Foreign Relations of the United States, 1969–1976, Volume E–10, Documents on American Republics, 1969–1972

638. Memorandum Prepared by the NSC Interdepartmental Group on Latin American Affairs¹ ²

Washington, September 26, 1972

To:

• Dr. Henry A. Kissinger
  Assistant to the President for National Security Affairs
• Mr. Peter M. Flanigan
  Assistant to the President for International Economic Affairs

Review of U.S. Policy Toward Peru

In accordance with the instructions of NSSM/158—CIEPSM/23 of August 13, 1972, I enclose a review of U.S. policy toward Peru taking into account the full range of U.S. political and economic interests in that country in the context of our global and hemispheric policies and interests.

The study reflects agreement by all members of the expanded Interdepartmental Group for Inter-American Affairs, except where so noted.

In view of the increasing Peruvian frustration with our current policy and the attendant risk that Peru may take steps that would limit the choices available to us from among the options we have identified, I urge that an SRG meeting be called as soon as possible to prepare recommendations for an early Presidential decision.

[Omitted here is Section I, “Peruvian Developments Since October 1968;” Section II, “Evolution of U.S. Policies Since October 1968;” and Section III, “Prospects for the Future (18–24 Months).”]

IV. Interests, objectives, and how they have been served by U.S. policies³

The interests stated below are not presented in any order of priority, and in some cases they may conflict.

A. U.S. interests in Peru

(1) Positive political and military U.S. influence in Peru and the avoidance of Peruvian alignments with the Soviet Union, the People’s Republic of China, and Cuba.

a. Our non-overt economic pressure policy has had little or no impact on the military government’s determination to pursue a universalist, but not necessarily anti-U.S., foreign policy. On the other hand, this policy has contributed to an adversary relationship between Peru and the U.S., which in turn, has provided opportunities for exploitation by the USSR. There is considerable evidence that the Soviet Union, in working to increase its influence in Latin America, desires the loosening of ties between the U.S. and Latin America and the creation of an atmosphere of hostility in the region toward the U.S. The Soviets pay particular attention to Peru in this regard. U.S. pressure probably has contributed to Peruvian assertions of independence.

b. Our policy is interpreted in Peru and elsewhere in Latin America as further evidence that the defense of IPC is more important to the U.S. than its other interests, including peaceful, non-Marxist economic and social reform. This stimulates alienation from the U.S. in Peru, tends to strengthen radicals within the Peruvian military and government, and provides opportunities to our adversaries.

c. Reasonably good relations between the U.S. military and the Peruvian military have been maintained, although weakened by the broad policy conflict and by the fisheries dispute, with its effect on the availability of Foreign Military Sales (FMS). However, the Peruvian military find it difficult to understand why Marxist Chile’s access to FMS credits is currently greater than Peru’s.

(2) Acceptable norms for economic relations with the U.S. including:

• —favorable trade and investment climate;
• —minimum prejudice to existing U.S. private investment in Peru;
• —continued access over the long run to Peru’s mineral and petroleum resources.

a. Our non-overt economic pressure has so far failed to induce the military government to settle the IPC dispute and has not seriously damaged the Peruvian economy.

b. Our policy has probably exacerbated other investment and contract disputes (Morrison-Knudsen, Zachry, Brown and Root, Conchan, Marcona, and All America Cables and Radio). In fact, the Peruvians now appear to have concluded that, so long as IPC remains the key to unrestricted access to the IDB, IBRD, and IDA, there is little incentive to settle smaller disputes or provide compensation for other expropriations of U.S. interests.

c. The Grace expropriation and buy-out involves special factors subject to conflicting interpretation. On the one hand, threatened Congressional action against Peru’s sugar quota caused Peru grave concern; on the other, the Executive Branch’s efforts to preserve Peru’s quota while insisting on good faith negotiations with Grace, seemed to have been clearly perceived and appreciated. In any case, Peru and Grace did reach a settlement in principle; but continuance of current U.S. policy could adversely affect either the Peruvian terms or timeframe of this settlement. On the other hand, Peruvian interest in continued U.S. investment would act as a constraint on Peruvian actions.

d. The freeze on Eximbank credits to Peru has hindered our export expansion program and our ability to compete in Peru with foreign competitors who enjoy ample, low cost, government-backed credits. Our percentage of the market has declined from 34% in 1968 (pre-IPC) to 29% in 1971, with Japan, U.K., and Germany the big gainers.⁴

e. Our policy has not discouraged U.S. Petroleum companies or other European and Japanese investors from putting substantial private capital in Peru.

f. U.S. policy has not significantly discouraged other governments from offering Peru substantial public financing, a good part of it concessional. Indeed, the policy may have encouraged Soviet and Chinese participation in such lending.

