Foreign Relations of the United States Diplomatic Papers, 1937, The American Republics, Volume V

611.2531/193a

The Department of State to the Chilean Embassy

Memorandum

The Department of State has deemed it a great pleasure to have had the opportunity of discussing with the Honorable the Under Secretary of Commerce²³ in a frank and informal manner the commercial relations between the United States and Chile. It is believed that these discussions have served to clarify the points of view of the Governments of Chile and the United States with respect to their commercial relations. It has been particularly gratifying to learn from the Under Secretary of Commerce that Chile entertains precisely the same objectives as those of the Government of the United States, namely the improvement and expansion of commercial relations between the two countries through a liberal trade policy which is based upon the principle of equality of treatment and designed to effect an ever increasing exchange of goods.

Although it is fully understood that the purpose of these discussions was not to reach binding commitments, nevertheless, as a matter of record, it is believed desirable to embody in a memorandum the scope of the discussions. It is the endeavor of this memorandum to set forth the principal points raised and views expressed during the discussions, but if any have been omitted through oversight, the Department of State would welcome a memorandum from the Under Secretary of Commerce indicating such omissions and making any other observations.

The Department of State set forth to the Under Secretary of Commerce its basic view concerning the improvement of international trade, namely, that a full and permanent solution of the trade and payments difficulties with which various countries are today confronted depends upon the removal of those excessive restrictions upon imports which have contributed with such magnitude to the economic depression. The Government of the United States is equally convinced that increases in imports through removal of excessive trade restrictions are certain ultimately to result in an increase of exports and that the contrary policy leads to a diminution of exports. This conclusion is believed to be especially valid when existing restrictions even although not so intended, result in some instances in preferential treatment for the products of one country as compared with the same or similar products of another country.

The Department of State informed the Under Secretary of Commerce that it was fully and sympathetically aware of the magnitude of the economic difficulties with which Chile had had to contend, and had been gratified to perceive the progress which Chile had made in overcoming these difficulties. The Under Secretary was reminded, however, that the foreign exchange control measures adopted by Chile during the economic crisis had imposed severe burdens on United States trade with Chile.²⁴ These hardships have been rendered particularly acute as a result of the preferential rates and amounts of exchange available for imports from countries with which Chile has compensation arrangements. There has been an especially wide margin of preference in the case of products such as automobiles, radios, etc., for which when imported from the United States, importers are obliged to pay as high as 35 pesos to the dollar, whereas the same or similar products originating in certain other countries can be covered at very much more favorable rates.

In contrast, the Government of the United States has continuously accorded to the imports of Chilean products unconditional most-favored-nation treatment and desires to continue that policy of equal and friendly treatment of Chilean trade.

Following the observations of the Department of State, the Under Secretary of Commerce stated that the Chilean Government was in basic accord with the views of the United States as to the necessity of removal of artificial trade barriers as an ultimate solution of present trade difficulties, and that the Chilean Government intended to proceed by progressive steps as rapidly as possible to the complete elimination of exchange restrictions. The Under Secretary stated, however, that it would not be practicable for Chile to proceed immediately to the elimination of these restrictions and that there would be of necessity a transitional period which he hoped would not be long, provided trade conditions continued favorable, during which the Chilean Government would progressively lighten the present controls.

With respect to the unfavorable exchange rates which importers of certain goods from the United States were obliged to pay in relation to the rates which importers of like goods from compensation-agreement countries were allowed, the Under Secretary of Commerce maintained that this was all a matter of availabilities. He stated that Chile does not grant preferential rates or amounts of exchange for imports from compensation-agreement countries. These rates and amounts are determined by supply and demand in accordance with the provisions of these agreements. He stated that, since in general there is available an abundance of exchange for the compensation-agreement countries, rates for imports from such countries are more favorable than for dollar exchange because the balance of payments is so adverse to Chile that dollar availabilities are insufficient despite the fact that there is made available for exports of the United States surpluses of exchange derived from economic relations with other countries and from Chilean gold production. The Under Secretary said further that the exchange restrictions in question bore on only a relatively small portion of American trade and asserted that, taking all the economic relations between the two countries into account, Chile considered that American interests as a whole received better treatment than those of any other country. He suggested that more dollar availabilities could be created if the American-owned industries in Chile could be induced to retain in that country for the time being a greater proportion of the proceeds of their sales abroad.

