LIBRARY OF CONGRESS 020 915 877 2 ^/lQ+^J^ Cr4nft !«/» OAA-? DA T D 635 .F3 Copy 1 CENTRAL AND SOUTH AMERICAN TRADE AS AFFECTED BY THE EUROPEAN WAR BY JAMES A. FARRELL President of the United States Steel Corporation ■mmI Ctiairman of the National Foreign Trade Council „»«tfa* dk^ Publication No. 901 Reprinted from America's Intekests as Affected by the EuHorivvN War Vol. LX of The Annals of the American Academy of Political and Social Science Philadelphia, .July, 1015 APR iei92? Reprinted from The Annals of the American Academy of Political and Social Science, Publicadelphia, Jxily, 1915. Publication No. 901. CENTRAL AND SOUTH AMERICAN TRADE AS AFFECTED BY THE EUROPEAN WAR By James A. Farrell, President of the United States Steel Corporation and Chairman of the National Foreign Trade Council. The commercial interdependence of modern nations became strikingly apparent when the first shock of the European war halted neutral commerce as abruptly as that of the belligerents. Although transportation and exchange were dislocated in every country of the globe, probably no other neutral nations were affected to so serious an extent as were the twenty Latin American republics to the south of us. Not only were their business relations with the United King- dom, France, Germany, Austria and Belgium subjected to an ab- normal strain, but their commerce with each other and with the United States was interrupted and is only now beginning to resume encouraging proportions. The completion of the Panama Canal and propaganda in favor of closer relations with our sister republics are partially responsible for the fact that the American public has developed a tendency to view world trade in terms of Latin America, overlooking the fact that the total trade of the twenty republics with other nations and with each other is but 6 per cent of the total foreign trade of the world, and that the Dominion of Canada normally buys more from us than the whole of Latin America. Educational Power of Varied Trade Those who, by reasonof .their. interest in the greater consuming markets, may view this attitude of the American public with dis- appointment, should realize, however, that the study of the many conditions governing this trade and the tariffs and laws to which it is subject is rapidly acquainting the general public with valuable knowledge concerning foreign trade policy. It is needless to look beyond our Latin American export trade for examples of the strength and weakness of our commercial intercourse with all nations. In gauging the effect of the European war upon Central and 1 4 The Annals of the American Academy Effect of War Even before the outbreak of the war the effect on Latin Amer- ican markets of curtailed European investment, beginning with the second Balkan war, was marked. Dependent as new enterprises were upon the selling of securities on the British and Continental bourses, prosperity in South America had long been dependent on the European money market, and all industry and most govern- ment finance showed distress a full year before the great European war began. When hostilities were declared, the situation became the worst in their history, and moratoria were promptly declared in practically every country.* Pending loan negotiations were halted, new con- struction was suspended, sterling exchange, the almost universal currency of Latin American trade, soared to unprecedented heights, steamship communication was interrupted, and confidence was com- pletely impaired. The demoralizing effect of the crisis upon the domestic, as well as the foreign business of the United States, is not yet forgotten; in Latin America it was even more severe. Trade between the United States and South America came almost to a halt and, even after British control of the sea restored transporta- tion, the credit situation and the difficulties of collections prevented the resumption of normal business. Purchasing Power Curtailed Those whose enthusiasm led them to believe that, with Ger- many out of the race for trade, the United States could immediately gain the export trade formerly enjoyed by that country, failed to consider the fact that Latin American purchasing power had shrunk by reason of the curtailment of British investment and the loss of the German, Austrian and other customary European markets for their products. More thoughtful exporters realized that the mechanism of commerce must be restored before present business could be taken care of, leaving aside the question of a greater future trade. The disadvantage of the former custom of liquidating transactions in our trade with Latin America at London in sterling bills of exchange was made apparent, and its excessive expense bred in exporters and importers the desire for the establishment of dollar exchange and direct settlements between this country and southern Central and South American Trade 5 markets. In the furtherance of this desire, the federal reserve bank- ing law is timely. Its authorization of the federal reserve banks to deal in acceptances representing transactions in the export and import trade created in each of the great export centers a discount market for this paper, with the result that bills drawn on oversea customers find ready sale when accepted by banks belonging to the federal reserve system, and the extension of credits has been greatly facilitated. Immediately the war assumed its present gigantic proportions, it was plain that the purchasing power of Latin America had dwin- dled to the value of its exportable products, and much depended, therefore, upon the state of crops, such as wheat in Argentina, coffee in Brazil, and elsewhere. Situation Improving Fortunately, these crops were large and foodstuffs commanded unusually high prices in the European market, with the result that, within the last three months, trade has quickened, confidence has been partially restored, and business is beginning to be conducted "as usual," except that all new construction is at a standstill and no extensive development is contemplated until the end of the war. A notable effect of the war in our commercial relations with Latin America has been the increasing reexportation of characteris- tic Central and South American products. New York and other ports of the United States are now important distributing points for international commerce, as shown by the fact that exports of foreign merchandise for the eight months ending February, 1915, were valued at $33,166,512, as against $20,541,138 for the same period in the previous year. This gain was especially notable in the case of cacao, the reexports of which increased more than fivefold, reaching, for the eight months ending with February, a total value of $2,835,- 591. The reexports of coffee leaped from $968,530 to $4,482,368. This was largely due to the closure of Hamburg and conditions prevailing in other European ports, formerly the center of the world- distributing trade. In comparison with these old-world centers, New York became the greatest open port. By reason of restrictions placed upon the export of rubber by the United Kingdom, to prevent its being used by the enemy, the importance of American ports for 6 The Annals of the American Academy the distribution