(3) Reasonable economic growth and development which permit solution of Peru’s internal and political problems without resort to extremism.

Our non-overt economic pressure, by impeding Peru’s access to resources necessary to the military government’s development program, has probably slowed Peruvian progress. It has also tended to weaken the arguments and influence of the moderates within the military government. These are generally constructive elements who have been most prominent in efforts to resolve bilateral disputes amicably and who believe in the need for foreign investment and in the importance of a private sector in Peru, as opposed to those who favor the adoption of economic policies similar to those evident in Chile.

B. U.S. hemispheric and global interests and objectives with particular relevance to Peru

(1) Deterrence of expropriation and assurance of prompt, adequate and effective compensation, when expropriation takes place, in accordance with the January 19, 1972, policy statement.

Although our policy has certainly demonstrated our intention to retaliate against hostile treatment of U.S. investments, no firm judgment can be reached on the basis of available evidence concerning the deterrent effect on expropriation elsewhere of our non-overt economic pressure on Peru.

(2) Unimpeded transit for United States forces on the high seas and in international air space in the area, and a prompt settlement of the fisheries dispute.

Peru is a spokesman and a principal ideologist of the “200 mile club” and can exercise influence with other countries on Law of the Sea issues. Thus far, our policy does not appear to have affected one way or the other Peru’s position on Law of the Sea and fisheries issues.

(3) Existence of a strong inter-American system, including isolation of Cuba and an effective collective security function.

Our current policy does not thus far appear to have influenced either positively or negatively Peru’s general attitude toward the inter-American system.

(4) Strong and effective multilateral development financing institutions.

a. In spite of U.S. insistence that our actions are based on considerations of creditworthiness and that the international financial institutions must give due consideration to investment disputes, there is a widespread belief, apparently shared to some extent by their management, that these institutions are being used inappropriately by the U.S. to attempt to resolve essentially bilateral problems. Reports of the international financial institutions make clear that, the IPC case aside, Peru’s development and financial policies merit a substantial volume of development lending.

b. The application of sanctions to Peru has been consistent with Congressional attitudes toward U.S. contributions to multilateral lending institutions.

(5) Enhancement of the United States image as a power prepared to support responsible reform and to accept diverse approaches to achieving such reform.

Our policy, by contributing to an adversary U.S.-Peruvian relationship and by slowing Peru’s progress, has probably detracted from the U.S. image as a power prepared to support responsible reform and accept diverse approaches to development.

(6) Limitation of Chile’s influence as a model for other countries.

Current policy tends to give the impression that we make little distinction in our treatment of Peru and Chile despite the fact that Chile’s Marxist government presents a wider threat to a broader range of U.S. interests than does the Peruvian military government.

(7) Encouragement of private investment, both domestic and foreign, as a major component of economic and social development.

Developments in Peru indicate that private investment decisions over the last four years have been affected more by the military government’s policies in such areas as mining, petroleum, and industry than by the expropriation of IPC or our non-overt economic pressure. Investor wariness was marked in the period immediately following the IPC expropriation, but has noticeably decreased in the last two years. It is difficult to establish whether our policy toward Peru has had either a positive or negative effect outside Peru on our interest in private investment as a major component of development policy.

Treasury wishes to record its position as follows:

Our firmness in sticking to our principles regarding a fair treatment for private investment has encouraged moderates within the Peruvian government and other governments considering expropriation of foreign-owned enterprises to assure that their governments follow responsible policies in their treatment of foreign private investment in accordance with the established principles of international law.

Expropriation without compensation in Peru tends to discourage private investment—both domestic and foreign—not only in Peru but regionally.

Although the Peruvian government may consider the IPC question to be a “special case,” all expropriation without compensation cases could be justified on similar grounds. This is recognized internationally.

(8) Stemming the growth of Soviet, Cuban, and PRC influence in the Hemisphere at U.S. expense.

