148. Editorial Note

The Hickenlooper Amendment to the Foreign Assistance Act of 1961 required that the United States terminate foreign assistance programs in countries that had expropriated U.S. citizens' (corporate and personal) property without conforming to standards of international law, that is, without providing prompt, adequate, and effective compensation, submitting the dispute to binding international arbitration, or returning the property within 6 months. This amendment also required the United States to vote against loans from the international financial institutions (International Bank for Reconstruction and Development (World Bank), Inter-American Development Bank, and Asian Development Bank) to countries that had expropriated U.S. property. In the case of the Inter-American Development Bank, a negative U.S. vote would block the loan. The Hickenlooper Amendment was one of a number of "barnacles" in the Foreign Assistance Act taken up in the administration's overall approach to foreign assistance policy.

On October 9, 1968, the Government of Peru expropriated assets of the International Petroleum Company (IPC), a U.S. entity, and administratively took over the remainder of IPC's assets on January 28, 1969. The expropriation occurred in the context of a military coup that brought General Juan Velasco to power. The Sugar Act of 1948 also required suspension of the U.S. sugar import quota for countries that had expropriated U.S. citizen assets, and this act would apply to Peru. If the Peruvian Government did not pay compensation or otherwise resolve the dispute, termination of foreign assistance and suspension of the Peruvian sugar quota were imminent in April 1969.

In its closing weeks the Johnson administration was unable to resolve the issue and the Peruvian expropriation was one of the items on the agenda for the Nixon administration. On January 29, 1969, Henry Kissinger forwarded to the President a January 28 memorandum from the Department of State to Kissinger apprising him of the Peruvian/IPC situation. The section on "Consequences for U.S. Relations" in the State Department memorandum reads in part as follows:

"Up to now we have apprised the GOP quietly but forcefully of the existence in US law of the Hickenlooper amendments. We have sought to avoid confrontations so far, so as to give the Government room to maneuver and find a graceful way out. Unfortunately, the GOP's reaction to our approaches has been truculent rejection of the sanctions as an intrusion in internal affairs.

"What has made the situation so tragic is the mandatory requirement of the US law. Were it not for that, the US would have more flexibility, more options, and greater time to handle the problem, and without the need to appear to 'punish' which makes the present confrontation so serious.

"Aside from the expectable consequences already noted, application of US sanctions will surely precipitate widespread and vehement criticism of the US throughout Latin America. The larger Latin American countries especially would view such action as 'intervention', and would see the power to sanction in this way as threatening to themselves. In short, it would almost surely provide impetus toward unifying the now fractionated anti-US sentiment that exists in the region."

In his covering memorandum Kissinger told the President that the Latin American Interdepartmental Group had been asked to develop contingency plans should the "crisis" worsen. (National Archives, Nixon Presidential Materials, NSC Files, Country Files, Latin America, Box 794, Peru-Hickenlooper Amendment, Volume I 1/21-3/31/69)

At the end of January U.S. Ambassador to Peru J. Wesley Jones was called back to Washington for consultations. In the following weeks the Nixon administration attempted several initiatives to resolve the IPC situation with Peru, including discussions with World Bank President Robert McNamara, the dispatch of a special emissary to negotiate with high-level officials in the Peruvian Government, and economic pressures on Peru short of what might be considered overt economic aggression. In the meantime, because the Hickenlooper Amendment required sanctions if the expropriating government failed within 6 months to take "appropriate steps . . . to discharge its obligations under international law toward such citizen or entity, including speedy compensation for such property," the administration argued that negotiations with Peru over the expropriation constituted "appropriate steps" and deferred application of the amendment.

When little movement resulted from these efforts, the Nixon administration introduced an amendment to the Foreign Assistance Act that would allow the President to waive application of the Hickenlooper sanctions when he found the waiver in the national interest. Administration officials held talks with a Peruvian commission in Washington and considered other measures to delay application of Hickenlooper sanctions against Peru. At the same time, new bilateral development loans to Peru were withheld, one of the requirements of formal application of the Hickenlooper Amendment.

A severe earthquake struck Peru on May 31, 1970; up to 30,000 people were killed and 200,000 were left homeless. While the IPC case and other contentious issues in U.S.-Peruvian relations persisted, the need for reconstruction assistance dominated the relationship. Unusually heavy rains in Peru in the early spring of 1972 caused extensive economic damage to the agricultural northern coastal plain and the neighboring mountains, again raising the question of reconstruction assistance and detracting attention from the IPC matter.

A further complication arose when, despite the administration's opposition, Congress passed the Gonzalez Amendment on March 10, 1972 (Section 21 of the Inter-American Development Bank Act, P.L. 92-246; Section 12 of the International Development Association Act, P.L. 92-247; and Section 18 of the Asian Development Bank Act, P.L. 92-245). This amendment required the President to instruct his representatives to vote against any foreign loans to countries that expropriated U.S. investment without compensation and was even more restrictive in its exceptions than the Hickenlooper Amendment by substituting specific requirements, such as good faith negotiations, for the concept of "appropriate steps." As the first Nixon administration ended, its officials were considering whether the Gonzalez Amendment also applied to the IPC expropriation, which had taken place before its enactment.

Documentation on the Peruvian situation is in the National Archives, Nixon Presidential Materials, NSC Files, Country Files-Latin America, Peru, Boxes 792 and 793, Peru-Hickenlooper Amendment, Box 794, and Peru-IPC-Hickenlooper Amendment, Box 795; ibid., NSC Files, Subject Files, IADB, Box 333; ibid., RG 59, Central Files 1967-69, AID (US) and AID (US) 5; ibid., Central Files 1970-73, AID (US), AID (IBRD) 9 PERU, and AID (IDB) 9 PERU; ibid., S/S Files: Lot 80 D 212, NSSM 18, NSSM 42, and NSSM 158; ibid., S/S Files: Lot 73 D 288, NSC Review Group; ibid., S/S Files: Lot 83 D 305, NSDM 11, NSDM 21, and NSDM 199; National Security Council, Secretariat, Boxes 90 and 91; and Washington National Records Center, Agency for International Development, AID Administrator Files: FRC 286 73 A 158, LEG 6 Foreign Assistance Act.

In addition to the expropriation by the Government of Peru of the assets of the International Petroleum Company, U.S. officials were faced with the prospect of expropriation of U.S. private copper companies operating in Chile. In a May 4, 1969, letter to President Nixon, President Eduardo Frei of Chile wrote that he would soon present an austere economic program for Chile to try to control inflation and revive a depressed agriculture resulting from a severe drought the previous year. While expressing his desire for continued good relations with the United States, he warned: "To present this plan and to exclude from these sacrifices the copper producing companies is politically and morally impossible." (National Archives, RG 59, S/S Files: Lot 72 D 320, Chile: Frei to Nixon) President Frei informed the U.S. Ambassador in Santiago, Edward M. Korry, that he had to make changes in two areas of the 1967 agreements which would affect two U.S. companies, Kennecott and Anaconda: link the tax rate to the price of copper instead of a 53-54 percent rate regardless of the price, and "Chileanize" Anaconda, which was still entirely U.S.-owned, either by getting Anaconda to sell some of its stock to Chile or, if necessary, by expropriation. (Memorandum from Kissinger to President Nixon, May 6; National Archives, Nixon Presidential Materials, NSC Files, Country Files-Latin America, Chile, Volume I 1969, Box 773) Because Kennecott was already 51 percent-owned by the Government of Chile, it was not a candidate for expropriation.

President Frei informed the American copper companies of his goals on May 9. (Memorandum from Vaky to Kissinger, May 19; ibid.) Intense negotiations began on June 2 and concluded with an agreement with Anaconda on June 26. Although the negotiations were conducted directly between the Chilean Government and the companies, Ambassador Korry played an important role in mediating between the parties. In effect, the parties worked out a formula by which Chile would buy the entire company. The details of the agreement and its implications for future U.S.-Chilean relations as well as for prospects for expropriation initiatives by other countries were spelled out in a memorandum (with enclosures) from Department of State Acting Executive Secretary John P. Walsh to Kissinger, July 1. (Ibid.)

The Chilean elections in September 1970 brought to power the Socialist candidate, Salvador Allende, who had pledged during the campaign to submit legislation to the Chilean Congress covering nationalization of the major copper producers in Chile. In the following months, Nixon administration officials considered a broad range of political, diplomatic, and economic responses to prevent the consolidation of the Allende government, to try to limit its ability to implement policies contrary to U.S. and hemisphere interests, and at the same time to avoid precipitous actions that might allow the Allende government to rally support or blame the United States. The economic pressures against Chile included ending or cutting back further the U.S. Government's bilateral loans, as well as its financial assistance or guarantees for U.S. private investment, and persuading international lending institutions to limit financial assistance. Because copper accounted for about 80 percent of Chile's foreign exchange earnings, measures were also considered that might affect the marketing of Chilean copper. As Allende sought enabling legislation and constitutional amendments from the Chilean legislature to nationalize major industries, especially the American-owned copper mines, Nixon administration officials agreed that if expropriation occurred without just compensation, the United States would use the 6-month waiting period in the Hickenlooper Amendment to explore prospects for working out settlements. When Chile seemed receptive to some kind of pragmatic compromise with the copper companies, the Nixon administration avoided a direct confrontation with the Allende government and approved or deferred some loans and FMS credits instead of cancelling them.

A July 16, 1971, amendment to the Chilean Constitution effectively nationalized the three largest copper companies in Chile (Anaconda, Kennecott, and Cerro), and the Government of Chile announced on October 10, 1971, that there would be no compensation for Anaconda and Kennecott and only $13 million for Cerro. Meanwhile, President Nixon had issued National Security Decision Memorandum 136 on October 8 (Document 169), which set forth the administration's expropriation policy. The Nixon administration intensified its economic pressures on the Allende government: when Chile stopped paying its foreign debts, most of which were owed to U.S. companies or the U.S. Government, and sought multilateral rescheduling of them, the administration took a hard line that would include Chile's prompt and adequate compensation for its expropriation of U.S. properties.

U.S.-Chilean relations were further complicated when Allende announced on April 18, 1972, that he would send legislation to the Chilean legislature requesting the nationalization of the International Telephone and Telecommunications Company (ITT). On the following day a multilateral rescheduling agreement between Chile and its creditors was reached in Paris. As 1972 ended, the Allende government faced serious economic dislocation and political instability. The Nixon administration was still considering whether to sign the rescheduling accord; and its policymakers were engaged in bilateral talks with Chilean representatives, with the U.S. side emphasizing debt repudiation and compensation for expropriated property and the Chilean representatives stressing access to U.S. and U.S.-influenced financing. A national interest waiver announced by Secretary of State Rogers on November 17, 1972, allowed the U.S. Government to remain engaged with the Chileans pending resolution of the issues.

Documentation on the Chilean situation is in the National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Treasury, Box 290; ibid., Country Files-Latin America, Chile, Boxes 773-778; ibid., Subject Files, Box 336; ibid., RG 59, Central Files 1970-73, AID (US)(CHILE), POL CHILE-US, and POL 1 CHILE-US; ibid., S/S Files: Lot 72 D 320, Chile; ibid., S/S Files: Lot 80 D 212, NSSM 97; ibid., S/S Files: Lot 73 D 288, NSC Files, NSC Miscellaneous Memos, NSC Meetings, SRG Meetings, and SRG Miscellaneous Memoranda; ibid., S/S Files: Lot 83 D 305, NSDM 93; National Security Council, Secretariat, NSC and SRG Meetings, Boxes 86 and 119; and Washington National Records Center, Department of the Treasury, Secretary's Memos: FRC 56 74 A 17; ibid., Files of Under Secretary Volcker: FRC 56 79 A 15, Latin America, and NAC; and ibid., Agency for International Development, AID Administrator's Files: FRC 286 75 A 13.

Washington, April 6, 1970.

SUBJECT
Your Memorandum of March 28 on Protection of American Property in Foreign Countries/2/

The document in your possession is, I believe, part of a larger study being prepared by a working group in the State Department at the Secretary's request./3/ The project is in the early stages of drafting, and the end product will likely consist of more than one paper.

The subject is the general one of "economic nationalism" in developing countries and its implications for U.S. investment. The papers will consider specific cases of expropriations or disputes which have arisen in a series of countries, including most of the ones you list in your memorandum. The difficulties vary from case to case, but all cases, as you can imagine, involve delicate matters of negotiation.

The principal purpose of this study is to develop specific recommendations for improving our handling of these cases. It will deal with such topics as ways of promoting new U.S. investment in a manner consistent with the preferences and priorities of the host countries, ways of protecting existing U.S. investments, means and strategies for settling disputes with host countries, ways of improving cooperation between the U.S. Government and U.S. investors, and so forth. Any recommendations for new policies or possibly new legislation will most likely be matters for Presidential decision.

