EXPORT trade is the avenue through which the European war directly affects the American economy. Many observers regard the war as a providential opportunity to increase American exports. Belligerents, they point out, need vast supplies of airplanes, munitions, and other war supplies which American firms are able and eager to provide. In addition, they tell us, American exporters will find new opportunities in neutral markets. "So far as the Old World is concerned," writes one enthusiast, "United States manufacturers and producers now have practically no competitors in markets worth two billion dollars a year." In his wide grasp, this speaker seized for our benefit markets in the four corners of the earth formerly supplied by German, French and British producers. But, for the most part, the boosters of American exports have lavished their attention on the possibilities of increased sales in the Latin American market. Much as the prospects of selling to hundreds of millions of Chinese stirred an earlier generation, potential sales in the millions of square miles south of the Rio Grande stir the imagination of American traders of today. They find support for their hopes in the commercial statistics of 1914-1920.

After a ten percent decline in 1915, United States exports to the other American republics rose sharply in 1916, reaching in 1917 a total value equal to more than twice the prewar level. This was only the beginning. After a year of hesitation, the advance was renewed in 1919, carrying the export figures in 1920 to the amazing sum of $1,483,323,550, five times the 1910-14 average. Our share in the total purchases of the Latin American republics from all countries rose from 23 percent at the beginning of the war to 49 percent in 1920. To repeat this performance on perhaps an even larger scale is the "golden opportunity" which now floats before the eyes of American exporters.

A European war, the condition which gave the initial impetus to our trade expansion in 1915-20, is again present. The principal belligerents -- England, France and Germany -- will probably, as before, be greatly handicapped in their attempts to continue shipments of clothing and textiles, machinery and other industrial products to the ports of Central and South America. German trade will probably once more be entirely cut off. Will American exports again rush in to fill the gap? How will the war affect the ability of the Latin American countries to pay for imports? Shall we resume lending them money? How far will our government intervene actively to support the new trade expansion? Will such intervention help or hinder the development of a permanent Good Neighbor policy?

In 1938, the combined imports of the twenty Latin American republics had a value (in U.S. dollars) of 1.4 billions. Two thirds of this amount was supplied principally by the three leading industrial nations. The United States furnished 36 percent; Germany, 17 percent; and the United Kingdom, 12 percent. The remaining third included trade between the Latin American countries themselves (roughly 10 percent of the total), imports from France (3.5 percent), Italy (3.1 percent), Japan (2.7 percent), and from a large number of less important suppliers.

Valued at the official rate of 40 cents to the Reichsmark, the German sales were worth 238 million dollars; but because of the liberal use made of overvalued Aski marks in the Latin American trade, a figure of 200 millions would probably be nearer the truth. If we assume that the Germans in this war will have no greater success in evading the Allied blockade than in 1914-18, it looks as if there were now a 200 million dollar gap in the Latin American market. But it does not necessarily follow that an equivalent amount of American goods can be pushed into that gap. For, through barter deals, a considerable amount of German goods was exchanged for surpluses of coffee, cotton, cacao beans, and other products which would not have been saleable in the same quantities in a free exchange market. The United States, with a few unimportant exceptions, has rejected barter dealing as inconsistent with its trade policy; hence a further discount may have to be applied to the German trade prize.

Sales of English and French goods to the Latin American republics in 1938 amounted to about $220,000,000. How much of this can be captured by our exporters? The answer depends upon the ability of British and French textile mills, iron and steel plants, and miscellaneous smaller industries to keep up production and keep down costs, and upon their success in securing transportation. Shipping may prove the crucial factor. We may be sure that both France and England, bent upon protecting their balances of international payments, will spare no effort to keep exports moving. In the last war English goods were not driven from Latin American markets, although their proportionate share fell from 24 percent in 1913 to 16 percent in 1918.

