157. Paper Prepared for the Senior Review Group1
The U.S. Response to Expropriations of U.S. Private Investment in Developing Countries—NSSM 131
Expropriation of American-owned business in the developing countries, which is a result of economic nationalism, increasingly presents the United States with both domestic and foreign problems. This is the case for a number of reasons:
- The number of expropriations is increasing, and this trend is likely to continue. As indicated in a recent CIA study annexed at Tab A,2 economic nationalism stems from deep rooted political, economic, and social trends and a desire to assert independence and sovereignty. It is likely to develop further and to affect additional investment sectors in Africa, Asia and Latin America. Some agencies believe that this trend can be countered or channeled along more constructive lines by a firm [Page 405] U.S. policy against expropriation. Other agencies believe that a firm U.S. policy aimed at deterrence cannot modify the basic elements of economic nationalism and that we must be careful to avoid aggravating the problem by precipitating confrontations.
- This increasing trend is not limited to expropriation and economic nationalism is often being asserted in more sophisticated ways than in the past, including legislated participations, investment codes (e.g., Andean Code), mandatory joint-venturing of new projects, and pricing confrontations (e.g. OPEC).
- The United States has significant economic, political, and security interests in this problem, which are diverse and in some cases mutually incompatible. These interests are discussed in the following section.
Present U.S. Policy
- Present U.S. policy (Tab B)3 is to rely primarily on diplomatic and non-overt economic pressures to deter expropriations to the extent possible and, when expropriations occur, to assist U.S. investors to obtain prompt, adequate, and effective compensation. This policy has avoided confrontations and has been effective in achieving compensation in some cases and not in others. Illustrative case studies are included in Tab B, and a list of pending cases is at Tab C.4
- Some agencies believe there is an urgent need to change the present United States expropriation policy. They believe that there is, in fact, no overall expropriation policy and that each case is handled on an individual basis and policy is formulated ad hoc in response to expropriations. These agencies assert that, in a number of cases not requiring Presidential attention, but still important, no coherent response has been adopted. They suggest that the leaders of some developing countries have been encouraged to embark on the politically popular course of expropriation by the knowledge that the United States will probably make a weak and uncoordinated response. On the other hand, these agencies assert that the United States policy has provided no support for moderate elements within the developing countries to resist expropriation demands and that the present U.S. policy has not deterred or slowed down the trend toward increasing expropriation of American-owned business. Other agencies believe that present policy has been consistent and represents a proper balance of U.S. interests. These agencies believe that it is prudent to avoid a belligerent stance by the United [Page 406] States in cases where other U.S. interests are at stake, and our leverage is limited.
U.S. Interests in the Developing Countries
- The United States has an interest in the preservation of an international community composed of a predominance of independent self-sustaining countries reasonably well disposed to the United States. Although few developing countries are now significant powers, some are much more important than others, and as a group they constitute a significant political force. Some of them occupy or border upon areas of strategic importance to the security of the United States. Others are of considerable economic importance. Political developments in the developing countries can vitally affect U.S. relations with the major powers, both friendly and hostile. Ultimately, the character of the international community, through political, psychological and economic pressures as well as direct security threats, can fundamentally affect the well-being of the United States and the character of our national life.
- The United States Government has a significant financial stake in the expropriation question. The Overseas Private Investment Corporation has a total of $2.5 billion outstanding in expropriation risk insurance. While it is quite unlikely that all or even a major part of our liability will be called, the costs could be very substantial, especially if the current trend continues. For example, our exposure in Chile alone amounts to $312 million. Expropriations are also costly to Treasury tax revenues.
- The United States has an interest in maintaining access at a reasonable price to natural resources located in the developing countries. Although the U.S. is a major producer of raw materials, we presently import 15% of our requirements. Among important crude materials, we import 10-15% of both crude oil and copper, 25% of iron ore, and over 80% of bauxite needs. While we are self-sufficient in coal and zinc, we must import iron ore, most of our tin, natural rubber, nickel and chromium. As good-quality, indigenous resources are depleted, we find it cheaper to turn to higher grade foreign sources—the development of which will require substantial amounts of foreign capital. Long-range projections indicate that by the year 2000 we will import 30% or more of our requirements. This growing U.S. dependence on foreign raw material resources means a greater U.S. impact on world raw material markets, as well as increased competition amongst the developed countries for those resources found in the developing countries.
- The United States has an interest in maintaining and expanding the market for U.S. exports in the developing countries—particularly with Latin America. In 1970, U.S. exports to LDCs were $13.2 billion and U.S. imports were $10.8 billion, for a favorable trade balance of $2.4 billion.
