A Note on Payments Relations between Latin American and EPU Countries

PART OF LATIN AMERICAN TRADE with countries of the European Payments Union is conducted on a dollar basis, part on a sterling basis, and the remainder on the basis of other currencies. The payments, clearing, and compensation arrangements of Latin American countries with Europe differ widely from country to country and are subject to frequent change, making difficult a precise division of Latin America into “dollar area” and “nondollar area” countries. Some Latin American countries which have “Bilateral Accounts” with the sterling area are “dollar countries” insofar as continental European countries are concerned. Other Latin American countries, however, which are classified in the “American Account” group of the sterling area, have bilateral arrangements with some continental countries.

Abstract

PART OF LATIN AMERICAN TRADE with countries of the European Payments Union is conducted on a dollar basis, part on a sterling basis, and the remainder on the basis of other currencies. The payments, clearing, and compensation arrangements of Latin American countries with Europe differ widely from country to country and are subject to frequent change, making difficult a precise division of Latin America into “dollar area” and “nondollar area” countries. Some Latin American countries which have “Bilateral Accounts” with the sterling area are “dollar countries” insofar as continental European countries are concerned. Other Latin American countries, however, which are classified in the “American Account” group of the sterling area, have bilateral arrangements with some continental countries.

PART OF LATIN AMERICAN TRADE with countries of the European Payments Union is conducted on a dollar basis, part on a sterling basis, and the remainder on the basis of other currencies. The payments, clearing, and compensation arrangements of Latin American countries with Europe differ widely from country to country and are subject to frequent change, making difficult a precise division of Latin America into “dollar area” and “nondollar area” countries. Some Latin American countries which have “Bilateral Accounts” with the sterling area are “dollar countries” insofar as continental European countries are concerned. Other Latin American countries, however, which are classified in the “American Account” group of the sterling area, have bilateral arrangements with some continental countries.

Certain bilateral payments agreements between Latin American and European countries provide that freely disposable U.S. dollars shall be used as the means of effecting commercial payments (e.g., the agreement between Uruguay and Italy and that between Peru and Western Germany). Other agreements, in contrast, employ the U.S. dollar as a unit of account (“restricted” dollars); the mechanism of current settlements, however, is designed to avoid payment in freely disposable U.S. dollars, and only final settlement at the termination of the agreement is to be effected in freely disposable U.S. dollars, other agreed currencies, or gold. (See Table 1.)

Table 1.

Summary of Payments Relationships between Latin American Countries and EPU Countries as of January 31, 19511

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For the sterling area, the first column indicates the type of account provided for under the agreement; for the other areas or countries, it denotes the currency for current payments. For all areas and countries, the second column indicates the kind of credit—if any—that is provided for under the agreement; a blank in that column indicates that no credit feature exists. A dash (—) indicates that no bilateral payment, clearing, or compensation agreement exists between the two countries; in these cases payments are usually made in dollars. The following abbreviations are used in the table:

Recently expired; renewal under discussion.

Information not available.

Free dollar payments for copper and nitrate.

Trade in copper and 50 per cent of trade in nitrate is paid in free U.S. dollars.

In November 1950, a £700,000 barter agreement was concluded between Chile and Italy. Both Chile and Italy are transferable account countries except for trade in copper.

Free dollar payments for copper and nitrate (Germany) and coal and coke (Chile).

Arrangement whereby 50 per cent of the value of nitrate exports to Portugal will be entered in a compensation account, from which specified exports to Chile are to be paid. The remaining trade between Chile and Portugal will be on free dollar basis.

In October 1950, a $2 million barter agreement was concluded between Colombia and France. All other trade is settled in freely disposable dollars.

In May 1949, a $500,000 barter agreement was concluded between Colombia and the Netherlands. All other trade is settled in freely disposable dollars.

In an agreement concluded on September 20, 1949, Mexico and Italy agreed to grant authorization for private compensation operations between residents of Mexico and Italy.

With countries that are classified in the American account group by the U.K. Exchange Control, U.K. trade is in effect conducted on a dollar basis, under a mechanism whereby the United Kingdom makes payments in sterling which is convertible into dollars whenever the recipient country so requests. In this group are the Central American countries, the Caribbean countries, and Colombia, Venezuela, Ecuador, and Bolivia.

The Latin American countries included in the American account group of the sterling area do not coincide exactly with the countries described as dollar countries in relation to Western European countries. Bolivia, for example, has payments agreements with France and Belgium-Luxembourg which bilateralize Bolivian payments with the French franc and Belgian franc areas, respectively, on the basis of these European partners’ currencies. Bolivia’s trade with other countries is conducted on a dollar basis. Colombia has either clearing or compensation agreements with Belgium-Luxembourg, Denmark, France, and Western Germany; trade with other EPU countries is conducted on a dollar basis. Ecuador is linked by bilateral agreements to the French franc area and to Western Germany, on the basis of “restricted dollars.” Mexico’s trade with the French franc area is on a clearing basis. All other Latin American countries in the sterling area’s American account group also trade with Western Europe on a dollar basis.

