Foreign Relations of the United States, 1964–1968, Volume XXXI, South and Central America; Mexico

428. Memorandum From the President’s Special Representatives (Anderson and Irwin) to President Johnson¹

Washington, September 2, 1965.

SUBJECT

• Panama Canal Treaty Negotiations

Since May, the United States negotiators have been discussing with the Panamanians three treaties, an Interim Treaty (regarding the existing Canal), a Sea Level Canal Treaty and a Base Rights and Status of Forces Agreement. All aspects of the discussions have been carefully coordinated with the Departments of State and Defense on a continuing basis. We have reached a point in the negotiations at which we wish to bring to your attention the far-reaching nature of the proposals which have been discussed, and alternatives, and to recommend courses of action for your decision.

We have informed key Senators and Representatives about the general progress of the negotiations and are meeting with varying degrees of concern, in some cases deep concern, because of the prospect that the United States may actually relinquish practical aspects of sovereignty, and because there might be delegated to a new Joint Authority the important functions which the Congress has heretofore controlled directly, such as: formulation of new laws for the Canal Areas, approval of the budget and expenditures, and decisions with respect to tolls, commercial enterprises and employment conditions.

Based upon your decisions resulting from this meeting, we recommend that you advise the leaders of Congress (including the majority and minority leaders of the Foreign Relations, Armed Services, Appropriations and Commerce Committees of both Houses and the House Merchant Marine and Fisheries Committee and its Panama Canal Subcommittee) of your policy goals with respect to the Panama Canal and of the guidelines you have given to the United States negotiators. In view of the extent to which the suggested new participation by Panama in the practical application of sovereignty will depart from tradition, it is doubtful that anyone but you can persuade the leaders of Congress to accept these changes.

I. INTERIM TREATY

1. Form of Administration of Existing Canal

Following the guidance of your December 18, 1964, statement,² we have sought a treaty which will recognize the sovereignty of Panama while retaining such rights as are necessary to provide effective operation and defense of the Canal and to enable us to treat fairly and helpfully the Canal employees, both United States and non-United States. We are seeking a treaty which will be recognized as a sincere and generous effort on the part of the United States to meet Panama’s aspirations; so that, if it should be rejected by Panama or if accepted and later events require the use of military force to ensure the operation or defense of the Canal against hostile Panamanians, the United States will be in a more favorable position, and especially in Latin America, than under the 1903 Treaty or a new treaty in which Panama does not participate as a real partner.

We have been discussing with the Panamanians two formulas for Panamanian participation in the administration and operation of the Canal:

(1) a proposal (suggested by us) that Panama be given a minority participation on the Board of Directors of the existing Panama Canal Company, the authority and responsibility of the Board to be expanded to include functions now exercised by the Governor, and

(2) a proposal (suggested by Panama but also considered independently by us to be a possible solution) to create by the Interim Treaty a Joint Authority in which the United States and Panama would share as partners full authority and responsibility to operate the Canal and administer the Canal Areas.

We recommend proposal (2), the Joint Authority, because:

(a) While meeting the principal aspirations of Panama, we believe we can retain for the United States (i) the ultimate control of the administration and operation of the Canal through majority control of the Board of Members or by having a “casting vote,” and (ii) the unilateral right for the President of the United States to defend and secure the Canal under any circumstances in which he believes such action necessary.

(b) It is an overt expression of Panamanian sovereignty and will be a major step in eliminating the “foreign colony” stigma with which Panamanians view the Canal Zone.

(c) It seems to offer the best hope of concluding a mutually satisfactory bilateral arrangement with Panama which will both ensure the continued effective operation and defense of the Canal and reduce the likelihood of violent United States-Panamanian confrontations.

(d) It is doubtful that we could negotiate successfully Panamanian membership on the Board of Directors of the existing Panama Canal Company. The Panamanian negotiators state that the Panamanian Government has never officially recognized the Panama Canal Company, that its existence has been a continued source of irritation to Panama, and that it is not compatible with a recognition of Panama’s sovereignty.

(e) United States agreement to participation by Panama on the Canal Company’s Board of Directors would, in effect, be accepting the idea of joint administration without receiving the political benefit which would flow from an offer of a new and real form of partnership with Panama, as under the Joint Authority proposal.

(f) The United States can include in the Treaty provisions which will ensure fair treatment to the employees (both United States and non-United States) in the light of the changed circumstances, and the United States Government can take action independent of the Treaty to provide for the United States employees.

The principal disadvantages of the proposed Joint Authority are:

(a) It removes the United States, and particularly the United States Congress, from direct control over the Canal. Ultimate control would be exercised through a Board of Members the majority of whom would be appointed by the President of the United States.