- U.S. private investment (book value) in the LDCs totals $20 billion ($8 billion petroleum), of which $13.8 billion ($3.7 billion petroleum) is in Latin America. U.S. investors repatriated some $3.3 billion of income in 1969, of which $2.3 billion came from the petroleum sector. Net U.S. direct investment (including retained earnings less liquidations) in less-developed countries increased by some $1.2 billion annually in the five years 1965-69, the great bulk of these new investments going to Latin America. From a peak of $1.6 billion in 1968, the net annual increase in direct U.S. investment declined to the level of $1.3 billion in 1969, and $1.7 billion estimated in 1970. OPIC insurance against expropriation totaled some $2.5 billion, of which $1.5 billion is in Latin America.
- For the above reasons, and on humanitarian grounds, the United States will continue to have an important interest in the economic, social and political development of the countries, in Africa, Asia, and Latin America.
Relationships of U.S. Investment in the Developing Countries to U.S. Interests There
- Foreign private capital and management skills, in some form, will continue to be necessary for the development of the countries of Africa, Asia and Latin America, and may well be of increasing relative importance depending on the levels of capital flows. Private investment is not only an important source of capital, but it is a major contributing source of needed technology and managerial skills.
- U.S. investment abroad also increases profit and export opportunities for U.S. industry, and in the past has helped to secure supplies of needed commodities.
- The net effect on the U.S. balance of payments is beneficial over the long term.
- Expropriations will not only tend to cut off the flow of private capital but could also result in reduced Congressional support for foreign assistance and in amendments limiting Presidential discretion in giving assistance. The Senate version of the Sugar Act already demonstrates this trend as well as lack of confidence in the Executive Branch to carry out Congressional expropriation policy in good faith.5
- At the present time, the political implications of U.S. foreign investment are both positive and negative. Over the years, private [Page 408] investment has contributed greatly to the U.S. presence in the developing world, particularly in Latin America. In the present context, that presence has sometimes been a factor in the growth of nationalism adversely affecting U.S. relations with developing countries.
The relative importance of U.S. relations with a developing country in the balance of total U.S. interests in that country is a matter on which not all agencies agree. Some believe that U.S. interests can best be served by taking a forceful attitude toward protection of U.S. investors abroad; others believe that investment interests, however important, must be weighed with respect to each country against all other relevant economic, political, and security interests.
U.S. policy has traditionally focused on fostering a hospitable investment climate abroad for private capital, while recognizing that every country has the sovereign right to expropriate private property within its territory provided reasonable provision is made for payment of prompt, adequate and effective compensation. The U.S. has two distinct and related protection objectives: (1) to deter expropriation to the extent possible and feasible, and (2) to insure that the investors’ rights under international law and practice are protected when expropriation takes place.
U.S. Influence and Protection Policy
The ability of the United States to deter expropriations and to encourage payment of prompt, adequate, and effective compensation will necessarily vary from case to case. Some statistics relevant to this question of leverage are set forth at Tab D.6 The following conclusions on U.S. influence and protection policy seem warranted:
- U.S. bilateral influence to deter expropriations has decreased, but it is still significant (although not with all countries), particularly if exercised in concert with other capital-exporting countries. When expropriations take place, U.S. influence can be helpful to investor efforts to achieve compensations settlements in some but not all cases.
- Inter-governmental confrontations arising out of investment disputes can adversely affect important U.S. interests—including other American-owned investments.
- Active and firm U.S. protection efforts can be helpful in many situations, particularly if steps can be taken to prevent a dispute from ripening into a confrontation. Our policy should avoid unnecessary [Page 409] confrontations. However, some agencies believe that in the few cases where developing countries seek confrontations the United States has a strong interest in not backing down.
- Firm action to protect an investment as part of a clear investment policy can have a deterrent effect in some other countries even if it is not effective in the particular case. The announcement of a clear policy on expropriations is an important element in deterrence. Such an announcement would assure that governments contemplating expropriation would know in advance the probable costs and would help to promote the view that developing countries do not have a right to foreign assistance and other preferential benefits.
- Decisions on measures to protect investment must take into account all relevant U.S. interests and the costs and benefits of any U.S. response. Therefore, U.S. protection policy must retain flexibility. However, some agencies believe that the present policy, which has emphasized flexibility, has little, if any, deterrent effect and results in practice in a minimum covert response. They believe that a tougher general policy, which would require a positive decision if economic benefits were not to be suspended in response to expropriation would, in fact, provide more flexibility to the President, since it would make suspension of benefits more feasible by making it more common and part of a general policy, thus avoiding singling out any one country. Other agencies believe that U.S. interests other than investor interests will continue to require case-by-case flexibility, both as to the action to be taken and the timing, and that flexibility and deterrence are not mutually incompatible.
