Development of the pattern of agreements

By early 1950, the twenty Latin American countries could be roughly divided into three groups on the basis of the number of their payments agreements. The first group comprised Argentina, Brazil, Paraguay, and Uruguay, each of which was partner to a significant number of payments agreements. Since, in accordance with these agreements, trade was financed in inconvertible currencies, each was a non-dollar country to most of its main trading partners with inconvertible currencies, although, because of the development of their bilateral accounting positions, they were in that period usually not considered soft currency countries by their payments agreement partners. The second group, consisting of Bolivia, Chile, Colombia, Ecuador, and Peru, had signed few payments agreements and was considered part of the dollar area by most of the major trading countries. However, under its sterling payments agreement with the United Kingdom, Peru was able to pay and receive sterling in trade with many non-sterling area countries on the basis of administrative transferability, so that in some respects that country was halfway between a dollar country and a payments agreement country. Chile, similarly, financed part of its foreign trade in automatically transferable sterling, but required payment in dollars for its copper exports, and therefore remained closer to the position of a dollar country. The third group consisted of Mexico, Venezuela, and all the republics in Central America and in the Caribbean. In these countries, payments in inconvertible currencies were either nonexistent or negligible, and consequently they were universally considered as part of the dollar area. This grouping was closely connected with the pattern of production, and hence with the pattern of foreign trade, the countries with either few or no payments agreements being those which traded mainly with the United States and Canada, while those with more agreements included the River Plate countries, much more dependent on trade with Europe, and in some respects, direct competitors of the United States and Canada.

In recent years, the early pattern of agreements has changed in three principal ways. First, some of the Latin American countries which to all or most of the rest of the world constituted part of the dollar area entered into a number of payments agreements, or into trade arrangements similar in some of their main effects to payments agreements, with certain European countries. This was done in order to overcome the effects of discriminatory import licensing in countries with inconvertible currencies, and thus to recapture or expand markets in Europe. The principal pacts of this kind are those of Cuba with France, the Federal Republic of Germany, the United Kingdom, Italy, Austria, and Yugoslavia; the agreements concluded by Colombia with Austria, Belgium-Luxembourg, Denmark, Finland, France, the Federal Republic of Germany, Italy, Spain, Sweden, and the United Kingdom; and a number of bilateral agreements entered into by Mexico, which in 1950 embarked on a policy of tightening its commercial ties with Europe by means of various types of agreement. There have been developments along similar lines but of less quantitative significance in some of the smaller dollar countries of Latin America, such as El Salvador and Guatemala.

The second major development was the extension of the network of agreements signed by the countries in the southern part of South America. Argentina, Brazil, Paraguay, and Uruguay further increased the already significant number of their payments agreements and complementary trade agreements, particularly by concluding such pacts with some of the smaller European trading countries. Also, while concluding few additional payments agreements which attempted to cover the greater part of the payments relations with the partner country, Chile in its exchange budgeting in 1951 adopted a bilateral approach vis-à-vis many countries.

The third principal change was the termination of a number of agreements with some of the major trading countries of Europe. Thus, payments in convertible exchange were resumed between the Federal Republic of Germany and Mexico in 1952; the German payments agreement with Colombia was denounced late in 1953, but subsequently was temporarily extended. The Brazilian trade agreement with the United Kingdom which expired in 1951 has not been replaced, although the sterling payments agreement is still in force. The payments agreement made by the Belgian-Luxembourg Economic Union with Brazil had been terminated in 1948; that between BLEU and Argentina had been ended in 1950; and the 1946 trade agreement between the Economic Union and Brazil had not been renewed. When the trade and payments arrangements between Argentina and Switzerland expired in 1951, payments between them continued in Swiss francs on the basis of unilateral Swiss regulations creating, for most payments, a clearing regime under the supervision of the Swiss Clearing Office. In regard to the Mexican-German agreement, the lack of prescription of currency in Mexico had caused a significant proportion of imports to be effected outside the agreement, i.e., against payment in free U.S. dollars and at the lower prices which the German export bonus system for exports settled in convertible currencies made it possible to quote. The main reason for the termination of other agreements has been the serious differences of view with regard to Latin American import licensing and export pricing policies.

There have also been two other developments of importance. Under bilateral sales agreements concluded by the semiofficial Nitrate and Iodine Sales Corporation, Chile has increasingly sold its nitrates against payment in soft currencies rather than in dollars as in the early postwar years. Whereas Chile in certain respects thus came closer to being a payments agreement partner and could even be regarded by its trading partners as, in effect, a soft currency country, Peru moved in the opposite direction by reducing its acceptance of sterling from non-sterling area countries, as a result of which other countries have insisted more than before on payment in dollars for all sales to Peru.

There are comparatively few intra-Latin American bilateral trade and payments agreements. Most of them cover trade and payments either with neighboring countries or with Argentina, and the most important agreements are with Argentina. Until recently, payments between Argentina and Chile were effected mainly in Argentine pesos under the terms of circulars issued by the Argentine Central Bank, which prescribed the financing in Argentine pesos of most trade with neighboring countries and with Peru. When an agreement aiming at economic union between the two countries was signed in 1953, discussions started on ways and means of improving the payments mechanism and thereby fostering reciprocal trade. These have now resulted in a bilateral payments agreement with the U.S. dollar as the unit of account, which it is hoped will reduce the difficulties arising from the inability of Chile to apply its system of multiple buying and selling rates to the fluctuating rate of the Argentine peso in the Chilean banking free market. The Argentine-Chilean agreement is significant, also, in that it is open for adherence by other Latin American countries. New trade and payments agreements signed by Argentina with Paraguay and Ecuador are apparently considered by some as constituting a partial implementation of the multilateral provisions of the agreement with Chile, although in each case payments transactions remain on a bilateral basis. The payments agreement with Paraguay may eliminate some exchange rate problems similar to those that existed between Argentina and Chile.

The agreements concluded with Japan complete the general picture. Japan is the principal agreement partner outside Latin America and Europe. The first Japanese agreements with Latin American countries were signed in 1949. Since then, their number has not increased, but discussions of additional agreements continue intermittently.