Our capacity to supply the manufactured goods which constitute the bulk of the European goods bought by Argentina, Brazil, Mexico, Chile and other southern countries is unquestioned. For many years American textiles, machinery and machine tools, automobiles, hardware, electrical goods, leather goods, watches and clocks have been keenly competitive with European goods in these markets. American whiskies may not exactly suit Argentinian palates accustomed to ten-year-old Scotch; our automobiles are larger and more expensive than the German makes; Brazilian railroads may not find our coal sized or graded exactly like the German or English coal. But, judging from the experience of twenty years ago, such differences will not prove serious handicaps to the growth of our trade. In certain lines, as for example dyestuffs and pharmaceuticals, we are in a far better position to supply Latin American deficiencies than we were in 1914. Our export firms have the advantage of twenty additional years of dealing with Latin American customers. Finally, transportation and communication facilities have enormously improved. Airways furnishing mail and passenger services have brought Buenos Aires and Rio de Janeiro almost as near as were London and Paris in 1914. Scores of American ocean freighters, excluded from European ports by our new neutrality legislation, will be available for Latin American trade.

But what about payment? Our neighbors to the south, as they find it increasingly difficult to supply their needs for industrial products from Europe, may be expected to turn to representatives of Yankee firms able and eager to supply them; but where will they find the necessary exchange? There are three major possibilities: the credit side of their balances of payments may be swelled by increased exports; by proceeds of new loans or direct investments; and possibly by increased expenditures of American tourists.[i]

Enthusiasts who see in the present situation a rich opportunity for our exporters are apt to forget that Latin America's trade with Europe is a two-way street, and that war will interfere with traffic in both directions. The continuance of the buying power of Argentina and Uruguay, Brazil and Chile depends largely on their sales to belligerent markets. Estimates for 1938 show that 11 percent of all foreign sales of the twenty republics was destined for Germany, and 16 percent to the United Kingdom. For certain countries, the degree of dependence was much higher than the average, as appears from the following table:

From To the United Kingdom To Germany
Bolivia 62.5 1.1
Argentina 31.8 11.5
Uruguay 26.1 23.5
Costa Rica 24.4 19.2
Chile[ii] 21.8 10.0
Peru 20.0 10.6
Brazil 8.8 19.1

Argentina depends on the British market for an outlet for 90 percent of its meat exports, for over one third of its corn, and for one quarter of its wool. Brazil disposes of the bulk of its cotton crop to Germany and the United Kingdom. One third of Chile's all-important copper exports go to the United Kingdom; Chilean wool is sold principally in Germany and the United Kingdom. The latter takes practically all of the Chilean exports of mutton. France and Germany are large buyers of Colombian, Brazilian and Central American coffees.

During the first World War, the value of the exports of the Latin American republics to the United Kingdom showed substantial gains ($588.7 millions in 1918 as compared with $329.8 millions five years earlier). Exports to France increased also, but on a smaller scale. In this war, as in 1914, we have to consider the submarine menace and a possible shortage of shipping;[iii] but, in addition, the British policies of restricting civilian consumption and diverting overseas purchases to Empire sources must be reckoned with. Profiting by the experiences of the last war, England is about to ration certain imported foodstuffs such as butter and bacon. But military demands will probably far overbalance civilian savings on meat, wheat, sugar and fats, and on raw materials such as wool, hides and copper.

England's agricultural resources, notwithstanding vigorous government encouragement since 1931, are not capable of meeting any considerable part of the new demand. But the Dominions -- Canada, Australia, New Zealand, South Africa -- are great reservoirs of bread grains, meat, fruit, wool, hides, and vegetable oils. In recent years, large "surpluses" of some of these products have accumulated. Canada, for example, will be able, it is estimated, to export this year enough wheat to supply the entire English imports for a two-year period. Rhodesia can replace Chile and Peru as sources of copper. South Africa and Australia are large exporters of wool and hides.

The preferential tariffs set up in the Ottawa Agreements of 1932 have diverted a considerable proportion of English overseas purchases from foreign to Empire sources; now the desire to conserve to the utmost English supplies of exchange, and to support the value of the pound, will reinforce tariff policy. How far England will carry the diversion process depends on the duration and character of the war, and particularly upon the effectiveness of the German submarine campaign. If economy of shipping becomes a primary consideration, the nearer sources of supply will have preference: Canadian grain will have an advantage over Argentine, but Argentine and Uruguayan wool and hides will be on an even basis with South African, as far as distance is concerned, and twice as attractive as the Australian supplies. Argentine, Uruguayan and Brazilian beef will probably hold the British market against Empire competition. In this case, lower costs and better services, made possible by the vast slaughtering and chilling establishments of Buenos Aires, Rio and other ports, will probably outweigh other considerations.