Our non-overt economic pressure policy has contributed to an adversary relationship between Peru and the U.S., which in turn, has offered increased opportunities for enhancing the influence and image of the USSR, Cuba, and the People’s Republic of China in the Hemisphere.

(9) Halting the decline in the U.S. share of the market in many Latin American countries and removal of obstacles to further expansion in others.

Latin American countries resent our curtailing multilateral and bilateral resources and our other economic pressures as manifested in Peru. Such resentment provides some of these countries with further impetus for seeking to lessen their economic dependence on the U.S. As a consequence, these countries seek to reduce dependence on the U.S. for capital equipment and other vital imports and conversely to expand their trade and other ties with our competitors, including the Soviet Bloc.

[Omitted here is Section V, “Issues.”]

VI. Options

We see three basic options or strategies with a series of sub-options or variants. They are:

(1) To continue the policy of non-overt economic pressure, including the possibility of our initiating negotiations for an IPC settlement, with some phased relaxation of these restraints to achieve specific objectives.

(2) To move to a tougher policy, applying all or some of the existing legislative sanctions.

(3) To conclude that the IPC case is not very likely to be settled in the short-run (two years) and to relax the sanctions in order to reduce the damage to other U.S. interests while looking toward a more propitious environment for future settlement.

(Although only Option 1, Variant A, specifically proposes that the U.S. take the initiative toward negotiations, it is implicit in all of the options that we would exploit any openings for negotiations with the Peruvians that might otherwise arise.)

Option 1

To continue to apply the existing policy of non-overt economic pressure along the general lines followed since 1969 and to avoid, if possible, any deterioration in the present impasse with Peru, i.e., a worsening of Conchan or other investment disputes.

Existing non-overt economic pressure includes a freeze on normal bilateral development lending, denial of Eximbank direct credits, delaying tactics in the IDB to keep loans for Peru from reaching the point of decision, and encouragement of the IBRD to continue to apply its expropriation policy.

It should be noted that the Gonzalez Amendment, which became law on March 10, 1972, affects our ability to apply non-overt pressure in the IDB. Prior to the enactment of the Gonzalez Amendment, our tactics in the IDB consisted of delaying loans for Peru from reaching the point of decision. For the five loans that came to a vote in the IDB since the IPC expropriation despite delaying tactics, the U.S. abstained on one Ordinary Capital loan in 1969 and voted affirmatively on the others to avoid confrontation. (In addition, the U.S. supported one IDB loan for earthquake reconstruction in July 1970 and another in December 1971 in the context of the secret IPC negotiations.) The Gonzalez Amendment, however, obliges us either to vote no or, if we vote yes, to provide publicly a satisfactory legal rationale to explain non-application of the amendment.

Variant A

Take the initiative to seek another opportunity to undertake secret, high-level negotiations, perhaps through non-U.S. good offices, with some increase or decrease of economic pressure keyed to the negotiations. We would avoid a decision on whether or not to apply the Gonzalez Amendment to the IPC case until forced to do so by a specific loan requiring a U.S. vote. If a decision were made to vote in favor of a loan for Peru because of progress toward an IPC settlement, this might be done on the grounds that good faith negotiations were underway or on the basis of a legal determination that the Gonzalez Amendment is inapplicable to IPC.

Further secret negotiations would involve possibly exploring revised bases of negotiation with Jersey Standard, as well as consideration of alternative possibilities for good offices.

Advantages

(1) Would permit us to maintain pressure on Peru in support of an IPC settlement.

(2) Would maintain the thrust of our expropriation policy, and maintain whatever deterrent effect it may have on other countries.

(3) Would permit exploration of whatever chance there may be of arriving at a solution of the IPC case at this time.

(4) Would avoid having to decide now that the Gonzalez Amendment is not applicable to IPC on grounds that the statute does not apply to events prior to its enactment or having to seek its modification on grounds related to Peru.

(5) If the Peruvians agreed to and began negotiations, our construing them as “good faith negotiations” would: provide a reasonable basis for not applying the Gonzalez Amendment to Peru if a delayed IDB loan reaches the decision stage; revalidate the “appropriate steps” basis for not applying Hickenlooper; and enhance the Administration’s credibility with Congress.

