Foreign Relations of the United States, 1969–1976, Volume E–11, Part 1, Documents on Mexico; Central America; and the Caribbean, 1973–1976

452. Action Memorandum From the Assistant Secretary of State for Inter-American Affairs (Rogers) and the Assistant Secretary of State for Economic and Business Affairs (Enders) to Secretary of State Kissinger¹

Washington, June 11, 1975.

Jamaica: AID Loan for Rural Education

The Problem

Do developments to date in the bauxite negotiations between Jamaica and the bauxite companies justify execution of the authorized AID Loan for Rural Education?

Background

Since 1973, the Jamaican Government, in cooperation with AID, the World Bank, and Canadian technicians, has been at work on a developmental project to improve educational opportunities for the rural, predominantly Black, poor of Jamaica. AID’s participation in the project, a concessional loan, became ready for authorization in early June, 1974, which coincided with the GOJ’s bauxite actions. At the time, ARA and EB did not believe this small loan provided any real leverage and recommended that it be authorized with final execution related to developments in the bauxite negotiations. Accordingly, on the joint recommendation of ARA and EB, you approved proceeding with the authorization of a $9.1 million AID Rural Education Loan with the proviso that “execution of the subsequent bilateral agreement... be tied to developments in the bauxite negotiations” (Tab 1). The GOJ was informed of this decision (Tab 2). In December, 1974, a copy of the draft loan agreement was submitted to the GOJ for study and review. On April 18, 1975, the GOJ notified our Embassy in Kingston of its readiness to begin final negotiations on the loan agreement preparatory to its execution. GOJ officials in Kingston and in Washington have pressed for a response over the last several weeks.

The bauxite investment dispute was created by the GOJ’s passage of the Bauxite (Production Levy) Act in May, 1974. This legislation imposed a tax on bauxite production tied to the price of primary aluminum. As a result, the GOJ derived an estimated $150 million from the bauxite levy in 1974, as compared to only $25 million in bauxite revenues in 1973. The other Caribbean bauxite producers have established levies along the lines of the Jamaican formula. To prevent three companies from exercising contractual rights to submit disputes to the International Centre for the Settlement of Investment Disputes (ICSID), it canceled, insofar as awards concerning natural resources, existing statutory authority, which, pursuant to the provisions of the ICSID convention, obligated Jamaica to recognize any ICSID award to be as enforceable in the Jamaican Supreme Court as would be a final judgment of that court, and binding upon the parties.

Jamaica’s further objectives have been to regain ownership of company ore reserves, obtain majority equity participation in the mining operations (the companies retain managerial control, at least through an initial period), and secure additional company investment in the bauxite/alumina industry in Jamaica. Negotiating separately, three U.S. firms—Kaiser, Revere, and Reynolds—have now negotiated heads of agreements in conformity with all the Jamaican objectives. Revere, however, has notified the GOJ that it wishes to close down production in Jamaica for a minimum of six months and is holding discussions with the GOJ. There is no precise timetable for the remaining companies, Alpart (a consortium composed of Kaiser, Anaconda, and Reynolds), Alcoa, and Alcan, to complete negotiations; and they may run into late 1975 or 1976.

Analysis

ARA Position

ARA believes that prompt negotiation and signing of the agreement for this small development loan directed at Jamaica’s rural poor is justified in terms of the progress made to date in the bauxite negotiations.

ARA views our continuing delay in negotiating and signing this small loan as serving only as an adverse influence on the negotiating climate and souring our bilateral relationship to a degree far beyond the intrinsic importance of the loan.

The GOJ has reached agreements in principle with the three companies most dependent on Jamaica. Further delay on the loan will not force any change in the GOJ strategy with the remaining companies. It will only stiffen the Jamaicans’ resistance, and they can be counted on to raise the question publicly. Within the next few months, Manley will be traveling to Mexico and Cuba and is scheduled to address the UNGA Special Session on September 3—and could exploit the current situation to his advantage. The Latins are, to a man, opposed to our efforts to tie aid to good behavior towards multinational corporations, with the Hickenlooper and Gonzalez amendments among our biggest headaches in the hemisphere.

We have been working hard to defuse this dispute for the last year, and we have succeeded in good measure. Why expose ourselves to a fresh round of criticism about “economic coercion” for something which will have no practical effect anyway?

So says ARA—strongly.

ARA also views the prolonged delay in taking action on this loan as akin to keeping Jamaica under an indefinite sentence. Further delay ties the USG to supporting the companies’ positions without knowing whether or not their positions are in our best interest. Furthermore, using this loan as the sole measure of signaling our displeasure is only confusing the GOJ in that, in other activities, including P.L.–480, EXIMBANK credits, CCC agricultural credits, etc., we have been pursuing what could be characterized as a normal bilateral relationship.

Of particular concern to ARA is the fact that the sanction involves a program designed to help Jamaica’s neediest people, and that withholding the loan can be exploited to our discomfort by the GOJ as an act of callousness by the USG.