On balance the prospects of large increases in the value of Latin American exports to the European belligerents seem dubious. European neutrals deprived of Empire wool, copper or hides may possibly turn to South America for their supplies, but their demands will be reduced below the peacetime level by measures restricting consumption and imports.

But the United States need not depend on triangular trade for the expansion of its exports to Latin America. We can increase our own imports and thus ourselves create the dollar exchange needed to purchase more of our flour, canned milk, automobiles, chemicals, office equipment, electrical appliances and a thousand other modern Yankee notions. This suggestion is most frequently heard in export circles, and in newspapers published in our eastern cities. But in the Corn Belt, in the flaxseed growing area of the Dakotas, in states from Ohio westward where wool or dairy products provide a substantial part of farm income, in regions where cattle ranching predominates, it meets most emphatic negatives. To this chorus of dissent the voices of the oil men in Texas and Oklahoma and of the copper miners in Montana and Michigan add a strident obbligato. Evidently the nation is not agreed as to the best method of promoting our exports to the Latin American countries.

The truth is that some of the principal exports from those countries -- sugar, wheat, flaxseed, corn, beef, hides, wool, cotton, copper and oil -- are competitive with important products of our own farms or mines.

The situation is best summarized by reference to the status of imports from Latin America under the American tariff. As a general rule, all competitive imports are dutiable (even some whose competition is indirect). At present dutiable goods make up about one half our imports from the other American republics, but this average conceals many wide divergences. In 1937 over 90 percent of our imports from Cuba and Paraguay were dutiable (i.e., they are competitive) and over 80 percent from Argentina and Uruguay. On the other hand, only 13 percent of the imports from Brazil paid duties.

The distinction between dutiable (competitive) and free (non-competitive) imports is of major importance when framing a policy to encourage trade with Latin America. In putting coffee and bananas on the free list, our government has done about all it can to promote their importation. Our coffee roasters by spending millions in advertising have made Americans the largest consumers of the great Brazilian product. The importation of bananas is largely in the hands of a single large corporation which has effectively promoted their consumption. Our purchases of the principal non-competitive raw materials -- tin, rubber, nitrates, henequen and quebracho logs and extract -- fluctuate widely with swings in the cycle of domestic business. In prosperity we buy more; in depression we buy less. If the war actually brings a considerable measure of industrial recovery, our markets will absorb larger amounts of raw materials of all kinds. In this change, our southern neighbors will be in a much better position to profit than in 1914-18.

With regard to imports of competitive products, the obvious first step, if we wish really to increase imports, is to lower our tariff barriers. For this purpose machinery is ready at hand in the trade agreements program, but thus far it has been only timidly employed. The European war, with its threat to our trade relations with the Old World, has given a renewed impetus to tariff bargaining with our southern neighbors. On November 6, 1939, a new trade agreement was signed with Venezuela. The principal concession on our side was on crude petroleum and fuel oil which constitute 85 to 90 percent of Venezuelan exports. For its part, Venezuela cut tariffs on 35 items exported from the United States, including lard, wheat, flour, lumber, furniture, and parts for agricultural machinery. Negotiations have been begun with Argentina, Uruguay and Chile, all large exporters of competitive commodities which we now restrict by substantial tariff duties. Trade treaties with these countries, and perhaps a few other South American states, containing real concessions on both sides, would be a most effective contribution to the expansion of our Latin American trade. Whether they can in fact be negotiated depends, in part, upon the willingness of our southern neighbors to give us an even break in their exchange controls, but also upon the courage of the present Administration in withstanding the attacks of domestic pressure groups.