(b) A significant number of Senators and Representatives will oppose strongly a real partnership with Panama. They will consider it a “giveaway” and a weakening of our historic position of strength in Central America, a position they believe is needed to ensure the defense of the Western Hemisphere and to retain reasonable tolls for the benefit of both world commerce and United States shipping and those who ship the cargoes, particularly those ships and cargoes involved in trade between the east and west coasts of the United States. Their principal concern, however, might be said to be the instability of Panama and its Government, the seeming lack of capacity of its people, the lack of concern of the controlling “oligarchy” for the masses, and the activity of Communist elements.

In addition to the above two proposals, Panamanian representation on the Board of the Canal Company and creation of a Joint Authority, there are several possible alternate concepts of administration. Among these are:

(a) Maintain the existing Panama Canal Company and Canal Zone Government while granting significant concessions to Panama.

(b) Abolish the Panama Canal Company/Canal Zone Government and reestablish an independent United States Government agency similar to that existing before the establishment in 1950 of the Panama Canal Company; grant significant concessions to Panama, perhaps including some form of Panamanian participation in the functions of the United States Government agency.

(c) Create by treaty a multinational agency composed of representatives of the United States, Panama and the principal users of the Canal, or perhaps others selected by any variety of ways.

(d) A plan, known as the Machado Plan, under which the World Bank would be authorized to organize an international corporation to purchase the interests of the United States in the Panama Canal Company and the Canal Zone Government and obtain from Panama a long-term franchise to operate the Canal as an international waterway on a self-sustaining and self-liquidation basis. This plan might provide a quick and practical business solution of the problem and avoid many of the political differences which have arisen in the past.

Alternatives (a) and (b), maintenance of the existing organization or establishment of a new independent Government agency, would be much more acceptable to Congress than the proposed Joint Authority, but neither would meet the Panamanian aspiration for sovereignty. We believe Panama would refuse Alternative (a) but might be induced to accept Alternative (b) for a specified and fairly short term of years if convinced there was no hope for some form of real participation.

Alternatives (c) and (d), multinational operation and the Machado Plan, would be difficult to sell both to Panama and to Congress, but we believe it possible to do so to the Panamanians if they are convinced they cannot negotiate a satisfactory bilateral arrangement.

2. Tolls and Unamortized United States Investment

These two subjects present primarily internal United States political problems.

(a) Tolls

One of the traditional purposes of the Canal has been its contribution to world commerce. The United States never raised tolls since the Canal was opened, and inflation has had the effect of reducing tolls to approximately one-third of the 1914 toll. Strong voices in Congress have opposed any increase in tolls, even though many Canal Governors have recommended increasing them.

It would probably be possible to establish a new tolls system, based party on value of cargo, which would be more equitable while more profitable. We recommand that the Joint Authority be empowered to hold toll hearings and fix tolls, possibly subject to the Presidents of the United States and Panama each having a unilateral power to veto increases.

(b) Unrecovered United States Investment

The unrecovered United States investment in the existing Canal enterprise is fixed variously at from $329,000,000 (net direct investment) to $463,000,000 (equity of the United States Government). There are two schools of thought: (i) those who believe that the United States has been more than repaid through the use of the Canal for commercial and defense purposes for a period of over 60 years, including two world wars, the Korean war and the current world situation, and (ii) those, including many in Congress, who believe the unrecovered investment should be recovered.

The Panamanians dispute the amount of our unrecovered investment and argue that the United States has adopted intentionally the policy that has resulted in no amortization. They point out that the United States can afford to subsidize world commerce but that Panama cannot, so either the tolls should be raised to bring an optimum income to Panama or the United States should pay Panama an equivalent sum.

A related factor is that the Panama Canal Company now pays interest to the United States Treasury (approximately $11,000,000 in 1964) on the interest bearing investment of $329,000,000 computed on the basis of statutory criteria established by Congress. After payment of the interest, the Panama Canal Company now is not able to establish adequate reserves for capital improvements.

If you approve the Joint Authority proposal, we shall try to achieve some formula which will permit recovery of the unrecovered investment in the 1903 Canal, either by agreeing on a figure to be amortized under the new arrangement or by obtaining a new equity when the sea level canal financing is arranged. Acceptance of the Joint Authority proposal would have the effect of discontinuing present interest payments to the United States Treasury.

Other Issues

Among other difficult and sensitive issues in the negotiations of the Interim Treaty are the law to be applied in the new “Canal Areas,” the system of courts, the financial solvency of an independent Joint Authority, the commercial enterprises of the Panama Canal Company, the welfare of the employees, and the question of defense and security of the existing Canal. We believe that reasonable solutions can be achieved under the Joint Authority proposal.

With respect to the duration of the Interim Treaty, Panama opposes strongly tying the duration to the effective date of a sea level canal because of the United States position that we may build the sea level canal in Colombia or elsewhere. However, we believe we can obtain an Interim Treaty with a duration of between 35 to 60 years.