In short, I can assure you that the entire exercise is intended to address the concerns which you express.

The study will be, of course, a classified document. If you receive any further inquiries, I recommend that you state simply that the entire subject is being studied carefully, that these concerns are being addressed, and the matter will likely receive Presidential attention.

Washington, September 8, 1970.

SUBJECT
Encouragement and Protection of Investment

PARTICIPANTS
Nathaniel Samuels, Deputy Under Secretary for Economic Affairs
Charles Meyer, Assistant Secretary, Bureau of Inter-American Affairs
Herbert Salzman, Assistant Administrator, Office of Private Resources
David D. Newsom, Assistant Secretary for African Affairs
John R. Stevenson, Legal Adviser
Eugene Braderman--E/CBA
Sidney Weintraub--E/IFD
Robert Smith--AF/W
Joseph Mintzes--IN

The Working Group on Protection of U.S. Private Investment Abroad/2/ met with Mr. Samuels this morning to discuss the paper prepared by L on the "Encouragement and Protection of Investment in Africa, Asia and Latin America."/3/ Mr. Stevenson reported that there appeared to be general support for a more selective approach to the encouragement of U.S. direct investment in the developing countries, and that there also appeared to be considerable support for a policy of avoiding coercion in the solution of investment disputes. Mr. Samuels then asked whether the U.S. should continue to encourage U.S. private investment abroad through such direct and tangible means as the investment guaranty program. He wished to know the extent to which that program actually contributes to the flow of investment funds to developing countries and what impact it has on our relations with those countries. What effect would the curtailment of the program have on investment?

Mr. Salzman indicated that, given the fact that we have had an investment guaranty program for many years, the termination of the program would have wide repercussions. In his view, countries such as Indonesia would be hurt, and it would be particularly difficult to induce flows of debt investment to LDC's without guaranties. In general, investors would demand a higher rate of return. AID has considered the possibility of placing a ceiling on the amount of guaranties in certain countries where AID exposure is very great and it has decided to gradually wean some countries such as Korea from the investment guaranty program. AID has a guaranty exposure commitment in Korea of approximately one billion with another 500 million in the pipeline. Although it is not possible to estimate the amount of investment that might be lost if guaranties are not forthcoming, the percentage would be significant. Mr. Salzman emphasized that there are many other aspects to U.S. encouragement of investment than the guaranty program including information, advisory assistance, and protection policies, and he stated that a judgment on the investment guaranty program should be accompanied by a review of measures for the protection of U.S. investment abroad more detailed than that in the draft paper.

There was also discussion of the implications of the guaranty program for U.S. Government involvement in investment disputes with foreign governments. Although it was pointed out that the U.S. Government cannot expect completely to avoid involvement as long as it follows the traditional practice of diplomatic espousal of claims, an investment guaranty may involve the United States Government at an early stage of the dispute as U.S. Government responsibility under an investment guaranty contract may come into play before the host government's decision on compensation is determined. On the other hand, AID guaranty contracts with investors contain their own definition of expropriation and compensation formulas which may differ from the obligation of the host government under international law.

Mr. Samuels indicated that he was leaning towards not encouraging investment where it is not wanted. He suggested it might be best to encourage the developing countries to determine how much they wish to encourage foreign private investment and to establish the necessary incentives. U.S. investors could rely upon tax write-offs for losses from foreign expropriations. Mr. Braderman mentioned three considerations other than foreign policy consequences that argue against an investment guaranty program. (a) It is questionable whether unilateral programs such as guaranties improve the investment climate; (b) U.S. labor is concerned about the creation of competitive export industries in other countries; and (c) there is some opinion that foreign investment diverts resources that are needed at home.

Mr. Weintraub and Mr. Salzman emphasized the development objectives of the investment guaranty program and the increasing importance of transfers of private resources as U.S. public assistance for developing countries declines, at least in relative terms. Mr. Newsom suggested the importance of distinguishing between Africa where investment guaranties are needed to channel investment into new areas and other regions with a history of investment disputes. In Africa, U.S. influence depends upon association with the transfer of private resources, which transfer may or may not depend upon guaranties. Further, Africa holds large supplies of important minerals and it is in the national interest to secure access to these supplies through U.S. private investment.

Mr. Newsom stated that in Africa in the last 10 years there have been no expropriations without compensation except in Algeria,/4/ and he urged that we maintain perspective on the few problems we have had in comparison with the total magnitude of investment. In this regard, it was recalled that AID has paid claims under political risk guaranties of approximately $3,000,000.

/4/Accommodations were reached in investment disputes with Zambia and the Central African Republic. Zambia had assumed 51 percent of an American mining company and the Central African Republic had seized American-owned diamond mines.

Mr. Meyer said that the U.S. Government should determine that it is in the national interest to ensure sources of certain important minerals. There are many techniques for encouraging investment in those sectors. Noting that protection will present problems, he observed that we cannot hope to have a policy that will be completely free from problems.

In conclusion, Mr. Stevenson suggested that the group seemed to be agreed on a policy of selective encouragement of investment in the developing countries. No one supported a policy of general encouragement of all investment. With respect to protection policy, there may be some difference of emphasis, but there seems to be agreement that we do not need the Hickenlooper Amendment. Mr. Samuels asked if there were any new ideas on measures to encourage governments to respect their agreements with investors. Mr. Stevenson expressed the view that perhaps further guidance could be sent to our posts abroad to be alert to investment disputes and to advise the Department more fully at an earlier stage.

At the close of the meeting, Mr. Samuels reviewed the specific suggestions in Mr. Stevenson's memorandum of August 11 and expressed the following views.

(a) AID should administer the investment guaranty program selectively. In addition to the actions taken to date, consideration should be given to maintaining an investment guaranty program only in those countries that are prepared to conclude agreements containing adequate assurances for the settlement of investment disputes. Others at the meeting expressed reservations on this point.

(b) The U.S. Government is now supporting a multilateral investment insurance scheme with participation of the LDC's in some form. We might be prepared to forego that participation, but four or five donor countries will not.

(c) The U.S. Government already encourages investors to accept local capital participation to some extent, but the outstanding guidance to our posts calls for a neutral position on this matter. Perhaps the Embassies should be given new guidance indicating U.S. Government support for the concept of local capital participation but not making such participation a condition for U.S. Government support.

(d) At the first opportunity, the Hickenlooper Amendment should be revised to afford the President greater flexibility. The Administration AID bill to be submitted to the 92nd Congress may be the best opportunity.

(e) The guidance to U.S. posts with respect to the encouragement of U.S. private investment and the avoidance of investment disputes should be revised and brought up to date.

(f) Additional measures to encourage acceptance of impartial procedures in the settlement of investment disputes should be considered in the light of the comments to be submitted on the L memorandum on that subject.

(g) No decision was taken on the desirability of a statement by the Secretary on U.S. policy towards investment. However, subsequently Mr. Samuels asked Mr. Stevenson to revise the paper in light of this meeting omitting the options rejected and presenting recommendations to the Secretary.

In addition to the problems of expropriation of U.S. properties in Peru and Chile (see Documents 148 and 149), by late 1970 Nixon administration officials were becoming increasingly apprehensive about the general problem of growing investment disputes of U.S. companies in foreign countries and the expropriation of U.S. companies by foreign governments (see Documents 150 and 151). The documentation printed here details the administration's increased attention given to the problem and its efforts to develop a comprehensive policy that could be applied to specific cases. This compilation does not attempt to document in detail the Nixon administration's responses to the many nationalizations by foreign governments of U.S. companies or companies with U.S. shareholders' participation. Readers interested in the U.S. response to specific expropriations should consult the compilation covering the country in the appropriate Foreign Relations volume.

Washington, May 8, 1971.

SUBJECT
Pending Expropriation Cases Involving United States Property Abroad

A National Security Council memorandum of May 4 states that you have been informed that there are "200 expropriation cases pending involving U.S. business abroad," and that you wish an individual report on each of these cases./2/

Our records of expropriations and nationalizations indicate that there are currently pending 56 corporate cases, of postwar origin, in 16 non-Communist countries./3/ This figure is based on a broad definition of "expropriation" to cover even cases where host country pressure falls short of nationalization of majority ownership of the affected corporations.

We have consulted with the Department of Commerce, the source of the original report,/4/ and have reviewed with them the 200 cases cited. The vast majority of these cases stem from trade complaints. They cover a variety of foreign governmental actions during 1970 which in some way--either actual or potential--affect adversely U.S. economic interests.

Individual and other known claims also are included in the attachment./5/ There are also thousands of unsettled claims in Communist countries, which are summarized in the attachment.

Most of the 56 actual pending expropriation cases involve disputes now under negotiation or litigation. The only significant non-Communist corporate case with little present prospects for settlement involves the International Petroleum Company in Peru. In addition to that one, we anticipate that the compensation negotiations over the nationalization of United States-owned copper mines in Chile may also pose difficult issues, although the Allende Government has stated publicly its intention to negotiate with the companies./6/

While every expropriation by a foreign government is a potential problem, the majority of such cases are small and are settled without United States Government intervention. Others are significant due to size and to their significant impact on our overall relations with the host country. The 56 current cases in which U.S. interests have been seized but for which compensation arrangements have not been implemented have an aggregate book value of $875 million, of which about $575 million is in Chilean copper mines.

To put these 56 cases in perspective, it should be noted that over a dozen cases have been settled since the beginning of 1970. For example, five cases were settled in Algeria alone, involving Mobil, Atlantic Richfield, Dresser Industries, Esso and Newmont Mining. Settlements on significant expropriation actions were also reached in Chile and Zambia--involving South American Power, a Boise Cascade subsidiary, and the 80 percent US-owned Roan Selection Trust. Finally, the enclosed list of 56 cases includes some--most notably Gulf Oil in Bolivia and Bethlehem Steel in Chile--for which settlements have been reached but have not yet been fully implemented.

John N. Irwin II

Washington, June 11, 1971.

SUBJECT
Expropriations in Latin America

We are facing a situation of snowballing expropriations of the property of American investors in Latin America and the Caribbean. We are facing a serious situation in Bolivia, Chile, Guyana and Jamaica. If we allow these actions to go forward without showing our serious concern by imposing financial penalties, we can expect other countries to take similar expropriatory action. Loss of international credit standing will be an important deterrent to future expropriations.

We must act to

--protect American business overseas;

--eliminate the very substantial risk that the Overseas Private Investment Corporation (OPIC) has on expropriation insurance issued to American businessmen in Latin America by assuring full compensation where expropriations take place. OPIC potential expropriation risk in Bolivia and Chile amounts to about $350 million and for Latin America as a whole to about $1.5 billion;

--support the moderate political elements in Latin America and the Caribbean against the demands of the radical Left for further expropriations.

(1) In Bolivia, Gulf Oil was expropriated in October 1969 and a compensation settlement has been worked out satisfactory to Gulf. However, in January the International Metals Processing Company (IMPC) was expropriated, and at the end of April, on the day after we made a P.L. 480 agreement with Bolivia, another American company was expropriated. Although compensation has been promised, no meaningful discussions have taken place in either of these two cases.

(2) In Chile, the Allende Government has engaged in a broad program of nationalization of foreign investment. Allende is accomplishing his objective through a gradual step-by-step process utilizing technically legal means, but with the ultimate objective of communizing the whole country. While some companies have been compensated satisfactorily, the negotiations for compensation of the copper companies are just beginning. OPIC has undisputed expropriation coverage of $300 million to American companies and a further $200 million of such coverage which is in dispute. OPIC President Mills, and I am told Ambassador Korry, feel strongly that we should use financial pressure to assure satisfactory settlements in the copper compensation negotiations. I agree with them.

(3) In Guyana, legislation has been enacted to take over the bauxite facilities of ALCAN. The problem in Guyana has ramifications for the whole Caribbean area. Jamaica is carefully watching the situation in Guyana and if Guyana succeeds against ALCAN and eventually against Reynolds, an American company, they will be under great pressure from their radical Left to move against American bauxite operations there. The United States has large investments in the Caribbean with $732 million of OPIC expropriation coverage, of which $465 million relates to bauxite.

I would propose that bilateral assistance to expropriating countries be halted. For example, our bilateral aid program has gone forward in Guyana.

We should follow a similar policy in the multilateral lending institutions. I am seriously considering an instruction to our representatives in the World Bank and Inter-American Bank to vote against loans to Bolivia and Guyana.