The Trade Act, which was not available to the USG to use as leverage last June, provides possible sanctions to employ against Jamaica should unfavorable developments in the negotiations occur. The GOJ is fully aware of the eligibility requirements for GSP consideration and has taken note of the Taft amendment, which penalizes a country for failure to uphold an arbitral award. In addition, we might consider making a strong démarche and withholding other concessional credits if the situation warrants. These are potentially more effective levers, although the application of economic sanctions in these matters is of questionable effectiveness.

ARA would agree that no new loans (after the education loan) should be considered until there is a satisfactory solution of the bauxite problem.

EB Position

EB sees no benefit to the U.S. from granting the $9 million loan. The best that can be said in favor of signing now is that we could possibly avoid some uncomfortable criticism.

There is a much greater and far reaching risk, however, in granting the loan at this time. Our response to Jamaican efforts to break contracts and treaty commitments, jack up prices and form a producer cartel will inevitably be viewed by other primary producing countries as an important indicator of USG policy toward such efforts. It would be a serious error to allow our policy to be misinterpreted. If we ratified Jamaican tactics, Jamaica and other raw materials producers would be encouraged to repeat them. The Jamaicans have thus far (a) imposed demands unilaterally and in breach of contract through legislative action and (b) withdrawn from treaty commitments to the U.S. (The GOJ rescinded legislation that gave ICSID awards relating to natural resources the statutory force in Jamaica required by the ICSID convention). It is essential that the U.S. not appear to accept such tactics as legitimate means for pursuing national objectives. Likewise, the USG should not appear to approve the terms imposed by the GOJ on three U.S. companies to date. Accordingly, the rural education loan should be delayed, as a minimum, until the major U.S. companies have reached agreements in principle and we are able to assess the implications of those settlements in light of U.S. national interest.

Further, we should not have a continuing aid program in Jamaica, given that bauxite will be a continuing problem between Jamaica and the U.S. Prime Minister Manley will continue to squeeze the companies further, regardless of contractual commitments, given his policy of establishing a socialist economic system and his need to turn again to bauxite for fiscal relief in the future. It would thus be folly to present to the GOJ new loan proposals which almost inevitably will become ensnared in a resurgence of the bauxite dispute.

L Position

L calls attention to the ICSID proceedings filed by Alcoa, Reynolds, and Kaiser against the GOJ (Reynolds and Kaiser have agreed in principle to withdraw as part of their Phase II settlement). Because we do not want the GOJ to interpret our action on the loan as suggesting that the ICSID question is not important to us, L recommends that we clearly point out to the GOJ our interest in the integrity of the ICSID proceedings and to voice the expectation that the GOJ, like the USG, will honor any award eventually granted.

Treasury Position

Treasury’s position is that this loan was obligated with an explicit decision, in which Secretary Simon participated, to hold up signing as leverage to press Jamaica to resolve the bauxite disputes. Treasury reconsidered the situation, including a personal review by Secretary Simon, taking into account recent agreements in principle between the GOJ and three of the bauxite producers, and feels strongly that the USG should continue to withhold the proposed aid loan for now. This case must be viewed in the context of our overall expropriation policy. Signing the loan would signal the rest of the world—and particularly the LDCs inclined to support or follow the GOJ’s lead—that the USG is not concerned with and will not meaningfully respond to GOJ (and other LDC) efforts to (a) subvert ICSID as an institution for settling investment disputes, by unlawfully withdrawing consents earlier given to arbitrate and (b) unilaterally abrogate contracts with foreign investors which remain abrogated or unresolved from the foreign investor’s point of view. We do not wish to provide some elements within the GOJ the opportunity to claim success in redressing the power balance with the MNCs while at the same time acquiring concessional assistance from the USG.

In addition, Treasury wants to point out that (a) to the furthest extent possible, we should encourage Alcoa not to accept a settlement which is disadvantageous to the U.S. (Alcoa has expressed the view that it would be better not to sign the loan now), and (b) we should not provide concessional assistance to fill a foreign exchange gap in Jamaica at a time when it is discouraging private capital flows by its attitudes and actions toward foreign investment in bauxite and in other areas.

The Options

1. Initiate final negotiations on the loan agreement with intention to sign loan agreement when negotiations are completed, with internal USG understanding that no further AID capital lending would be provided to Jamaica until there is a satisfactory solution of the bauxite problem, including the ICSID aspect. In informing the GOJ of our decision, we would convey our continuing interest in the integrity of the ICSID procedure.

Pro

—Requires that future assistance take into account the status of negotiations and would provide flexibility for future sanctions in the event GOJ undertakes additional initiatives.

—Would remove an irritant in our bilateral relationship and demonstrate our interest in maintaining friendly relations with Jamaica.

—Could help preserve an atmosphere conducive to a favorable settlement of all negotiations.