Disadvantages

(1) A major disadvantage of this variant is that the prospects are poor that the military government would agree to negotiations.

(2) Given the central nature of the IPC case for the military government, and the heightened Peruvian sensitivity resulting from premature public disclosure of previous secret negotiations, the prospects are poor that the Peruvians would accept the conditions requiring public acknowledgement of direct or indirect compensation to IPC and amnesty for IPC officials.

(3) Given Peruvian frustration with continued economic pressures, there are increasing prospects that the military government will take an irrevocable step in another investment dispute; this would trigger legislative sanctions which would destroy the viability of this option and bring into play the disadvantages of Option 2, notably including an almost certain foreclosure of any settlement of the IPC case.

(4) Continuing economic pressure while waiting for negotiations to begin reduces the incentive for the military government to settle pending investment and other disputes (e.g., Conchan, Morrison-Knudsen, Brown and Root, and Zachry).

(5) There are several Peruvian loan applications in the IDB that have been kept from reaching decision steps by our pressure on that institution’s management. The longer they remain blocked, the greater the risk that the Peruvians may seek to force the IDB to act on a loan as they have in the past.

(6) Assuming the Peruvians agree to negotiations, and if they should force a vote in the IDB, a negative U.S. vote would abort the negotiations and lead to the disadvantages of Option 2.

(7) Although the Peruvians might not force a vote in the IDB while negotiations were in progress, if they did so, a positive U.S. vote would require public affirmation by the U.S. either that “good faith negotiations” were in progress, or that a decision had been taken that the Gonzalez Amendment did not apply to IPC. Past history suggests that public disclosure of good faith negotiations would lead the military government to abort the negotiations and deny their existence.

(8) Would continue Peruvian frustration over lack of access to multilateral lending, increasing Peruvian criticism of the U.S. role in the lending institutions, thus increasing controversy within them.

(9) Would adversely affect the U.S. image in various sectors as a power prepared to support responsible reform and accept diversity in the Hemisphere.

(10) Would continue adversely to affect U.S. export trade.

Variant B

In view of the poor prospects for negotiations, continue the existing non-overt economic pressure policy unchanged and decide now not to apply the Gonzalez Amendment to the IPC case (on grounds that the statute in inapplicable to events prior to its enactment) in order to be able to continue to apply economic pressure “non-overtly” with as much flexibility as possible. If pressed or if tacitly useful, we would inform the Peruvians that the Gonzalez Amendment does not apply to the IPC case.

This is essentially a waiting variant that recognizes the disadvantages of applying formal sanctions to Peru (e.g. confrontation and retaliation) as well as the poor prospects of again resuming secret negotiations within the near term as a result of the April 1972 collapse of the secret negotiations. Should negotiating opportunities appear, they would, of course, be exploited; but in contrast with Variant A, the early resumption of negotiations is not an essential element. This variant seeks, as in the past, to avoid confrontation and relies on the long-term effects of economic pressure to bring about conditions favorable to a settlement of IPC. This would not be a viable option if another investment dispute deteriorates to the point of obliging us to apply legislative sanctions.

Advantages

(1) Would permit us to maintain the pressure on Peru while affording flexibility to avoid a confrontation or to recognize a positive Peruvian move to settle a particular bilateral dispute.

(2) Would maintain the thrust of our expropriation policy and whatever deterrent effect it may have on other countries.

(3) If questioned by Congress, it could be defended on the grounds that pressure, informally applied, offers better prospects of achieving our objectives than the formal application of sanctions.

(4) By our not applying public sanctions, the military government would have less opportunity to precipitate a confrontation.

(5) Informing the Peruvians that the Gonzalez Amendment is inapplicable to the IPC case might provide some incentive for the Peruvians to make progress toward settling other investment disputes (e.g., Conchan, Grace, Marcona).

Disadvantages

(1) The principal disadvantage to this option is that it probably cannot be continued for long. Growing Peruvian frustration increases the possibility of an irreversible Peruvian action in an investment dispute (e.g. Conchan) which would trigger application of the legislative sanctions.

(2) If Congress does not accept our rationale for not applying the Gonzalez Amendment, and if the statute has not been modified, then our credibility would be damaged and Congressional appropriations for development agencies might be jeopardized.