These two Banks will shortly be considering loans to Bolivia, the proceeds of which will be used to finance a gas pipeline to Argentina. Part of the profits from the pipeline will be used to compensate Gulf. Our negative vote against the pipeline could upset the Gulf expropriation settlement. But we cannot let the interests of one company affect our whole posture in Latin America.

The World Bank will also be considering a loan to Guyana of $5.4 million for anti-flood works. Even though the company is nominally Canadian (approximately 50% U.S. owned) and Canada is not opposed to the loan, I would again draw the line in this case. A loan to Guyana would be a signal that they can nationalize American property without penalty. It would similarly be a signal to the radical Left in Jamaica, which the moderates would find hard to resist, for further nationalizations there.

This situation can no longer be handled in a piecemeal fashion. It requires a decision on your part to set a strong policy of both bilateral and multilateral financial pressure on expropriating governments to both assure compensation and deter future expropriation actions.

Washington, June 23, 1971.

TO
The Secretary of State
The Secretary of the Treasury
The Secretary of Defense
The Secretary of Commerce
The Director of Central Intelligence
The Director, Office of Management and Budget
The Assistant to the President for International Economic Affairs

SUBJECT
U.S. Policy in Cases of Expropriation

The President has directed that a study be undertaken on an urgent basis of United States policy in connection with expropriation without fair, effective and adequate compensation by foreign governments of properties owned by U.S. citizens, or in which U.S. citizens have a substantial interest.

The study should address issues arising in our relations with such foreign governments as a result of expropriations of U.S. privately owned property. It should assess the options open to the U.S. in dealing with expropriation actions in terms of effecting fair and prompt compensation. The legal, economic and foreign policy implications of these options should be discussed, and should be considered in relation to the totality of U.S. interests. The proposed policy options should cover the full range of relationships--including diplomatic, economic and military assistance, Export-Import Bank financing, and such special areas of interest as tariff preferences and sugar quotas.

The study should review our experience with foreign governments which in the past have expropriated U.S. privately owned property or which may be engaged in such an action, including an assessment of the role of the guarantee program in negotiations, and the efficacy of U.S. actions taken.

The study should be performed by an Ad Hoc Group comprising representatives of the addressees of this memorandum and representatives of OPIC, the Export-Import Bank and the NSC staff and should be chaired by the representative of the Secretary of State. A CIEP memorandum is being issued simultaneously providing guidance on the economic aspects of the study./2/ The study will be submitted concurrently to the CIEP Review Group for consideration of the economic issues, and to the NSC Senior Review Group for consideration of the foreign policy issues. The Assistant to the President for International Economic Affairs will participate as a member of the Senior Review Group in its consideration of this study. The study should be submitted not later than July 12, 1971.

Until the study has been completed and reviewed by the President, all loan and guarantee applications to U.S. agencies pertaining to countries which have expropriated private business owned by U.S. citizens or in which U.S. citizens have a substantial interest, or are currently in the process of expropriating such property, without a compensation agreement having been reached, should be held in abeyance unless specifically approved by the President./3/ The previously approved loans for India and Peru may be processed without referral. Any other loans which need to be authorized before the end of the current fiscal year should be submitted to the President for approval.

During this period, we should also seek to defer consideration of such loans by multilateral financial institutions of which the U.S. is a member. If it is not possible to defer, all factors should be considered before the decision is made to vote for, against or to abstain. If there is disagreement among interested agencies, the matter should be referred to the President for a decision.

Henry A. Kissinger

Washington, July 13, 1971.

SUBJECT
U.S. Expropriation Policy

The expanding number of expropriations of United States-owned property overseas presents us with a major threat to our foreign interests. The continuation of further expropriation action against our companies abroad will deepen the erosion of public support for our foreign political and economic policies. This will lead to additional Congressional limitations on Presidential prerogatives and even greater difficulty in pursuing our foreign objectives.

The problem is urgent because the expropriation trend abroad is accelerating. (Nearly 70 expropriations against U.S. investors in 17 less developed countries have taken place since 1968, almost double the number in the preceding eight years.)

It is not only the frequency which has brought the issue to a head. We are faced with a rash of subtle, legally correct actions. We encounter "interventions", not "expropriations"; assertions of a vague acceptance of the principle of compensation and not an outright rejection, as in Cuba. Today, the indirect expropriation technique is more exportable and pernicious, more threatening to the world order than the past outright actions.

It is in our political as well as economic interest to discourage less developed countries from pursuing actions which are inimical to increasing private capital flows and which create a bias towards the public sector at the expense of the private sector. Development is in our economic, political, and security interest, but it cannot be accomplished without private capital. Moreover, development totally dependent upon statist regimes threatens all our interests. Finally, the expropriation issue extends beyond its impact on our relations with LDC's. A continued permissive attitude toward expropriations could have carryover effects in developed countries. The stakes are enormous.

It is a false dichotomy to present the issue as one involving protection of either our political-security or economic interests. Only by enhancing our long-term economic interests can we assure ourselves of the wherewithal to maintain a strong voice in international military and political affairs. The policy for the future must reflect this fact.

There are basically four policy options open to the U.S.:

(1) a passive approach;

(2) an ad hoc approach;

(3) a policy of deterrence based on withdrawal of economic preferences;

(4) a policy of reprisals based on the imposition of economic sanctions.

Neither our national interests nor the political environment tolerate a passive approach. While the existing ad hoc posture has allowed each case to be treated individually, it has not worked to deter expropriatory actions; its administrative flexibility without a strong policy framework has developed a bias in the direction of limiting even the covert pressure we might bring to bear.

Our analysis suggests that a firm policy of deterrence is needed. However, a policy of strong economic sanctions would deny us the allies we must obtain to make our policy effective.

There is not now a U.S. expropriation policy. Each case is handled on an individual basis and policy is formulated ad hoc at the time the act occurs. In a number of cases not requiring Presidential attention, but still important, no coherent response is adopted.

Perhaps because they are aware of the weak and uncoordinated response the U.S. will probably make, several LDC leaders have embarked on the politically popular course of expropriation: they believe that they can carry it through with little or no cost imposed from overseas and with substantial gains at home. It is relatively easy for LDC leaders to paint themselves into a corner from which the United States must retreat or face a major political confrontation. We provide no support for moderate elements, as exist in Jamaica, to resist extremists' demands for expropriation and no incentives for self restraint.

The impression of our unwillingness to impose costs in terms of withdrawal of preferential benefits has snowballed from the Peruvian experience where the overall image was projected of the United States unable or backing away from support of an American investor overseas. Perhaps it is no coincidence that the growing trend toward expropriations can almost be dated from the IPC expropriation in 1968. Surely there is some relationship between our lack of action in Peru and the Bolivian and Chilean expropriations. If present lack of policy has not positively led to the acceleration in expropriation, it surely has in no way tended to deter or slow down the growth in the number of expropriations.

The defenders of the current policy make no pretensions of effecting deterrence. As I understand it, they assume that it is not possible to deter--or would not risk deterrence--because they believe it would jeopardize what they consider to be more vital political interests. The present ad hoc response policy is said to have the advantage of avoiding confrontation with other governments, preserving other U.S. interests from countervailing attack and preventing U.S. policy from being controlled by an unreasonable and unfair United States investor.

I believe this defense is wrong both in its basic assumptions and objectives.

There are several reasons why a policy aimed at deterrence of expropriations will be successful in protecting these interests at acceptable costs.

(1) Expropriations are often deterrable if we indicate a clear policy response in advance. If political leaders know the costs of pursuing expropriations (and if the costs are significant), they will avoid putting themselves in a position where they will have to pay these costs. Even more important, there are moderates in developing countries who, if supported by a firm U.S. stand plus a clear identification of the economic cost to the host countries, would create a counterpressure to the domestic radical nationalistic groups which push for expropriation.

Political realities abroad are such that it is impossible to claim that with a new policy of deterrence no expropriations will take place. However, an atmosphere will be created which should reverse the trend of increasing expropriations and serve to assure prompt, adequate and effective compensation when nationalization does take place. In many cases more constructive outlets will be found for the deep-seated nationalistic impulses that cause expropriations. In those few cases where no substitute is found, those nations should just have to forego the receipt of preferential benefits.

(2) Less developed countries have been permitted to regard their receipt of preferential benefits such as foreign assistance as a right--resulting from an "obligation" of the rich countries to donate. We have allowed a distortion of economic reasoning to develop. Initially, we will have to offset this attitude. A strong U.S. position, not based on threats, but on the proposition that only countries that respect international practices with respect to investment are entitled to future preferential benefits will become respected as a reasonable exercise of our own self interest.

Much depends upon style. A policy can be formulated that will deter, without threats and without provocations. The Hickenlooper amendment generates a violent reaction because it threatens public retaliation for failure to provide compensation within a fixed time limit. This pitfall can be avoided. A tough policy will not mean that every expropriation will mean a major confrontation or that American investors will hold the keys to U.S. policy in their hands. We have a policy option which will deter without provocation and with full U.S. control over the development of our policy in specific cases.

(3) We must also face the cold facts of relative power. Less developed countries are, in general, more economically dependent on relations with the U.S., and, in particular, on the preferential economic treatment which we give them, than we are on them. Even in the short term, political relations and security concerns are not paramount in Bolivia or Chile, for example. Where they are important, the overall U.S. national interests can be maximized through that necessary degree of flexibility contained in the recommended option.

(4) It is simplistic to assume that less developed countries act as a group, that is, economic action against one is necessarily action against all. Whatever initial expressions the LDCs may make, over the long run they will not act is a group when their self interest is at stake. Moreover, a well articulated and understood policy should not permit a clear U.S. policy to be viewed as an attack on a region.

A clear general policy position against uncompensated expropriation would be announced by the President regarding future situations and divorced from any specific expropriation case. It would be based on the policy framework that uncompensated expropriations of foreign property are inimical to sound development policy, to continued U.S. support for foreign assistance and to our national interests, including legitimate U.S. economic interests. The following steps would be taken to implement this policy:

(a) If a significant United States interest is expropriated, the United States would suspend granting new preferential benefits (e.g., bilateral assistance., P.L. 480, tariff, quota preferences) to the expropriating country.

(b) The U.S. would seek to defer new loans from multilateral institutions and could vote against them if necessary. The U.S. would need to develop support from other developed countries for its position.

(c) The United States would take an active role in judging whether reasonable steps had been taken. Submission of a dispute for settlement under international arbitration procedures would automatically be considered as reasonable steps to settlement of a dispute.

(d) Preferential programs would not be resumed until the country had taken reasonable steps to assure prompt, adequate and effective compensation.

(e) All of the foregoing general policy would be publicly announced. However, when an expropriation actually took place the United States would make no public announcements of cutoffs of foreign assistance or other preferential benefits. Press briefings would reiterate our general policy and the facts of the particular situation.

(f) An administrative policy group--perhaps headed by the CIEP or Commerce--would be formed to (i) recommend to the President on those instances where the withdrawal of benefits is not to occur immediately, (ii) determine when reasonable steps had been taken so as to justify restoration of preferential benefits, (iii) monitor emerging nationalization policy, and (iv) coordinate agency actions.

I see major advantages for this proposal:

1. It would provide an unequivocal indication of the United States position on expropriations and clearly establish the consequences for a developing country for such action. In contrast with present ad hoc covert pressure policy, it would provide a substantial chance of deterring the rising trend of nationalization of foreign property.

2. It would provide a strong support to moderates in many countries who wished to resist expropriations but are unable to do so because present ad hoc policy does not give them support.

3. It provides deterrence without provocation as foreign reaction would be minimized through the prior announcement of our policy divorced from any particular expropriation case. Restoration of assistance becomes a carrot for rewarding responsible behavior and, in doing so, we reverse the present distorted situation in which assistance is regarded as a right. Hickenlooper threats of retaliation would not occur. No ultimatums would be given. It would be clear in advance that the U.S. bilateral assistance program would cease until reasonable steps had been made to effect compensation. Not only would the President get something from his policy of deterrence but the President would have great flexibility, including the ability to regard a particular expropriation as not significant, allow continued humanitarian assistance, or narrow the scope of the cutoff of new preferential benefits as the situation required.

4. It would be strongly supported by United States business leaders. While particular individuals in particular situations may wish to soft pedal U.S. actions, the overwhelming general view of U.S. business is that a tougher line is needed.

5. There would be strong Congressional support. In fact, the present trend can only lead to mandatory expropriation legislation going beyond Hickenlooper.

Washington, July 31, 1971.

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:

1. 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 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.

2. 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).

3. 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.

1. 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/

/3/Entitled "Present U.S. Policy on Expropriations," undated.

2. 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 States in cases where other U.S. interests are at stake, and our leverage is limited.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

1. 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.

