Foreign Relations of the United States, 1969–1976, Volume IV, Foreign Assistance, International Development, Trade Policies, 1969–1972

156. Draft Memorandum From the Department of the Treasury to President Nixon¹

Washington, July 13, 1971.

SUBJECT

• U.S. Expropriation Policy

I. The Problem

The expanding number of expropriations of United States-owned property overseas presents us with a major threat to our foreign interests. The continuation of further expropriation action against our companies abroad will deepen the erosion of public support for our foreign political and economic policies. This will lead to additional Congressional limitations on Presidential prerogatives and even greater difficulty in pursuing our foreign objectives.

The problem is urgent because the expropriation trend abroad is accelerating. (Nearly 70 expropriations against U.S. investors in 17 less developed countries have taken place since 1968, almost double the number in the preceding eight years.)

It is not only the frequency which has brought the issue to a head. We are faced with a rash of subtle, legally correct actions. We encounter “interventions”, not “expropriations”; assertions of a vague acceptance of the principle of compensation and not an outright rejection, as in Cuba. Today, the indirect expropriation technique is more exportable and pernicious, more threatening to the world order than the past outright actions.

II. U.S. Interests

It is in our political as well as economic interest to discourage less developed countries from pursuing actions which are inimical to increasing private capital flows and which create a bias towards the public sector at the expense of the private sector. Development is in our economic, political, and security interest, but it cannot be accomplished without private capital. Moreover, development totally dependent upon statist regimes threatens all our interests. Finally, the expropriation issue extends beyond its impact on our relations with LDC’s. A continued permissive attitude toward expropriations could have carryover effects in developed countries. The stakes are enormous.

III. U.S. Policy Options

It is a false dichotomy to present the issue as one involving protection of either our political-security or economic interests. Only by enhancing our long-term economic interests can we assure ourselves of the wherewithal to maintain a strong voice in international military and political affairs. The policy for the future must reflect this fact.

There are basically four policy options open to the U.S.:

(1) a passive approach;

(2) an ad hoc approach;

(3) a policy of deterrence based on withdrawal of economic preferences;

(4) a policy of reprisals based on the imposition of economic sanctions.

Neither our national interests nor the political environment tolerate a passive approach. While the existing ad hoc posture has allowed each case to be treated individually, it has not worked to deter expropriatory actions; its administrative flexibility without a strong policy framework has developed a bias in the direction of limiting even the covert pressure we might bring to bear.

Our analysis suggests that a firm policy of deterrence is needed. However, a policy of strong economic sanctions would deny us the allies we must obtain to make our policy effective.

IV. Experience under Our Present Ad Hoc Policy

There is not now a U.S. expropriation policy. Each case is handled on an individual basis and policy is formulated ad hoc at the time the act occurs. In a number of cases not requiring Presidential attention, but still important, no coherent response is adopted.

Perhaps because they are aware of the weak and uncoordinated response the U.S. will probably make, several LDC leaders have embarked on the politically popular course of expropriation: they believe that they can carry it through with little or no cost imposed from overseas and with substantial gains at home. It is relatively easy for LDC leaders to paint themselves into a corner from which the United States must retreat or face a major political confrontation. We provide no support for moderate elements, as exist in Jamaica, to resist extremists’ demands for expropriation and no incentives for self restraint.

The impression of our unwillingness to impose costs in terms of withdrawal of preferential benefits has snowballed from the Peruvian experience where the overall image was projected of the United States unable or backing away from support of an American investor overseas. Perhaps it is no coincidence that the growing trend toward expropriations can almost be dated from the IPC expropriation in 1968. Surely there is some relationship between our lack of action in Peru and the Bolivian and Chilean expropriations. If present lack of policy has not positively led to the acceleration in expropriation, it surely has in no way tended to deter or slow down the growth in the number of expropriations.

The defenders of the current policy make no pretensions of effecting deterrence. As I understand it, they assume that it is not possible to deter—or would not risk deterrence—because they believe it would jeopardize what they consider to be more vital political interests. The present ad hoc response policy is said to have the advantage of avoiding confrontation with other governments, preserving other U.S. interests from countervailing attack and preventing U.S. policy from being controlled by an unreasonable and unfair United States investor.

I believe this defense is wrong both in its basic assumptions and objectives.

V. Deterrence is Feasible

There are several reasons why a policy aimed at deterrence of expropriations will be successful in protecting these interests at acceptable costs.

(1) Expropriations are often deterrable if we indicate a clear policy response in advance. If political leaders know the costs of pursuing expropriations (and if the costs are significant), they will avoid putting themselves in a position where they will have to pay these costs. Even more important, there are moderates in developing countries who, if supported by a firm U.S. stand plus a clear identification of the economic cost to the host countries, would create a counterpressure to the domestic radical nationalistic groups which push for expropriation.