Principal types of agreement

Latin American trade and payments agreements have shown a gradual trend toward standardization. Most of the early payments agreements with European countries provided for agreement accounts in the European partner’s currency. The only case of a single currency pact in which the Latin American partner’s currency was used for this purpose was the provisional payments agreement between Brazil and the Netherlands, which was replaced in mid-1953 by one providing for U.S. dollar accounts.² Since many of the early payments agreements have continued in force, many Latin American payments agreement accounts are still in European currencies. Thus the six agreements with the United Kingdom are so-called sterling payments agreements, under which—in contrast to the type called “monetary agreements” by the United Kingdom—all payments are effected in sterling. Of these agreements, five provide for bilateral account status under the U.K. exchange control regulations, while that with Chile grants that country transferable account status.³ Several other Latin American payments agreements are conducted in French francs, Swedish kronor, Netherlands guilders, etc. Most of the newer agreements, however, including all payments agreements with Western Germany and Japan, are based on the U.S. dollar. Thus, the usual type now is an agreement with the U.S. dollar as the unit of account and with obligatory invoicing in U.S. dollars. This minimizes the difficulties resulting from multiple currency systems and also those with regard to exchange guarantees on outstanding balances and the liquidation clauses applicable to balances at termination. The trend is also toward the decentralization of payments, i.e., toward agreements which permit commercial banks to conduct subaccounts of the central agreement account. Where such decentralization already exists, the number of private banks participating in the conduct of the agreement accounts is growing. Single-account agreements are predominant.

The transactions covered by payments agreements are mostly current transactions related to direct trade between the partner countries. In many cases, however, specific provisions on permitted types of transit trade are now included; and in certain cases, there are clauses defining the origin of goods to be considered direct exports or provisions regarding the use of certificates of origin. There has been a fairly general tendency for the swing margins to be increased, although experience of the way in which many agreements operated in the post-Korean boom caused certain European countries to attempt a downward revision in some cases. Clauses constituting an arrangement similar to a swing were inserted, however, in 1951 in the sterling payments agreement between the United Kingdom and Argentina. The ceiling on the swing in the Swedish-Argentine payments agreement was eliminated in the same year. Clauses intended to keep part of the direct trade between partners on a dollar basis are disappearing. The number of clauses providing for the use of Latin American shipping and insurance facilities for part of the trade between the partner countries is increasing. At the same time, the trade agreements have become less significant. Some have been dropped altogether; in others, the value or quantity quotas have become less detailed. Several important agreements, however, now include provisions for participation by the partner country in the Latin American country’s industrialization programs through the supply of capital equipment under deferred payment arrangements.

In view of the large number of countries involved, it is not surprising that, despite this tendency toward standardization, there is considerable variety in the Latin American payments agreements. One type of relatively minor practical importance is the agreement which provides for settlement at regular intervals in freely disposable U.S. dollars of the full accounting balance. Under the Franco-Peruvian agreement—although it is of a different type—dollar settlements are made by the debtor country almost continuously. The agreement commits Peru to maintain the appropriate cross rate for the French franc in the Peruvian certificate market. There are a few intercentral bank arrangements under which the central bank of a Latin American country is prepared to buy and sell the other country’s currency, most bilateral trade being conducted in that currency. Furthermore, the Japanese agreements with Peru and Uruguay are of the so-called “dollar cash” type, under which all payments and receipts are actually made in freely disposable U.S. dollars; among Japan’s agreements, only those with Argentina and Brazil are of the “open account” type under which the U.S. dollar is no more than an accounting unit and the intergovernmental credit element is implemented by swing provisions. Japan has also had “dollar cash” payments agreements with Chile, Colombia, Mexico, and Venezuela, all of which were concluded by SCAP in 1949 and expired when the Japanese Peace Treaty went into effect. Finally, some of the Latin American payments agreements are clearing agreements of the interwar type that contained no swing margin of the postwar type but provided for payments to exporters out of amounts in domestic currency paid in to the clearing office by importers in the same country, while the importer’s debt to the exporter was discharged at the moment he made his in-payment in his own currency. Such payments regimes exist between Cuba and Spain, and between Uruguay and Switzerland. Some balances under interwar Latin American clearing agreements still have to be cleared.

The increasing number of payments agreements, trade agreements, and combined trade and payments agreements concluded by Colombia with European countries has already been noted. In return for purchasing commitments with regard especially to coffee and bananas, the European partners are permitted by those agreements to supply goods whose import into Colombia had previously been restricted severely or prohibited.⁴ Since February 15, 1952, Colombia has permitted certain goods to be imported only from countries with which trade is considered approximately balanced (United States and Canada) or with which trade or payments agreements have been concluded. In May 1953, the awarding of public contracts was restricted to the same group of countries. After discussions with Switzerland, however, it was declared in October 1953 that this provision was no longer applicable to countries maintaining freedom of exchange and imports. Some of the agreements specify that Colombian coffee may be resold by the partner country to countries other than those specifically excepted—the latter generally being countries of the North American continent and those with which trade or payments agreements are in force. A Colombian agreement concluded in February 1954 reportedly permits Sweden to fulfill one half of its purchasing commitment for coffee by purchases of that product through London, against payment in sterling. The number of agreements and understandings has become so great that most of Colombia’s exports to Europe are probably being settled in inconvertible currencies or—where only a trade agreement has been signed and payments both ways continue in free dollars—offset by additional European exports. It has been stated officially in Colombia that the agreements are intended as instruments to recapture and expand markets in Europe that had been endangered by Colombia’s status as a dollar country.

