Foreign Relations of the United States, 1952–1954, The American Republics, Volume IV

611.19/11–753

Memorandum by the Acting Secretary of State to the President

confidential

Washington, November 7, 1953.

Subject:

• Relations between the United States and the Republic of Panama

I refer to your memorandum of September 29 to the Secretary of Defense¹ concerning certain complaints of President Remón of Panama.

These complaints are for the most part not new; most of them are the subject of agreements, and of continuing discussion, since 1903. On the whole, it can be said that the Canal Zone authorities have taken all reasonable steps to guard against the abuses mentioned, often without corresponding cooperation by the Panamanian authorities. The specific complaints made to you by President Remón are one-sided. I have discussed these in brief detail in the accompanying attachment.

These complaints are among those under study by an Interdepartmental Committee, established upon the initiative of the State Department. This Committee has the task of formulating the United States position on the issues which the Panamanians are raising in the conversations, now under way in Washington, on the whole field of United States–Panama relations arising from the construction and operation of the Canal. A genuine effort will be made to reach fair and just solutions, as you have directed.

While President Remón presented the Panamanian side solely, I believe that there are a number of steps which might be taken by this Government which would, without sacrificing any of our basic rights in the Zone, go a long way toward removing current Panamanian dissatisfactions. Among these might be listed the transfer to Panama of certain lands no longer needed for the operation and/or protection of the Canal and its auxiliary works, increased purchases from Panama, closer adherence to our commitment to pursue a policy of equality of treatment and opportunity for Panamanian labor in the Canal Zone, fulfillment of our commitment to build a bridge or tunnel, to be under full United States jurisdiction, at the Pacific end of the Canal, and the granting to Panama of the right now prohibited by treaty to tax Panamanian citizens employed in the Canal Zone. I shall place before you certain recommendations when the current conversations have progressed to a point where such a step is feasible.

The Department of the Army has concurred in this memorandum.²

W.B. Smith

[Enclosure]

Comments on Issues Raised by President Remón

1. Establishment of the Panama Canal Company.

The reorganization of the Panama Canal Company was the result, not of a desire to make the operation free of control from Washington, but of a study by the Bureau of the Budget which recommended certain organizational changes with a view to putting the Canal on a business-like basis. In its report to the President of the United States in 1950, the Bureau of the Budget recommended that the operation of the waterway and all related business enterprises be transferred to the Panama Railroad Company, a United States Government-owned corporation operating as an adjunct to the Canal and already conducting most of the business enterprises related to the Canal. This recommendation was transmitted to the Congress by the President with his approval, and implementing legislation was enacted in 1950, becoming effective on July 1, 1951. The Company was renamed the Panama Canal Company.

The Panamanians apparently fearful that the word “company” implied a commercial enterprise, formally protested the new organization in March 1953, as indicating the intention of this Government through such reorganization to escape fulfillment of certain treaty obligations to Panama. The Panamanian protest was rejected on the grounds that it is for the Government of the United States to determine which agencies or instrumentalities are appropriate for the exercise of its rights and the performance of its obligations. At the same time, the Panamanian Government was assured that it does not seek in any way to avoid fulfillment of its treaty obligations to Panama. The Secretary of the Army, under delegation of authority from the President, gives continuous and close personal supervision to the operations of the Company and the Canal Zone Government with respect to basic policies and selection of officials.

2. Sales to Ships.

The sale of supplies to ships passing through the Canal, which President Remón alleges to be a violation of the spirit of the treaty, is in fact expressly authorized in a note accessory to the 1936 Treaty with Panama. Panamanian suppliers, however, are permitted and encouraged to participate in this market, and the Panama Canal Company, for the express purpose of permitting Panamanian merchants to compete, imposes a special surcharge on many items sold by the Panama Canal Company to such ships.

3. Commercial Competition.

The United States is pledged to regular and continued opportunity for conference and exchange of views on this question. A joint commission is maintained in an endeavor to suppress smuggling from the Zone into Panama. The Zone also maintains a costly system of checks to insure that only duly authorized persons purchase at the commissaries and PX’s, where prices are lower than in Panama. Undoubtedly some purchases in the Zone are made by authorized persons for friends and relatives who lack the privilege, and it is virtually impossible to control such transactions in the home. The Panamanian Government, on its part, has never adopted or enforced measures complementary to those of the Zone. The Panamanians aspire to the elimination of the commissaries and PX’s, and a monopoly of the Canal Zone market. Such a step, however, under present circumstances would work a hardship on Zone personnel by placing them at the mercy of price-gouging merchants in Panama. However, as long as prices in the Canal Zone are cheaper than those in Panama, this problem will continue to be an irritant in United States-Panama relations. Imports into the Zone are duty-free, with resultant lower retail price, because the Canal Zone is outside the customs area of the United States and by treaty is not subject to Panamanian duties.

One source of complaint in this field is in the process of liquidation. The supply and storage yards formerly maintained by contractors on military reservations in the Canal Zone are being discontinued. The Government of Panama had pointed out that such yards were susceptible for use as bases of contraband operations.

4. Panamanian Taxation of Panamanian Employees of the Canal Zone.

The right of the Government of Panama to impose taxes on persons employed in the Canal agencies was expressly relinquished by Panama in the 1903 Treaty. This restriction appears to work an undue hardship upon the Republic, since many of these persons enjoy the benefit of Government services from the Republic. The matter of permitting Panama to tax its citizens residing in Panama or the Canal Zone, as well as United States citizens working in the Zone but residing in Panama, is being explored by the United States agencies concerned.

1. Ante, p. 1421.
2. The original State Department draft of Oct. 5, 1953, included “elimination of sales of foreign luxury items in Canal Zone stores” in its list of possible concessions to the Government of Panama. The Department of the Army objected to this point, which was subsequently deleted in the final memorandum. There were several other changes in wording. (Letter by Earl D. Johnson, Under Secretary of the Army, to Mr. Cabot, dated Nov. 3, 1953, 611.19/11–353)