2. 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.

3. The net effect on the U.S. balance of payments is beneficial over the long term.

4. 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/

5. At the present time, the political implications of U.S. foreign investment are both positive and negative. Over the years, private 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.

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:

1. 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.

2. Inter-governmental confrontations arising out of investment disputes can adversely affect important U.S. interests--including other American-owned investments.

3. 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 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.

4. 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.

5. 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.

6. The effectiveness of U.S. policy on expropriation will be enhanced if it is in an international framework.

7. We need a policy that guides our actions in international lending organizations as well as our bilateral actions.

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:

1. In each significant case of expropriation new foreign assistance, guarantees, and other benefits would be withheld and existing benefits 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.

2. 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.

3. 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:

a. 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.

b. 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.

c. 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.

4. 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.

5. 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/

1. 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.

2. 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.

Apart from the options presented in this paper, there is general agreement among the agencies that certain steps should be taken forthwith:

1. There should be an appropriate public statement announcing the policy adopted by the United States to respond to expropriations./9/

2. 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.

3. 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.

4. 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.

5. 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.

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.

[Omitted here are pages 14-27: "Discussion of the Options."]

a. 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 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.]

b. 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 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.

[Omitted here are pages 31-33: "Discussion of the Options."]

Washington, August 3, 1971.

NSSM 131--Issues for SRG Meeting

The response to NSSM 131/2/ did not include statements of agency preferences among the options, principally because most agencies had not yet made their decisions. Whether agencies will state their preferences at the Senior Review Group Meeting or by separate memorandum, I do not know. My understanding is that you decided at the briefing last Wednesday that the Department of State prefers Option 3C among the basic options (although coupled with a stronger public statement) and Option 2 among the multilateral voting options.

On the basis of my conversations with staff members of the key agencies, I would expect Treasury to support Option 1, with a fall-back to Option 3A and perhaps a further fall-back to 3B. Commerce will probably favor either Option 1 or 2 (we have retained Option 2--Hickenlooper--in the paper primarily because Commerce likes it) with a fall-back to 3A and perhaps to 3B. Commerce will also emphasize the importance of the United States not denying benefits in cases where the affected U.S. business does not want it (see the footnote on page 14). Defense is tending toward 3B, but no firm decision has yet been made.

Officially stated agency positions are as follows: OPIC prefers Option 3B. The Export-Import Bank prefers 3C. AID prefers Option 4, with a fall-back to 3C. All agencies that have commented prefer Option 2 of the multilateral voting options. Treasury at the staff level believes there should be no multilateral voting options and that our policy should be the same for both bilateral and multilateral benefits.

Aside from the preferences on the options, the most important issue is the composition and powers of the coordinating mechanism. The possibilities are discussed on pages 11 and 12 of the response of the NSSM. I would expect some agencies to support the CIEP Operations Group but Treasury will probably fight hard for the NAC or perhaps a new group chaired by the CIEP staff. I understand the NSC staff now tends to favor the CIEP Review Group.

From our point of view a most important issue is mentioned briefly on page 32 of the response in the description of Option 2 of the multilateral voting options, where it says that negative votes or abstentions in the international financial institutions as responses to expropriations should require the concurrence of the Secretaries of State and of the Treasury. I would expect Treasury to take issue with that conclusion and argue that such votes should be normal responses to expropriations and therefore not questions of unusual sensitivity.

It may be useful to point out that the area of agreement among the agencies is quite substantial, as described on pages 11 and 12 of the response. A public statement of policy, consultations with other developed countries, the strengthening of international mechanisms for dealing with expropriations, and a new U.S. coordinating mechanism are all important actions, and they are agreed, at least in general terms.

Washington, August 4, 1971.

NSSM 131

Having read the final (and to my mind retrograde) version of the response to NSSM 131,/2/ having been told that Treasury intends to pursue its so-called "hard line" vigorously in the SRG meeting this afternoon,/3/ and having much in mind my responsibilities in the execution of our policy toward the countries of Latin America, I am obliged to ask you to consider the following observations in your approach to that meeting:

1. We should be clear that we are not simply discussing USG policy on expropriations. We are really talking about a frontal attack on the basic concepts that gave rise to the President's policies laid down in October 1969 and reaffirmed in his foreign policy messages of February 1970 and 1971 and in the Secretary's report to Congress of March 1971. These basic concepts were examined exhaustively in connection with NSSM 108 earlier this year./4/ That inter-agency examination confirmed their validity as the most appropriate and effective means of serving our interests--all our interests--in Latin America. Indeed, the adoption of any option above 3/3b will prejudice seriously, if not render futile, any serious consideration of NSSM 108 by the SRG.

2. The basic judgment in 1969, reconfirmed earlier this year, was that our interests were endangered by the "hegemonic" posture of the past and that the realities required that we seek an easier, more flexible, less directive association with the countries of Latin America. While it was recognized that, given the fundamental forces at work in Latin America, the new policy was damage-limiting and that our interests would suffer some additional impairment while a new equilibrium in our relationship was being reached, it was explicitly and carefully decided that a "harder" or "softer" policy would cause greater damage to our interests.

3. Particularly in light of our present inability or unwillingness to meet our positive commitments given in 1969, the adoption of a "hard line"--whether naked or flimsily veiled--on investment issues (with its play-out into the trade and development assistance sectors), when coupled with the post-Chilean election emphasis on military associations, will give our policy a distinct coercive, repressive cast. Aside from the fact that in present-day Latin America such an approach is destructive of our interests--all our interests--are we not obliged to counsel the President about the costs, abroad and at home, of such an image?

4. Considerable attention is paid in the NSSM 131 paper to the domestic advantages of a stronger line on expropriation. This presumably refers to the points to be made with some important sectors of the investing community. No attention is given to the countervailing fact that the US electorate and the US Congress contain important--and vocal--sectors which would find the path which the Treasury and some others wish to take the Administration down to be disastrous, not to say repugnant.

5. There is still, apparently, attractiveness for some in the thesis that "if you get tough with the Latins, they may not like you but, by God, they respect you and shape up." I should have thought that this thesis, always of the most doubtful validity, would have been destroyed by the Dominican intervention,/5/ the most direct application of US authority in the recent history of our relations with Latin America, the most superficially successful exercise of that authority, and one of the most destructive in terms of our broad interests.

6. In the same vein, I am very disturbed by suggestions that we have to get "tougher" with Latin America because they are not grateful for or appreciative of what we have done and are doing for them. Leaving aside the questions of who is doing what for or to whom, what forms we expect gratitude or appreciation should take, or the big philosophical debate on the responsibilities of the rich to the poor, I think we should keep in mind the basic purpose of our development assistance and other economic benefits we direct or say we want to direct toward Latin America. Those benefits are not intended as Lady Bountiful largesse. They are intended to serve our calculated national interests. We usually remember that; the Latins never forget it.

7. I am also concerned by the implied adoption, particularly evident in the final version of NSSM 131, of a defensive attitude concerning the Department's handling of expropriation problems. There is shot through the paper intimations that the Department has been indifferent or supine or that it has not given the expropriation issue proper weight in the calculus of our interests. As you well know, this is simply and demonstrably untrue. It is certain that in dealing with the cases the Department has deliberately chosen to follow the President's policy prescription of "negotiation not confrontation," to exert pressures and influence behind the scenes and not from the roof tops, and to relate our real concerns about uncompensated expropriation to the totality of our interests. Such a posture, such techniques are, I submit, marks of a responsible institution charged with the execution of foreign policy--a foreign policy viewed as the pursuit of an intricate composite of interests, not a series of artificially isolatable interests or events. In the face of simplistic, even primitive attacks, this should be a source of pride, not of weak-kneed apology./6/

8. Does anyone with even the most superficial knowledge of the psychological drives and the economic and political imperatives of the developing countries seriously believe that the invocation of Hickenlooper in Peru would have produced compensation for IPC or have prevented Velasco from taking any other restrictive measures or deterred Allende from expropriating copper or kept the OPEC countries from moving against the oil companies?/7/ Does one seriously believe that we would have seen the limited but positive developments, carefully and painfully nurtured, in our relations with Peru--so important in terms of our broad policy concerns in Chile--if we had shouted threats at Peru and publicly flaunted our economic pressures against the Velasco Government?

9. I am convinced that the "hard" or "quasi-hard" line will, at best, provide us a few quick, cheap victories over some of the weaker Latin American countries, with the costs in terms of intensified economic nationalism, wider anti-Americanism and increased opportunities for the Soviets and their friends throughout the Hemisphere to follow almost immediately.

10. We must bear clearly in mind that the prosecution of a "hard line" is an invitation--even a request--to well-known sectors of Congress to load impossibly restrictive provisions on legislation that by any stretch of the imagination might confer "benefits" on the less-developed countries. Is that what the Administration wants? Do we want, for example, an anti-expropriation amendment on the generalized preferences bill? How could we, with consistency, argue against a flood of such measures?

11. If Secretary Connally really said: "The US can afford to be tough with Latin Americans because we have no friends left there any more"--and there has been no repudiation of the attribution--he has demonstrated only that he is a master of the self-fulfilling prophecy./8/

12. In sum, I believe it essential that we turn back the onslaught of Treasury and its allies which is directed not only against the basics of the President's policy toward Latin America but also against the primacy of the Department in the formulation and execution of foreign policy. Our objective should be to preserve the maximum flexibility in handling expropriation cases so that all our national interests can be assessed and so that we can consider, as we must if we are to be responsible, not only the short-term but also the middle and long-term play of those interests.

Washington, August 4, 1971.

SUBJECT
OPIC Views on Response to NSSM-131

As the USG agency whose function is the encouragement and protection of U.S. private investment in less-developed countries, OPIC offers the following recommendations on NSSM-131:/2/

1. The paramount objective should be to establish a mechanism to enable the U.S. Government to act as a coherent entity, promptly and with full consideration of all factors, in both the deterrence and resolution of expropriation cases. If the right mechanism for determining and executing policy is established, there is less need for finely drawn, advance determination by the President of a fixed policy line for dealing with the great variety of trends and events which will arise.

2. We applaud the Secretary of State's initiative in establishing an office, insulated from parochial geographic biases, that will deal solely with investment protection problems and an interagency working group chaired by the Deputy Under Secretary of State for Economic Affairs./3/ In our view, the latter group should report to a higher level interagency body centered in the White House and be assured of prompt consideration and decisions on its recommendations as to both bilateral and multilateral assistance. OPIC should be a member of both of these interagency organs.

3. If such an interagency mechanism is established, OPIC's preferences among the options presented in the subject paper are:

Option 3(A) under "Basic Options for United States Policy", revised as follows:

3 (as stated) Suboption (A): Pending the determination, the U.S. coordinating mechanism would make an urgent examination to decide what measures would be appropriate in the interim; during this interim period the USG would quietly defer making substantial new commitments. A general statement would be made now announcing a regular U.S. procedure of urgently reviewing each expropriation case as it arises with a view to determining U.S. assistance policy toward the expropriating country.

Option 2 under ''Options with Respect to USG Action in International Financial Institutions in the Event of Proposed Loans to Expropriating Governments", supplemented by the following:

In addition to the four "Additional Studies Required" on pp. 12-13, there should be a study by the Samuels' Working Group to establish better conceptual benchmarks for determining what constitutes "adequate" compensation for an expropriation, i.e., what we mean in today's real world when we declare a policy of insisting upon "prompt, adequate and effective compensation".

Herbert Salzman/4/

Washington, August 5, 1971.

SUBJECT
SRG Meeting--NSSM 131--U.S. Policy in Cases of Expropriation

I attended the SRG meeting yesterday at which the study on our policy toward expropriation of U.S. private investment by less developed countries was discussed. Dr. Kissinger turned immediately to consideration of the options which, you will recall, were five-fold. Broadly stated, these were:

1. To suspend economic benefits in each significant case of expropriation, immediately upon expropriation, until reasonable provision for compensation or arbitration is agreed, unless the U.S. determines otherwise.

2. To suspend economic benefits in each significant case of expropriation against a fixed deadline--say six months.

3. To determine in each significant case of expropriation whether or to what degree economic benefits would be suspended.

This had three sub-options--

a. No new commitments made pending the determination.

b. An interim determination of how to move in the interim would be made pending the determination.

c. New commitments would be made pending determination.

4. Withholding economic benefits, but only after a determination of what course all U.S. interests in the country would dictate, allowing reasonable time to elapse to permit the expropriating country to purge itself and ensuring that withholding would be effective.

5. Traditional diplomatic protection.

He quickly eliminated option 5 as being unrealistic. He also eliminated option 2, arguing that basically this is the Hickenlooper approach which we have already decided should be reversed.