Farm organizations have already launched attacks whose violence has astonished even seasoned observers of the tariff struggle. The opening, on October 16, of the public hearings on the Argentine agreement was the signal for a descent upon the Interdepartmental Committee of more than thirty Senators and Representatives, both Democratic and Republican, unanimously opposing the grant of any concessions on farm products imported from the Argentine. Hour after hour for two days, the Committee members listened to a mass of "testimony," much of which was irrelevant and incompetent. Some of the protesting Congressmen, realizing perhaps that their remarks could have but little weight with a Committee interested primarily in the facts of the competitive situation, threw into the scales the threat that, if, despite their wishes, duties on farm products should be reduced, they would destroy the entire trade agreements program. Echoes of this threat have been heard in subsequent speeches in Congress.

If the channels for importing farm products and raw materials from Latin America are so thickly strewn with political mines that little increased traffic seems possible, what are the possibilities of imports of industrial products? This problem is now being actively studied by our importers, with the coöperation of the Bureau of Foreign and Domestic Commerce. What they have in mind are not "tourist goods," novelty wares such as Mexican glassware, Peruvian silver, Chilean blankets or Ecuadorean homespuns. Handicraft products of this type are not considered to have potentialities for volume sales to American buyers. The search is rather for products like women's leather gloves, chinaware, glassware and fine knit goods, which until recently have been supplied principally by Germany, Czecho-Slovakia, Austria and Italy. Department stores in the larger cities, after handling these goods for many years, now find their European sources of supply threatened by war; and even if German (which now includes Czech, Austrian and Polish) goods could arrive they would be difficult to sell to an unneutrally-minded public. In casting about for alternative sources of supply, importers have turned to the nearest area where wages are still low, i.e., Central and South America. (In the last war, Japan furnished many manufactured goods formerly imported from Germany; but now the consumer's opposition to Japan's present policies in China precludes any important enlargement of purchases from that country.)

For the development of heavy industries, Latin America is handicapped by the lack of fuel and iron ore located in close juxtaposition, and by inadequate development of internal transportation. But in the light industries -- food products, cotton textiles, shoes, paper and its manufactures, tires and other rubber products -- striking progress has been made in the past twenty years, particularly in the neighborhood of Buenos Aires, in the State of São Paulo in Brazil, and in certain districts of Chile and Peru. So far, production has been entirely for domestic markets. But under certain circumstances, it can be made the basis for building manufacturing for export.

Women's leather gloves of the type previously imported from Czecho-Slovakia might possibly be made in Argentina, Brazil or Chile. There is no lack of raw material; as a matter of fact, skins for glove making have regularly been supplied from South America to German, Czech and Austrian tanneries. The large Italian colony in the neighborhood of Buenos Aires and the many Chileans of German descent in the south central part of Chile might be trained as factory operatives. For the manufacture of artistic glassware in Peru, reliance could probably be placed largely on Indian labor, whose handiwork, produced in numerous small glass factories, has shown a distinct appreciation for beauty in design. Wages throughout Latin America are absurdly low, measured by American standards. But labor's output per man is also so far beneath that of the American workman as to remove much of the apparent advantage in labor costs. Account must be taken also of additional expense imposed by labor legislation.

Argentina and Chile afford interesting possibilities for the production of linen goods in the medium-priced and cheaper grades. The huge Argentine flax crop, it is true, is raised exclusively for seed; but were a sufficient demand for fibre present, a certain proportion of the acreage could be diverted for that use. Chile produces flax for fibre, some of which has been of quality high enough to justify its export to Ireland. Both countries have plenty of cheap labor for the arduous and disagreeable tasks involved in cultivating and harvesting flax, and for the preparation of its fibre. A part of Argentina's well-established cotton textile industry might be diverted, without revolutionary effects, to the production of linen textiles. A further possibility is the production in Chile or Peru, where fine native wools are available, of the hand-knit embroidered sweaters formerly imported from Austria.

The change from production for the domestic market to production for export is revolutionary; it will not come automatically, as prospective importers are well aware. Either they, or other American businessmen, must find initial capital, perhaps supply management as well, and furnish the all-essential advice in styling the new products for the American market. On this account we may expect progress to be slow. For the immediate future the resulting exports measured in dollars will be meagre.