In regard to this suggestion the Under Secretary was informed that the Government of the United States had consistently taken the position that it could not assume any responsibility in respect of the allocation of exchange as between different American interests, and that for the same reason it did not regard it as proper to attempt to influence in any way the policies of American-owned industries in Chile in regard to exchange matters. As to availabilities, the Department of State declared that recent reports indicated that there were at the present time sufficient dollar availabilities at rates more favorable than those now established by the Exchange Control Commission for certain categories of articles, and that previous shortages had apparently occurred because of the restrictions on exchange resulting from compensation arrangements with other countries and the fact that the exchange rate of the peso was not placed at its natural point, i. e., a rate which would have resulted from the free operation of supply and demand.

It was said to the Under Secretary of Commerce that the existing inequality of treatment in exchange matters was a result in large measure of the compensation arrangements which Chile had entered into with other countries. In this regard the Under Secretary of Commerce stated that Chile did not consider these arrangements as a sound basis for trade but had been forced to accept them in order to maintain access to important markets for Chilean products. The Under Secretary said that Chile had striven tenaciously to obtain provisions in those compensation agreements which would protect the copper and nitrate industries and thereby especially benefit American interests by providing that a considerable portion of Chilean exports of these commodities should be paid for in free currency. He asserted that the Chilean Government thereby defended American interests as much or more than its own.

The Under Secretary stated that if these countries had succeeded in imposing, as they endeavored to, a régime of complete compensation on sales of nitrate and copper, the foreign exchange situation would have been very much worse, both for the United States and Chile. The Under Secretary of Commerce was reminded, however, that while Chile was acceding to the desires of certain countries importing Chilean nitrate in entering into compensation agreements, the United States, which was receiving considerably more Chilean nitrate than all of such countries combined, was imposing no restrictions upon the free importation of this product into the United States.

The Department of State heard with much gratification the statement by the Under Secretary of Commerce that the Chilean Government had the intention to discontinue exchange control as rapidly as circumstances may permit. In accordance with this expression of policy, the Department of State suggested to the Under Secretary of Commerce various steps that might be taken at this time to ameliorate the situation. Among such measures were the following:

1. To permit the category of articles regarded as not indispensable to be imported into Chile from countries not having compensation agreements to be covered in a free market at rates of exchange to be determined by the operation of supply and demand, this free market to be supplied by (1) the production of gold in Chile, (2) all available exchange other than that created by Chilean exports, and (3) exchange derived from Chilean exports when not required to pay for imports of necessary articles. It may be observed in this regard that the Department of State does not see how this could serve to increase prices in Chile for indispensable imports from the United States and other countries (Peru, Cuba, Colombia, Mexico, et cetera) making their trade settlement in dollars, which was the principal objection advanced by the Honorable the Under Secretary of Commerce to the complete abolition at this time of exchange control.

The Under Secretary pointed out that this proposal (a) might lead to the increased sale of exchange by exporters in the free market rather than to the exchange control authorities, forcing them to adopt very strict control measures difficult of enforcement when, on the contrary, the Chilean policy is progressively to lighten all restrictions on exchange transactions; and b) might curtail temporarily the production of gold which the Chilean Government desires to maintain at present levels for the time being; the Chilean Government having adopted the present system of gold purchases with the sole object of increasing the means of payment for automobiles, radios, et cetera, from the United States. It was pointed out to the Under Secretary that a) other countries have successfully maintained a system such as that suggested and b) the subsidization of the marginal production of gold was in effect a special surtax on imports of United States goods.