In the discussion of the options, Mr. Irwin argued most persuasively that of course the U.S. has a variety of interests which would in effect be prejudiced if there were a general presumption that in each case of expropriation, the economic benefits would be forfeited. Mr. Walker of Treasury moved away from the first option, which Treasury had at one time espoused, suggesting that while indeed there should be a presumption that benefits not be accorded to the expropriator, they would not make this an automatic action. Rather the situation should be reviewed immediately by whatever group is established to handle these questions.

This discussion, then, left basically two options, cast in terms of whether we should examine expropriation actions with a presumption that we would withhold preferential benefits in any case or whether we should approach the individual case without this presumption. Mr. Packard suggested that in the real world it seems very unlikely to him that any kind of statement of action which the U.S. proposes to take vis-a-vis countries that expropriate would deter significantly these actions. Moreover, he noted that the U.S. policy should hardly be designed to restrain expropriation for we recognize this right in international law assuming that fair compensation be paid. It developed, however, from Treasury remarks and those by Mr. Peterson that in their judgment a tough line on expropriation action would be justified more in terms of the impact upon the domestic scene than upon the restraints it would exercise upon countries involve.

The discussion of the international lending agencies was not particularly clear for the amount of information available on past efforts to arouse an international consensus among the developed countries on actions which they might take jointly was limited. It was agreed that we should explore possibilities of joint action with other developed nations.

Under Secretary Irwin needed no particular help in defending his view. It would, however, be useful for you to send a note to Dr. Kissinger on this subject along the lines of the attached./2/ It seems important to me that we help to nail down the arguments made by Mr. Irwin.

Recommendation: That you sign the attached memorandum.

Washington, August 6, 1971.

SUBJECT
Policy Towards Expropriation

I thought it would be useful if I wrote down the Treasury policy option which I described and you identified as one of the three from which the President would be asked to choose. (It is neither option 1 nor 3(a) of the State paper.)/2/

What I call the "presumption option" has the following elements:

(a) There would be a presumption that if a significant United States interest is expropriated, new preferential benefits to the expropriating country would be suspended. This presumption would be applied to suspend such benefits unless it was determined that the expropriating country was taking reasonable steps to provide compensation or that the presumption was overcome by major factors requiring continuance of all or part of these benefits.

(b) New loans from multilateral institutions would be deferred and we could vote against them if necessary.

(c) The United States would take an active role in judging whether reasonable steps had been taken.

(d) Preferential programs would not be resumed until the expropriating country had taken reasonable steps to assure prompt, adequate, and effective compensation.

(e) While this general policy would be publicly announced, when an expropriation actually took place no public announcements of cutoffs of foreign assistance or other preferential benefits would be made.

The major thrust of this option is to put governmental decision making on expropriation into a policy framework where it is possible to take decisions to protect our overseas economic interests. This is done by the presumption that preferential benefits would not be continued unless this presumption was overcome by overwhelming other factors. Other options without this presumption make the cutoff extremely unlikely and thus limit the President's ability to respond to expropriation problems.

Yet the presumption which is the vital element of the option I have outlined retains flexibility to react to difficult situations. There are several points that should be mentioned.

First, the presumption of suspension of assistance would apply to new preferential benefits; existing benefits would not be cut off pending a decision on suspension of them. This avoids confrontations with governments in the interim period before a decision is made on whether or not there are sufficient factors present in the case to overcome the presumption of suspension.

Second, the policy applies only to significant cases of expropriation. It could be decided, as we have done in Indonesia, that no significant U.S. interest is affected.

Third, the policy applies unless reasonable steps have been taken to provide compensation. This gives two important elements of flexibility:

(a) It would allow a decision from the very outset that a country had taken reasonable steps to effect compensation. If a country had a history of adequate compensation and made specific provisions for compensation in its law, the policy on expropriation would not have to be applied.

(b) It would assure that the U.S. Government maintained control over policy and was not helpless in the hands of a difficult American investor who demands unreasonable compensation. Although most U.S. investors need U.S. Government protection in order to have adequate bargaining leverage against a foreign government, in the case of an unreasonable U.S. investor the U.S. Government could determine that the host government was taking reasonable steps and resume assistance to that country.

Finally, in making decisions in the light of the presumption that preferential benefits would be suspended, the President would have the options to, for example,

(a) allow all assistance to continue

(b) narrow the scope of the cutoff of preferential benefits

(c) allow continued humanitarian assistance.

Because of this flexibility, the presumption option has none of the disadvantages which the State options paper ascribes to options 1 and 3(a). This option, together with new decision-making machinery, should contribute in a major way to curbing the rising trend of expropriations and restore the President's ability to take initiatives which are denied to him under present machinery and policies.

Charly

Washington, August 20, 1971.

SUBJECT
Expropriation Policy

At the SRG meeting on NSSM-131 on August 4,/2/ I supported the issuance of an expropriation policy statement. This statement, however, should be one that does not: (a) get the United States into a confrontation situation with the developing world; (b) ignore the inherent rights of countries (including our own) to expropriate as long as prompt, effective, and adequate compensation is paid; (c) denigrate our past efforts to obtain fair compensation.

/2/See Document 161.

Confrontation with one country may, of course, have a deterrent effect on others with respect to future expropriation. However, expropriations usually flow from internal political, economic and psychological conditions, so that it seems unrealistic to expect too great a deterrent effect on one country from action taken in another.

We should have a policy which makes it clear that expropriation is not riskless, in order to have deterrent effect. Each case, of course, has its own characteristics, and should be examined in the context of all our interests in that country, including other financial interests which often limit our leverage. We should, of course, weigh carefully in any decision the deterrent (or other) effect a confrontation in one country might have elsewhere.

Once an act of expropriation occurs, however, confrontation generally will not be useful in reaching a settlement in the particular situation. Confrontation can best be avoided by forward looking actions as early as possible.

Multilateral institutions constitute a special case. Our pursuit in them of unilateral policy objectives make less credible the President's advocacy of multilateralism. We should consult with other developed countries to determine common ground on expropriation policy, and how best to carry out our policy in an effective way. If we decide enough ahead of time how we are going to vote, we may be able to obtain support and avoid appearing isolated and possibly defeated.

We should also pursue the point which you raised of the foreign policy implications of, and the role of the Secretary of State in, instructions to vote negatively or abstain on particular projects in the multilateral institutions.

Attached is a draft statement that the President or the Secretary of State might issue on United States Government policy toward expropriation./3/ It may be preferable for the Secretary to issue it in order not to involve the President until we see how the statement is received domestically and internationally. You might consider the usefulness of having the President at the same time or later reiterate his view that the Hickenlooper Amendment should be repealed. Such a statement might reinforce our position that the Executive Branch needs maximum flexibility in coping with these expropriation problems.

John N. Irwin II

Washington, September 16, 1971.

SUBJECT
U.S. Policy in Cases of Expropriation

Of the three options presented in your memorandum,/2/ my recommendation would be for a combination of Options 1 and 2.

The third option does not strike me as a practical approach since whatever positive impact withholding new benefits can have, the advantage would be defused if the response does not closely follow the expropriation act. Option 2, as stated, does not in my opinion, afford the new, tougher policy approach which is needed for both foreign and domestic consumption, and which we have in fact been following for the past two months. Operationally, it would be more difficult to manage than Option 1 since ad hoc decisions would have to be reached in regard to each expropriation issue and each new commitment before any action were possible.

Option 1, with an appropriate public policy announcement, would signal a tougher U.S. stance in expropriations matters, although in reality, if applied primarily to new loan obligations, it would merely formalize the policy we have recently been following. Since, the presumption of withholding pertains only to new commitments, Option 1 would not entail the rigidity or danger inherent in a policy of automatically suspending existing agreements (although cut-off of the latter is not precluded). Option 1 would, however, provide an effective interim policy pending settlement of an expropriation issue as well as the flexibility to waive the withholding and proceed with further new commitments, if appropriate.

In recommending Option 1, however, I would suggest that the presumption of withholding should be applied only to significant new loan commitments. For minor changes in existing loans, grant assistance and operations of a quasi-commercial nature, the reverse presumption of Option 2 appears more suitable. This need could be accommodated in Option 1 by addition of a de minimus provision with delegation of authority to operating agencies, thus eliminating the time-consuming process of inter-agency review for grant assistance and for minor matters, the withholding of which would represent a petty irritant or more injury to U.S. commercial interests than to those of the expropriating country./3/ Obviously the inter-agency group dealing with expropriation cases could decide to reduce or eliminate grant assistance, etc. just as in some circumstances it might decide to proceed with a certain loan. A suggested draft decision memorandum to illustrate this approach is attached./4/

Of the three voting options presented, I would recommend the second. However, this should not be followed in isolation from bilateral policy. In general, I think the same presumption should apply to multilateral institutions as recommended for bilateral programs, that is, abstention or negative vote unless the circumstances of the particular loan warrant otherwise.

On both bilateral and multilateral, if there is inter-agency disagreement, review of the case could be considered by my office and, if necessary, the decision be made by the President. At that point, I would send you a copy of whatever was going to the President and seek your counsel and concurrence.

Incidentally, I'd like a guy on the inter-agency group who reviews these cases so I can be kept up to date on impending problems.

Washington, undated.

SUBJECT
U.S. Expropriation Policy in Multilateral Institutions

In a separate memorandum you considered the issue of general U.S. policy toward expropriations./2/ A second issue relates to what policy the U.S. should take on the expropriation question in the multilateral development institutions. There are two options:

--This would put expropriating governments on notice that the U.S. would make it more difficult for them to obtain multilateral financing and reinforce USG efforts to strengthen the expropriation policy of the multilateral institutions.

--However, for the most part, our negative votes or abstentions merely annoy expropriating countries without having any economic effect on them; the overt nature of negative votes or abstentions could harden the expropriating country's position; and by pursuing this policy the U.S. would, on numerous occasions, be voted down and isolated in the Boards of the institutions, thus diminishing the significance attached by other nations to our votes. (Only in the soft loan window of the Inter-American Development Bank would a U.S. negative vote or abstention block a loan.)

United States votes would be decided on a case-by-case basis. We would not abstain or vote negatively unless it is determined that it would promote the payments of satisfactory compensation and the effects of such action on other USG interests are fully considered. There would not be a presumption to abstain or vote against loans to these countries.

--This would preserve the greatest flexibility to consider various U.S. interests, and enable us to use our votes in the multilateral institutions as leverage when bilateral leverage seems insufficient, respect to a greater degree the multilateral character of these institutions, and, except for the soft window of the IDB, our negative votes or abstentions do not prevent loans from being approved anyway.

--However, it might accentuate the difference between our bilateral actions and our actions in multilateral institutions if bilateral loans were cut off and we vote in favor of multilateral institution loans.

All agencies agree that abstentions or negative votes are appropriate levers. However, Treasury and Commerce would like to have a presumption which would allow them to be used frequently in cases of expropriation and favors Option 1. Pete Peterson concurs./3/

State argues for deciding votes in the multilateral institutions on a case-by-case basis with no presumptions (Option 2).

There is also a subsidiary question of whether the Secretary of State should have concurrence in instructions to our Directors on the Boards of these Banks to vote negatively or abstain. Under present arrangements, U.S. Directors are instructed on how to vote by the Secretary of the Treasury--with advice from the National Advisory Council on International Monetary and Financial Policy (NAC). Treasury is not required to follow the foreign policy advice of State, which sits on the NAC, although traditionally it has done so; and Secretary Connally on one occasion authorized a U.S. Director to vote in a manner to which the Secretary of State was opposed.

State believes that because of the major foreign policy importance of negative votes or abstentions it should have the right to concur in all such votes,/4/ with interagency differences brought to you for decision, and argues that this is consistent with the National Advisory Council Executive Order--which states that "nothing in this Order shall be deemed to derogate from the responsibilities of the Secretary of State with respect to the foreign policy of the U.S." Treasury wants no change in the present arrangement.

Because of political friction caused by public abstentions and negative votes in the multilateral development institutions, and the negligible economic effects of such votes on the expropriating nation, I do not believe that they constitute an effective lever against expropriations. However, there will be times when such votes will be a logical complement to our bilateral economic sanctions. Option 2 provides enough flexibility so that negative votes or abstentions in multilateral institutions can be considered in light of the full range of U.S. interests. No policy would be announced, but decisions would be made, without any presumptions, based on the circumstances of each loan.

