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THE seizure by Mexico of the properties of American oil companies in that country has done much more than subject the Good Neighbor policy to a strain. It has precipitated a train of unforeseen developments which may drastically alter the position hitherto occupied by the United States in Mexican international relations; and many believe that it may even open wide the doors of Mexico to influences generally regarded as alien to the professed ideals of all American republics. These possibilities appear at the moment to be causing nearly as much concern in some quarters as the expropriation of the oil properties.
The unexpected by-products of Mexican policy are due in part to the economic condition of the country and in part to inexperience and disregard of realities on the part of its leaders. The oil seizures of last March could hardly have been made at a more unpropitious time. The severe crop failure of the previous autumn had made it necessary to import unusually large quantities of foodstuffs. This alone would indicate the need of proceeding cautiously with economic innovations. The situation had been further complicated by a speeding up, during the past two years, of the agrarian reforms and by an ambitious public-works program. Both of these undertakings had been a heavy drain on the Treasury. Irrigation projects had been inaugurated in order to convert arid lands into fertile farms for the peons. Modern highways had been built to stimulate domestic business and attract the tourist trade. Millions of acres from expropriated haciendas had been divided among more than a million peon families, and millions of pesos in government funds had been spent in placing agricultural workers on the soil and equipping their farms. The confiscated farm lands, however, no longer paid taxes, and the Government was badly in need of money. Tariff duties were raised and a progressive sales tax was imposed on the business of certain types of foreign concerns, but these new imposts tended further to restrict business and brought no substantial relief to the Treasury.
Then came the seizure of the oil wells in March 1938. A major depression quickly followed. The third largest source of the Government's revenue had been the taxes obtained from the oil companies, and this was now lost. Furthermore, oil products had constituted about 11 percent of Mexico's exports, and the ensuing curtailment of oil shipments made it difficult to obtain the foreign exchange needed to pay for necessary imports of foodstuffs. As a result, the exchange value of the peso could no longer be pegged at 3.6 to the dollar, and it soon dropped to approximately 5 to the dollar -- a depreciation of 28 percent. Domestic prices rose sharply, and as there was no appreciable readjustment of wages the workers felt the pinch of higher living costs. A large part of the public works program was suspended, and unemployment slowly but steadily increased.
Immediately after the expropriation, oil production fell from a monthly average of 600,000 metric tons to an average of about 178,000. The foreign oil properties had been taken over by the Government ostensibly to improve conditions among the oil workers, although they were admittedly the best-paid labor group in the country. The expropriation brought none of the promised improvement, but thus far it has not resulted in widespread unemployment in the oil fields. Since about 40 percent of the oil output is consumed at home, it has been possible to keep the industry in motion and most of the workers at their jobs if not at full wages. Workers in the textile industries have also felt the depression. Tourist traffic has diminished. Mexico's export surplus was declining even before the oil expropriations. For the calendar year 1937 it was 278,000,000 pesos, compared with 311,000,000 in 1936. The Government's budget is out of balance, and fiat money is being issued in increasing amounts.
What Mexico has passed through in recent months would have wrought havoc in a country with a more highly developed economic and financial structure. Her status, however, should not be gauged by American standards. Mexico can survive much buffeting because her economy is relatively simple and because through years of revolution and turmoil she has become inured to the shock of sudden changes. A general verdict at this time on the results of the Government's reform programs would be premature, but since they may bring sweeping economic and social changes in a country 60 percent of whose trade is with the United States, they have an obvious interest for peoples on both sides of the Rio Grande. And when, as in this instance, events in Mexico may introduce complications in the international situation which impinge on established policies of the United States, the interest of this country is increased many times over.
The success of Mexico's present program will depend in large measure on her ability to find foreign markets for the expropriated oil. Great Britain would normally be one of the largest purchasers. Before the oil properties were seized about two-thirds of their output was under the control of the British Royal Dutch-Shell interests. Since the seizures the British have not only refused to buy Mexican oil, which they insist has been "stolen," but they have exerted their influence to prevent purchases by other countries friendly to Great Britain. The United States has a surplus domestic production and thus offers a poor market -- especially as the chief purchasers of crude oil are companies which have been ousted from Mexico!
The most promising customers, therefore, are Germany, Italy and Japan. These three authoritarian Powers buy large quantities of oil in the world markets, and their purchases evoke no comment. But when they obtain oil from Mexico the case is different, for they buy something claimed by the nationals of other countries, and they pay for it, in large part, with materials which may supplant the goods customarily supplied by other countries.