Somewhat similar agreements between Cuba and various European countries have had the effect of making quantities of Cuban dollar sugar available to European countries against payment in inconvertible currencies or, in the absence of a payments agreement, against shipments of additional exports settled in dollars. The main agreements provide that Cuba shall extend preferential tariff treatment to the partner country on listed goods in return for a purchase commitment for specified amounts of sugar and other products, particularly cigars. Such agreements enable the European country to cover part of its sugar purchases in Cuba by additional exports to Cuba, which continue to be settled in dollars. The multilateral most-favored-nation provisions of the General Agreement on Tariffs and Trade (GATT) extend these tariff concessions to other countries, but the items on which they are granted have, of course, been chosen so as to offer Cuba’s agreement partners the likelihood of increasing sales significantly. The main pacts of this type have been concluded with the United Kingdom and the Federal Republic of Germany. Another type of agreement concluded by Cuba provides for the sale to a European country of sugar, for which payment is made in part in that country’s currency, and which is to be resold entirely to third countries—with that part of the sales proceeds which is in inconvertible currencies being available only for imports by Cuba from the partner country. As in the case of Colombia, these arrangements attempt to improve sales prospects in Europe, which had been impaired by the fact that all purchases in Cuba had to be settled in dollars and that there was little likelihood that these purchases would induce increased exports, to Cuba unless there was some type of bilateral arrangement. There has been a tendency for certain sales under such arrangements to be concluded at prices slightly higher than those charged to other countries. Most of the partner countries, however, seem to have continued granting to exports to Cuba all the facilities granted to sales against payment in convertible currencies.

The so-called global compensation agreements concluded by Italy with a number of countries, including Peru and Colombia, are also of interest. Under these pacts, there is no bilateral payments agreement, but trade is balanced by a number of individual compensation transactions up to specified totals for specified commodities, while usually all payments are in free U.S. dollars. There is some similarity between these agreements and the Franco-Colombian trade agreement. Under that agreement French coffee importers are required to contact intending exporters to Colombia through the banking system, in order to effect their coffee purchases in Colombia on the basis of “combined transactions” in accordance with prescriptions given by the Ministries of Finance and of Economic Affairs. Under that system, also, payments are made in U.S. dollars via New York.

Customs tariffs

The signing of trade and payments agreements in many cases has had a greater impact on trade between the partner countries than the customs duties applied by each to the other’s exports. This does not imply, however, that the importance of action on tariff matters may be ignored. Eight Latin American Republics (Brazil, Chile, Cuba, the Dominican Republic, Haiti, Nicaragua, Peru, and Uruguay) are signatories of the GATT, and all but Brazil and Peru have extended the period of validity of their tariff concessions to July 1, 1955. Several republics have overhauled more or less thoroughly their import tariffs in the postwar years, one of the main aims being the change-over from specific to ad valorem customs duties in order to adapt both the revenue and the protective effects of the tariffs to the general postwar rise in price levels. Latin American countries have also entered into a number of additional most-favored-nation treaties regarding customs duties and internal taxes and levies on imported goods, both with payments agreement partners and with other countries.

In Central America, a movement toward economic integration, affecting tariffs and other matters, is making progress. Within the framework of this movement, Nicaragua and El Salvador in 1951 concluded an agreement which is referred to as a free trade treaty. It exempts some of their imports from each other from export and import duties as well as internal levies and charges. It also abolishes import and export restrictions on certain products entering into their mutual trade. The treaty states that the two countries aim ultimately to establish a customs union.⁵ Later in 1951, the two countries also signed a payments agreement, the use of which is not obligatory, however. The central banks are to sell each other colones and córdobas up to a swing ceiling of US$100,000. The agreement accounts may be used only for imports originating in the partner country and which are listed in the annex to the free trade treaty. Since then, El Salvador has concluded free trade treaties with Guatemala and Costa Rica. Also, the Central American Republics in 1952 signed an agreement regarding the unification of tariff nomenclature.

Changes in positions vis-à-vis bilateral agreement partners

Developments affecting the functioning of the Latin American trade and payments agreements after the 1949 devaluations in Europe include the creation of the EPU, the outbreak of the Korean hostilities, the three successive droughts in the River Plate region, and the increasing availability of export goods in Europe and Japan. In this period, inflation in most of the South American countries continued, whereas in Europe inflationary pressures were eased significantly. Also, the 1949 devaluations in Western Europe were fairly general, affecting 13 countries, whereas in Latin America most countries maintained their par values or their basic exchange rates. Among the countries trading heavily with Europe, Brazil did not devalue its currency, while Argentina effected a partial devaluation against the U.S. dollar by a sweeping revision of its multiple rate system, but made no change in the rate for the basic exports which go mainly to Europe. Within a few days of the Argentine action, Uruguay made similar adjustments in its multiple rate system. Several Latin American countries subsequently were forced to permit a gradual depreciation of specific import and export rates.

The creation of the EPU enabled member countries to buy commodities available in Latin America more freely from each other, and particularly from each other’s nonmetropolitan territories, or from outside sources which accepted sterling. After the hostilities in Korea had started, several Latin American countries, especially Argentina and Brazil, made heavy purchases abroad, including purchases from their European agreement partners. In some cases there was a significant formal relaxation of import and exchange restrictions; for example, in Uruguay, where in 1950 a system of “sworn declarations” exempted certain types of imports from the requirement of prior import permits, and in Chile, where a “free area” of commodities not subject to quantitative restrictions was included in the exchange budget for 1951. The droughts in the River Plate region severely limited exportable stocks in Argentina. This had repercussions in other Latin American countries, mainly Brazil and Paraguay, both of which had to obtain wheat from the United States against payment in dollars, although Brazil held a large claim under its payments agreement with Argentina. This in turn tended to induce these countries to restrict their other dollar purchases more severely and therefore to turn increasingly to European suppliers with whom payments agreements were in force. In addition to low exportable stocks, official pricing policies and exchange rate policies frequently prevented large European purchases. This was true, e.g., of Brazilian cotton, Chilean copper, and various products sold by the Argentine Trade Promotion Institute (IAPI). The increasing availability of goods for export in countries outside Latin America finally meant the return of a buyer’s market, with opportunities for Latin American countries to obtain more favorable terms of payment for imports from private exporters and large credits from foreign governments.