Approve/5/
Prefer Option 1

On the subsidiary question of State concurrence, I recommend that, because of the foreign policy effect of U.S. votes, the Secretary of State be permitted to concur in negative votes or abstentions. (This could be handled delicately by indicating in the Decision Memorandum that the NAC continues to have responsibility for advising the Secretary of the Treasury on instructions for U.S. Directors, but it is understood that the Secretary of the Treasury will seek the concurrence of the Secretary of State on votes which will have a major foreign policy effect.) I therefore recommend that you approve Option 2, with the stipulation that the Secretary of State concur in negative votes or abstentions.

Approve
Prefer no State concurrence.

Washington, September 22, 1971.

SUBJECT
Expropriation Policy

Henry Kissinger has forwarded his memo to the President setting forth the options on expropriation policy./2/ The paper contains two basic options:

1. The Treasury option--There would be a presumption of a cut off of assistance to countries that expropriate without compensation unless it was decided that the country was taking reasonable steps to provide compensation or that there were major economic, political, or military factors which require continuance of benefits.

2. The State Department option--This would assume continuance of benefits to an expropriating country unless at some subsequent time it was decided to cut them off.

Moreover we understand that the Kissinger memo contains three options directed exclusively towards multilateral institutions:

Option 1--always vote no in the case of loans to countries that expropriate without compensation;

Option 2--decide on a case-by-case basis; and

Option 3--always vote yes./3/

In addition, the President is requested to decide whether the Secretary of State should be required to concur in all decisions on voting no in multilateral lending.

The multilateral options and the option on the Secretary of State's concurrence went to the President over our strong protest. We argued that the multilateral options were not needed since we should follow the same policy multilaterally as we would bilaterally and that there should be no changes in the institutional arrangements for instructing the U.S. Executive Directors to the multilateral institutions.

You may wish to contact the President on this matter. Attached is a memorandum which you could send to the President/4/ or use as talking points in your conversation with him.

There are three procedural points which should be emphasized:

1. That the President should make a policy statement. This is an essential feature of achieving a framework for deterrence.

2. That decision making should be in the CIEP framework with operations carried out either by utilizing the NAC as an arm of the CIEP or through a CIEP-chaired interagency group; and

3. That there should be no change, formal or informal, in the arrangements for instructing the U.S. Executive Directors to the multilateral financial institutions.

Washington, September 25, 1971.

SUBJECT
Expropriation Policy

We are all agreed that a clear and firmer policy is urgently needed and that continuation of the present expanding trend of expropriations presents us with a major threat to our foreign interests. A policy is needed that will help deter expropriations. This is the reason why we have all concurred in the recommendation that you make a public statement on the new policy.

The NSC options paper/2/ lists the Treasury as being in favor of Option 1--what I call the "presumption option." I strongly favor this option because I believe it gives us the best chance of deterring future expropriations and achieving compensation where expropriations do occur. I firmly believe that deterrence is feasible and can be accomplished without confrontation. In fact, we owe it to the LDCs to tell them that there are economic costs involved in expropriation without compensation and they should know it before they get too far out on any political limb at home.

The World Bank has successfully implemented what I would call a presumption policy of immediately cutting off new loans on the occasion of expropriations for many years without causing confrontations with host governments.

However, the central element involved is the framework for implementing expropriation policy. There must be a presumption that aid will be cut off on the occasion of an expropriation unless the reasons of continuing aid are clearly overwhelming. If preferential benefits are to be automatically continued--as Option 2 would have it--unless a decision is made otherwise, I fear that it will be very difficult to make decisions to protect our interests overseas. Moreover, by adopting a clear and firm bilateral policy we will be in a better position to obtain support from other developed countries in multilateral forums.

Adopting the presumption policy will restore your option to act clearly (but carefully) in expropriation cases rather than continually postpone actions thus having circumstances narrow your options.

The new policy would provide a firm foundation for action against expropriations while giving you full flexibility, for example, to regard a particular expropriation as not significant, allow continued humanitarian assistance, or otherwise narrow the scope of the cutoff of new preferential benefits. This restores Presidential options for action that are now--in effect--foreclosed.

I attach great importance to the fact that this policy would be strongly supported by the Congress, by United States business leaders and by the general public. Indeed, it would also be supported by many--and respected by all--factions in the LDCs. The present trend can only lead to mandatory expropriation legislation going beyond Hickenlooper and to complete loss of support for aid programs.

The clearer, stronger policy I suggest would be complementary to your new economic policy overseas. Foreign countries have thus far restrained their response to this policy because they realize the basic equity of our position. I would expect the same results from a new expropriation policy.

I would like to register my strong opposition to one aspect of the NSC paper. That paper poses several options for voting on multilateral loans to expropriating countries./3/ I do not believe it is feasible to have a separate multilateral expropriation policy. It is not viable from a Congressional viewpoint in the long term to let loans go forward to expropriating countries when we deny them bilaterally; and it is not viable internationally to expect to withhold loans multinationally while allowing them to go forward bilaterally. The presumption policy can and should be applied to both bilateral and multilateral programs.

I also strongly object to proposals to require the formal concurrence of the Secretary of State on voting "no" in multilateral institutions./4/ As you well know, the Secretary of State has ample opportunity both through the National Advisory Council and in direct contacts with the President to make his views known on these issues. Moreover, the multilateral institutions have been regarded as essentially financial institutions and a requirement of concurrence by the Secretary of State would seem to inject a political element which would be inconsistent with your emphasis on multilateral institutions as the major vehicle for foreign assistance in the future.

John B. Connally

Washington, undated.

SUBJECT
Expropriation Policy

Secretary Connally (Tab A) has written to re-emphasize his strong feelings about the expropriation issue, on which I sent you two memoranda last week./2/

On the question of general U.S. policy toward expropriations, Connally supports the recommendation of my memorandum for a presumption that the U.S. would suspend granting new economic benefits to expropriating countries unless and until it was determined that the country was taking reasonable steps to provide compensation, or that there were major factors which required continuance of all or part of these benefits.

On the question of U.S. expropriation policy in multilateral development institutions the recommendations of my original memorandum (Tab B) differ from those of Secretary Connally. Connally does not believe it is feasible to have a separate multilateral expropriation policy and argues that there should be a presumption in favor of negative votes or abstentions on loans to expropriating countries unless decided otherwise (Option I in my memorandum). He also argues against requiring the formal concurrence of the Secretary of State for negative votes in the multilateral institutions on the grounds that they are essentially financial in nature and a requirement of concurrence by the Secretary of State would inject a political element.

There is, however, a significant difference between our bilateral policy on this question and our policy in multilateral institutions. If a country expropriates without adequate compensation, we could delay providing new bilateral development assistance for several months without calling public attention to our actions although privately the expropriating government would be aware of our reasons. If, on the other hand, a loan to an expropriating nation came up for a vote in the Board of a multilateral institution soon after an expropriation had taken place, a negative presumption would mean that, unless a quick decision were taken to do otherwise (which would be difficult given the bureaucratic problems in moving on such questions), we would cast a negative vote. This would immediately focus a great deal of publicity on our act, raise the level of emotion in the expropriating country, and thereby make it more difficult for the expropriating nation, in a face-saving way, to compensate us even if it had every intention of doing so. In addition, for the most part negative votes have no economic effect on the expropriating nation. (Only in the soft loan window of the Inter-American Development Bank would a U.S. negative vote or abstention block a loan.)

Option 2, which my memorandum recommends, calls for deciding votes on a case-by-case basis with no negative presumption. There would be no abstentions or negative vote unless it is determined that it would promote the payment of satisfactory compensation and the effects of such action on other U.S. interests are fully considered. If Secretary Connally, who as Secretary of the Treasury is charged with instructing our Executive Directors in the multilateral institutions, believes a negative vote is in order he is in a strong position to determine what our vote should be.

On the subsidiary issue of the Secretary of State's role, my memorandum recommends that, because of the significant foreign policy effect of U.S. votes, the Secretary of State be permitted to concur in negative votes or abstentions. However, I have also pointed out that this need not be stated in the formal manner to which Secretary Connally objects. The Decision Memorandum could indicate that it is "understood that the Secretary of the Treasury will seek the concurrence of the Secretary of State on votes which will have a major foreign policy effect." Differences would be brought to you for decision.

Should you wish to reconsider this question in light of Secretary Connally's memorandum, I continue to recommend Option 2--deciding votes on a case-by-case basis with no negative presumption./3/

Approve
Prefer Option 1

On the subsidiary issue of the Secretary of State's role, I continue to recommend that, because of the foreign policy effects of U.S. votes, the Secretary of State be permitted to concur in negative votes or abstentions.

Approve
Prefer no State concurrence

Washington, October 8, 1971.

TO
The Secretary of State
The Secretary of the Treasury

SUBJECT
Policy in Cases of Expropriation

The President has reviewed the response to NSSM 131/2/ and the views expressed during the Senior Review Group meeting on August 4, 1971,/3/ concerning U.S. policy with regard to expropriations by foreign governments of property owned by U.S. citizens. The President has decided that:

--In each case of an expropriation of a significant U.S. interest there will be the presumption that the U.S. will suspend new bilateral economic benefits to the expropriating country unless and until it is determined that the country is taking reasonable steps to provide compensation or that there are major factors which require continuance of all or part of these benefits. The presumption will not apply to humanitarian assistance, PL-480 humanitarian food aid, quasi-commercial CCC and Export-Import Bank operations, and small scale technical assistance within FY 1971 country funding levels.

--A mechanism should be established under the Council for International Economic Policy to coordinate interagency policies on expropriation questions and recommend to the President appropriate measures for dealing with specific problems.

--The U.S. should take the lead in promoting the use of international mechanisms for settling investment disputes. The Secretary of the Treasury in coordination with the Secretary of State should work to strengthen and promote greater use of the International Center for the Settlement of Investment Disputes and increase efforts to bring about early establishment of the International Investment Insurance Agency.

--The Secretary of State in coordination with the Secretary of the Treasury should initiate consultations 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.

--Further measures should be taken by the Departments of State, Treasury and Commerce 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 this subject.

The President also has directed that the Assistant to the President for International Economic Affairs, in coordination with the Secretaries of State and Treasury, draft for his consideration a public statement announcing the foregoing policy on expropriation./4/

A separate NSDM will be issued conveying the President's decision covering the position which the United States will take in multilateral institutions in cases of expropriation./5/

Henry A. Kissinger

Pursuant to NSDM 136 (Document 169), Peter Peterson on October 14, 1971, sent a letter to Secretary of State Rogers indicating that the expropriation policy statement would be announced shortly and requesting his recommendations for a draft statement by October 21. (National Archives, RG 59, S/S Files: Lot 83 D 305, NSDM 136) On November 9 Nathaniel Samuels sent a memorandum to Peterson forwarding a draft statement that the Department of State recommended be issued by the Secretary. Samuels noted that the draft statement had been written "in a form and manner intended to be generally acceptable to developing countries" and expressed the concern that if it were issued by the President it might polarize the issue with those few governments that had expropriated without compensation and might result in confrontation, not only with the expropriators but with more responsible governments as well. (Ibid., Central Files 1970-73, FN 9) On November 15 Peterson sent Samuels a note thanking him for the draft expropriation statement and providing a copy of a Treasury Department draft from Charls Walker. (Ibid., S/S Files: Lot 83 D 305, NSDM 136)

Anticipating Secretary of the Treasury Connally's return from Asia, Walker sent him a memorandum on November 12 informing him of the receipt of the State Department's proposed draft statement, which was substantially different from a draft prepared in the Treasury Department. Walker called Connally's attention to the Treasury Department's strong view that to be credible the statement must be released by either the President or Connally, rather than Rogers, and that the policy on multilateral institutions still awaited resolution. Walker informed Connally that Kissinger wanted to discuss the issue with him. (Washington National Records Center, Department of the Treasury, Secretary's Memos: FRC 56 74 A 17, Memo to Secretary 11-12/71)

On January 14, 1972, Robert Hormats sent Henry Kissinger a memorandum summarizing the issues surrounding the issuance of the expropriation statement and noting that the section in the statement dealing with multilateral institutions was still unresolved pending Kissinger's discussion with Connally. Hormats disagreed with Connally and Peterson that the President should issue the statement. Hormats recommended that Kissinger support Option 3 in Peterson's memorandum (Document 172). At the top of the memorandum is the handwritten note: "Peterson's office says HAK advice received orally by Peterson 15 Jan 72." (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP) The President chose Option 1; see footnote 4, Document 172.

Washington, January 14, 1972.

SUBJECT
Expropriation Policy

A statement of U.S. policy on expropriation, which has been worked out in an interagency group under Pete Peterson's direction, will shortly be forwarded to you./2/ A proposed National Security Decision Memorandum on our policy in the international financial institutions with respect to this subject is also before you or will shortly be so and will be incorporated into the statement.

