46. Study Prepared by the National Security Council Interdepartmental Group for Inter-American Affairs, Washington, August 10, 1971.1 2

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REVIEW OF U.S. POLICY IN THE CARIBBEAN AREA
Response, to NSSM–117

Prepared by National Security Council Interdepartmental Group for Inter-American Affairs
(NSC–IG/ARA)

Table of Contents Page

I. Overview 1

II. Introduction 14

III. U.S. Interests

A. Historical 15

B. Current Interests 17

IV. Situation, Trends and Policy Environment

A. The Current Situation 20

B. Trends 21

C. Current Policy Environment 22

V. Present U.S. Involvement in Area

A. Political-Psychological 25

B. Security 26

C. Trade 29

D. Investment 30

E. Development Assistance 30

F. Immigration 31

VI. Major Policy Problems

A. Nationalism, Black Radicalism and Anti-Americanism 32

B. British Disengagement from the Caribbean

1. British Presence and Intentions 35

2. British Alternatives 36

3. Implications for the U.S. 37

C. Increase in Soviet Military Activities 42

D. U.S. Caribbean Base Requirements 45 [Page 2] E. Bauxite in the Caribbean

1. Summary of Problem 46

2. Importance of Caribbean Bauxite 48

3. U.S. Policy Options 51

F. How Best to Best to React to Area’s Social and Economic Problems, Needs and Aspirations 57

1. Nature of Future Trade Relations 59

2. Nature of U.S. Economic Assistance Programs 65

3. Regional Integration Efforts 68

VII. Recommendations 70

VIII. Annexes

Annex A - NSSM–108 Interests (Summary)
Annex B - U.S. Bases and Installations in Caribbean
Annex C - Intelligence Community Response to NSSA–117, The Situation and Trends in The Caribbean
Annex D - U.S. Trade Statistics
Annex E - U.S. Investment in Caribbean
Annex F - U.S. Immigration from Caribbean
Annex G - British Dependencies and Associated States in Caribbean
Annex H - Bauxite Outlook in Guyana, Jamaica and Surinam
Annex I - Barcelona Traction Company Case

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[Omitted here are Sections I through VI, Part D.]

E. Bauxite in the Caribbean

1. Summary of Problem. Following three months of inconclusive negotiations with the company, Guyana on March 1 passed a bauxite nationalization law to permit it to take over the local subsidiary (DEMBA) of the Aluminum Co. of Canada (ALCAN). ALCAN is a Canadian corporation with about 46% ownership. The actual takeover occurred on July 15, but was immediately preceded by intensive high level negotiations which produced an agreement on compensation for the expropriated assets. Under the agreement, the Government of Guyana will pay $53.8 million in equal installments over 20 years, with interest of 6 percent. Interest payments are subject to a 25 percent withholding tax. Up to 30% of payments due in any given year (up to 40% in the first year) may be deferred, but full payment of all such outstanding deferments must be made at the end of the fifth, tenth, fifteenth and twentieth years.

The compensation is recognized as an obligation of the Government of Guyana, and is to be covered by notes in two series; one covering the fixed portion of the debt and the second, any deferred portion. The notes are non-negotiable until 1977.

The precedent established in the ALCAN case may set the pattern for similar action against Reynolds Metals’ $31.5 [Page 4] million* investment in Guyana. Guyanese officials including Burnham, however, have offered assurances that action against Reynolds will not occur before 1972. OPIC holds a $16.3 million investment guarantee covering the Reynolds investment. Moreover, the Guyanese action may trigger demands for increased local control and ownership of over $1 billion of U.S. investment in bauxite and alumina located elsewhere in the Caribbean. Of this, almost $650 million is in Jamaica and is covered by more than $430 million in OPIC insurance against expropriation. The outlook for Jamaica and other Caribbean countries will depend in part upon the ability of Guyana to successfully operate the nationalized properties and market the output of bauxite and alumina.