- The effectiveness of U.S. policy on expropriation will be enhanced if it is in an international framework.
- We need a policy that guides our actions in international lending organizations as well as our bilateral actions.
Basic Options Presented
Generally speaking, the U.S. Government has five basic options open to it in dealing with significant expropriation of American investments abroad by foreign governments.7 They are:
- In each significant case of expropriation new foreign assistance, guarantees, and other benefits would be withheld and existing benefits [Page 410] suspended immediately upon expropriation until reasonable provision for just compensation is made or an impartial arbitration or adjudication procedure is agreed on by the parties to the dispute, unless the United States makes a positive determination to make an exception to this policy. Such a determination would have to overcome a presumption that benefits should not be continued, except where suspension would violate U.S. legal obligations. This policy would be announced as a new general policy but no announcement would normally be volunteered of the withholding or suspension of benefits in any particular case.
- In each significant case of expropriation new foreign assistance, guarantees, and other benefits would be withheld and existing benefits suspended on a fixed deadline, e.g., six months under the Hickenlooper Amendment, after the expropriation, unless appropriate steps are taken to provide just compensation.
- In each significant case of expropriation a determination would be made whether and to what degree to extend new foreign assistance guarantees, and other benefits or to suspend existing benefits. That determination would be made taking into account all United States interests involved and what would be the best means of promoting a satisfactory solution of the expropriation situation. This policy would be implemented with flexibility required to respond to changing circumstances in the expropriation situation or U.S. relations with the expropriating government. This option has three sub-options:
- Pending the determination, no new commitments would be made unless otherwise decided. A general statement would be made in advance announcing this policy and characterizing it as a new and harder U.S. policy on expropriation of U.S. investments.
- Pending the determination, the U.S. coordinating mechanism would make an urgent examination to decide what measures would be appropriate in the interim. A general statement would be made announcing this policy, emphasizing that the United States would make a close and critical evaluation of expropriation actions.
- Pending the determination, new commitments would be made in due course unless otherwise decided. A general statement could be made indicating a relationship between United States foreign economic programs and the treatment of U.S. investment in accordance with international law.
- Withholding of new selected foreign assistance and other economic benefits, but only after a determination (1) that the withholding takes into account all U.S. interests in the expropriating country, (2) that, except in clearly flagrant cases, a reasonable time has elapsed during which the U.S. has ascertained that appropriate remedies, legal or administrative, are either not available or have been exhausted, and (3) that withholding will contribute to a satisfactory resolution of the dispute.
- Traditional diplomatic protection, including formal espousal of claims, but no use of economic pressure (though there may be some reduction in U.S. willingness to assist in the future).
These relatively simple options are complicated, however, by several factors which flow from the varied nature of the economic benefits the United States could conceivably withhold or terminate. (See fuller discussion at Tab E.)8
- U.S. assistance subject to the cut-off falls into two categories—already committed or contracted, and prospective or future. The withholding of future commitments is the denial of a carrot, whereas the cut-off of assistance already contracted and in the “pipeline” amounts to a sanction. The former is an understandable (and less visible) exercise of U.S. sovereignty, whereas the latter will be seen by the foreign government as retaliatory and presents it with a challenge from which it cannot easily back down. Doubtless developing countries will see both as punitive and coercive, but reactions will be stronger to the latter. Some agencies suggest that the reaction of developing countries is caused in part by a distortion of reasoning whereby they have come to regard preferential benefits as a right. These agencies assert that a clear policy of withdrawing preferential benefits would, in time, become respected as a reasonable measure to protect recognized rights. Other agencies, on the contrary, believe that increasing condemnation of the United States would be more likely, particularly where the withdrawal of benefits precedes violations of law by the expropriating country.
- U.S. assistance to developing countries is provided both bilaterally and multilaterally. The bilateral assistance is theoretically controllable by the U.S. Government, whereas the multilateral is not. The multilateral institutions involve third countries, requiring support of other members if U.S. efforts are to result in denial of loans. Nevertheless, U.S. abstention on loans to Bolivia and Guyana have succeeded in impressing on the managements of the World Bank and the Inter-American Bank the seriousness with which the United States regards the expropriation problem. An effective U.S. policy needs to cover both bilateral and multilateral assistance, and separate options are presented on the question of voting in the international financial institutions.
