Expropriation of foreign-owned property nearly always strains relations between the countries concerned, and in the past was often the occasion for forcible intervention. By now, the right of a country to take foreign-owned property is widely accepted and the dispute centers on compensation. This subject has been dramatized during the past year by the Chilean seizure of copper mines in that country that were owned by U.S. companies. While this is the most notable recent event of its kind, many other expropriations have occurred in Chile and elsewhere in the years following World War II. Expropriation, of course, is only one of a range of possibilities open to the less-developed countries as they grope for a way of improving their returns from their resource industries. Another route, taken by petroleum exporting countries, is reported elsewhere in this issue.
Expropriations of one sort or another have occurred throughout the postwar years. Sometimes they have amounted to confiscations, with very little compensation paid. In recent years Zambia negotiated the transfer of a majority interest in its copper mines. Peru expropriated large agricultural properties (some of them foreign-owned) and seized the International Petroleum Corporation (IPC) after one of the more extended disputes of this kind. Chile has taken many foreign properties over the past year in addition to the copper mines.
When a government takes property it is almost certain to do so within the terms of its own law. Whether this also conforms to international law becomes a very involved question. A UN General Assembly resolution of 1962 espoused three criteria to govern compensation when foreign-owned resource industries are taken, namely that the compensation should be (1) appropriate; (2) in accordance with rules in force in the State taking such measures in the exercise of its sovereignty; and (3) in accordance with international law.
But the adequacy of compensation may be judged by different standards. Economists probably incline toward market value as the appropriate one (and this is the thrust of international law) but even this is not clear cut. Stock prices are affected by the very prospect of expropriation. Use book value? It does not reflect price changes, the success of investments made, or the value of the management team. Moreover, since market value reflects profit expectations, the government can affect theirs through taxes, harassment, renegotiation of contracts under duress, and in myriad other ways so as to reduce the value of the enterprise it seeks to acquire.
Some of this can be illustrated by the Chilean copper expropriation. The value of these properties to their owners was affected for many years by a succession of tax measures and exchange regulations that increased the Chilean share of mine revenues. Partial transfer of ownership occurred in 1967 and 1969 under agreements made with the Frei government that plainly were influenced by this earlier history. These agreements, while complex, provided the companies with assurances on taxes in return for expansion of the industry and arrangement of the financing required for expansion.
When President Allende came to power in late 1970, a constitutional amendment was proposed to permit the complete expropriation of the large copper properties. It passed unanimously. Included was a provision permitting the deduction of any "excess profits" made by the companies since 1955 from the compensation due. In October 1971 the Chilean official responsible determined that excess profits were so great that only in the case of two new mines was any compensation due, as indicated in the following table released by the Chilean government:
These determinations were under appeal at the time of writing.
What do the Chileans gain by the expropriation? Clearly they gain valuable investments at little cost if present indications prevail. However, over the longer term their gain will depend on their success in operating the mines and on the kind of retaliation they encounter. While elements of national pride are important, and ideological and emotional objections to the U.S. government and to U.S. business are satisfied by the action, Chileans of all classes are not unaware of the problems created.
At least initially, the mines do not seem to be a source of great profit. Copper prices are lower than in the last few years and Chilean production costs appear to have soared. Many skilled supervisory employees (perhaps a third or more of the total, including many at the upper levels) have left the mines. Costs of production at one major mine are said to have more than doubled in the nine months following take-over, and the miners are seeking a generous pay increase. Longer term, there is a question of whether a government enterprise in this case will be able to summon the capital and management resources to find new deposits and to develop new mines.
Possibilities for retaliation do exist. The United States can stop Export-Import Bank loans, curtail aid, influence the availability of World Bank financing, and is required by law to vote against (and thereby block) low-interest Inter-American Development Bank (IDB) loans. However, the Chileans may not consider such action very probable or that it will be very long-lasting. The United States strained to avoid a formal aid cut-off when Peru acted against the IPC and has behaved with restraint in the case of Bolivia. Private capital flows also may be affected.
The policy of the U.S. government is that it will not oppose expropriations, but will seek prompt compensation in accordance with the standards of international law. However, this poses certain difficult policy choices for the United States. The law now provides for three types of mandatory retaliation for failure to pay prompt compensation. Under the Hickenlooper amendment, a determination that inadequate compensation has been paid requires that foreign aid be refused the offending country until a proper settlement is made. Also the U.S. representative on the IDB is required to vote against approval of soft loans from that organization to the offending country. Many persons, both inside and outside the Administration, deplore the lack of flexibility in these mandatory measures since it is difficult to gauge the retaliation to the magnitude of the offense or to withhold action where it may only aggravate the situation. Another form of pressure available is the U.S. sugar quota, which is of great value to some countries. The President has authority to suspend sugar quotas in retaliation if he chooses, or to tax sugar imports from the offending country.
It is unclear whether policies of firmness or retaliation, mandatory or not, will improve the chances of securing compensation. In situations where feelings have been exacerbated by ideological or nationalistic differences, a policy of retaliation may simply result in still more confiscations of the property of U.S. firms.
The U.S. government has sought to encourage private investment in less-developed countries by offering insurance against the political risks involved. Of the $3.8 billion of insurance against expropriation in force in March 1971, $2.2 billion was for investments in Latin America (and Chile led the list of all countries). However, the existence of insurance may make the investor less cautious and at the same time may cause the expropriating country to exercise less restraint in acting against foreign firms. Meanwhile, U.S. taxpayers may have to make good the private losses the government has insured.
For investments already in place, some of them encouraged by government policy, the U.S. government seems obligated to defend the interests of its nationals in accordance with international law, even though what it can do may be limited. For new investments, perhaps both the investors and host countries should be put on notice that they must themselves evaluate the advantages and risks of their actions more carefully without the assurance that the U.S. government will pick up the tab. Host countries should be made aware of the possible costs of worsening their climate for private investment, and investors in turn should be more careful about their commitments and perhaps more accommodating to the needs of host countries.
A version of this article appeared in print in the January 1972 issue of Resources magazine.