(3) Even if Peruvian action does not trigger legislative sanctions, continuing this policy reduces the incentive of the military government to settle investment and other dispute (e.g. Conchan, Morrison-Knudsen, Brown and Root, and Zachry).

(4) Strengthens the hands of elements in the Peruvian military and government which favor more radical policies and alignments.

(5) Would continue Peruvian frustration over lack of access to the multilateral lending agencies, increasing Peruvian criticism of the U.S. role in those institutions, thus increasing controversy within them.

(6) Adversely affects the U.S. image in various sectors as a power prepared to support responsible reform and accept diversity in the Hemisphere.

Variant C

Maintain pressure on multilateral agencies and continue the freeze on bilateral lending, but permit all Eximbank programs, including direct credit, except those of a magnitude that would be interpreted as a significant relaxation of U.S. policy. (In general the advantages and disadvantages for this variant would be the same as for Variant B above, with some possible improvement in the style and tone of our relationship with Peru.)

Advantages

(1) Would benefit U.S. exports, particularly in such areas as aircraft sales and engineering projects where U.S. inability to provide competitive financial packages has been a serious hindrance.

(2) Would offer some “signal,” although extremely modest, that the U.S. might be prepared to relax its policy further in return for Peruvian responses.

Disadvantages

(1) Because it would be considered a promotion of U.S. exports and not a conciliatory move, it probably would not provide an important incentive to Peru to make further concessions.

(2) Would make it more difficult to hold the line against lending to Peru by the multilateral lending agencies; the larger the Eximbank credit, the greater the difficulty.

Variant D

Maintain pressure on multilateral agencies and continue the freeze on bilateral lending, but permit all Eximbank programs, including all direct credits and guarantees.

Advantages

Same as for Advantage 1 of Variant C above, plus the following:

(1) Eximbank financing of capital equipment sales could be a factor in the resolution of current and incipient investment disputes.

(2) Eximbank financing of capital equipment sales could be a factor in preventing investment disputes.

(3) Eximbank financing could result in important capital equipment sales and retention by the U.S. of control over valuable mineral resources.

(4) Would clearly differentiate Eximbank credits intended to promote U.S. exports from development assistance.

Disadvantages

(1) Major Eximbank financing to Peru, particularly for large mining investment, would make it extremely difficult to prevent IDB and IBRD loans from coming to a vote.

(2) Major Eximbank loans to Peru, particularly for large mining investment, would remove a significant element in our policy of non-overt economic pressure.

(3) Major Eximbank loans to Peru, particularly for large mining investment, would remove an intended incentive for Peru to settle the IPC case.

Option 2

To move to a tougher policy by applying all or some of the relevant legislative sanctions.

Variant A

Formally apply the three legislative sanctions (Gonzalez Amendment, Hickenlooper Amendment, and Section 408(c) of the Sugar Act) and reduce or eliminate remaining U.S. official quasi-commercial activities (Eximbank and CCC credits).

Advantages

(1) Would be a clear demonstration to other countries of the Administration’s resolve to punish and deter expropriations.

(2) Would demonstrate to Congress that the Administration is determined to combat expropriation.

(3) Would most clearly comply with provisions of existing laws.

(4) Would apply the maximum economic pressure short of Cuba-type economic denial measures.

Disadvantages

(1) Would certainly lead to serious strains in all aspects of U.S.-Peruvian relations and possibly to a rupture of relations.

(2) Would certainly foreclose any settlement of the IPC expropriation in the next two years.

(3) Would probably lead to retaliation, including possible expropriation of U.S. economic interests in Peru (copper and oil, which represent the bulk of present and growing U.S. investment in Peru, would be particularly vulnerable), and possible default on certain official debts to the U.S.

(4) Would give the military government a “patriotic” issue, allowing it to solidify its popular support.

(5) Would probably compromise the moderate elements in the military government and drive them toward more radical policies and alignments.

(6) Would probably lead to a resumption of fishing vessel seizures which would prejudice a favorable settlement of the fisheries dispute.

(7) Would offer the USSR, Cuba, and the PRC an easily-exploited opportunity to expand their influence.

(8) Application of the Hickenlooper Amendment, by forcing suspension of disbursements on all AID loans, would repudiate the Presidential commitments to earthquake and flood reconstruction assistance.

