41. Memorandum From the Acting Secretary of State (Irwin) to President Nixon 1 2

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Subject:

  • U.S. Bauxite Investment in the Caribbean

I reported to you on April 9 the results of a meeting my colleagues and I held that day with the principals of the major American and Canadian aluminum companies to discuss problems they are confronting in the Caribbean. The purpose of this memorandum is to bring you up to date on this situation, particularly with respect to the actions we have been taking to protect important U.S. interests which are at stake.

The decision of the Government of Guyana to nationalize an Aluminum Company of Canada bauxite/alumina subsidiary has created major uncertainties regarding the future of U.S. private investment in the Caribbean bauxite industry. Involved are our relations with several Caribbean countries (principally Jamaica, Guyana and Surinam), a commodity essential to our economy, U.S. private investments in excess of $1 billion, and OPIC investment guarantees totaling more than $450 million.

This action against a Canadian firm is an extreme manifestation of the wave of economic nationalism which is affecting U.S. and other foreign private investment interests in developing countries, particularly in the Western Hemisphere and Africa. U.S. private investment in the bauxite/alumina industry in the Caribbean has traditionally been on the basis of 100% equity ownership, a pattern which was modified for the first time in 1970, when Reynolds Metals agreed to a 50–50 joint venture arrangement with the Government of Surinam to [Page 2] develop some new deposits. Some elements of the aluminum industry are strongly committed to maintenance of the principle of 100% ownership, whereas others are more willing to consider some degree of local equity participation, private or governmental.

All segments of the industry strongly oppose any arrangements which would give local interests majority control, which would have local equity financed out of future cash flow or profits, or which would in any way imperil the principle of the U.S. parent company’s management authority. Our Embassies in Jamaica and Guyana, and our Consulate General in Surinam, have all stated that some type of local equity participation in the now foreign-owned bauxite industry is inevitable in these countries in the future.

It was clear from my April 9 meeting, as it has been from subsequent contacts, that there is a basic difference of opinion—reflecting some divergence of interest—among the companies as to a proper course of action for us to pursue. John Harper of Alcoa, who showed particular concern for the future of Alcoa’s $250 million investment in Surinam (it also has major investments in Jamaica), wishes us to pursue a policy overtly critical of Guyana, making a clear and public demonstration of our unhappiness over its actions against Alcan.

The other companies, all with holdings in Jamaica (Reynolds also has holdings in Guyana which have not yet been touched) have recommended that we pursue an active but quiet, behind the scenes role in their behalf, as the course with the least risks and with the best prospects for success. They oppose the kind of public statement suggested by Alcoa. Our Ambassadors in both Jamaica and Guyana also counsel against such a public statement, since it could raise a substantial risk of bringing about precisely those actions it is designed to prevent.

U.S. Policy in Current Situation

We have pursued the following lines of policy with respect to our varied interests in this particular situation:

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(1) Guyana. In Guyana we sought to dissuade Prime Minister Burnham from resorting to expropriation, emphasizing possible economic and legal consequences of such action, as well as the positive aspects of private foreign investment. After he decided, nonetheless, to expropriate Alcan’s holdings, we have focused our attentions on protecting the interests of Reynolds’ $23.5 million OPIC-insured investment, against which Guyana apparently does not intend to move before 1972.

We have considered the possibility of direct and indirect economic pressures against Guyana, but have decided thus far to rely primarily on active diplomatic representations. We believe that economic pressures could precipitate Guyanese action against Reynolds, and might initiate a chain of events which would bring opposition leader Cheddi Jagan to power. Jagan, an avowed Moscow-Communist with a large following, would not hesitate to align Guyana with the USSR. He has urged immediate nationalization of Reynolds’ facilities and would almost certainly refuse adequate compensation.

Should Burnham achieve a successful, trouble-free takeover of Alcan’s holdings without adequate compensation, this would have serious implications for Reynolds, and for the U.S. companies in Jamaica. He is, however, now encountering a whole series of unforeseen and serious problems relating to the takeover. These continuing difficulties, reinforced by our Embassy’s representations, are principally responsible for our ability—so far at least—to dissuade the Guyanese Government from a comparable takeover of the Reynolds facility. We do not intend to do anything as a government that would assist Burnham in resolving the specific difficulties his nationalization actions bring upon Guyana.

We have closely coordinated our moves with the Canadian Government, but have relied upon the Canadians to be the principal defenders of the Canadian corporation Alcan. This is consistent with the International Court of Justice ruling in the Barcelona Traction Company case that a state may not extend diplomatic protection to its national who is a shareholder in a foreign corporation that has been injured by a third state.

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(2) Jamaica. In Jamaica, we have emphasized the Embassy’s “good offices” role to ensure the continuation of a constructive dialogue between the Government and the U.S. companies, whose bauxite/alumina investment exceeds $650 million. We have also stressed to the Government the many differences of national interest between Jamaica and Guyana which would make it unwise for Jamaica to consider following the Guyanese approach.

Ambassador de Roulet has had many frank discussions on bauxite with Prime Minister Shearer and has made strong representations to him outlining the potential adverse effects, on the Jamaican economy of any nationalization. Shearer has told us that if Burnham is successful in expropriating and operating the former Alcan facility, his ability to hold a moderate line in Jamaica will be seriously eroded. Assistant Secretary Meyer has also counseled moderation on the bauxite issue with Shearer and with opposition leader Michael Manley whose stated position on the issue does not differ greatly from Shearer’s. (A national election will take place before next February, in which the bauxite issue could become a political football. We are seeking to minimize this possibility.)