* “gross value” figures (total investment without regard to either appreciation or depreciation) are used throughout this paper for bauxite investments. Figures are confidential and were furnished by the companies to the Office of Emergency Preparedness.

Burnham is encountering a host of problems as a result of his own poor planning and, notwithstanding the compensation agreement, the prospects for a trouble-free operation are dim. To the extent that they remain so, it will tend to alleviate pressures for expropriation elsewhere in the region. With respect to Guyana’s internal politics, however, total failure of the nationalization scheme could pose serious bilateral problems for us. Already Burnham’s Marxist rival (Cheddi Jagan) is trying to capitalize on the government’s troubles which he depicts as resulting from inept leadership, poor planning and the failure to take over the entire bauxite industry (i.e., the U.S.-owned Reynolds holdings). In fact, Jagan has hinted darkly of U.S.-Burnham collusion to save Reynolds from ALCAN’s fate. In an atmosphere of growing labor unease and diminishing public confidence in the government’s ability to successfully operate DEMBA, Burnham might move impulsively against Reynolds and adopt anti-U.S. positions in order to reassert his “progressive” credentials. The likelihood of this would be increased if he felt the USG were applying economic pressures on him. Even less attractive alternatives include Burnham’s replacement by more extremist elements in his own party, or a Jagan return to power. In the latter event, Jagan would certainly nationalize Reynolds, and seek to align Guyana openly with USSR.

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In Jamaica, neither the government nor the opposition is anxious to follow Burnham’s lead, although both see some local equity participation in the bauxite industry as inevitable, and are searching for an acceptable formula. Both Jamaican party leaders fear that a Burnham “success” could create irresistible pressures on them to seek a similar arrangement.

In Surinam, there is no pressure at present for expropriation. Government leaders there have been critical of Burnham’s actions. For a more detailed discussion of the situation and outlook in Guyana, Jamaica and Surinam, see Annex H.

2. Importance of Caribbean Bauxite.

(a) Bauxite imports are vital to U.S. We currently import nearly 90% of bauxite/alumina from the Caribbean, nearly half from Jamaica alone and an additional 20% front Surinam, on a content basis. Our Caribbean bauxite/alumina suppliers (in rank order) are Jamaica, Surinam, Dominican Republic, Guyana and Haiti.

Major expansion of bauxite/alumina capacity in Australia, and bauxite capacity in Guinea, and to a lesser extent in Brazil and elsewhere, will substantially increase alternative sources of bauxite/alumina supply by 1973–74. These expansions reflect to a large degree a projected increase in world demand for aluminum. Substitutions for U.S. imports of metallurgical grade bauxite from Guyana (about 3% of total U.S. imports) should not be difficult. Canada, which imports nearly half (on an alumina content basis) its bauxite/alumina from Guyana will face more of a problem, but Alcan apparently believes imports could be supplied from alternative sources with little difficulty given a two-year transitional period. Larger scale substitution for existing Caribbean bauxite/alumina production (particularly any large part of Jamaican production), would take several years and major additional capital investment. Moreover, transportation costs (port-to-port) from Australia at present are much higher.

The developing situation, even assuming the worst outcome (nationalization of the Jamaican bauxite industry without any agreement on compensation) would not necessarily threaten U.S. access to adequate supplies of bauxite/alumina. Given the lack of alternative buyers for its ten million ton output, Jamaica needs our market as much as we need its bauxite, [Page 6] even though it might be able to sell a small part of its output elsewhere. The combination of stockpile availabilities, medium-term alternative sources for the U.S., and, in particular, Jamaica’s relative lack of other buyers makes the access problem not a critical one. What could be affected, in the worst outcome situation, is terms. Jamaica might capitalize on the transportation cost differential and certain technical considerations to seek a higher price for the product it sells. Even short of nationalization, its demands on the companies could compel them to consider a price increase for aluminum.