Political realities abroad are such that it is impossible to claim that with a new policy of deterrence no expropriations will take place. However, an atmosphere will be created which should reverse the trend of increasing expropriations and serve to assure prompt, adequate and effective compensation when nationalization does take place. In many cases more constructive outlets will be found for the deep-seated nationalistic impulses that cause expropriations. In those few cases where no substitute is found, those nations should just have to forego the receipt of preferential benefits.

(2) Less developed countries have been permitted to regard their receipt of preferential benefits such as foreign assistance as a right— resulting from an “obligation” of the rich countries to donate. We have allowed a distortion of economic reasoning to develop. Initially, we will have to offset this attitude. A strong U.S. position, not based on threats, but on the proposition that only countries that respect international practices with respect to investment are entitled to future preferential benefits will become respected as a reasonable exercise of our own self interest.

Much depends upon style. A policy can be formulated that will deter, without threats and without provocations. The Hickenlooper amendment generates a violent reaction because it threatens public retaliation for failure to provide compensation within a fixed time limit. This pitfall can be avoided. A tough policy will not mean that every expropriation will mean a major confrontation or that American investors will hold the keys to U.S. policy in their hands. We have a policy option which will deter without provocation and with full U.S. control over the development of our policy in specific cases.

(3) We must also face the cold facts of relative power. Less developed countries are, in general, more economically dependent on relations with the U.S., and, in particular, on the preferential economic treatment which we give them, than we are on them. Even in the short term, political relations and security concerns are not paramount in Bolivia or Chile, for example. Where they are important, the overall U.S. national interests can be maximized through that necessary degree of flexibility contained in the recommended option.

(4) It is simplistic to assume that less developed countries act as a group, that is, economic action against one is necessarily action against all. Whatever initial expressions the LDCs may make, over the long run they will not act is a group when their self interest is at stake. Moreover, a well articulated and understood policy should not permit a clear U.S. policy to be viewed as an attack on a region.

VI. A New Policy Proposal

A clear general policy position against uncompensated expropriation would be announced by the President regarding future situations and divorced from any specific expropriation case. It would be based on the policy framework that uncompensated expropriations of foreign property are inimical to sound development policy, to continued U.S. support for foreign assistance and to our national interests, including legitimate U.S. economic interests. The following steps would be taken to implement this policy:

(a) If a significant United States interest is expropriated, the United States would suspend granting new preferential benefits (e.g., bilateral assistance., P.L. 480, tariff, quota preferences) to the expropriating country.

(b) The U.S. would seek to defer new loans from multilateral institutions and could vote against them if necessary. The U.S. would need to develop support from other developed countries for its position.

(c) The United States would take an active role in judging whether reasonable steps had been taken. Submission of a dispute for settlement under international arbitration procedures would automatically be considered as reasonable steps to settlement of a dispute.

(d) Preferential programs would not be resumed until the country had taken reasonable steps to assure prompt, adequate and effective compensation.

(e) All of the foregoing general policy would be publicly announced. However, when an expropriation actually took place the United States would make no public announcements of cutoffs of foreign assistance or other preferential benefits. Press briefings would reiterate our general policy and the facts of the particular situation.

(f) An administrative policy group—perhaps headed by the CIEP or Commerce—would be formed to (i) recommend to the President on those instances where the withdrawal of benefits is not to occur immediately, (ii) determine when reasonable steps had been taken so as to justify restoration of preferential benefits, (iii) monitor emerging nationalization policy, and (iv) coordinate agency actions.

I see major advantages for this proposal:

1. It would provide an unequivocal indication of the United States position on expropriations and clearly establish the consequences for a developing country for such action. In contrast with present ad hoc covert pressure policy, it would provide a substantial chance of deterring the rising trend of nationalization of foreign property.

2. It would provide a strong support to moderates in many countries who wished to resist expropriations but are unable to do so because present ad hoc policy does not give them support.

3. It provides deterrence without provocation as foreign reaction would be minimized through the prior announcement of our policy divorced from any particular expropriation case. Restoration of assistance becomes a carrot for rewarding responsible behavior and, in doing so, we reverse the present distorted situation in which assistance is regarded as a right. Hickenlooper threats of retaliation would not occur. No ultimatums would be given. It would be clear in advance that the U.S. bilateral assistance program would cease until reasonable steps had been made to effect compensation. Not only would the President get something from his policy of deterrence but the President would have great flexibility, including the ability to regard a particular expropriation as not significant, allow continued humanitarian assistance, or narrow the scope of the cutoff of new preferential benefits as the situation required.

4. It would be strongly supported by United States business leaders. While particular individuals in particular situations may wish to soft pedal U.S. actions, the overwhelming general view of U.S. business is that a tougher line is needed.

5. There would be strong Congressional support. In fact, the present trend can only lead to mandatory expropriation legislation going beyond Hickenlooper.

1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 A 15, NSC. Confidential. Drafted by M. Bradfield and J.R. Petty on July 13. Forwarded to Volcker under cover of a July 14 routing note from Petty who noted it would “take care of some of your problems.” No final version of the memorandum was found.