Agreed Further Steps
Apart from the options presented in this paper, there is general agreement among the agencies that certain steps should be taken forthwith:
- There should be an appropriate public statement announcing the policy adopted by the United States to respond to expropriations.9
- Consultation should be initiated with other developed countries to explore the possibilities for improving coordination of positions and developing a common strategy on expropriation questions, particularly in the international agencies. It is desirable to enhance the effectiveness of U.S. policy against expropriation by encouraging other developed countries to take a similar position in their bilateral programs and in the international financial institutions.
- The U.S. should also take the lead in seeking to strengthen the existing international mechanisms for dealing with expropriations, such as the International Center for the Settlement of Investment Disputes, and in creating additional devices such as the proposed International Investment Insurance Agency. The agencies were all in agreement on the desirability of stepping up the U.S. effort to bring the IIIA into being. (See discussion of impartial dispute settlement at Tab F.)10 The agencies also agreed that the United States should seek ways and means to expand the present functions of ICSID so that it will be able to render useful service.
Efforts should be made to improve inter-agency coordination on foreign investment issues, and a procedure should be established for prompt resolution of inter-agency differences on operating questions, particularly those related to actual and prospective expropriation. The Secretary of State has designated Deputy Under Secretary Samuels to coordinate the U.S. response to expropriation problems and has asked the heads of the other concerned agencies to appoint representatives to work with Mr. Samuels.11 Other possible coordinating mechanisms would be the CIEP Operations Group and the NAC. Any coordinating group should include representatives from State, Treasury, Ex-Im Bank, Commerce, DOD, OPIC, Agriculture, AID, and CIA.
The Group would have responsibility for assuring:
- —inter-agency coordination of political and economic policies involved in expropriation problems;
- —alerting all agencies to possible expropriations and recommending measures to prevent them from occurring;
- —determining or recommending appropriate measures to be taken in the cases of expropriation or threat of expropriation.
- Further measures should be taken to improve communication with the business community to ensure that it is aware of the actions taken by the Administration to assist business and to facilitate the exchange of views on related issues.
Additional Studies Required
In response to the specific terms of NSSM 131, this memorandum presents options open to the United States in dealing with expropriations. However, the problem presented by economic nationalism is much broader than that.
A number of other basic issues should be addressed, such as: (1) U.S. trade, investment, and assistance policy toward the developing countries, including a consideration of U.S. objectives and an assessment of the roles that foreign investment and government aid can play in development in an environment of increasing economic nationalism; (2) the meaning and extent of this Administration’s emphasis on multilateral institutions as a vehicle for assistance in a context in which the lending policies of multilateral institutions may not accord with U.S. views (The Department of the Treasury dissents and believes no such study is necessary); (3) the proper role of investment insurance in U.S. policy toward economic nationalism; and (4) the role that the U.S. Government can or should play to help avoid investment disputes by influencing the character and terms of U.S. investments abroad and maintaining continuing good offices with host governments.
Without delaying decisions on the options presented in this paper, studies on these issues should be undertaken as soon as possible and the options presented in this paper reviewed when these further studies have been completed. It is estimated that at least three months will be required to complete the above studies.
B. Options with respect to USG action in international financial institutions in the event of proposed loans to expropriating governments
To Promote Constructive Policies
It was agreed by all agencies that the USG should use its voice in management and capital replenishment to induce the IBRD effectively to apply its traditional policy on compensation and to seek to persuade other institutions to adopt a similar policy on withholding assistance to [Page 414] countries not taking reasonable steps to meet compensation obligations.12 Such a policy on expropriation by the international financial institutions could be most useful in providing a multilateral “sanction” against uncompensated expropriations. It was recognized that adoption of such a policy would not of itself result in withholding loans in all cases of interest to the USG, since implementation of the policy necessarily involves subjective determinations. In addition, discussion of such a policy within the IDB should proceed on a low key, since most Latin American countries would be unlikely to publicly agree to such an expropriation policy for the Bank.
“The Bank has taken a similar position in the case of those member countries whose credit is impaired by the existence of a dispute over a default on their foreign debt or over compensation for expropriated property formerly owned by foreigners. The Bank is charged, under its Articles of Agreement, to encourage international investment. It has, therefore, a direct interest in the creation and maintenance of satisfactory relations between member countries and their external creditors. Accordingly, the normal practice is to inform governments who are involved in such disputes that the Bank or IDA will not assist them unless and until they make appropriate efforts to reach a fair and equitable settlement.” [Footnote in the source text.]
To Defer Loans
It was also agreed that intervention with the management of these institutions with a view of having management suspend consideration of a loan until reasonable steps to arrive at fair compensation had been taken would be a normal first step in any event where we decided to defer or withhold new bilateral assistance.
When the Board of an international financial institution decides upon a loan to a government which has expropriated significant U.S. business interests, the United States is faced with a choice of actions—to support the loan, to abstain, or to oppose the loan. Under all of the basic policy options, except for the last, this question will arise.