The success or failure of new ventures such as we have described will depend on political as well as on economic factors. The attitude of Latin American governments, and of our own as well, may be decisive. For a number of years the prospects for investment of capital in our sister republics to the South have been beclouded by anti-foreign policies. A "war of economic independence" is in progress. The struggle, although assuming a variety of forms in the different countries, is unified by the desire-- common to all of them -- to free their economic (and political) life from the dominance, or the threatened dominance, of foreign capital. In Mexico and Bolivia, the attacks on the foreign oil companies resulted in expropriation; in Argentina, operations of foreign-owned oil companies have been restricted by the privileges granted a government-owned corporation. In Chile the position of the foreign businessman is no bed of roses. Chile has put its government into business by setting up a state-owned oil importing and distributing company; it has required the reorganization of a great American-owned public utility so as to give representation on its Board to Chilean nationals and to afford government participation in its earnings. Like a number of other Latin American countries, Chile restricts through its system of exchange control the expatriation of profits earned in the country. In Peru, the radical political party, the Apra (Alianza Popular Revolucionaria Americana), has as the strongest plank in its platform the control of foreign capital. This demand, says a writer in Fortune (January 1938) is the "hard core" of nationalism that characterizes nearly all vital Latin American movements.

In meeting anti-foreign policies, new ventures, like all direct investments already made, may rely somewhat on diplomatic protection, but a surer guarantee of fair treatment probably lies in persuading the masses and their governments that the new enterprises will raise productivity and living standards, and not merely exploit natural resources for the benefit of foreign investors.

It will be essential to give new manufacturing ventures a distinctively national character by insisting that capital invested be national to the extent of perhaps one half the total. This objective may prove difficult to attain in countries in which capital has traditionally been as scarce as labor has been plentiful. Capital has been accumulated in Latin America, generally, by great landowners, who have invested it in more land, or in government bonds, or in European enterprises. Recently, however, in both Argentina and Chile there have been indications that new capital is available for domestic investment; in Argentina, it is estimated, sixty percent of the capital now invested in manufacturing enterprises is of local origin.

There is, finally, the question of loans. Trade can always be stimulated, at least temporarily, by lending. If the loans are wisely made, the resulting increase in productivity may provide the basis for a permanent expansion in international exchanges. What are American investors prepared to do in this direction? And how far will government agencies supplement their activities?

There is, of course, a presumption against lending new money in any form in countries which have defaulted on old loans. Altogether, Latin American governments have borrowed 1.6 billions on dollar bonds, of which 77 percent are now in default. [iv] Argentina and a few other Latin American countries have a fairly clear record. Some countries, because of the collapse of prices for their principal export commodities, obviously are unable to meet service on the loans lavishly granted them without due consideration of their economic future. Other countries seem to have reached a stage of economic recovery where resumption of payments at least on a partial scale would be possible; but still no payments have been forthcoming. Continued default in such cases looks to the bondholders like repudiation. However, calling names will not settle anything. Only a realistic approach to the problem, including a consideration of the conditions under which the loans were made and of the effects of subsequent price changes and exchange depreciation, can lead to a solution. Until such an attitude prevails, defaults will remain an obstacle to new lending.

Our direct investment in Latin America, now estimated at somewhat over three billions, is a horse of another color. Beginning approximately at the outbreak of the World War, the migration of American industry to South America resulted in the establishment of manufacturing companies and public utility services, and the opening of mines and oil wells. All of them were supplied not only with American capital but with American management and direction. Meat packing in Argentina, silver and copper mining in Peru and Chile, oil wells in Colombia, Peru and Venezuela, public utilities in Argentina, Cuba and Brazil, fruit plantations in Central America have yielded satisfactory, in some cases very profitable, returns to American stockholders. An extension of this type of investment would be one of the most promising methods of economic coöperation with Latin America.

The Export-Import Bank has now become the principal government agency for financing foreign trade. By agreeing in March 1939 to extend acceptance credits up to $19,200,000, to the Bank of Brazil, it attacked the problem of unfreezing sums due to American exporters. Such loans help temporarily to bridge gaps in the balances of international payments. But neither they nor loans to "stabilize currencies" reach the underlying causes of the exchange difficulty, viz., the lack of balance in international payments. More promising in this direction are the Bank's loans running from one to five years, and in some cases longer, to promote exports. They have aided in financing sales of American locomotives to the Chilean State Railways, in the promotion of public works in Haiti involving the export of engineering equipment and materials, and in the expansion of the business of the International Telephone and Telegraph Corporation in various parts of South America. Recently credits have been extended to the government of Brazil ($6,000,000) for the purchase of locomotives, to Nicaragua ($2,000,000) for the extension of its road system and for other public improvements, and to Chile ($5,000,000) "to develop production." The Bank has given particular attention to Latin American trade, but has used its powers so cautiously that its present commitments in that field probably do not exceed $25,000,000.