The trade with the sterling area of Latin American countries that are not in the “American Account” group is conducted under the system of “Transferable Accounts” or “Bilateral Accounts.”

The transferable accounts mechanism allows for current payments within the sterling area and for the automatic use of sterling for settlement within the transferable accounts group. At the inception of EPU, this group included among EPU participants Norway and Sweden, the Netherlands, and Italy. The United Kingdom has offered to extend the transferable accounts status to all EPU countries.1 This would imply that sterling held on transferable account by nonparticipating countries would enjoy transferability on an even wider scale than the currencies of EPU countries other than the United Kingdom. Chile is the only Latin American transferable account country. But since exports of copper and nitrate of soda, which are the most important Chilean products, are settled in dollars and specifically excluded from the transferable accounts system, only the rest of Chilean trade would benefit from the multilateral settlement which the extension of transferable accounts status to all EPU countries would make possible.

The bilateral accounts countries are entitled to the automatic use of sterling for settlement of current payments only with the “scheduled territories” (sterling area). The Bank of England frequently authorizes the use of sterling held under bilateral accounts for transfers from one bilateral account country to another, or from a bilateral account to a transferable account. This so-called “administrative transferability” helps to relax the bilateralism of payments vis-à-vis bilateral account countries. Since the scope of automatic transferability of bilateral accounts is limited to the sterling area and does not extend to Western European countries and their overseas territories, the transferability in continental Europe of sterling earned by Latin America under bilateral accounts is thus determined by administrative discretion. The bilateral accounts group includes Argentina and Brazil—the two most important Latin American trading countries—and also Uruguay, Paraguay, and Peru.

The Latin American countries having bilateral account relations with the sterling area for the most part also have bilateral trade and payments relations with other European countries. The countries of the River Plate area (Argentina, Uruguay, and Paraguay) and Brazil have concluded a network of bilateral arrangements with these continental countries. Where no such agreements exist, the U.S. dollar is the means of international settlement for countries in this group. As was pointed out above, some of these bilateral agreements provide that freely disposable U.S. dollars are to be used as the means of payment between the contracting partners. Situations where the U.S. dollar is used only as a unit of account or as a safeguard against depreciation of outstanding balances should not be considered cases of “dollar trade.” They are more appropriately regarded as bilateral relationships, with interim settlements in the currencies of the parties concerned and final settlements of uncleared balances in U.S. dollars, gold, or a third agreed currency. Most of the bilateral agreements in question provide for reciprocal credit; a few of them provide for unilateral credit from the Latin American country to the European partner.

Since the bilateral accounts make the currency of payments disposable only within the partner country for specified purposes, the degree of convertibility or transferability is very low or nonexistent. The EPU agreement provides that a debtor country, A, may discharge its gold obligation to EPU in the currency of a nonmember country, X, when this is acceptable to an EPU creditor country, B. This provision would, in certain cases, permit country X to compensate its deficit with country A against its surplus with country B. It is doubtful, however, that such operations will be frequent because they will be practicable only if two further conditions are satisfied: first the EPU creditor (B) will accept the currency of the nonmember (X) only if its own deficit with the nonmember has also to be paid in gold or convertible currency; and second—for the same reason—the operation will be acceptable to the nonmember (X) only if its own deficit with the other EPU country (A) has to be paid in gold or convertible currency. In view of these qualifications, no net advantage would arise from the arrangement, except for the avoidance of a triangular shift of gold.

Venezuela and the Central American and Caribbean countries carry on all their trade with Europe on a dollar basis. The European trade of these countries is comparatively small, and EPU will have no appreciable effect upon it, since the exports of the countries to Europe are already limited by the dollar availabilities of their European partners. On the other hand, Argentina, Brazil, and Uruguay, which have bilateral agreements with Europe, could be adversely affected during the first year of EPU. The extent of these effects will depend, however, on the trade situation which develops from their bilateral agreements with individual EPU members, as well as upon general supply conditions. The development in one or two years from now could be such that an EPU member, having already exhausted the first tranche of its quota, would prefer to import from such countries rather than from the dependent overseas territories or from sterling area countries.

*

Mr. Vera, economist in the Latin American Division (South), was educated at the University of Asuncion, Paraguay and at Ohio State University. He was formerly Faculty Member of the National School of Commerce, Asuncion, Paraguay.

1

To date, Austria, Denmark, and Greece have accepted this invitation.