. We will need more time to report on this. Consultation with industry will be required.
5.
In addition to the points suggested above, arguments Frei could use to convince Leftists and Nationalists that copper rollback is in Chilean interest. We could suggest to Frei that Chile, Canada, the United Kingdom, Peru, Zambia, the U.S. and other copper producers consult together concerning measures for keeping prices at a level [Page 627]which will not invite substitutions and be harmful to the copper industry and at the same time meet world demand during this period of shortage and uncertainty. Frei might find that participation in a committee of this kind would be useful to him from a domestic political standpoint.

On the separate question of who might be the most effective persons to approach Frei, George Ball and I believe that Governor Harriman and Tony Solomon, together, would be the best choice for this job.4

Thomas C. Mann 5
  1. Source: Johnson Library, White House Central File, Subject File, Ex BE 4/Copper. No classification marking. Drafted by James D. Johnston, Mann’s staff assistant. The memorandum was evidently sent to the President at the LBJ Ranch in Texas.
  2. Telegram 711 from Lusaka, November 12. (National Archives and Records Administration, RG 59, Central Files 1964–66, POL 16 RHOD)
  3. Not further identified.
  4. A handwritten note from Marvin Watson records the President’s decision: “Califano—call Tom Mann notify Harriman and Solomon ask them to undertake this assign[ment] and proceed as your judgment dictates.” (Johnson Library, White House Central File, Subject File, Ex BE 4/Copper) For another account of these instructions, see Joseph A. Califano, Jr., The Triumph and Tragedy of Lyndon Johnson: The White House Years, p. 102.
  5. Printed from a copy that bears this typed signature.