The danger in a large program of lending public funds abroad is that government policy is rarely based on strictly economic considerations; most of the loans already made by the Export-Import Bank have had political or semi-political objectives. Also, if the Administration is serious about its Good Neighbor policy, it should remember that bad loans do not make good friends. Our bankers made the mistake in the twenties of overlending to Latin America. Now that the government has replaced the banks as the principal lending agency for both domestic and foreign business, it can well profit by their experience.

Wars always throw trade out of its accustomed channels. Neither England nor France, certainly not Germany, will be able to supply Latin American markets as effectively as in times of peace. To a certain extent, American firms will be in a position to profit, as we did in 1914-18, by our rivals' preoccupation elsewhere. We have the capacity to supply all the industrial and agricultural products which our southern neighbors are in the habit of importing, and we have the ships in which to carry the goods. But Latin Americans must have purchasing power in terms of dollars.

In the first World War, they were able to buy more of our manufactured goods by selling more raw materials and foodstuffs to the belligerents and to us. But now the picture is changed. This war is different. It is a poor man's war, fought with great caution both on the military and economic fronts. England and France are economizing to the utmost so as to keep the volume of imports at a minimum, and are drawing those imports as far as practicable from their own imperial dominions. This policy will not affect all Latin American countries equally; but, on balance there seems little reason to expect, certainly not in the next year or two, a great expansion in the demand for Latin American goods on the part either of European belligerents or of neutrals.

This brings the problem down to our own trade relations with Latin America. We can always sell more goods if we are willing to provide funds to finance their purchase. The memory of recent defaults is still too fresh to permit another wave of private lending; but today's experiments in government lending through the Export-Import Bank may be supplemented tomorrow by larger ventures. The danger in such lending, as far as the promotion of foreign trade is concerned, is that being motivated too largely by political considerations it will not be self-liquidating.

No matter how we beat the devil about the bush, we cannot escape the conclusion that the only way to sell more is to buy more. Our purchases of Latin American raw materials and food products will automatically expand if, as seems probable, we are entering a period of rising prices and expanding domestic trade. But if we want to provide for a permanent increase in our Latin American trade we must modify our tariff policy. Under proper restrictions, perhaps under progressively expanding tariff quotas, we can safely take larger amounts of competitive raw materials and foodstuffs and perhaps of semi-competitive industrial goods as well. Either we must be prepared for sacrifices and readjustments, and they need not be too large, or else we must give up the idea of an expanding export trade. There is no alternative.

[i] In 1937 and 1938 American tourists spent an annual average of about 150 million dollars in European and Mediterranean countries. Travel expenditures in Latin America were about 110 million dollars, of which only 7 percent was spent in South America. In view of the European war a larger percentage of United States tourists may now go southward, but it is doubtful whether this will substantially affect during the next few years the total of dollar exchange available in Latin American countries.

[ii] Chilean export figures do not show the destination of nitrate exports.

[iii] Shortage of shipping might reduce the total volume of imports into England and France, but still the value of the imports might increase, as happened in 1914-18, owing to price increases. But as far as the buying power of Latin American countries is concerned, it is value, not quantity, which is decisive, and wartime demand is notoriously inelastic.

[iv] This estimate of the Bondholders Protective Association includes outstanding foreign dollar bonds issued and/or guaranteed by governments or political subdivisions thereof. "A Survey of Latin America's Bonded Debt to the U. S. A." prepared by Business Publishers International Corporation estimates the total at $1,718,200,000, of which the amount of interest in default is estimated at $1,287,500,000.

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  • PERCY W. BIDWELL, former Economist of the United States Tariff Commission; Director of Studies, Council on Foreign Relations; author of "The Tariff Policy of the United States," "The Invisible Tariff" and other works
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