I wish to convey my views on three points that remain to be resolved:

In order to achieve the maximum impact I recommend that you issue the statement. However because expropriation is such a sensitive subject with the less-developed countries generally, particularly the Latin American countries, you may decide that you would rather not issue it in your name.

I am of the opinion that, if you decide not to issue the statement, it should be issued by the Secretary of State in order to emphasize the fact that our policy on expropriation is to be an important part and parcel of U.S. foreign policy.

The proposed expropriation statement contains a presumption set forth in National Security Decision Memorandum 136/3/ to the effect that we will not accord new bilateral economic benefits to expropriating countries unless we specifically determine in the national interest to do otherwise. The question as to whether we should adopt a parallel policy with respect to multilateral assistance, i.e., how we will vote on loans in these international institutions, such as the Inter-American Development Bank, is before you. I recommend that we do adopt a parallel policy.

I believe we should make a presumption on our votes in the international institutions on proposed loans to expropriating countries similar to the presumption we will make on bilateral assistance. However, because of the strong foreign policy impact of a refusal in the international institutions to support loans to particular countries, it is essential that each case be carefully considered by State and Treasury. Therefore I believe that any instructions to our Executive Directors of these institutions in this regard be coordinated by State and Treasury and resolved by the President in the unlikely event of a disagreement.

Because of the foreign policy impact, I believe that operational responsibility for dealing with expropriation matters as they arise should be in the Operations Group of the Council on International Economic Policy as presently constituted.

William P. Rogers

Washington, January 14, 1972.

SUBJECT
Policy Statement on Expropriations

The policy statement--attached for your review/2/--on expropriations required by NSDM 136 has been formulated by an interagency committee of Treasury, State, NSC and the Council on International Economic Policy. The views of others, both within and without the Government, have also been taken into account. Dick Allen chaired the committee. There are two issues which will require Presidential determination:

1. who makes the statement, and

2. when the statement should be made.

Treasury, and specifically John Connally, believes you should make the statement. Treasury feels that the importance of the expropriation issue, reflected by the rising concern of American foreign investors, merits a Presidential announcement. John Connally believes the statement will be very advantageous for you in domestic political terms. John also feels that it would be a serious error if Secretary Rogers were to make it, not only because you get less credit, but because the State Department is a far less credible source for this kind of policy statement. If you were to choose not to make the announcement, he would find it more acceptable if I were to make it in your behalf, though he clearly prefers your making the statement in your own behalf.

Secretary Rogers, while quite agreeable to your issuing the statement, believes that you would be better protected against both foreseeable adverse reactions, particularly in Latin America, and possible unforeseeable reactions here and abroad if he were to issue the statement./3/ He further argues that it is essentially a foreign policy issue on which he should take the heat for you. He would object to my making the statement on your behalf on the grounds that he, as the senior U.S. spokesman for foreign policy should do so.

/3/See Document 171.

My first recommendation is that you read the statement before making any decision. I believe it has enough in it that supports development abroad that the domestic political benefits probably outweigh the foreign policy costs. Very important, John Connally feels so strongly about this that you will want to consider whether it is worth taking a course of action he opposes. It is not as "Presidential" a kind of statement as I would like but given the total situation, including Connally's strong views, I think you should make it. Henry Kissinger agrees.

As to the method of making this announcement, I would prefer it be issued in your behalf through Ron Ziegler's office but not with any strong personal involvement on your part which might, on balance, not be in keeping with your Presidential peacemaker role./4/ Then, Connally, I and others can see to it that you get credit for the decision with the domestic interests.

/4/On January 18 Peterson sent a memorandum to Rogers, Connally, and Stans informing them the President had directed the immediate release of the statement on his behalf by the White House Press Secretary. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP)

I recommend/5/

Option 1--The Statement be made by the President.

Option 2--The Statement be made by the Secretary of State.

Option 3--The Statement be made by a White House spokesman, perhaps Pete Peterson, on the President's behalf.

Treasury identifies an urgency to make the statement very soon, before Congress reconvenes, since passage of legislation covering replenishment of funds for international finance institutions may be affected. The legislation will probably be considered by the House quite soon after Congress reconvenes. Furthermore, the draft legislation currently before Congress includes the Gonzalez amendment,/6/ unpalatable to Secretary Connally and others, which would require the U.S. to withhold support for multilateral loans in the case of uncompensated expropriations. Early issuance of the statement would strengthen the Administration in opposing this amendment. State and NSC have no objection to an early statement; I also believe it should be made now.

Make announcement very soon, before Congress reconvenes/7/
Make announcement later

Washington, January 18, 1972.

TO
The Secretary of State
The Secretary of Treasury

SUBJECT
Expropriation Policy in the Multilateral Development Institutions

The President has reviewed the response to NSDM 131/2/ and the views expressed during the Senior Review Group meeting on August 4, 1971,/3/ concerning U.S. policy in multilateral development institutions in case of expropriations. The President has decided that:

--The Secretary of Treasury should use the influence of the United States with the management of the World Bank to induce the Bank to effectively apply its stated policy on compensation and to seek to persuade other institutions to adopt a similar policy on withholding assistance to countries not taking reasonable steps to meet compensation obligations in cases of expropriation.

--In each case of an expropriation of a significant U.S. interest there will be the presumption that, unless and until it is determined that the expropriating country is taking reasonable steps to provide compensation or that there are major factors requiring us to do otherwise, the United States will attempt to have new loans deferred in the multilateral institutions and if a vote is necessary will abstain or vote negatively.

The provisions of this directive do not imply any change in the procedures established by Executive Order 11269 pertaining to the National Advisory Council on International Monetary and Financial Policies./4/

Henry A. Kissinger

On January 24, 1972, Executive Secretary of the Department of State Theodore Eliot sent a memorandum to Henry Kissinger reporting only limited foreign reaction to the President's January 19 expropriation statement. Chile and Venezuela were generally antagonistic, and the British Embassy in Washington had referred back to President Nixon's meeting with Prime Minister Heath in Bermuda in December 1971 and requested U.S. support to oppose on expropriatory grounds a $10.5 million IDA loan for Tanzania that was slated to come to the IDA Board on January 25. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 285, State, Volume 14)

On February 1 the Department of State sent a telegram to the Embassies in Tokyo and 10 Western European capitals instructing them to provide copies of the expropriation statement to officials of their host governments and solicit their views, including those on the prospects for multilateral cooperation on expropriation issues. The telegram also informed the Embassy in London that the IDA loan for Tanzania had been withdrawn by IBRD staff before the United States had to state a position. (Telegram 17872; ibid., RG 59, Central Files 1970-73, AID (US) 1/1/72)

The Embassy in Tokyo reported that Japan shared the basic U.S. position on expropriations, i.e., for a public purpose and upon payment of prompt, adequate, and effective compensation, but saw no need for a public statement of policy beyond the clauses it had included in its bilateral trade and investment agreements with a number of developing counties. Japan was concerned that the strong U.S. view would make it more difficult to work out a multilateral approach if expropriation were posed as a U.S. issue. The Embassy's interlocutor cautioned, in a personal capacity, that if the United States was interested in a major cooperative initiative in the expropriation field, it should take a very low profile and leave the initiatives to the multilateral organizations. (Telegram 1831 from Tokyo, February 23; ibid.)

The Embassy in Bonn reported that Germany was prepared to participate in an exchange of views in the DAC, if other OECD members were willing, but did not share U.S. views on dealing with expropriation issues on a multilateral basis. German officials carefully answered the U.S. initiative with an official aide-memoire that set out the investment protection principles in German treaties with a number of developing countries. In presenting the aide-memoire, the Embassy's German interlocutor said it was not the policy of the Federal Republic to link new assistance to compensation for expropriated property, and that even in the case of Chile German participation in the debt rescheduling would not be contingent on compensation. (Telegram 2933 from Bonn, March 2; ibid.)

The Embassy in Bern reported Swiss pessimism regarding multilateral cooperation on investment protection. The Embassy's interlocutor said the nature of the investments from capital exporting countries were so divergent that he could not envisage coordination of policy. He said the Swiss Government did not regard it as the role of government either to encourage or to discourage investment, and the Swiss had no legal basis, such as the Hickenlooper Amendment, to exert pressure on governments that had expropriated Swiss investments. (Telegram 741 from Bern, March 17; ibid.)

The United Kingdom, by contrast, agreed to a series of bilateral consultations with the United States on approaches to expropriations. British officials agreed with the United States on some linkage among debt repudiation, expropriation, and debt rescheduling but as of March 28 had not decided on the British position at the April meeting of the Paris Club when the Chilean debt rescheduling would come up. (Telegram 2767 from London, March 28; ibid.)

Washington, March 8, 1972.

MEMORANDUM FOR
The Secretary of State
The Secretary of the Treasury
The Secretary of Defense
The Secretary of Commerce

SUBJECT
Policy Implementation on Expropriation Questions

NSDM 136, NSDM 148, and the President's January 19, 1972 public policy statement concerning Economic Assistance and Investment Security in Developing Nations require establishment under the Council on International Economic Policy of a special interagency coordinating mechanism on expropriation questions.

Accordingly, a CIEP interagency staff coordinating group, to include representatives of the Departments of State, Treasury, Defense, and Commerce is established. The Secretary of State should designate a senior officer, who will also be responsible to the Executive Director of the CIEP to chair the group./2/ Provision should be made by the Chairman for NSC and CIEP staff participation, as well as of other agencies on appropriate occasions.

The functions of the group will be:

--to keep under continuing review all potential and active expropriation cases; compiling relevant facts and analyses, to include information concerning economic benefits subject to potential U.S. action;

--to make a finding in each case for purposes of policy implementation that an expropriation affecting a significant U.S. interest has, or has not, occurred; and, if so, whether reasonable provision has been made for prompt, adequate, and effective compensation;

--to recommend courses of action for the United States Government, consistent with the President's January 19 expropriation policy statement, and

--to coordinate policy implementation.

The group, upon request of any member, is expeditiously to deal, within its terms of reference, with any alleged expropriation problems.

In case of interagency disagreement, the Chairman--if urgent efforts to resolve the issue fail--will promptly submit a report to the CIEP Executive Director setting forth the issue or issues, the conflicting views, the options proposed, and a reasoned statement of advantages and disadvantages of each course of action under consideration. Each Department may, at its option, request the Executive Director to review a case to attempt to resolve the issue or, if necessary, to submit it for Presidential decision.

The provisions of this memorandum do not imply any change in the procedures established by Executive Order 11269 pertaining to the National Advisory Council on International Monetary and Financial Policies.

Washington, March 9, 1972.

SUBJECT
Enrolled Bills S. 748, S. 749 and S. 2010--Contributions to International Financial Institutions
Sponsor--Sen. Fulbright (D) Arkansas

March 14, 1972--Tuesday

Authorizes U.S. participation in, and appropriations for U.S. contributions to, capital increases for three international financial institutions as follows:

These bills authorize the full amount requested by the Administration for the U.S. share of the capital increases of the three institutions. The contributions are to be paid in installments over several-year periods. Appropriations for U.S. installments, as provided in the 1973 budget or projected for 1974, are as follows:

This will be the United States' first contribution to the Asian Development Bank's Special Funds. Accordingly, S. 749 contains a number of customary administrative provisions concerning loan terms, procurement policy, and burden-sharing as proposed by the Administration.

The House Banking and Currency Committee added two amendments which were enacted into each of the three bills. The first would require the Secretary of the Treasury to instruct the United States Executive Directors to these institutions to cast a negative vote on assistance to any country which the President determines has failed to take adequate steps to prevent illegal entry of narcotics into the U.S. or to prevent sales of narcotics to U.S. employees and their families abroad./3/ It provides for removal of this requirement when the President determines that these steps have been taken. This amendment parallels a similar provision, applicable to U.S. bilateral foreign aid which was recently added to the Foreign Assistance Act at the Administration's request.

The second amendment would require the President to instruct the U.S. Executive Directors to vote against any loan or other aid by the institutions to any country which expropriates property owned by U.S. citizens or takes other action equivalent to expropriation./4/ This requirement does not apply, however, if the President determines that appropriate arrangements have been, or are being made to provide for adequate compensation. This amendment provides less Presidential discretion on two respects than that in your January 19, 1972, statement on expropriation policy. That statement (1) permitted the United States to abstain as well as vote against loans in international institutions and (2) allowed "major factors affecting U.S. interests" as a reason for not withholding support for loans in an expropriation situation.