Mainly as a result of the basic developments indicated above, the Latin American creditor position of the early postwar years vis-à-vis Europe was reversed. Latin American holdings of sterling and other European currencies had been practically all used by mid-1951 and, despite increasingly long credit terms obtained on imports from several European countries, large commercial and financial arrears accumulated against many European countries, in several cases implying the Latin American countries’ overdrawing of the swing ceilings. The main debtors under payments agreements were Argentina and Brazil, while the main creditors were the United Kingdom, the Federal Republic of Germany, France, Italy, the Netherlands, Sweden, Denmark, and Finland. Trade agreements usually were fulfilled only in part, mainly because of the low level of exportable stocks referred to above, and the difficulties in obtaining Latin American import licenses for nonessential goods, which were caused in part by protective policies but were aggravated by the growing imbalance in payments agreement accounts.

Increasing significance of transit trade

Of perhaps more fundamental importance for the use, and therefore the functioning, of Latin America’s payments agreements was the increasing significance of transit trade, which made for more complicated trade and payments relations with agreement partners. In part, transit trade was independent of the positions developing under specific payments agreements, but it also was used for the express purpose of changing such bilateral positions. The European countries were anxious to build up their transit trade for a variety of motives. One was to increase the movement of goods through their ports, warehouses, and processing facilities, in view of the employment which resulted, and without reference to the monetary aspects of the financial settlements involved. Another motive was to increase the usefulness and therefore the strength of their currencies by supplying third countries with an increased range and volume of products. Of significance in this connection is the route along which payment was effected rather than the route taken by the goods. Intermediary countries would usually insist on receiving currencies at least as hard as those spent, but this was no hard and fast rule. The receipt of a specific soft currency might, e.g., be authorized if a relatively small outlay of dollars would result in a much larger accrual in the inconvertible currency, or if, in re-establishing a commodity market, it was considered desirable to give countries with inconvertible currencies access in that market to hard currency goods. A third motive was to influence the composition of exchange reserves, e.g., by reducing excessive credits accumulated under payments agreements.

The fact that certain established trade channels run through third countries has in itself caused differences of opinion between some Latin American and some European countries. Thus significant proportions of Mexican and Peruvian exports to Europe are shipped via ports in the United States. All of the exports to such countries as Bolivia and Switzerland from countries other than their neighbors are shipped through third countries. The actual routing of exports may produce misleading trade statistics. Thus, part of the French exports to Cuba are shipped through Belgian or German ports and are recorded in Cuba as imports from Belgium or the Federal Republic of Germany, whereas French export statistics seem to count certain French iron and steel exports shipped to Cuba through foreign ports as exports to those countries rather than to Cuba. Resulting uncertainties as to the significance of official trade statistics have been of some importance where trade agreements between Latin American and European countries provide that there shall be a specified relationship between the partner countries’ purchases from each other, as, e.g., between Peru and the Federal Republic of Germany. In the present context, however, the use of the term “transit trade” will be reserved for transactions in which, regardless of the route along which the goods are shipped, the country of final consumption makes payment not to the country of origin but to a third, intermediary, country.

Transit trade in Latin American products was extensive in the interwar years, when a substantial proportion of the sales of such products as cereals, wool, cotton, metals, coffee, cocoa, and tobacco was channeled through the various London and continental commodity markets. In practically all cases, such transit trade was based on the official exchange rates, since the currency received was largely a matter of indifference in a world which was substantially convertible.⁶ After the war there was a strong urge in various European countries to resume this traditional trade, which had resulted in large shipping, banking, and insurance earnings, in addition to the profits of the trade, and also to a general tightening of relations with the countries of origin. The Latin American countries entering into postwar trade and payments agreements, however, initially showed a distinct tendency to exclude transit transactions from settlement under the terms of payments agreements and from the commodity quotas included in trade agreements, usually making all operations of this type dependent on ad hoc approval. Nevertheless, the actual treatment of transit proposals gradually became more liberal on the Latin American side.

Meanwhile, there arose a new type of transit trade, based on hardness-of-currency grounds and profitable because of the price differences for the same or similar goods in various markets that were caused by restrictive and discriminatory import licensing. The transactions referred to include the so-called commercial switches. In such transactions, the profit to be made on the sale of a hard currency commodity in a soft currency market where prices are inflated allows the intermediary to engage in a linked second transaction which results in a loss and therefore cannot be undertaken independently. The unprofitable transaction is a sale of a soft currency commodity in a harder currency market at a price lower than that ruling in the country of origin plus the cost of shipping. Trade based on this principle may also involve compensation deals and outright purchases and sales of currencies at a discount or at a premium. Significant discrepancies between the cross rates for different currencies, such as are now found in Brazil and Chile, create additional incentives for commercial transactions which could not be consummated if the official exchange rates were applied between the currencies of the countries of origin and those of final consumption.

“Straight” transit trade—that is, transit trade carried out without the assistance of exchange manipulation or broken cross rates—has made it possible for certain European soft currency countries to supply some Latin American inconvertible countries with products originating in other European inconvertible countries, and conversely to buy products from the former for resale to the latter. Part of that trade has been a resumption of a traditional interwar pattern, e.g., where an established commodity market in an intermediary country assures buyers of a good choice of qualities, financing facilities, and other regular commercial facilities. Thus, through the re-opening of the London commodity markets, countries with inconvertible currencies could, against payment in sterling, obtain certain raw materials and foodstuffs from a large variety of sources, including in certain cases dollar sources. In such straight transit transactions, however, it has been usual to effect purchases and sales in currencies of equal hardness. This transit trade is of even wider scope if the resale of imported commodities after a certain degree of processing is taken into account, such as the trade in refined sugar by the United Kingdom and the Netherlands. Another part of this “straight” transit trade has been induced largely by monetary or commercial policy considerations. A European country having a payments agreement with a Latin American country might want to provide the latter with additional exchange to enable it to increase its imports from the former; the European partner might then buy certain products in excess of its immediate requirements and resell them to a third country. Or a European country with an extreme credit position vis-à-vis a Latin American payments agreement partner, which caused the latter to reduce its purchases there, might channel part of its sales to the partner country through a European country where the Latin American country was buying more liberally. Payments agreement partners with an extreme debtor position, on the other hand, have had an incentive to channel their purchases through third countries in order to avoid the need for settling deficits in hard currency which would arise if the swing ceiling were overdrawn.