Public Announcement of Progress in Negotiations

The President of Panama wishes to make a public announcement of progress in the negotiations before the opening of the Panamanian National Assembly on October 1. It may be advisable to have a joint announcement of the President of the United States and the President of Panama in order to assist the President of Panama and to have more control over the exact wording. What can be said will depend on the progress made not only on the Interim Treaty but also on the Sea Level Canal Treaty and the Base Rights and Status of Forces Agreement. The primary interest of the Panamanians is the Interim Treaty.

II. SEA LEVEL CANAL TREATY

1. Option

In the Sea Level Canal Treaty we are seeking essentially an option to construct a sea level canal in Panama at a time and place and by a means of our own choosing. Panama wishes to have a sea level canal if one is constructed, but the concept of the option causes difficulty to Panama because of our announced intention to seek similar options from Colombia and from Nicaragua and Costa Rica. If we are successful in signing three satisfactory treaties with Panama it may be advisable to reconsider present plans to proceed with site surveys in Colombia, Costa Rica and Nicaragua.

We anticipate difficulty, particularly in obtaining an open-ended option to construct a sea level canal by nuclear methods. Consequently, it may be necessary to agree to share with the host countries the decision with respect to construction of a canal by nuclear means.

2. Form of Control

No decision has yet been made with respect to the agency to control a sea level canal. Should it be multinational, binational, or possibly a combination of the two?

We recommend that the treaty provide for a multinational agency composed of representatives of the United States, the host country, the financiers and the principal users of the Canal but include a provision to permit the United States and the host country to decide on a bilateral agency rather than a multinational agency if the United States and the host country, before the financing arrangements are made, each determines that it prefers a bilateral arrangement.

3. Other Issues

Although there are numerous other complicated problems, such as the method of financing, defense of the canal, tolls, compensation of the host country, question of provision for repayment to the United States of the unrecovered investment in the 1903 Canal, and the duration of the controlling agency and of the treaty (including Panama’s desire to own the sea level canal outright after the cost has been amortized), we refer to these only for your general information and do not seek decisions at this time.

4. Congress

Congressional criticism is most likely to be reflected in concern over multinational control of a sea level canal, and over control of tolls. Some have expressed the view that a new canal should be built outside of Panama.

III. BASE RIGHTS AND STATUS OF FORCES AGREEMENT

The Base Rights and Status of Forces Agreement has been prepared by the Department of Defense and is based on similar agreements with other countries. The present draft provides that the bases will be made available by Panama free of charge, in keeping with a worldwide Department of Defense policy. The Panamanians may expect payment.

The prosposed Base Rights and Status of Forces Agreement will be opposed by some in Congress on the grounds that we are giving up areas in which we are now “sovereign,” turning them over to Panamanian sovereignty, and taking them back under a treaty which gives us less control than we now possess.

IV. GENERAL

1. Compensation to Panama

In the Sea Level Canal Treaty draft, we have provided for an annual payment of a fair and reasonable return to Panama, without specifying the amount. In the Interim Treaty we provide for a payment to Panama in the proportion of Panama’s interest in the Joint Authority. There is no provision in the Base Rights and Status of Forces Agreement for any payment to Panama. We have included in the Sea Level Canal Treaty draft a general undertaking to assist Panama in meeting the adverse economic impact of a sea level canal which will be caused by a sharp decrease in employment and similar changes in the existing economy.

The Panamanians have indicated that they will put a price on the use of their land and water areas (their “greatest natural resouce”) and either expect to receive it from the canal revenues, or for the United States to pay the difference. As stated earlier, there is a possibility Panama may demand rent for use of the military bases. They will ask United States assistance in meeting their economic problems when the sea level canal is opened.

2. Possible Special Trade Relationship with Panama

The Panamanian President, Foreign Minister and special negotiators have expressed, at various times, a pointed hope that the United States might be willing, because of the unique relationship with Panama, to grant Panama trade preferences or even a complete exemption from customs duties in the United States market. The most active negotiator, Ambassador Aleman, has said that this would result in new investments in small industries in Panama—on the order of those that have been developed in Puerto Rico—which would have markets in the United States, and that this business would become so important to Panama eventually that Panama would beseech the United States to remain in partnership in canal operations in order to retain the trade preference that would be made dependent upon the Canal partnership. Such a trade relationship would be logical, would cost the United States virtually nothing (since there are now few Panamanian products that would compete more effectively in a duty-free United States market), and would assure the United States an increasing reciprocal market in Panama while promoting a longer Canal partnership.

We have been told informally in the State Department that special legislation for this purpose possibly could be justified upon the basis of the unique Canal relationship, and we recommend that you direct the Executive Branch to seek to devise a plan for such a special trade relationship and, if found feasible in the light of all other United States trade relationships, to formulate such legislative proposals as it may be desirable to submit to the Congress.³

1. Source: Johnson Library, National Security File, NSC Histories, Panama. Confidential. The memorandum was unsigned, but a handwritten line at the top of the first page indicates it was from Anderson and Irwin.
2. See footnote 3, Document 421.
3. Attached but not printed is Annex A, a list of 31 members of Congress briefed by Irwin and Woodward.