In its letter on the enrolled bills, Justice states:

"The form of the bills is unusual in that they instruct the President as to how to cast votes in carrying out an aspect of United States foreign policy. We do not believe, however, that the bills sufficiently encroach on Executive power so as to present a substantial constitutional issue. It is relevant that the instruction is not absolute since the President does not have to follow it if he finds that an arrangement has been made for compensation, if the matter has been submitted to arbitration, or if negotiations are proceeding in good faith. Moreover, the Committee reports indicate that the amendment is consistent with the existing policy of the executive branch in this area."

With respect to this amendment, the Treasury Department has suggested that you provide the Secretary of the Treasury with a memorandum making it clear that Executive Order No. 11269 of February 14, 1966, which delegated to the Secretary of the Treasury authority then vested in the President to instruct U.S. representatives to international financial institutions, applies to the President's functions under this expropriation amendment./5/ However, your January 19 statement set up interagency machinery under the Council on International Economic Policy to advise you on questions of terminating foreign assistance in expropriation situations. In view of the sensitivity of expropriation issues and their many implications for foreign policy, a single policy-setting and decision-making mechanism for both bilateral and multilateral assistance seems advisable to avoid confusion and embarrassment.

We think that the apparent contradiction between these two positions can be satisfactorily resolved by (1) having the President make the determinations upon advice from the Council on International Economic Policy and (2) having the Secretary of the Treasury convey those determinations to the U.S. Executive Directors of the designated international financial institutions. We will provide a memorandum along these lines for you to send the Secretary of the Treasury at an early date.

The Department of State has proposed a signing statement for your consideration. We understand that the staffs of the National Security Council and the Council on International Economic Policy are working on the question of a signing statement and, if appropriate, its content.

Geo. P. Shultz/6/

Washington, April 12, 1972.

SUBJECT
Memorandum from the President to the Secretary of the Treasury on Instructing U.S. Representatives to the International Financial Institutions in Expropriation Situations

George Shultz (Tab B) recommends that the President sign a memorandum (Tab C) instructing the Secretary of the Treasury on the method of handling instructions to U.S. representatives to the international financial institutions in expropriation situations./2/ From your point of view, the memorandum to the Secretary of the Treasury is totally unacceptable.

According to all previous interagency agreements, the authorization bills for the multilateral development institutions, and Pete Peterson's directive to the agencies of February 7 (Tab D)/3/ final authority for making determinations on whether or not appropriate arrangements have been, or are being, made to provide for adequate compensation resides with the President. While the Secretary of the Treasury clearly has authority to instruct U.S. executive directors in the multilateral development institutions under Executive Order 11269,/4/ nowhere--prior to this--has it been decided that the Secretary of Treasury would also make the determination on the compensation question. It had been agreed that the President--with advice from CIEP--would determine whether compensation was being carried out in an appropriate manner. Indeed, the Administration's position in dealing with the authorization bills for the multilateral institutions was to assure that the legislation vested authority to make this determination in the President not the Secretary of the Treasury. In my view it is especially important that the President himself retain this power since the judgment involved in making this determination obviously requires consideration of foreign policy questions--which do not fall under the purview of the Secretary of the Treasury.

[FYI: Peter Flanigan, who concurred in this memorandum, is giving away a good bit of his own authority by moving the determination decision from the White House (under CIEP) to the Treasury, and he is certainly compromising yours.]/5/

/5/Brackets in the source text.

I should like to make it clear that consistent with the delegated authority contained in Section 3(a)(1) of Executive Order 11269 dated February 14, 1966, the Secretary of the Treasury, in accordance with Presidential determinations reached upon the advice of the Council on International Economic Policy, should give instructions to the representatives of the United States to the respective organizations pursuant to Section 21 of the Inter-American Development Bank Act, Section 18 of the Asian Development Act, and Section 12 of the International Development Association Act.

Washington, June 23, 1972.

SUBJECT
Expropriation Policy

Flanigan may speak to you about this today. As you will recall, the question of handling instructions to US representatives to the international financial institutions in expropriation situations has not yet been resolved. Attached is an earlier memorandum which I sent to HAK on this subject recommending that he indicate to Flanigan and Shultz his objection to delegating to the Secretary of the Treasury the Presidential power to make determinations on whether or not appropriate compensation was being paid./2/ I do not know whether HAK pursued this with Shultz and Flanigan but I have no indication that he did. I do know, however, that Shultz and Irwin have discussed this./3/

Recently, precipitated by discussion of what policy the US should pursue with regard to a loan to Panama--which had intervened in an American company but has since agreed to amicably settle the issue, thereby obviating the necessity for us to vote negatively--before the Board of the Inter-American Development Bank,/4/ there has been renewed interest in getting out a memorandum to the Secretary of the Treasury. If my antennae serve me well, Flanigan is attempting to resolve this problem and may speak to you about it in the near future. If he does, I still feel that the President--not the Secretary of the Treasury--should have the final say on whether we vote negatively or not since there is an obvious foreign policy component in any such decision. And for purposes of consistency it is important that we not pursue one policy in the multilateral institutions and another with respect to bilateral aid. Giving the Secretary of the Treasury power to make this determination on votes in multilateral institutions runs this risk.

Flanigan, however, may feel that in order to avoid putting the direct pressure on the President to make determinations in expropriation situations it is preferable to delegate this power to the Secretary of the Treasury. And Shultz would be reluctant to cease fighting for authority to make this determination--since Connally and the Treasury bureaucracy have fought hard to get this authority./5/ If this is the case, you might try to work an agreement whereby:

--The determination power would be given to the Secretary of the Treasury.

--Secretary Shultz would give private oral assurances to the Secretary of State that he will consult with him prior to directing our representatives to these institutions to cast a negative vote or abstain.

--If the Secretary of State differs from the Secretary of the Treasury, the matter would be brought to the President for resolution. (At that time, HAK would have his say.)

This would take direct pressure off of the President, allow Shultz to work out a modus vivendi with Rogers without having to formally back down from Connally's tough position, and allow HAK an input when State and Treasury differ (which, historically, is on about every major case).

Washington, June 27, 1972.

Dear Peter:

Thank you for responding so quickly to my telephone request last Friday/2/ and sending over for our comments the draft Presidential memorandum with respect to delegations of authority under the Gonzalez Amendment./3/

It was not entirely clear to me from what you said whether this draft language has already been approved by the President. As you know, this is the first time that I or, to my knowledge, anyone else in State has had a chance to review the language or to comment on it, although I had called George Shultz to ask about it two weeks ago. If the President has already approved it, so that it is impossible to consider a substantial revision, I would like to suggest as a minimum the addition of the following sentence at the end of your draft language.

"When the Secretary of the Treasury intends not to follow the recommendations reached through these CIEP review procedures, he shall give sufficient prior notice of this intent to the agencies participating in the CIEP review to allow the issue to be brought to the attention of the President in appropriate cases."

This addition is intended to allow time for further discussion with the Secretary of the Treasury and, where appropriate, reference to the White House, whenever a decision reached in the CIEP process is not going to be followed by the Secretary of the Treasury. As we understand it, the Secretary would be empowered under the language of the draft memorandum to make his own "determinations" and to issue instructions in disregard of the CIEP recommendations if he saw fit.

If, on the other hand, your draft language has not yet been approved by the President, or if it seemed to you advisable to go back to the President on this issue, we would prefer a more substantial revision of the draft memorandum along the lines of the attachment to this letter./4/

There are two types of Presidential powers involved in the Gonzalez Amendment. The first is the power of the President to instruct the United States representatives to the international financial institutions. The second is the power of the President to make various determinations on which these instructions must, under the terms of the Amendment, be based. These include determinations, first, as to whether nationalization, expropriation, repudiation of contracts or the imposition of discriminatory taxes has taken place, and, second, if so, whether an arrangement for prompt, adequate, and effective compensation has been made, whether the parties have submitted the issue to international arbitration or whether good faith negotiations are in progress. The first type of power, the power to instruct representatives, already has been delegated to the Secretary of the Treasury under Section 3(a) (1) of Executive Order 11269. We agree that it is useful to confirm that this delegation applies to instructions under the Gonzalez Amendment.

At the same time, subsection (c) of Section 3 provides "Nothing in this section shall be deemed to derogate from the responsibilities of the Secretary of State with respect to the foreign policy of the United States." The question we have is whether the second type of power, the power to make the determinations referred to above, can be delegated to the Secretary of the Treasury without causing just such a derogation.

You will recall that the Gonzalez Amendment as originally drafted provided that the Secretary of the Treasury would make all such determinations. The House-Senate Conference Committee, in considering the bill, changed the language in order to make clear that it is the President who has this power. The Department of State had argued forcefully for this change in order to preserve the prerogatives of the President and the foreign relations responsibilities of the Secretary of State.

All of the determinations called for under the Gonzalez Amendment rest essentially upon interpretations and applications of international law. Whether nationalization, expropriation, repudiation of contracts, or the imposition of discriminatory taxes have taken place, as well as what constitutes prompt, adequate, and effective compensation, are questions which can be answered only by reference to international law. The Convention for the Settlement of Investment Disputes, referred to in the Gonzalez Amendment, is an international treaty whose interpretation and application depend upon international law. Clause (C) of the Gonzalez Amendment explicitly refers to "applicable principles of international law" for purposes of defining what is prompt, adequate and effective compensation towards which "good faith negotiations" are to be aimed.

Primary responsibility and expertise for questions of international law have always rested with the Department of State and specifically with the Legal Adviser's Office. No other government agency has this authority with respect to questions of international law. Moreover, these questions bear directly upon the overall foreign policy of the United States. For these reasons, we consider that delegation of exclusive authority to make determinations under the Gonzalez Amendment to any agency or body in which the Secretary of State or his representative does not fully participate would be inconsistent with Subsection 3(c) of Executive Order 11269.

There is a further point to be made with respect to the Secretary of State's responsibility. It is the settled policy of this Administration, as evidenced in the President's policy statement of January 19 1972, that the invocation of any sanctions in cases of expropriations be weighed against our overall national interest. Because the necessary flexibility in this area was not provided for, the Gonzalez Amendment was opposed by the Administration.

Even in the absence of a national interest exception, however, it is inevitable that interpretations of the facts in close cases will be influenced to some degree by concern for critical national interests. These interests involve considerations of general foreign relations, of defense and national security, of the financial and banking integrity of the multilateral financial institutions and of general commercial and investment policy. Given the variety of interests which are likely to be involved in these close cases--and we are already seeing a number of such cases--we believe the perceptions, not of just one agency, but of all concerned agencies, should be brought to bear on the "determinations" which must be made under the Gonzalez Amendment.

Your memorandum of March 8 established the CIEP interagency staff coordination group to review expropriation cases, make findings for purposes of policy implementation, and recommend courses of action for the United States Government. The matters for its determination, governing bilateral as well as multilateral assistance, are precisely the same as those set forth in the Gonzalez Amendment. We consider, therefore, that the CIEP interagency mechanism offers the most comprehensive means of reconciling the furtherance of our many national interests with the requirements of the Amendment. This mechanism can also assure that our approach to bilateral assistance issues remains as parallel as possible with our approach to multilateral assistance issues.

Finally, there is the question of maintaining an effective method for resolution of differences between interested agencies. At the heart of the CIEP arrangements set up by your memorandum of March 8 is the appeal mechanism through you to the President. Under the proposed draft memorandum there seems to us the danger that the time for such an appeal might not be available in cases where the original CIEP review did not involve a Presidential decision. Our preferred redraft would take care of this problem automatically, since the determinations required by the Gonzalez Amendment would be made through the CIEP procedures. If our preferred redraft is not acceptable, we would at least urge the addition of language such as I suggested at the outset of this letter, to preserve an effective right of appeal to the President.

With best regards,
Sincerely,
Jack

Washington, July 6, 1972.

SUBJECT
Instructions to U.S. Representatives to Certain International Financial Institutions

I recently approved enrolled bills S. 748, S. 749, and S. 2010,/2/ 92nd Congress, relating to U.S. participation in increases of the Inter-American Development Bank's Consolidated Special Funds,/3/ and the International Development Association.

I should like to make it clear that as part of the delegated authority contained in Section 3(a) (1) of Executive Order No. 11269, dated February 14, 1966, the Secretary of The Treasury, after taking into account any advice received as a result of CIEP expropriation policy coordination and review procedures,/4/ is to make determinations and to give instructions to the representatives of the United States to the respective organizations pursuant to Section 21 of the Inter-American Development Bank Act, Section 18 of the Asian Development Bank Act, and Section 12 of the International Development Association Act. If the instruction of the Secretary of The Treasury is contrary to advice received as a result of the CIEP review procedures, he shall so advise the agencies participating in the CIEP review prior to giving such instruction./5/

Richard Nixon