European payments agreement partners have also resorted increasingly to “straight” transit trade in order to obtain at better prices goods that could be obtained more cheaply from the Latin American countries of origin via some of the latter’s other agreement partners, even if this has implied that the European buying countries’ bilateral claims on Latin American countries were not reduced as much and as fast as they might have been. This has occurred, e.g., where Latin American countries created subsidy export rates for specific products if sold in specific currencies only.

Although in “straight” transit trade soft currency goods are usually sold for a currency at least as hard as that of the original exporting country, and hard currency goods only for hard currencies, it has recently become possible in certain cases to buy dollar goods on this basis. Thus dollar coffee, dollar cocoa, and dollar metals have become available in the London commodity markets against payment in soft currencies.

As noted above, another type of transit trade which has assumed significant proportions is the commercial switch deal involving the resale to the dollar area of goods bought in Latin America under payments agreements, and correspondingly the resale of dollar goods to Latin America or Europe against payment in inconvertible currencies. In some cases, such resale has been made in the trader’s own country. Similar transit trade on a switch basis between Latin American payments agreement countries and EPU countries, in both directions, has also occurred. One motivation for these two types of commercial switch has been to reduce claims on Latin American payments agreement partners. They can also be operated in such a way as to increase claims or reduce debtor positions. Finally, owing to the EPU arrangements—under which member countries’ accounting deficits, once their quotas have been exhausted, are payable 100 per cent in gold or dollars—it has been possible at times for European countries to buy commodities in dollars outside the EPU monetary area and to resell them against soft currencies to EPU members, even without charging the mark-ups normally obtained for sales of dollar commodities in soft currencies. Such transactions were particularly significant when undertaken temporarily by the United Kingdom in the second half of 1952. They affected relations between certain Latin American countries and their agreement partners.

All these forms of transit trade have implied that the direct ties between certain Latin American countries and some of their European payments agreement partners have become looser. Also, countries on both sides have obtained easier access to competing products, particularly dollar products, through transit trade of the switch variety. A similar effect resulted from the relaxation of restrictions on dollar imports into some European countries over the last three years. In addition, the premia charged on dollar products sold for inconvertible currencies have fallen significantly in that period because inconvertible countries were better supplied with dollar imports.

The actual importance of these types of transit trade has varied greatly from country to country, from commodity to commodity, and over time. In a majority of cases, however, they have tended to obscure the developments in direct trade with agreement partners. Commercial switches have been in part responsible for the lopsided trend in some of Colombia’s main payments agreement accounts. A significant proportion of certain partner countries’ exports has been supplied in transit by third countries which have received dollars for those sales, so that the agreement accounts have recorded mainly the partners’ purchases in Colombia, and very few sales. The import prices in dollars for such indirect purchases usually have been below those quoted for the same goods obtained directly from the country of origin against payment in the appropriate inconvertible currency. The resale of Latin American products to the dollar area by payments agreement partners has assumed its largest proportions in Argentina and Brazil, which have incurred the highest debtor balances under their agreements. As a defensive measure, many Latin American countries have introduced or tightened regulations regarding the production of certificates of origin and of consumption, and regarding the supervision of the valuation of imports and exports. Colombia, on July 7, 1952, prescribed payment through the appropriate agreement account for all imports originating in countries with which payments agreements were in force, even if those goods were imported from third countries. El Salvador, which lacked a regular system of prescription of currencies, has made customs clearance conditional on the production of documentary evidence that payment had been made through an appropriate account. On the other hand, some Latin American countries have permitted certain resales of their products to the dollar area by payments agreement partners paying in inconvertible currencies.

Working off of excessive balances

Since, as a rule, the Latin American countries running large deficits with payments agreement partners also incurred significant liabilities vis-à-vis the United States and other dollar area suppliers, they were, in many cases, not in positions to settle in dollars their overdrafts under payments agreements. Hence European creditors cut back their exports, and a deadlock developed in many instances, with trade between each pair of countries decreasing markedly, and often being sustained mainly by barter and compensation deals or by European purchases for resale to third countries.

The methods chosen to clear the agreement accounts and thus to reopen the channels of trade have varied considerably. Their main impact has been on Argentina and Brazil, the payments problems of other Latin American countries under their agreements being of less significance. The European creditor countries have tried to increase their purchases in those countries where they have held significant balances, and to reduce their sales to them. In view of the export price policies being pursued at times by some of the Latin American countries, commercial switch deals have been used at the same time, in some instances, to reduce those prices to other EPU countries and to the United States. Compensation deals have been resorted to in order to keep both imports and exports moving, and those deals usually have involved an implicit depreciation of Latin American export rates. Countries engaging in switch transactions both ways between Latin American payments agreement partners and EPU countries probably have sought to ensure that the amounts in Latin American currencies used up in such deals would exceed the corresponding receipts in such currencies. Transit sales of third countries’ products to Latin America at official exchange rates presumably have been reduced by agreement partners holding claims under payments agreements on those countries.

Direct imports from Latin American partner countries have been facilitated by more extensive use of open general licenses and free import lists, and by measures intended to stimulate domestic consumption, such as derationing or a reduction of domestic taxation on coffee. On the other hand, European countries have taken various measures to restrict exports to some payments agreement countries in Latin America, including certain measures intended simultaneously to cheapen imports from those countries. For example, some European countries have required that exporters, in order to make shipments to Argentina and Brazil, make a payment resulting in a subsidy to importers effecting purchases in the same country. Also, under such systems imports and exports could be linked in such a way that exports to a specific partner country would not exceed a certain predetermined proportion of imports from that country. Other measures taken by European countries have included the creation of freely fluctuating spot or forward markets for some Latin American agreement currencies in which they have shown a significant discount. Such measures have amounted, in effect, to a subsidization of imports that has been financed from the windfall profits obtained from exports to those countries. Several of these schemes proved to be of little help, however, when the Latin American countries drastically reduced the volume of import licenses granted for purchases in Europe. In a few cases, claims on Latin American countries have been transferred between European countries, with the consent of the debtor country. The types of cover granted under export credit insurance schemes on exports to Latin American debtors have been reduced, and the premia for such cover raised. In certain cases, private creditors in Europe have engaged in compensation deals under which they have obtained settlement of long-standing debts at a discount. Finally, the sale of payments agreement balances at a discount to residents of third countries against payment in harder currencies has been permitted in some countries of Europe.