U.S. industries depend upon Caribbean producers for calcined bauxite, a special type used for refractories, abrasives, and chemicals. Guyana and, to a lesser extent, Surinam, together enjoy practically a world monopoly in the production of refractory grades. If necessary, substitutions of other materials (alumina, kyanite or synthetic mullite) could be made for refractory purposes, but at a higher cost or loss of efficiency. Available information suggests that such substitutions would have only a marginal effect on the cost of steel or cement. Industries producing these materials are primary users of bricks made from refractory grade bauxite. At present, calcined bauxite is in short supply and alternative sources are not likely to be in large-scale production before 1974.

U.S. strategic interests are important, but do not appear to be threatened. Although a preliminary review of requirements for refractory bauxite indicates a potential growing deficit, this would not seriously impair industrial activity. Strategic needs for aluminum would not be threatened unless Jamaica and other Caribbean sources generally denied or greatly reduced U.S. access to bauxite and to alumina and aluminum. This contingency seems unlikely. Total annual mobilization requirements for bauxite are calculated to be 14.5 million dry tons, of which 48 percent depends on imports from Jamaica and 26 percent on imports from other Caribbean areas. The U.S. also depends on imports of 17 percent of its alumina requirements from the Caribbean area. Direct military requirements for aluminum would not be in question because they constitute only about 23 percent of total mobilization requirements, and would be seen to by the priority system already in effect under the Defense Production Act. The other 77 percent would be required, even in war, for transportation equipment, construction materials, food containers, etc. [Page 7] The Caribbean area is considered available as a source of supply during all three years of the war emergency planned for, unlike other overseas area, which are not considered available during the first year of a war. Under present stockpile procedures, which are being reexamined in an inter-agency study in NSC channels, supply from these Caribbean Sources is evaluated in terms of the following reliability percentages: Jamaica 100 percent; Guyana, Surinam, and the Dominican Republic, 75 percent; and Haiti 50 percent.

(b) U.S. bauxite investments in Caribbean exceed $1 billion. Five U.S. corporations, Alcoa, Reynolds, Kaiser, Revere and Anaconda--are involved in bauxite/alumina production in the Caribbean. Combined total investment of these companies is estimated at over $1 billion, $650 million of which is in Jamaica. OPIC investment guarantees presently cover $447.7 million but could reach $544.3 million under existing agreements. The Aluminum Company of Canada, Ltd. (Alcan) also has substantial Caribbean interests. Although a Canadian firm, Alcan’s top management is American and 46% of the company’s shares (figure confidential) are held by U.S. investors.

(c) Status of U.S. inventories, U.S. consumption in 1970 of metallurgical and calcined bauxite, including refractory grade, was estimated at 16 million long dry tons. U.S. industry purchased from GSA some of the metallurgical grade bauxite which is excess to that required by the strategic objective. There is no excess of refractory grade bauxite in the USG stockpile and negligible commercial stocks. Including these quantities of ore under contract but as yet not removed from GSA storage sites, commercial stocks of metallurgical grade equate to about five months current consumption. USG inventories hold an additional 3.9 million tons of metallurgical grade ore which is excess to that needed to meet the objective. With Congressional approval, this could be made available to meet non-wartime requirements. Should all imports of metallurgical grades be stopped and the U.S. industry forced to rely exclusively on the stockpile, differences between Jamaican and Surinam bauxite would require the industry to make technical production adjustments. Stockpile supplies not in excess of the strategic objective can, of course, be made available for the purpose of the “common defense” during peacetime; this criterion excludes other economic reasons. In a wartime situation, security of access to foreign bauxite supplies would become more critical.

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U.S. Bauxite Stockpiles*

*All figures in long dry tons.