(9) Application of the Hickenlooper Amendment would require termination of military assistance (training of the Peruvian military) and the expected seizure of fishing vessels would lead to suspension of FMS and probably expulsion of our MAAG.

(10) Would provoke Peru to raise “economic coercion” charges in the Organization of American States (OAS) under Article 19 of the OAS Charter, putting heavy strain on the inter-American system.

(11) Would tend to rally other Latin American countries in support of Peru.

(12) Would lead Peru to orchestrate a concerted attack on U.S. influence in multilateral lending institutions, thus increasing controversy within those institutions.

(13) Would reduce U.S. exports to Peru.

Variant B

Apply the Gonzalez Amendment because of IPC, but continue to defer application of the Hickenlooper Amendment and Section 408(c) of the Sugar Act, following the general lines of the existing policy with respect to bilateral lending and Eximbank operations. (This variant has the same range of general advantages and disadvantages as the all-out line in Variant A, but Peruvian reactions would probably be somewhat less vigorous initially.)

Advantages

(1) Would avoid the disadvantages of deciding that the Gonzalez Amendment is not applicable to events prior to its enactment or of seeking its modification on grounds related to Peru.

(2) Would retain: some flexibility in comparison to Variant A, including retaining Peru’s sugar quota; the ability to continue technical and humanitarian assistance, and the possibility of responding to natural disasters.

(3) Would allow continuation of military training.

Disadvantage

Would, by affirming publicly that “good faith negotiations” are not in progress, make it even more difficult to explain the non-application of the Hickenlooper Amendment.

Option 3

To conclude that the IPC case is not subject to resolution in the short run and relax the sanctions in order to reduce the damage to other U.S. interests, while keeping future options open on IPC.

Variant A

We would indicate clearly to the Peruvian Government, to the Congress, and to IPC that we do not consider the IPC case closed and that we intend to raise it again at an appropriate future time, but that, in the interim, we are prepared to return to more normal relations. This return would be conditional on Peruvian agreement to move ahead expeditiously and reasonably to settle other outstanding disputes (Grace, Marcona, Morrison-Knudsen, Zachry, Brown and Root, All American Cables and Radio) and would be geared to progress on settlements. We would be prepared to relax restrictions on: access to the multilateral lending institutions; all Eximbank programs, including direct credits; and bilateral development lending. This variant would require a decision that the Gonzalez Amendment does not apply to IPC and that the deferral of the Hickenlooper Amendment should be continued. Congressional consultations in this regard will be necessary if for no other reason than not to hazard the passage of appropriations legislation now before the Congress.

Advantages

(1) Would provide the greatest incentive to Peru to settle outstanding disputes other than IPC.

(2) Would provide a better climate for present and future U.S. investment in Peru.

(3) May improve the prospects for settlement of the fisheries dispute.

(4) Would tend to encourage and strengthen moderate elements within the Peruvian Government and reduce the influence of radical elements.

(5) The settlement of various disputes, other than IPC, would help to gain Congressional support for the decision not to apply the Gonzalez and Hickenlooper Amendments.

(6) Would offer the least opportunity for enhancement of Soviet, PRC, and Cuban influence.

(7) Would demonstrate U.S. willingness to accept diversity in the Hemisphere and commitment to economic and social development.

(8) Would reduce the strain on the multilateral lending institutions.

(9) Would promote U.S. exports.

Disadvantages

(1) Would be interpreted in some sectors of opinion as an indication that a country can expropriate U.S. investments without compensation and that, faced with an impasse, the U.S. will eventually give in.

(2) Would remove any tangible U.S. pressure to settle IPC.

(3) Would make it extremely difficult to return to a policy of economic pressure to achieve a solution of IPC.

(4) Could well encourage Congress to toughen the language of legislative sanctions and imperil appropriations for development financing.

(5) Would require reliance on a controversial legal rationale.

(6) May not be acceptable to Jersey Standard, producing adverse public and Congressional reactions for the Administration

Variant B

Implement Option 3 by obtaining prompt Congressional revision of the Gonzalez and Hickenlooper Amendments to conform with the President’s policy statement of January 19 so as to take into account “major factors affecting U.S. interests which require continuance of all or part of these benefits.” Prior consultation with Congress would be necessary. With the exception of the key element of speed, the advantages and disadvantages of this Variant would generally be the same as for Variant A above with the additions listed below. This Variant and the preceding Variant are not necessarily mutually exclusive.