Measures taken on the Latin American side have included the cutting back of imports, and presumably of transit purchases, from European creditors; the creation of new export rates, such as the Argentine preferential export rate for wool sold against payment in U.S. dollars or Argentine Account sterling; and the downward adjustment of export prices in the Latin American currency for sales to specific European creditors. Some of these measures have created new patterns in transit sales to Europe. In some instances, the currency of the European partner has been permitted to reach a premium over the U.S. dollar in the Latin American country’s exchange market; this was true of the German agreement dollar and sterling in the Chilean banking free market. Also, the debtor countries increasingly have permitted the creditor countries to purchase commodities for resale to third countries in various types of transit transactions. Argentina in 1953 appears to have made a particular effort, to a large extent by a reduction in direct imports, to build up sterling balances and to use the swing against Germany as slowly as possible. When Latin American countries have considered their earnings of certain payments agreement currencies excessive, they occasionally have permitted the sale of these currencies in free exchange markets against dollars. Such sales have involved especially current sterling earnings. The reluctance of some Latin American countries to hold certain currencies has been related to their dissatisfaction with the revaluation clauses covering balances under the payments agreements in question. Occasionally exporters have been required to surrender all export proceeds in U.S. dollars, even if this has involved the exchange of inconvertible receipts for dollars in a free market.

A substantial part of the trade carried on between Latin American and European payments agreement partners during the last two years has consisted of European exports with long delivery dates that had been contracted for earlier; of individual compensation deals often involving goods valued at many millions of dollars each way; and of trade which, in effect, was transit trade conquering the obstacles of official pricing policies and exchange rates. During the past year, however, some of the major arrears problems have been solved or have come near to a solution. For instance, agreements have been reached by Brazil with Germany and the United Kingdom. There has been agreement between Argentina and Italy on the use of the Italian claim for the support of the emigration of agricultural workers to Argentina. The Netherlands was negotiating in early 1954 on the renewal of the 1948 trade and payments agreement with Argentina and discussing its claim on that country.⁷ Also, some countries, e.g., Finland and Sweden, have worked off, by various methods, most of their excessive claims on Latin American partners. Thus one basic condition for an improvement in trade and payments relations between Latin American countries and their payments agreement partners, viz., the clearing of the agreement accounts, would now seem to have been fulfilled in some of the major bilateral relationships. At the same time, the gradual adaptation of Latin American exchange policies and export pricing methods associated with world-wide changes in the commodity supply situation has increased the likelihood of some Latin American export prices being closer to world levels. Argentina has agreed to trade at “world market prices” with the Federal Republic of Germany and Sweden. Brazil early in 1953 started to facilitate the sale of its “produtos gravosos” by applying subsidy export rates; and late in 1953, it permitted many foreign currencies to appreciate in the Brazilian exchange market by the application of an auction system for foreign exchange.

Difficulties in the functioning of agreements

Without being acquainted with the exact purposes each partner had in mind in agreeing to each clause of a payments agreement, it is impossible to determine how satisfactorily a payments agreement is functioning. But it may be said that an agreement does not function satisfactorily unless a high and continuous volume of trade of appropriate composition and at reasonable prices is financed under its terms—without significant debtor and creditor positions developing for periods longer than those caused by seasonal sales—and unless all other current payments provided for in the agreement are also continuously and without undue restriction permitted to be effected in each direction. In terms of these criteria, both the functioning of many of the Latin American payments agreements during the last three years and the implementation of complementary trade agreements, some of which have been permitted to expire, have been extremely unsatisfactory. The most important development from the viewpoint of international monetary stability has been the fairly general attempt to work off excessive claims on Latin American countries, involving the implicit and explicit breaking of cross rates. It might be said that the trade and payments relations of some Latin American countries with many or most of their payments agreement partners during the last two years had almost reached an impasse. There are some signs, on the other hand, that the worst may be past. As indicated above, the fact that certain agreement accounts have been cleared creates one of the essential conditions for satisfactory relations with trade and payments agreement partners. Nevertheless, it may be concluded from past experience with the Latin American agreements that some past and present causes of their unsatisfactory functioning may grow in importance, and that others may lie ahead, some of which may appear if convertibility is introduced for certain major European trading countries.

First, there is the fact that at least three of the main European countries—Belgium-Luxembourg, Switzerland, and the United Kingdom—have been reluctant thus far to become involved in complicated contractual relationships with Latin American countries, and show few signs of a change of attitude despite the pressure brought to bear on the respective governments by their export and financial interests. Also, the Federal Republic of Germany has informed certain Latin American agreement partners that the termination of its payments agreements with them is preferred. From this attitude, which presumably has been strengthened by the improvement of the European payments position during the last two years, the inference may be drawn that, if difficulties in the operation of the agreements should arise, these countries will be less ready than in the past to make special concessions in order to solve the difficulties. Second, the growing use of transit trade based on broken cross rates, by providing a technique for the reduction of excessive positions, may reduce the interest of both the Latin American and the European countries in facilitating the smooth functioning of bilateral payments agreements in such a manner as to prevent the emergence of such positions. Third, the reopening of commodity markets in London and elsewhere makes some European countries less dependent on satisfactory payments relations with Latin American raw material producing countries in order to cover basic import requirements, and may indeed serve to concentrate a larger proportion of Latin America’s foreign trade on a smaller number of European countries. Fourth, the liberalization of dollar imports by the Netherlands and the Federal Republic of Germany may, by reducing those countries’ demand for soft currency goods—such as Brazilian cotton and tobacco—have unfavorable effects on their direct trade with certain Latin American payments agreement partners, thus increasing the likelihood of renewed European bilateral surpluses arising and of transit trade and other measures being resorted to in order to prevent these surpluses from becoming excessive or to reduce them. Finally, the diminishing scope of governmental imports and the growing freedom of private importers in such countries as the United Kingdom, the Federal Republic of Germany, and the Netherlands, together with the growing availability of competitive goods from new sources,⁸ will tend to reduce sales to European agreement partners unless there is fully competitive pricing of Latin American exports; but in the face of high, and often still rising, domestic costs of production, such competitive pricing may be difficult to attain.