A short time after the expropriations of last March, William R. Davis, an American oil broker and promoter with numerous international connections, entered into an arrangement with the Mexican Government under which he was to find a market for $10,000,000 worth of oil and oil products by the end of the current year. Mexico is to be paid 40 percent of the value of this oil in cash and 60 percent in credits for materials in foreign markets. Under this agreement a limited amount of oil has begun to move to foreign countries. Shipments have been hampered by the lack of transportation facilities, since most of the tankers are under the control of the ousted companies. To date, about thirty cargoes of the expropriated oil have been exported. The bulk has gone to Germany and a small amount to Italy. More recently the Mexican Government has made direct sales of some oil to an independent refiner in Texas and to Japan and has negotiated a further agreement with Germany for the exchange of oil for newsprint.
For obvious reasons these transactions are of special interest to the United States Government. Mexico is selling oil which American companies claim is their property, and she is receiving payment in foreign goods a part of which would otherwise have been bought from the United States. American interests are thus adversely affected in two ways. Germany, it is claimed, is not only paying Mexico for American oil but she is paying with machinery and other equipment, thereby driving similar American materials out of a market in which they have long held a leading position. Italy is also finding it convenient to barter rayon yarns for expropriated oil. Japan is less able to profit from the barter arrangements because of the high cost of transporting oil from the east coast of Mexico through the Panama Canal and across the Pacific, as compared with transportation charges from fields nearer at hand.
Apart from the injuries which it may inflict on various American business interests, the Mexican oil situation is a source of concern to the United States because of the opportunity which it may afford the authoritarian Powers to extend the influence of the Berlin-Rome-Tokyo axis into the Western Hemisphere. Although the present Government of Mexico has been avowedly anti-Fascist, it has suspended diplomatic relations with Great Britain, the leading democracy overseas, and it has been exchanging sharp notes with its democratic northern neighbor. Meanwhile, the Fascist Powers have been doing something to blunt the edge of Mexico's economic depression, and fears are sometimes expressed that they may seek to exploit the situation to their political as well as their economic advantage.
The tardiness of the Mexican Government in publishing trade figures makes it impossible as yet to gauge the commercial effects of the oil program. It may be noted, however, that in 1937 Mexico's imports from the United States had a value nearly four times as great as that of her combined imports from Germany, Italy and Japan. Even if these three Powers were to take all the oil Mexico can supply, about 90 percent of Mexico's foreign trade would not be affected by their purchases. Nevertheless, there is something anomalous in an arrangement which causes a Leftist Mexican régime to become a purveyor of a strategic war material to the leading Fascist Powers. It may be recalled that on New Year's Day of 1937 President Cárdenas of Mexico proudly informed his countrymen that during the preceding four months his Government had supplied the Spanish Loyalists with $1,500,000 worth of guns and ammunition. Today this same Government, under the strain of economic adversity, is selling Germany and Italy oil which, for all it knows, may be used in fighting the very Loyalists in whose hands it has placed guns and shells! And in September, while delegates to a Latin American Labor Congress in Mexico City were urging a boycott of merchandise from Fascist countries, a German freighter arrived at Vera Cruz with 2,300 tons of merchandise received in payment for Mexican oil.
At present, however, the really strategic material in the relations between the United States and Mexico is not oil but silver, and here Washington holds all the trumps. The United States is the sole purchaser of Mexican silver; and its present purchases are at the average rate of 6,000,000 ounces a month. Sales of the metal to the United States not only maintain the activity of an important industry, but they furnish Mexico with dollar exchange to meet her most pressing needs. Under existing conditions, a suspension of American silver buying would produce an economic upset in Mexico and possibly a political one as well. This would hardly conform with the postulates of the Good Neighbor policy as laid down in Washington. Such action would also cut two ways, for about 70 percent of the capital invested in Mexican mining industries is American.
Prior to the oil expropriations, the United States Government had an arrangement with Mexico under which it purchased 5,000,000 ounces of silver a month at a price slightly above that in the world market. When the oil properties were seized, the Treasury Department announced that it would defer new purchases of Mexican silver until further notice, and for a fortnight there was a lull in the buying. This was as near as Washington came to applying direct pressure on the Cárdenas régime. The agreement to buy silver direct from Mexico in a fixed amount was not renewed, but since April 1938 the United States has been purchasing Mexican silver in large quantities in the world market. While the American taxpayer may grumble at this virtual subsidy to a foreign industry, the purchases enable Mexico to increase her imports of American goods, and they may afford some insurance against the extension of expropriations to American-owned mining properties. More significant, silver rather than oil is the basis of Mexican prosperity. The democratic nation which buys Mexico's silver will presumably hold a more important place in her international connections than the dictator countries which buy her oil.