—Reduces potential GOJ exploitation of the linkage between this loan and the bauxite negotiation in appeals to hemispheric and Third World allies.

Con

—To provide USG financial assistance in the context of a major unresolved investment dispute could be mistakenly interpreted as lack of USG support for fair treatment of U.S. investors.

—Granting the loan could be viewed as indifference to the GOJ position that it will not honor an ICSID award, should Alcoa pursue its contractual right to arbitration to a conclusion.

—Execution of the loan could be falsely interpreted as official approval of the terms of the settlements negotiated to date.

—The loan would provide no leverage to obtain moderation of GOJ demands in its negotiations with the companies.

—Treasury would take execution of the loan as confirmation of Treasury’s long-standing allegation that State is too “soft” to remain in charge of expropriation policy.

2. Continue to delay negotiation and execution of the loan agreement until there is a mutual resolution of issues at dispute with the major companies; e.g., delay decision until outcome of the Alcoa negotiations is clear.

Pro

—Would convey a conviction that new bilateral lending is inappropriate in the context of a major unresolved investment dispute.

—Would support USG disapproval of the stated GOJ position that it will not honor an ICSID award in the natural resources area.

—Would avoid an appearance of lending official approval to the terms of agreements reached to date.

—Would head off an allegation by Treasury that State is too “soft” to remain in charge of expropriation policy.

Con

—Would be viewed by the GOJ as a punitive action, antagonize friendly elements in the GOJ, and have an adverse effect on U.S.–GOJ bilateral relations.

—May encourage the GOJ to take precipitate action in imposing a unilateral solution on those companies with which it finds difficulty in negotiating a settlement.

—Would enable the GOJ to implicate the USG for using economic assistance to protect MNCs, especially Alcoa, against economic nationalism in appropriate multilateral fora.

—Would probably delay execution of the loan, which has already been authorized almost a year, for several more months; i.e., into 1976.

—Would postpone signing well into the next academic year, which might force the GOJ to seek financing for the educational loan program elsewhere.

Bureau Recommendations

ARA strongly supports proceeding with final negotiations and execution of the loan agreement (Option 1). Continued delay in executing this loan is no deterrent, only an irritant. The Jamaicans will not knuckle under on bauxite to get this loan. And rejecting it does not convey a clear signal of the USG position, given our approval of over $21 million in EXIMBANK credits and $1.5 million in P.L.–480 Title I assistance since June, 1974. The Trade Act’s sanctions against countries which refuse to comply with an ICSID award provides leverage that far outweighs this loan. ARA agrees that no additional loans should be considered until there is a solution to the bauxite problem.

EB recommends Option 2. Granting the loan will not induce the GOJ to reduce its demands upon the aluminum companies. The investment dispute has not been resolved; until it is, execution of this loan to Jamaica is not appropriate.

L also supports Option 1 on grounds that it most clearly follows existing guidance. Execution of this modest loan is not unreasonable in view of the progress in the negotiations to date, and in any event, is consistent with the Hickenlooper amendment and the January, 1972, policy statement. The GOJ should be made aware, however, of our continuing interest in the integrity of the ICSID procedure.

Unless State has overriding political reasons for not moving forward with the loan at this time, AID prefers Option 1 on the grounds that the loan is fully justifiable in developmental terms and represents an orderly final step in a development activity that was well underway long before the bauxite problem arose. AID is concerned that further delay could lead the GOJ and others to attack the use of developmental assistance as a form of economic coercion. If we proceed with the loan, AID concurs in L’s recommendation that we make clear our position on ICSID to the GOJ.

Recommendation:

That we proceed to negotiate and sign the loan with the internal USG understanding that no further AID capital lending would be considered until there is a satisfactory solution of the bauxite problem, including the ICSID aspect. In informing the GOJ of our decision, we would convey our continuing interest in the integrity of the ICSID procedure (Option 1) (ARA, L, and AID).

ALTERNATIVELY, that we continue to delay negotiation and execution of the loan agreement until there is a mutual resolution of issues at dispute with the major companies, e.g., delay decision until the outcome of Alcoa negotiations is clear (Option 2) (EB, and Treasury).

1. Summary: Rogers and Enders presented the views of their respective bureaus on whether or not to proceed with a planned AID loan to Jamaica prior to the resolution of the bauxite issue.

   Source: National Archives, RG 59, Central Foreign Policy File, P830115–0764. Confidential. Drafted by Norton and Stebbing on June 9, and cleared by Eagleburger and John Murphy in A/AID and in draft by Bushnell, Luers, Kleine, Gantz, Burke, and Boeker. Kissinger approved the first recommendation on June 24 and wrote: “Make sure we get Treasury aboard.” Tab 1 is published as Document 448; Tab 2, telegram 162106 is dated July 25, 1974. (National Archives, RG 59, Central Foreign Policy File, D740202–0526)