Type Strategic Objective Inventory Excess to Inventory
Metallurgical 10.3 million 14.2 million 3.9 million
Refractory 173,000 173,000 none

Type Strategic Objective Inventory Excess to Inventory

Metallurgical 10.3 million 14.2 million 3.9 million

Refractory 173,000 173,000 None

3. U.S. Policy Options. (Because of the intricate nature and the special importance of the bauxite problem, which involves relations with Canada as well as with three major Caribbean bauxite-producing nations and five major North American aluminum companies, a more detailed consideration of the options available to us is presented on this problem than for several of the others.)

a. Guyana. NOTE - These options are subject to revision in the light of decisions to be made on NSSM–131.

(Assumption: Reynolds will not face expropriation issue before 1972, but cannot hope to maintain the status quo indefinitely.)

Option 1. Diplomatic representations stressing general U.S. position re nationalization and compensation and problems that expropriation raises for GOG vis-a-vis USG. The primary objective would be to avoid any unilateral action by the GOG that would lead to expropriation of Reynolds; and secondarily to insure just compensation for Reynolds in the event of nationalization. This option would recognize the likelihood of an ultimate change in ownership patterns in Guyana, and would place priority on closely coordinating our actions with Reynolds and making private diplomatic representations to Burnham and the GOG when it appeared the GOG was taking any action inimical to our interests. We would hope expropriation could be avoided via negotiations, and we would encourage Reynolds to negotiate in good faith. However, we would not encourage the company to accept terms that would constitute an unfavorable precedent for future changes in Jamaica, even if the alternative was expropriation and the OPIC guarantee had to he paid.

We would take a strong stand with the GOG on assuring prompt and adequate compensation for an American company as [Page 9] a principle of international law and in order to limit claims against OPIC.

Pro - Might help delay expropriation of Reynolds in Guyana and lead to better settlement terms in event of expropriation; might limit, although not necessarily avoid, claims against OPIC; could help assure access to calcined bauxite for at least an interim period; problems with the GOG would be less than under Option 2.

Con - May he interpreted by Jamaicans and others as showing lack of strong U.S. concern over expropriation route; may bring criticism from some U.S. bauxite companies as inadequate protection of their interests; existing settlement with ALCAN might be limiting factor on terms.

Option 2. Hard line approach on expropriation. This option would be predicated on the assumptions that an aggressive approach would help deter expropriation of Reynolds, but that, even if it did not, it would discourage similar actions elsewhere. It would place primary emphasis on discouraging emulation of GOG pattern, even at the risk of undermining Burnham’s position vis-a-vis Jagan and limiting U.S. access to calcined bauxite. Under this policy the USG might use its influence to discourage U.S. firms from buying bauxite from Guyana or in any way cooperating with Guyana. Moreover, the USG might use its influence with foreign governments to limit foreign purchases and foreign assistance to the bauxite industry. It could also involve the use of public high-level statements critical of expropriation, designed to discourage nationalization of Reynolds.

Pro - Helps bring about economic difficulties for Burnham thus protecting position of U.S. bauxite companies in Jamaica and the rest of the Caribbean and reducing the possibility of OPIC having to pay claims in Jamaica; policy probably would be strongly supported by U.S. bauxite companies.

Con - Would precipitate action against Reynolds and incur likelihood of OPIC having to pay Reynolds’ claim in Guyana; would adversely affect over-all U.S. relations with Guyana and possibly cause Guyana to look to Bloc countries for assistance; could push Burnham toward extremist policies; might strengthen Jagan’s position; would lead to charges of [Page 10] economic imperialism by Guyana and others; U.S. would lose access to Guyana’s calcined bauxite, which would bring strong protest from U.S. refractory industry; barring the unlikely assistance of ALCAN to him, Burnham, who has already run into lots of problems, will have serious difficulties in any event for same time.

Contingent Options. (Assumes ALCAN has already been expropriated and Reynolds is also facing negotiation or expropriation; the options are listed as contingent and are not necessarily mutually exclusive, because we cannot now be sure of the circumstances which might prevail at the time Reynolds would be called in. Therefore, no recommendations are made concerning these options, other than that they be carefully reexamined when the situation arises.)

