Expropriation of U.S. property in South America: nationalization of oil and copper companies in Peru, Bolivia, and Chile

390 Pages·1974·7.52 MB·English

by  George Ingram

George M. lngram
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Praeger Publishers New York Washington London '
Library of Congress Cataloging in Publication Data
Ingram, George M
Expropriation of U.S. property in South America.
(Praeger special studies in international economics
and development)
Originally presented as the author's thesis, University
of Michigan.
Bibliography: p.
1. Petroleum industry and trade-Government owner
ship-South America-Case studies. 2. Copper industry
and trade-Government ownership-South America-Case
studies. 3. Corporations, American-South America
Case studies. L Title.
HD9574.S62I5 1974 338.4'7'6655098 73-18871
PRAEGER PUBLISHERS
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Published in the United States of America in 1974
by Praeger Publishers, Inc.
Second prínting, 1975
AI/ ríghts reserved
© 1974 by George Mason lngram
Printed in the United States of America
To my wife Claudia,
who faithfully supported me during the
two years it took to complete this project
PREFACE
Historically, students of international relations h ave limited their
interests to international politics-relations between governments and
activities of intergovernmental organizations. In the past several
decades governments have become increasingly preoccupied with the
international monetary system, trade policies, and balance of payments,
and the discipline has been enlarged to include international economics.
A review of a major daily newspaper should indicate that it is timely
to expand the scope again to encompass international business. In 1972
U.S. exports of goods and services amounted to $49.8 billion, whereas
the assets of U .S. direct foreign investment had a book value of $94
billion anda market value of approximately twice that figure. Further
more, the 1970 gross sales of 298 large U.S. multinationals and their
5,200 majority-owned foreign subsidiaries totaled $424 billion. Sales
by the subsidiaries alone amounted to $115 billion, approximately the
size of the gross national product (GNP) of Great Britain, the seventh
largest GNP in the world.l A growth rate for the output of interna
tional investment that is double the increase in world GNP has led to
the prediction that, by the end of the century, international investment
flowing from all nations will account for over half the world' s pro
duction. 2
In addition to tariff and nontariff barriers, one o f the major topics
of discussion at the international trade negotiations (scheduled to com
mence in 1974) will be acode for international investment. In 1965
the Department of state created the position of Deputy Assistant Sec
retary of state for Commercial Affairs and Business Activities, and
severa! international bodies have undertaken studies on the implications
of the "multinational corporation."* It is time for the political scientist
*In recent years the literature on international business has
abounded with the terms "multinational corporation," "international
corporation," and ''transnational corporation." Some authors have
tried to give exact definitions to one or more of the terms-ranging
in strictness from a corporation having a certain percentage of its
income derived from foreign operations to a corporation being managed
and owned by nationals of more than one nation and having a truly
"multinational" outlook. Under the first definition the terms would
apply to severa! hundred large U .S. corporations and possibly an equal
number o f W est European and Japanese firms; under the latter
vi
to join bis colleagues in the disciplines of economics and business
administration in studying international business phenomena, since
his training can be particularly useful in evaluating the political
implications of direct foreign investment.
Of the many topics concerning international business that need to
be investigated, one of particular interest to the political scientist is
conflict between the host government and the foreign investor. Such
conflict extends from denial of a proposed foreign investment, to a
dispute o ver the operations of a foreign business, to seizure of the
property of a foreign corporation. Because of the obvious breadth of
the subject, it was necessary to limit the present study to the type of
conflict that has caused the greatest problem for host country-foreign
investor relations. Little attention is drawn to the many routine
instances in which a government rejects a proposed investment by
foreign interests or to recurring conflicts over the practices of an
established foreign business. However, li investments of a substantial
size are seized by a host government, the incident generally receives
substantial coverage in the presses of both the host and the home
country; and the attempt by the conflicting parties to defend their
positions will reveal many of the factors involved in the action and
will provide the investigator with sufficient knowledge from which
to ask the pertinent questions.
Three terms are used to describe the seizure of foreign property
by a government-confiscation, nationalization, and expropriation.
Confiscation refers to the taking of property without compensation,
often for punitive reasons, and has most often occurred during time
of war. There is no consensus on the exact meaning of the other two
terms, which frequently are used interchangeably. As they are employed
in the literature on the subject, the most meaningful distinction is that
expropriation refers to the taking of one or several properties within
a single area of economic activity, whereas nationalization refers to
the government' s taking of all properties within the area. Some defi
nitions of nationalization include provisions that it be part of a general
national political program and/or that it be for a social purpose, but
the term frequently is used without such connotations. Some people
assert that expropriation and nationalization necessarily require that
compensation be paid to the deprived owners and that otherwise the
definition only a handful of corporations, Unilever and Royal Dutch
Shell being the most frequently mentioned, would qualify. However,
these terms are generally employed in a much looser frame of refer
ence and are usually just a colorful way of referring to direct foreign
investment, so no purpose would be served by trying to enter the
definition contest.
vii
act must be labeled confiscation, but there is no agreement on this
point. The two terms are generally applied to situations in which, at
the time of the seizure, compensation is granted or is promised, or
the question is left open; whether compensation actually materializes
has no bearing on the use of the two terms.
Seizure of foreign companies has occurred under two circum
stances. The greater number of incidents have taken place as part
