288. Telegram From the Department of State to the Embassy in Chile 1

469. For Harriman and Solomon. Please express to President Frei President Johnson’s warm personal thanks for his offer of cooperation. We are gratified that he understands the reasons why the failure to hold the price line in the US economy would be detrimental not only to the US but to the hemisphere and the world.

In view of the need for urgent action here and Frei’s political difficulties described in Embtel 6422 we accept Frei’s second alternative, i.e., a bilateral arrangement between Chile and the US.

We plan, as a first step, to make a public announcement3 at 7:15 p.m. Washington time today November 17 which will refer to hostilities and disturbances on world scene and threatened disruptions and distortions of copper market which pose problem of inflationary pressures in copper and generally throughout our economy. (You may inform Chileans that because of press leaks today on copper problem it was necessary to move quickly in order to avoid risk that substantial quantities of copper would be attracted abroad by higher prices.) USG announcement will cover following specific points:

1.
USG will promptly make available approximately 200,000 tons of copper from the stockpile and arrange for its orderly disposition to correct current imbalance between supply and demand. FYI. The mention of this amount of copper does not foreclose the possibility of additional releases in the future should this prove to be necessary. End FYI.
2.
Special export licenses will henceforth be required for exports of copper produced in the US or imported for consumption in the US market. Export licensing procedure would apply to scrap. FYI. This would be necessary to prevent higher prices elsewhere draining copper from this economy. Licenses would of course be granted for Chilean copper imported into the US in blister form for processing and reexport. End FYI.
3.
The President will recommend to Congress early in 1966 a suspension of import duties for a limited period of time. The exact nature [Page 634]of the Executive’s recommendation to the Congress will be determined after appropriate consultation with the Government of Chile, the US copper industry and the US Congress. FYI. An alternative formula would be the elimination of the 1.7¢ a pound tariff so long as the world price should remain above a certain level. The GOC should not be informed of this however unless Washington specifically so authorizes you. End FYI.
4.
USG will discuss with Directors of New York Commodity Exchange solution of problem of excessive speculation in copper trading, perhaps by raising the margin requirements to a figure comparable to requirements for trading on the New York Stock Exchange. FYI. USG has no legislative authority to direct that this be done. End FYI.

Once this announcement is made we believe, on basis of our conversation with members of US copper industry today, that US producers will in the case of Kennecott maintain its current 36¢ price level and that other US producers will roll back to 36¢ a pound. We estimate the steps taken in the announcement will result in a 36¢ price level in our market.

As we understand, GOC, when US price level at 36¢ is established, would be willing to make available, through the usual commercial channels, copper in quantities currently being imported for consumption in the US at a price of 36¢. FYI. The current level of US imports of Chilean copper for domestic use is about 100,000 tons per annum. We would prefer not to specify the 100,000 tons, thus leaving open the possibility of being able, depending on future developments, to maintain some flexibility in level of Chilean copper imports into this market. Request your opinion however on whether failure to specify precise tonnage would create a substantial risk that GOC will attempt to reduce this amount in the future especially if world prices remain at a level higher than 36¢.

Continue FYI. Similarly, we are inclined to believe it would be advantageous to US to fail to fix precise term of bilateral arrangements with Chile since future is somewhat unsure, especially in view of uncertainties surrounding future relations between Southern Rhodesia on one hand and Zambia and Katanga on the other. We are hopeful that Zambia and Katanga copper can continue to be exported at current or increased levels but we cannot be sure that there will be no temporary interruptions in flow from these sources.

Continue FYI. In addition to current level of 100,000 tons imported from Chile, US is currently importing about 150,000 tons from Canada produced by International Nickel and Noranda and 50,000 tons from Peru produced by the Cerro Corporation. The industry estimates that since both Canada and Peru have free economies most of Canadian and Peruvian imports will continue to flow into this market and that [Page 635]it will adjust to 36¢ price level since it is in the interest of these producers to maintain their traditional customers in this market and also because a part of this fabrication of this copper is done in US. The 200,000 ton imports from Canada and Peru will presumably be partially offset by export controls on scrap which according to our latest information is now leaving US at rate of about 135,000 tons annually. Balance can presumably be made up from stockpile. We do not think it is necessary therefore to approach Canadian and Peruvian Governments at this time. End FYI.

The US, in cooperation with policy of Chilean Government to reduce inflationary pressures in Chilean economy and promote Chilean economic development and social progress and, in cooperation with programs of international institutions, will make available 90 million dollar program loan on terms and conditions to be agreed upon by Governments of US and Chile. Negotiations will commence immediately and will follow self-help principles already discussed between two governments. Ten million dollars was added to 80 million dollar figure previously under consideration in view of estimated four million dollar loss to Chilean economy from roll back to 36¢.

Report urgently whether this arrangement is satisfactory to Chilean Government.

FYI. Foregoing leaves unresolved question of worldwide roll back which, as we understand, GOC is in any case unable to accept until copper legislation is finally approved by Chilean Congress and until strike is settled. Depending on reaction of world market to steps described above we have in mind possibility of discussing with GOC later question of general roll back. We leave to your discretion question of whether this possibility should be mentioned to GOC at this time. Our immediate aim is to obtain roll back in Chilean copper exported to US and this is paramount for time being.

Likewise we leave to your judgment whether to inform Chilean of following: Industry members today expressed strong opposition to copper commodity agreement. It is possible that we will be able to bring them around on this point but we are not in a position now to make any commitments to GOC beyond statement that we are prepared to discuss this problem with them since a commodity agreement would presumably require Congressional approval and we are uncertain at this time of what Congressional attitude would be, especially if US industry is strongly opposed.

We did not reveal to industry today fact that Chileans had raised with you possibility of USG using its influence to get companies to agree to additional concessions in their negotiations with GOC. We estimate situation at moment here is such that this would be unwise since our program is dependent on cooperation of industry. We are [Page 636]not therefore in a position to make any commitments at this time concerning negotiations between GOC and copper companies beyond undertaking to permit floating of 20,000 dollar Chilean bond issue in this market and permitting financing of Chilean copper expansion program along lines already discussed.

For same reasons we did not discuss with industry representatives question of creation of revolving fund and have not had time to study effect on US economy of increased Chilean capacity to process copper. You should therefore make no commitments regarding this.

We are however as always ready to discuss with Chileans these and other problems in an effort to find a mutually beneficial solution.

Report soonest GOC reaction to foregoing.4

Ball
  1. Source: National Archives and Records Administration, RG 59, Central Files 1964–66, INCO COPPER 17. Secret; Nodis; Flash. Drafted by Mann, cleared at the White House and by Bell (paragraph on AID), and approved by Mann.
  2. Document 287.
  3. The text of the announcement made by Secretary of Defense McNamara is in telegram Tosec 42 to Rio de Janeiro, November 18. (National Archives and Records Administration, RG 59, Central Files 1964–66, INCO COPPER 17)
  4. Frei accepted the U.S. proposal in a meeting with Harriman on November 18. Harriman and Frei agreed that the understanding should be “essentially verbal,” but that Solomon and Sáez would draft an unsigned memorandum for the record. (Telegram 661 from Santiago, November 18; ibid.) Califano forwarded a copy of the unsigned memorandum to President Johnson on November 20. (Johnson Library, White House Central File, Confidential File, Oversized Attachments, December 1965)