The Under Secretary said that he would be pleased to present the views of the Department of State to the attention of his Government. He then stated that he had a plan which he would like to suggest for the consideration of the Department of State and which might serve to ameliorate the restrictions on United States trade during the transitional period. His plan envisaged the gradual reduction of the existing margin between the gold exchange and the export draft rates until the former approximated the latter. This effect would be accomplished in three ways: a) by reducing the handling charges and the price paid for gold; b) by making available as and when conditions permit exchange not derived from the proceeds of exports or from gold; and c) by the application to so-called luxury products of any excess of exchange at the export draft rate. The Under Secretary stated that the possibility of reducing the sale price of gold exchange is, however, conditioned by the necessity of amortizing losses sustained by the gold-buying authority during a several-months period prior to October 1936 when gold exchange for imports of automobiles and radios was provided at the rate of 26 pesos to the dollar.

The Department informed the Under Secretary that it would welcome any plan which would promptly and systematically remove the discriminations now suffered by United States interests and which would thus pave the way to attainment of the objective of the complete elimination of exchange and other abnormal restrictions on United States trade.

2. To publish all regulations pertaining to exchange control procedure at reasonable periods in advance of effective dates and to administer such control in a manner which would give complete equality of treatment as among the applicants for the same type of exchange.

The Under Secretary of Commerce stated that it must be remembered that under a system of exchange control, it is often necessary to make quick decisions but that he would be glad to suggest to his colleagues in Santiago the desirability of improving the administration of exchange control.

3. In the establishment and administration of import quotas, to base quotas entirely upon imports during previous representative periods and to publish not only the quotas themselves but also all regulations with respect to their administration at a reasonable time in advance of their effective dates.

The Under Secretary of Commerce said that he saw no difficulty in this suggestion, since this seemed to be exactly what the Chilean Government was doing now.

4. Furthermore, it would be deeply appreciated if the Chilean Exchange Control authorities would make available to the United States Embassy in Santiago, in confidence if preferred, a statement of both receipts of foreign exchange, and the disposition thereof, by countries; the statement to indicate for each country the classes of payments for which the exchange was provided.

The Under Secretary of Commerce agreed that this would be a desirable procedure and said that he would be glad to present this suggestion to his Government.

As a suggestion for the improvement of commercial relations between Chile and the United States, the Under Secretary of Commerce presented informally a tentative outline of a commercial accord between the two countries, including tariff concessions, to operate until such time as a more comprehensive trade agreement might be concluded.

The Under Secretary of Commerce was informed that his suggestion opened up interesting possibilities and that it would be given the most careful study; also that the Department of State was pleased to note that many of the provisions of the suggested agreement contained the broad principles upon which it was the policy of the Government of the United States to base its reciprocal trade agreements with other countries. He was informed, however, that the United States could grant tariff concessions of the type desired solely through the instrumentality of a trade agreement made pursuant to the forms of procedure established under the Trade Agreements Act of June 12, 1934,²⁵ as renewed March 1, 1937,²⁶ requiring, among other things, public announcements and hearings. The Department of State also said to the Under Secretary of Commerce that in the event that the Chilean Government would take steps to grant equality of treatment to American trade with respect to exchange matters, and would indicate its acceptance of the unconditional most-favored-nation principle as the basis for a reciprocal trade agreement, the Government of the United States would be happy to explore with the Chilean Government the possibility of entering into negotiations for such an agreement.

Washington , July 16, 1937.

23. For about a week prior to the date of this memorandum discussions were conducted in the Department of State between Desiderio García, the Chilean Under Secretary of Commerce, and members of the staff of the Chilean Embassy, and Laurence Duggan, Chief of the Division of the American Republics, and various divisional assistants.
24. See Foreign Relations, 1933, vol. v, pp. 103 ff.; ibid., 1934, vol. v, pp. 1 ff.; ibid., 1935, vol. iv, pp. 389 ff.; ibid., 1936, vol. v, pp. 312 ff.
25. 48 Stat. 943.
26. 50 Stat. 24.