Peculiarities of trade with inconvertible currency countries

To determine whether there is much likelihood that Latin America’s trade and payments agreements will operate more satisfactorily, it is necessary to review somewhat more closely the special characteristics of its trade and payments with soft currency countries outside the American continent.

One basic cause of the difficulties in Latin America’s trade and payments relations with Europe is probably the inherent discontinuity in the reciprocal exchange of goods, but particularly in Latin American exports. This discontinuity, for various reasons (some of them political), is less marked in the European countries’ relations with their associated and dependent territories in Asia and Africa. Also, commercial and financial relations among Western European countries are very close and therefore of a more continuous nature. The composition of imports and exports between them is extremely broad and varied. Financial relations are well developed, the number and amount of payments each way being considerable on account of banking, shipping and insurance services, investment earnings, tourism, business travel, family remittances, etc. The volume and variety of the underlying transactions and the corresponding payments are very large. There is an uninterrupted flow of payments and, though each type may fluctuate from time to time, the fluctuations tend to cancel out. This is not true of trade and payments between any European country and any Latin American payments agreement partner. The Latin American country has only a small number of export products which the partner country is likely to purchase in relatively large volume, although there may be numerous products of which small quantities are bought. Consequently, the European partner’s imports are closely dependent on the availability of stocks of only a few major commodities, and on the prices quoted for their sale abroad. Also, many major Latin American export products are produced seasonally, whereas the predominantly industrial character of the European partner’s exports makes them available at all times. These two facts imply a much greater likelihood of significant fluctuations in trade and in corresponding payments between any Latin American-European pair of partners than between any pair of European agreement partners. So also does the fact that raw material prices are subject to greater fluctuation than the prices of manufactured goods. A corollary of this, and of the tendency for the terms of trade of most Latin American countries to move uniformly vis-à-vis Europe, is that most Latin American countries tend to be debtors (or creditors) vis-à-vis most European countries at the same time, a fact that has prevented a standing arrangement for the clearance of Latin American balances among EPU countries from assuming real significance.

The problem may be aggravated by the tendency in Latin America to reduce imports of manufactured consumer goods (the so-called nonessentials, or, from the European viewpoint, the traditional exports) to a minimum. This implies that a considerable and growing proportion of Latin American imports from European payments agreement partners now consists of capital goods whose delivery and payments show more discontinuity than those of consumer goods. Thus, the character of trade between Latin America and Europe implies that there is a greater likelihood of large fluctuations in actual movements of goods and in payments for those goods than there is in intra-European trade, where the existence of restrictions has not prevented the resumption of a significant exchange of textiles, wines, radio sets, passenger automobiles, etc. Added to this is the fact that financial relationships are less developed than in Western Europe, and that banking, shipping, and insurance transactions between a European and a Latin American country frequently are effected through companies related to the European partner; thus, when trade developments are unsatisfactory, the latter’s banking, shipping, and insurance business with the Latin American partner tends to deteriorate simultaneously. A further cause of discontinuities in bilateral relationships is the fact that most of a European country’s exports to a Latin American partner country are frequently effected by only three or four large firms—in recent years, sometimes firms that have established subsidiary manufacturing plants in the Latin American country. Since a considerable proportion of the direct trade between the partner countries is thus in the hands of a small number of Latin American exporters and a small number of European exporters, and since, furthermore, the two not infrequently are united in one and the same firm, it is relatively easy for the exchange control authorities both on the Latin American and on the European side to grant import and export privileges on a quid pro quo basis, including a barter or compensation basis which links imports and exports of approximately equal essentiality or which serves to offset, and continue in force, inappropriate prices or exchange rates. Since the criteria for the approval of such deals may be subject to frequent change, this is an unstable basis for a high level of trade.

In addition to these inherent discontinuities in trade and payments relations between Latin American and European agreement partners, there has sometimes been a lack of coordination between the trade and exchange control authorities on the European side, and more frequently on the Latin American side. Such lack of coordination has been caused to some extent by long delivery dates on European capital goods. And even where there has been no lack of coordination, the European countries have frequently contracted deliveries of capital equipment involving large sums and long delivery periods that cannot be altered or offset by the manipulation of other European exports, if the Latin American partner develops a serious bilateral debtor position. Under various payments agreements, also, European export licensing policies and Latin American import licensing policies apparently have not been adjusted sufficiently in accordance with developments in bilateral payments positions. These factors make it more likely that the payments balance may get out of hand.

Changes in official policy are more frequent in Latin America than in Europe. This is another factor making for instability in relations with payments agreement partners. In Latin America, changes frequently occur in the buying and selling rates of exchange for specific currencies and for specific goods; quotas and exchange rates under exchange budgets are likely to be revised during the year; the prescription of currency for sales of specific export commodities is subject to variation. Also, policies regarding permission to sell the Latin American partner’s products in transit, and to import a third country’s goods on a transit basis from agreement partners, are less enduring than in Europe. All of these are unsettling factors which affect the functioning of bilateral payments agreements and, even more, the functioning of bilateral trade agreements.