The Embassy believes that some form of Jamaican participation in ownership is inevitable and believes the outcome of the Guyanese nationalization will be a prime determinant of GOJ demands. We would not expect Jamaica to follow Guyana’s pattern in nationalizing the industry, particularly given the difficulties the latter is encountering, but we do anticipate increased Jamaican pressure for new arrangements with the companies.

(3) Surinam. In Surinam we have stressed to the Government U.S. policy regarding foreign private investment and the advantages for a developing country of a favorable investment climate. Alcoa currently has investments of approximately $250 million in Surinam. Reynolds Metals and the Government of Surinam signed on July 22, 1970, a 50–50 joint venture agreement for production of bauxite, alumina and—eventually—aluminum in West Surinam. The Surinam Government apparently views this new agreement as a model for the future.

Alcoa, which has operated in Surinam for many years and is interested in expanding its operations there, seems [Page 5] strongly opposed to any change in its current arrangements (100% ownership, and a lower tax bite than Reynolds has agreed to) with the government. Board Chairman Harper has expressed concern to us that there is a threat of expropriatory action by the Surinam Government, in the absence of a strong public stand by the U.S. Government regarding Burnham’s actions in Guyana. This is not consistent with our understanding of the situation.

In response to our Consul General’s recent representations to the government on the U.S. position regarding private foreign investment, Surinam’s Minister-President has replied that he agrees with the U.S. position, that he disapproves of Burnham’s actions, that both his party and the principal opposition party oppose expropriation, but that future foreign investment in bauxite would have to be under joint venture arrangements. He also stated that some change in Alcoa’s tax arrangements, to bring them into line with Reynolds, would be in order. He repeated this position in a talk with Deputy Under Secretary Samuels on May 18. Under existing contract, Alcoa’s present tax rate is fixed until 1988. The challenge to the status quo for Alcoa, therefore, does not originate from expropriation efforts by the government, but from Reynolds’ demonstrated willingness to respond to Surinam’s desire for investment on terms more favorable to the government than Aloca presently offers.

(4) U.S. Supply Requirement. Another key element of our assessment is the security of supply issue. In essence, we have concluded that the risk of a serious supply disruption occurring is not great, even should there be a modification in present ownership arrangements, given:

(a) the need of the governments concerned to market their products in the U.S., because of the lack of other adequate markets for their bauxite (50% of current Free World supply) and their need to earn enough foreign exchange to finance at least current levels of imports.

(b) the increasing availability of Australian and other non-Caribbean bauxite/alumina in the medium term; and

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(c) the one-year supply of metallurgical bauxite in our strategic stockpile.

For these reasons; we foresee no likely contingencies under which security of supply would be a paramount consideration in our policy deliberations in the next few years. Should there be nationalization on any significant scale what could result is a price increase for aluminum, although this is by no means certain.

(5) Anti-trust Aspects. Another potential issue concerns whether or not the companies should organize themselves jointly to deal with the threat of nationalization in these three Caribbean countries. Some companies have expressed interest in this concept, but so far they have not made any formal approach to us. Concerted action would certainly raise a serious anti-trust question. Since Guyana has been a supplier of bauxite to the U.S., such action could have some effect on U.S. commerce, and at least potentially, on prices and supplies in the U.S. As you know, in the recent Persian Gulf and North African oil negotiations we in the Department supported our oil companies’ attempts to secure the Justice Department’s approval of a carefully circumscribed program of joint action.

However, the same factors are not present in this case. There does not now exist any common front among bauxite-producing countries similar to the petroleum exporters’ OPEC, but it has been advocated by some (e.g., a report prepared last summer by the Secretariat of the Caribbean Free Trade Association-CARIFTA). Should such an organization be formed, this could change the bargaining picture for the companies; however, prospects for it seem slim at the moment.

Future Courses of Action

I will meet with the aluminum company principals at regular intervals of approximately six months to exchange views, and to brief them on U.S. policy and policy actions on their behalf, as well as the limitations on our ability to intervene.

In the interim, Deputy Under Secretary Samuels and Assistant Secretary Meyer will continue to maintain [Page 7] liaison with the companies and are reporting to me regularly on significant developments.

Our Ambassadors in Jamaica and Guyana and our Consul General in Surinam will continue to make active representations on behalf of U.S. investment interests.

Copies of relevant background documents and studies on the problem are being forwarded to Mr. Kissinger and Mr. Peterson for their information.

A general review of our policies and programs in the Caribbean, including those related to bauxite investments, has been undertaken in response to NSSM-117, addressing the broad policy options available to us in the bauxite area. It will have an inter-agency review at the regional Interdepartmental Group level in the next two weeks, before forwarding for consideration by the NSC.

John L. Irwin
Acting Secretary
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 798, Country Files, Latin America, Latin America General, Volume 4, January–June 1971. Secret. In Airgram A–90 to Kingston, the U.S. Embassy in Jamaica reported that the rise of Black Power in the Caribbean and increased economic nationalism in Jamaica might push the Jamaicans toward nationalization of the bauxite industry, Document 414. In Intelligence Memorandum 1839/69, August 6, 1969, the CIA reported on the rise of black radicalism in the Caribbean. (Ibid., Box 786, Country Files, Latin America, Jamaica, Vol. 1)
  2. Acting Secretary of State Irwin reported on efforts by some Caribbean and South American countries to nationalize the bauxite industry and steps being taken by the Department of State to respond to the situation.