Advantages

(1) Would enhance the President’s flexibility in conducting foreign affairs. If the Gonzalez Amendment is construed to apply to the IPC case, and there is no change in the Peruvian position, Variants B, C, and D of Option 1 and Option 3 could not be implemented without revision of the Amendment and the United States eventually would be confronted with all the adverse consequences of Option 2.

(2) Revision of the Gonzalez and Hickenlooper Amendments would provide the most credible legal basis for implementation of either Option 1 (Variants B, C, and D) or Option 3 and would minimize the domestic disadvantages of those Options.

(3) Even if the Gonzalez Amendment is construed not to apply to IPC, it is important, as a matter of general concern, to conform the law with the President’s policy. Unless the President is authorized to take into account major factors affecting U.S. interests, he may be required to subordinate all U.S. interests in a country, including possibly vital security interests, to the investment interests arising out of any one particular case regardless of the importance of that particular investment.

(4) Would provide another opportunity to request technical improvements in the legislation.

Disadvantages

(1) The process of revising the Gonzalez and Hickenlooper Amendments would take many months to achieve. Thus it might not permit the implementation of either Option 1 (Variants B,C,D, only) or Option 3 in time to avoid a serious deterioration of relations with Peru with the attendant consequences.

(2) Congress might not accept the revisions proposed by the Administration, and there is the risk of provoking further restrictive legislation.

(3) Failure to obtain revision of these Amendments following Congressional debate might limit the present flexibility of the Executive Branch in interpreting them.

(4) Prior or simultaneous implementation of Variant A would make it more difficult to obtain Congressional action on these Amendments.

(5) Proposals at this time to increase executive flexibility might be interpreted in some quarters as weakening the deterrent effect of the President’s statement of January 19.

Variant C

Proceed in accordance with either Variants A or B, but continue to withhold the relatively small bilateral development lending program. (In general the advantages and disadvantages would be similar to Variant A.)

Advantages

(1) Demonstrates to the military government and to the U.S. Congress that we do not consider the IPC case closed.

(2) Would reserve an element of leverage for future use.

Disadvantages

(1) Does not permit U.S. to use maximum incentives to achieve settlement of disputes other than IPC.

(2) Limits our ability to demonstrate our support of Peruvian development efforts or to influence them.

(3) Could lead Congress to criticize the multilateral lending institutions for assisting Peru when the U.S. Government, in support of its expropriation policy, is not doing so bilaterally.

[Omitted here are the Annexes.]

1. Source: National Archives, RG 59, S/S–I, NSSMs, 1/69–5/80: Lot 80 D 212, NSSM 158. Confidential. NSSM 158/CIEPSM 23 is published as Document 637. The minutes of the SRG meeting are published as Document 639. The Gonzalez Amendment of March 10, 1972, (86 Stat. 59) required U.S. representatives to the IDB to vote against providing loans to nations that had expropriated U.S. investments; or, if U.S. officials voted to provide such loans, to publicly state their legal rationale for their vote.
2. The study reviewed U.S. policy towards Peru, finding that United States interests included fostering a favorable trade and investment climate and maintaining U.S. influence. The study presented three policy options: maintaining the present policy; enacting a harder line policy; or softening the policy stance.
3. NOTE: The Treasury believes that this section which catalogs a series of United States “interests” in Peru and the Hemisphere tends to greatly over-emphasize these interests, under-estimates the constraints upon Peruvian freedom of action and ability to retaliate against the U.S., and plays down the importance of the President’s expropriation policy.
4. Peru this year has lined up $320 million from non-U.S. sources to finance various projects, much of it in the form of suppliers’ credits. Meanwhile, most U.S. companies have given up trying for Peruvian business in the absence of Eximbank direct financing. Others continue to solicit business, depending upon a change in Eximbank policy (e.g., Mack Truck on buses, G.M. on locomotives, and Aetna-Standard on steel tinning lines). Airways Engineering Co., Northrop Paige Communications, Ralph M. Parsons, Southern Peru Copper Corp., Wilcox Electric, and petroleum development companies are among other companies that have been affected by the Eximbank freeze. The growing competitiveness of this market and its characteristics (predominantly capital goods) make the availability of financing a sine qua non for selling in it.