1(a) Use our good offices to encourage both parties to achieve a negotiated—settlement that would keep Reynolds operating in Guyana. This option would accept a changed ownership pattern with probably at least majority ownership for the GoG; the possibility of better compensation arrangements than offered to ALCAN; could include a proposal for expansion. It could involve our attempting to influence both the COG and Reynolds toward this end, without assurance of success.

Pro - If successful, would assure access to calcined bauxite; would avoid payment of claim against OPIC; could help maintain favorable relations with Burnham. Would not necessarily be prejudicial to U.S. interests in Jamaica, particularly if Guyana were having difficulties assimilating DEMBA.

Con - Could be used by Jamaicans and other countries as a precedent for demanding equity from bauxite companies; would probably be opposed by other U.S. bauxite companies; if agreement on terms acceptable to Reynolds may not be possible; if agreement reached, could strengthen Burnham’s position of leadership in the Caribbean.

2(a) Strong representation to the COG stressing general U.S. position re nationalization and compensation. While seeking to avoid expropriation, the primary objective of this option would be that of assuring just compensation for Reynolds. It would be a concerted effort on this single issue. This policy would have to recognize that Guyana could only make [Page 11] compensation from future cash flow from bauxite/alumina operations thus accepting the principle of deferred compensation. The emphasis would be on a fair evaluation of assets and an acceptable formula for future payments. It might involve our urging Guyana to submit the compensation issue for international arbitration or judgment under the Convention for Settlement of International Investment Disputes, of which Guyana is a signatory.

Pro - Could lead to better settlement terms for Reynolds in event of expropriation than would be available without representations; might limit, although not necessarily avoid claims against OPIC; would probably be acceptable position as far as other U.S. bauxite companies are concerned.

Con - Would not assure continued access to calcined bauxite: risks of having to pay OPIC claims would be greater than under Option 1(a); runs likelihood of getting less adequate compensation than under 1(a).

3(a) Hardline Approach if Reynolds is Expropriated Without Prompt, Adequate and Effective Compensation. This approach, like Option 2 above, would emphasize sanctions against Guyana. It would include measures to compound Burnham’s difficulties in running bauxite industry, and could include formal application of economic sanctions such as the suspension of assistance and sugar quota upon expiration of the six-month waiting period contemplated by statute.

Pros and Cons - Many of the pros and cons of Option 2 above would be applicable, but relations with Canada would not be an issue as a U.S. company would be involved. Although we would not be, concerned about precipitating action against Reynolds, which would be a fait accompli, this option would imply willingness to sacrifice compensator for Reynolds in Guyana--and corresponding loss to the U.S. Treasury under the OPIC guaranty--to protect larger investments in Jamaica and elsewhere. Application of formal economic sanctions, however, would require a finding by the President that Reynolds had exhausted all adequate legal remedies in Guyana and that GOG was not prepared to take other appropriate steps such as submitting the dispute to arbitration. Moreover, formal application of sanctions would aggravate the political costs foreseen under Option 2 above and would expose USG to charges in the UN of economic coercion in violation of the UNGA resolution on non-intervention and the Declaration on Friendly [Page 12] Relations between States. Further, application of sanctions to Guyana while deferring such application against Peru (and possibly Chile) would expose U.S. to charges of racial discrimination with potentially wide repercussions. This charge would be even more serious if Reynolds and OPIC reject in Guyana terms that U.S. investors and OPIC have accepted in Chile or elsewhere.

[Omitted here are Sections IV, Part F through Section VIII.]

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–214, NSSM Files, NSSM 117. Secret. NSSM 131 is published in Foreign Relations, 1969–1976, volume IV, Foreign Assistance, International Development, Trade Policies, 1969–1972, Document 155.
  2. In this response to NSSM–117, the NSC Interdepartmental Group for Inter-American Affairs (NSC–IG/AR) laid out options regarding bauxite policy in the Caribbean, including diplomatic representations and a more hard-line approach.