A cause of instability, resulting from both general world market conditions and institutional factors in the Latin American or European partner countries, is the fact that some major Latin American exports have, in principle, been sold only in specific currencies, and that over-all supply and demand developments for these and competing products may affect the bargaining position of the producing country to the extent of changing the prescription of currency. Thus Chilean nitrates in the early postwar years were sold only against payment in U.S. dollars, but now they can be obtained for inconvertible currencies. In addition, the conditions attached to the use of these soft currency earnings have shown a tendency to change in such a way that they must be spent increasingly on imports of a type which Chile considers less essential. Chilean copper has, ever since the war, generally been sold only for U.S. dollars, but Argentina and the Federal Republic of Germany have in recent years been permitted to obtain limited quantities on more favorable terms—Argentina in exchange for cattle, and Germany against payment in German agreement dollars. Similarly, Brazilian coffee was initially to be obtained only against payment in U.S. dollars, whereas now it is available to all payments agreement partners under the terms of the relevant agreements, and to some even for certain transit sales to third countries. Colombia has increasingly permitted European countries, which previously had to settle their coffee purchases in U.S. dollars, to buy coffee under payments agreements or under trade arrangements, where the coffee is in effect paid for by additional exports settled in dollars by Colombia. Cuban sugar usually has been sold only for U.S. dollars, but it also has become available to some countries, and in limited quantities, against payment in soft currencies. Conversely, Peruvian cotton could in the past be purchased in sterling by non-sterling, nonagreement partners, whereas now they have to settle in dollars. It is clear that the possibility of negotiating on the prescription of currency for certain Latin American countries’ major exports in itself creates an element of uncertainty, the authorities on both sides being more inclined to put off any drastic measures regarding their bilateral trade, or the negotiation of new agreements, until there is greater certainty about the treatment of these raw materials.

State trading and attempts at state trading in such countries as Argentina, Brazil, Chile, Colombia, Cuba, and Mexico in recent years have provided another element of discontinuity in trade and payments with European countries, since they have made these relations more dependent on isolated central decisions affecting a large proportion of the Latin American partner’s exports.

Incentives to retain payments agreements

Attention has been drawn to the complications arising from commodity arbitrage, from other types of transit trade, and the negotiation of claims under payments agreements in the free exchange markets of third countries. The scope of these transactions appears to have increased to such an extent that the measures initially intended in most cases to improve the functioning of specific payments agreements may come to be an obstacle to their operation since they obscure direct trade and payments relations between some partner countries and also probable future developments in those relations. At the same time, the re-establishment of commodity markets in Europe, together with the improved dollar positions of some European countries and the liberalization of their dollar imports, facilitates access by their importers to many of Latin America’s staple exports, either by buying them in transit from European traders against payment in inconvertible currencies or by buying them directly in the country of origin against payment in dollars. Thus a tendency might well develop for some European countries to do without some of their Latin American payments agreements, particularly those with countries having relatively few restrictions on dollar imports and those which, although restricting dollar imports, have few payments agreements and consequently do not have a markedly discriminatory import policy.⁹ The termination of certain payments agreements with countries such as Ecuador and Peru could then be a step toward the restoration of convertibility on nonresident account by some European countries which already have made significant progress toward convertibility on resident account.

As indicated early in this paper, payments agreements in a world of inconvertibility serve to alleviate each partner’s difficulties in financing imports from the other, since these no longer need to be settled in convertible currencies; for that reason, the agreements at the same time serve to improve each country’s sales prospects in the other’s markets. If the partner countries subsequently revert to dollar payments, each might be eager to run a surplus against the other and therefore restrict its imports from that country, so that trade in both directions would fall. Also, the existence of a payments agreement frequently makes it possible for one partner country to induce the other to take more of its exports, namely by purchasing first and thus incurring a debtor position, which to the second country constitutes an inconvertible claim that it is eager to liquidate by means of additional imports. As long as some countries have to restrict their dollar imports significantly, their trading partners will consequently have an incentive to sign payments agreements with them, even when such agreements are not likely to function smoothly, provided that the countries are valued sufficiently highly as export markets, and provided that imports obtained under the terms of the agreement remain attractive as to price, quality, delivery date, and terms of payment. Since most European countries and Japan regard the River Plate countries and Brazil as valuable export markets, and since the latter are eager to keep their traditional export outlets in Europe open, while countries in both groups still maintain significant restrictions on dollar imports, it is likely that Argentina, Brazil, Paraguay, and Uruguay will continue to finance a significant proportion of their trade with inconvertible countries under payments agreements. Reference has already been made to the possibility that trade under existing Latin American payments agreements may become more concentrated on a few specific payments agreement partners, but this need not imply a reduction in the number of payments agreements maintained by these four South American countries.

In regard to the conditions outlined above—i.e., that sufficient incentives to enter into payments agreements were present only where imports could continue to be obtained on satisfactory terms as to price, quality, etc.—Latin American countries have had widely divergent experiences. Prices paid under payments agreements have usually been higher than those quoted for the same or similar goods if payment in dollars was offered. Dollar countries, such as Venezuela, have had the benefit of a wide variety of European dollar export promotion measures, which, together with the competition from suppliers in the United States and Canada, have led to lower prices, shorter delivery periods, and better terms of payment, than could be obtained by such countries as Argentina and Brazil, even before many European agreement partners started restricting their exports to the latter. On the other hand, it is difficult to say how these terms would have developed if Argentina and Brazil had not incurred large bilateral arrears, and had not had serious inflationary pressures. Also, these two countries in 1952 and 1953 were able to conclude with payments agreement partners a number of complementary trade agreements that assure deliveries of capital equipment over periods of various years, and thus may constitute a significant contribution to their development programs. This factor may well prove to be an additional condition in favor of maintaining payments agreements with the overseas countries which regard Brazil and the River Plate countries as desirable export markets.

It is unlikely, on the other hand, that countries now trading mainly in dollars would serve their own interests best by solving their sales problems by concluding a significant number of payments agreements. Those countries customarily trade with the United States and other dollar countries to such an extent that it would be very difficult to build up an exchange control administration capable of avoiding the accumulation of inconvertible balances, or in other ways to induce private importers to use up accruing agreement currencies. The governments of some of the northern Latin American countries have already had difficulties in inducing their importers to utilize balances in inconvertible currencies, and have had to award public works contracts to agreement partners in order to prevent undue accumulation of such claims. Also, it would be hard to prevent dollar commodities purchased under the terms of payments agreements from being resold to other countries, so that some potential dollar exports to nonagreement partners would be settled in soft currencies. In that case, a dollar commodity might ultimately be turned into a soft currency commodity, with a corresponding deterioriation of the currency composition of the exporting country’s balance of payments and monetary reserves. However, some of the smaller Latin American countries usually running import surpluses with Europe have found that payments agreements and, in a few cases, trade agreements, have expanded the volume of their trade, and for that reason they may be eager to maintain those pacts.