of India rubber greatly increased, the value of reexports growing about 80 per cent. Trade Balance Adverse to United States During the eight months ending February 28, 1915, our exports to all Latin America and the West Indies were valued at $159,742,- 863, as compared with $212,227,558 for the corresponding period ending February 28, 1914, a decrease of 25 per cent, while our world exports during the same period decreased 3f per cent. Our imports from the same countries, during the same period of the present fiscal year, amounted to $316,374,763 against $289,318,891, an increase of '9 per cent, although our world imports decreased 13 per cent. This comparison shows a trade balance of $156,631,900 in favor of Latin America and the West Indies, which will adequately answer the demand of those who are urging us to buy more freely from Latin America, but even in normal times, the balance is in our neighbors' favor. Under the provisions of the federal reserve law, we can reasonably look for largely increased sales of American products. The reasons for this decrease in our exports were the practical suspension of commerce during the first few weeks of war and the acute depression which followed. This decrease was noticeable in shipments of all construction materials, such as iron and steel manu- factures, lumber and cement, agricultural machinery and equipment, automobiles, railway cars, locomotives, sewing-machines and other highly finished manufactures, while exports of actual necessities occasionally increased, by reason of the lack of European competi- tion. For instance, exports of coal, which, before the war, except to Central America, were not heavy, trebled to Argentina, and greatly increased to Brazil, while shipments of American paper, because of the need of replenishing stocks and the elimination of German competition, also grew in volume, while inquiries began to pour in for numerous small lines, thus increasing the diversification of our export trade. At the close of the war, however, we will find it necessary to exert every effort to maintain this newly-won trade against the determined competition of Europe. The increase in value of imports from Latin America is largely due to higher prices of various products, combined with the fact that trade routes have been changed and New York has become more Central and South American Trade 7 active as a distributing point, as shown in the case of cacao, some importers of the Ecuadorian, Brazilian and Dominican product expecting to see it become the greatest distributing point in the world. The use of cocoa and chocolate in the ration of the modern army proved the salvation of Latin American cacao growers. The demand of the European belligerents for foodstuffs and supplies has saved the situation both in Latin America and the United States. The development of Latin America cannot proceed, however, without foreign capital. Citizens of the United Kingdom are forbidden, during the war, to invest in foreign enterprises, which eliminates England, France, Germany or Belgium, leaving the United States as the only great nation whose trade balance is in- creasing and whose gold is accumulating. Source of Future Investment That American capital is educated to foreign investment is proven by the fact that its holdings in the Dominion of Canada are nearly seven hundred million dollars, exclusive of agriculture, and half a billion dollars in Mexico, Central America, Cuba, Haiti, Santo Domingo, Chile and Peru. Since the beginning of the war, fifteen million dollars of short term Argentine treasury notes have been taken in the United States, one of the conditions of the issue being that the proceeds should remain in the United States as a credit against the Argentine purchases of American merchandise. This unusual condition illustrates the advantage of making loans to countries which can become large purchasers of our products. British investors are retaining their Latin American properties, which will prove more valuable than ever after the war, in view of their freedom from the heavy taxes which war imposes upon invest- ments in the United Kingdom. How important a part British capital will play in the financing of Latin America after the war remains to be seen, but the consensus of financial opinion seems to be that interest rates will materially increase, and the amount of this increase, as compared with the price of United States loans, will doubtless determine the question of who is to be the chief investor 8 The Annals of the American Academy Relation of Investment to Export Trade Of greater importance than the interest rate is the creation of a greater export market for American manufactures through rail- way and industrial loans. By reason of European investment, the area into which we can expect to send American exports is restricted. For instance, in view of the fact that railways promoted by European capital are confining their purchases of materials to Europe, our only field for railway supplies and equipment has been the govern- ment railways. When the output of American factories is increased by foreign investment, the investment becomes in reality a domestic investment and its encouragement by the United States govern- ment should naturally be expected. Upon this attitude will depend largely the future of American business enterprise abroad. With governmental support and inteUigent cooperation between investors much can be accomplished, although some hesitancy on the part of capital may be encountered, owing to the deterrent effect of the Mexican revolution. However, the awakened interest of the entire American business pubUc in the possibilities of Latin American trade is a great assurance of future increase. While the establishment of dollar exchange will not, perhaps, entirely replace confidence in sterling bills at the conclusion of war, a beginning has been made for American banking. Excessive versus Adequate Credits Although much is said in favor of conducting business in accord- ance with the desires and standards of our Latin American customers we should remember that this applies only to what is recognized by the world to be sound business practice. Arguments in favor of granting six, nine and twelve months' credit do not recognize the fact that extension of unusual credits was an important factor in the industrial depression preceding the war, Germany's eagerness for British trade having led many German firms to extend credits which deferred merchants' obhgations several months beyond the time when they realized on the purchased goods. With this ready money at hand, the merchant frequently speculated in land, with the result that collapse of the land boom caused heavy losses and failure to pay at maturity of even these long credits. Central and South American Trade 9 British exporters frequently voluntarily suffered the loss of old and valued business in preference to extending excessive credits, and Americans with experience in Latin American trade are of the opinion that the limit of credit should be sufficient only to cover the time required by purchaser to realize on the goods bought, taking into consideration the harvesting and marketing of crops. LIBRARY OF CONGRESS 0*0 915 877 2