Except in the case of the Fund for Special Operations of the Inter-American Development Bank, a negative vote by the United States is not by itself sufficient to block a loan. In cases where a loan is approved over our objection, as occurred in two recent instances, a negative vote or abstention by the U.S. does not result in a denial of a real economic benefit. Thus, it would not appear to be a particularly credible or effective means of exerting influence, beyond perhaps its symbolic value as a public expression of our attitude. On the other hand, to the extent that we are successful in promoting a harder policy on expropriations within the institutions and in obtaining voting support from other contributing countries, negative votes will become more effective. However, since this effort with the institutions and the other contributors [Page 415] will take time and is of uncertain outcome, decision is required on our voting policy under present circumstances where we are likely to be relatively isolated in negative votes and abstentions. Under these circumstances, three basic options are presented: (1) to express our disapproval in all cases (by negative votes or abstentions); (2) to determine our vote on a case-by-case basis in the light of all relevant U.S. interests; and (3) to abjure the use of negative votes or abstentions by the United States, on loans in these institutions as responses to expropriations until such time as such votes or abstentions would be in support of an expropriation policy endorsed by the institution and would receive significant support from other contributors.
One agency believes that including separate options on multilateral voting procedures is unnecessary. That agency suggests that there should be no separate policy for U.S. voting on loans by international financial institutions and that decisions on such voting should be made under the same policy formula as applied to bilateral programs.
The demurring agency believes that the premise upon which the three voting options are based is incorrect—that there will be a period of time in which the United States will not have succeeded in persuading either management or other countries to support our position and that voting differences therefore will have to come up in the Board. That agency asserts that lack of a firm U.S. stance has encouraged the IFI managements and directors to believe that the U.S. would take a relaxed view on lending to expropriating countries. That agency further believes that recent abstentions by the United States on several loans have had the effect of moving World Bank and IDB management views in the direction we desire and that adoption of a firm U.S. policy applicable equally to bilateral and multilateral assistance should further this trend and consolidate support from both management and directors. Other agencies differ in their assessment of the effects of the recent abstentions and consider this view unrealistic, particularly with respect to the regional banks. They believe that the United States will have to work hard over a period of time in order to induce the institutions and the other contributors to share our views, and even then the outcome is uncertain.
- Source: National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 131. Confidential. Circulated under cover of an August 2 memorandum from NSC Staff Secretary Davis to members of the SRG informing them the paper would be considered by the Group at its meeting on August 4. A July 28 Department of State memorandum, which forwarded the paper to Kissinger and Peterson, indicated it had been prepared by an Ad Hoc Group chaired by Legal Adviser John R. Stevenson, with wide representation from other interested agencies. (Ibid.) The paper was discussed by the SRG on August 4. Briefing materials for Kissinger’s use at that meeting, including a 13-page Analytical Summary of the paper and Issues for Decision, are in National Security Council, Secretariat, Box 98, 8/4/71 SRG Meeting—Expropriations (NSSM 131).↩
- None of the seven tabs (A-G) is printed. Tab A is “Implications of Economic Nationalism in the Poor Countries,” June 29.↩
- Entitled “Present U.S. Policy on Expropriations,” undated.↩
- Entitled “Current Situations in Noncommunist Countries Involving Expropriation or Negotiation Sale of Property in Which U.S. Corporations Have a Direct or Indirect Interest,” undated.↩
- The Senate Sugar Bill provides for a mandatory cutoff of the sugar quota of a country expropriating without compensation, a tax on the prorated quota to be used for compensating the victims of expropriations and a determination by the Tariff Commission on whether there has been an uncompensating expropriation as well as the amount of adequate compensation. [Footnote in the source text.]↩
- Entitled “Statistics on Leverage,” undated.↩
- The options are, of course, circumscribed to some extent by the provisions of United States law, in particular, the Hickenlooper Amendments to the Foreign Assistance Act (sec 620 (e), 22 USC 2370 (e)) and to the Sugar Act (7 USC 1158 (c)). Some options would require changes in those laws or modification to accommodate those laws. [Footnote in the source text.]↩
- “Benefits Which Might Be Withheld or Withdrawn in Response to Expropriations,” undated.↩
- Such a statement was issued on January 19, 1972. See Public Papers of the Presidents of the United States: Richard Nixon, 1972, pp. 31-34.↩
- Entitled “Third Party Dispute Settlement,” undated. Proposals to establish an International Investment Insurance Agency (IIIA) under IBRD auspices were not successful.↩
- See footnote 3, Document 160.↩
- The World Bank’s policy is stated as follows:↩