of a general nationalization of all private business, action that has
been limited to the Communist nations. Although this type of incident
accounts for the greater number of cases, it will not be considered
in this study, two principal goals of which are to examine various
reasons why foreign corporations are taken over by host governments
and to determine whether the target companies could have avoided
that action. There is little doubt about the answer to these two ques
tions in relation to the Communist bloc countries-the explanation
lies with the ideology of Marxism, and there would seem to be little
the companies could have done to prevent the actions. In addition,
this type of seizure took place within distinct periods-1917-20 in the
Soviet Union, 1945-48 in Eastern Europe, and 1959-60 in Cuba-and
during the 1960s and the beginning of the 1970s there has been no
indication that there will necessarily be more of such incidents.
Such is not the case with the selective seizure of foreign com
panies, selective in that either a single foreign firm or all foreign
firms in a particular industrial area are taken over. The first major
instance of selective nationalization was the Mexican nationalization
of foreign petroleum companies in 1938, and the practice rose in
intensity during the 1960s. Because of the expansion of international
investment and the rising number of seizures by less developed coun
tries during the last decade, expropriation has beco me a major issue
of conflict between industrial nations, particularly the United States,
and many of the nations of Latin America, Africa, and Asia. It there
fore is a prime candidate for investigation by students of international
relations.
Analysis of each case of expropriation of foreign property would
obviously be a task demanding many years of research, so it was
necessary to choose several case studies. First, because most of the
recent expropriations have involved U.S. corporations and information
on those incidents was more readily available to the author (who also
felt a certain ethnocentrism), the study was limited to U.S. corporations.
Second, because the issue has received greater prominence in the U.S.
Government' s relations with its neighbors to the south than in its rela
tions with Asia or Africa, it was determined to choose the cases from
Latin America. Finally, because they caused considerably greater
tremors in U.S. relations with its southern neighbors than did other
recent expropriations of smaller U.S. corporations, it was decided to
viii
center the study on the three major expropriations occurring in the
latter half of the 1960s and beginning of the 1970s: the expropriation
of the International Petroleum Company in Peru in 1968, the expro
priation of the Gulf Oil Company in Bolívia in 1969, and the national
ization of the Anaconda Copper Company, the Kennecott Copper Com
pany, and the Cerro Corporation in Chile during 1966-71.
Although it would be inappropriate to make broad generalizations
about the climat e for U .S. investment in Latin Ame rica from these
three case studies, it does seem highly probable that they are indica
tive of a trend because they are representative both of the general
direction of U.S. investment in the area and of the type of investment /
that is most often expropriated. U.S. business activity in Latin America \/
was sparse until the beginning of the twentieth century. It was only
with World War I that the United States overtook Britain as the
principal source of foreign capital. Furthermore, between 1950 and
1968 U .S. direct investment in Latin Ame rica fell from 39 percent to
20 percent of all U.S. direct foreign investment. At the same time
U .S. foreign investment in the resource-extraction sector-mining,
smelting, and petroleum-was rapidly being challenged by manufac-
turing as the key sector for U .S. direct investment in Latin America.
Despite this trend U.S. investment in Latin America still represents
50 percent of all U .S. direct investment in developing countries, half
of which remains in resource-extracting industries. 3 Finally, most
of the instances of expropriation of U .S. property, both in Latin Ame rica
and within the developing nations as a whole, have involved firms in
agriculture, public utilities, and resource extraction. Foreign control
of public utilities is quickly becoming history, and foreign investment
in agriculture is of little significance and brings few repercussions
when involved in expropriation. U.S. investment in petroleum and
mining, on the other hand, remains a significant portion o f U .S.
investment in less developed countries (LDC's) anda potential source
of conflict between the investor, the host country, and the U.S. Gov
ernment.
This study will not explain why the U .S. investor has rushed to
Canada and Western Europe during the past two decades and to parts
o f Asia during the 1960s, but it will attempt to delineate some o f the
reasons why U.S. direct investment has grown less rapidly in Latin
America and has become almost stagnant in resource-extracting
industries. Each case study will explain the reasons for the expro
priation and the efforts to settle the resultant dispute over compen-'\ /
sation, and will attempt to determine the effect of the event on the ~
politics and economy of the host country and on relations between
the U.S. Government and the host government. In order to enhance
the understanding of the conflicts, the case studies will also briefly
describe the history of U .S. investment in the country and place the
ix
efforts to settle the controversy over compensation in the relevant
context: the host government's attitude toward foreign investment,
the state of the economy and the political scene, and other events that
might help explain relations between the host government and the
United States. Chapter 1 sets forth the factors that the case studies
will examine, and the concluding chapter relates those factors to the
evidence developed in the case studies.
NOTES
1. Russell B. Scholl, "The International Investment Position of
the United States: Developments in 1972", Survey of Current Business,
Vol. 53, No. 8 (August 1973), p. 20; Leonard A. Lupo, ''Worldwide Sales
by U.S. Multinational Companies ", Survey of Current Business, Vol. 53,
53, No. 1 (January 1973), p. 37.
2. Judd Polk, "Rise of the World Corporation," Saturday Review,
Nov. 22, 1969, pp. 32-33.
3. See Lester B. Pearson, et al., Partners in Development,
report of the Commission on International Development, International
Bank for Reconstruction and Develooment (New York: Praeger. 1969),
p. 100, table.
ACKNOWLEDGMENTS
This work was submitted as Ph.D. dissertation to the Horace H.
Rackham School of Graduate Studies, University of Michigan, in 1973.
Appreciation goes to Professors A. F. K. Organski and Vernon Terpstra
for valuable guidance. A personal note of thanks goes to George M.
Ingram, Sr., for the many hours he devoted to providing editorial
comment on the manuscript.