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

545. Special National Intelligence Estimate 84–71¹ ²

Washington, February 18, 1971

[Omitted here are the table of contents and maps of the Canal Zone.]

PANAMA AND THE CANAL TREATY NEGOTIATIONS

CONCLUSIONS

A. General Omar Torrijos is in firm control in Panama, and there is little possibility of any serious internal opposition to his conduct of negotiations with the US on a new Canal Treaty. He will set the tone and make the important decisions on Panamanian demands and tactics but will rely on a close circle of experts and advisors to handle the day-by-day negotiations. He is impulsive and tends to be rather hostile toward the US; much will depend on his personal reactions as the negotiations proceed.

B. At a minimum Torrijos will demand concessions from the US which can be presented to the Panamanian people as going beyond the terms of the 1967 treaty drafts. The key issues for him will be (1) an extension of Panamanian jurisdiction over the present Canal Zone and (2) a substantial increase in economic benefits for Panama from operation of the Canal and from commercial activities in the Zone. He is likely to be most adamant on the issue of jurisdiction. Though financial pressures will sharpen Torrijos’ desire for additional income from the Canal to finance his economic and social projects, the economic situation does not appear serious enough to compel Torrijos to compromise Panama’s jurisdictional claims in order to gain immediate financial benefits.

C. Torrijos seems willing to agree to continued US control over the operation and defense of the existing Canal for a limited period of time, in return for Panamanian jurisdiction and control over the remainder of what is now the Canal Zone. It will be extremely difficult for him to agree to indefinite US control of the present Canal. He probably hopes to key the duration of a new treaty to a firm US commitment and schedule for building a new sea-level canal.

D. It is possible that a full-scale treaty can be negotiated in the next year or so, but, given the complexities of the issues, the chances are not good. If the talks bog down, there is a reasonable chance Torrijos would be willing to settle for a package of US concessions which he could claim as a national victory and as an important step toward a new treaty at a later date.

E. If an impasse develops, or if Torrijos concludes the US is stalling, he would be likely to shift to a hard line. He would step up threats and demonstrations against the US, hoping thereby to pressure the US into concessions. In so doing, he might well set in motion nationalistic forces which could lead to a prolonged confrontation with the US, including violent clashes along the Canal Zone border.

DISCUSSION

I. BACKGROUND

1. In the 28 months since the National Guard coup against the newly-elected Arias government in October 1968, General Omar Torrijos, the Guard Commandant, has steadily strengthened his grip on power. He has weathered a spate of plots and a coup attempt and in the process has gained new confidence in his role as de facto ruler behind the provisional junta government. His resentment over the US delay in recognizing his regime and his fears that the US was actively seeking his overthrow seem to have subsided somewhat in recent months. But he still tends to be rather hostile toward the US and wary of US intentions toward his government.

2. The junta regime’s “revolutionary” rhetoric and anti-US pronouncements have stimulated existing resentment over the entrenched US position in the country. They have helped to create an atmosphere which the government is counting on to support Panama’s demands for replacing the hated 1903 Canal Treaty. The Torrijos regime has denounced the three treaty drafts negotiated in 1965–1967 with the Robles government. It has given notice that, in its proposals for a new treaty, it will press hard to extend Panamanian jurisdiction over the Canal Zone and to increase substantially Panama’s share of income from the Canal operation.

II. THE TORRIJOS REGIME

3. At present no individual or group in or out of the National Guard appears to be in a position to threaten seriously Torrijos’ rule or to block his policies. Though top officers in the Guard continue to vie with one another for personal or political advantage, none seems willing to challenge Torrijos’ leadership. Efforts by former President Arias and some of his Panamenista followers to organize a coup against Torrijos have not been successful to date and seem even less likely to be so in the future. The press and other media are carefully controlled by the government, and constitutional guarantees remain largely in suspense. On the right the oligarchy has been pretty well cowed and the traditional parties have been proscribed. On the left the government has cracked down sharply against sporadic terrorist activities. Though leftist organizations generally are kept under fairly tight control, Torrijos has established contacts with communist student and labor groups which, though small, can play a significant role in nationalist agitation. A few members of the small pro-Soviet communist party have attempted with some success to gain access to the circle of advisors around Torrijos. Members of the party have been permitted to be come more active in recent months, but the party itself continues to be outlawed.

4. Torrijos’ dramatic dash back to Panama from a holiday in Mexico in December 1969 to defeat a coup attempt by dissident National Guard colonels gave a considerable boost to his personal appeal as a national leader. Since then, his constant barnstorming around the country and his regime’s energetic efforts to expand public works and improve government services have helped to widen his popularity in rural areas and among the middle and lower classes in the cities. But Torrijos has yet to build a firm political base or to legitimize his junta government. At one point he appeared to be seeking to transform the labor movement into a political vehicle to perpetuate his rule. Though he now appears to have shelved these plans, he could revive them. In the meantime, his regime continues to be based primarily on the power of the National Guard.

5. Last fall Torrijos experimented with a carefully controlled election in one district of Panama City, and he has since hinted at some sort of nation-wide vote this year or next. He is clearly in no hurry, however, to put his regime to an electoral test, and he has shown no inclination to extend his experiment in local elections. He apparently is willing to consider a plebiscite or elections for a constituent assembly at some point, but primarily as a way of satisfying US demands for ratification of a new Canal treaty, rather than as a step toward re-establishing a constitutional or traditional party system.

6. Torrijos seems sincerely anxious to build a “New Panama.” He is clearly determined to block any attempt to return to oligarchic rule, and, if he could do so, he would probably like to carry out radical social and economic reforms which would benefit the masses. The young and able technicians he has installed at the ministerial and subcabinet levels have in fact done much to improve the efficiency and quality of government services. They have also begun to show an active interest in devising solutions to fundamental problems in the fields of health, education, housing, land tenure, agriculture, and transportation.

7. Despite its constant pronouncements of “revolutionary” progress, however, the Torrijos government has done little to change the structure of Panamanian society. The shift away from oligarchic rule has not basically altered the country’s market economy nor destroyed the economic power of the traditional elite. Graft and corruption are not as flagrant as under previous regimes, but money still opens doors and gets things done. Notwithstanding his firm grip on the levers of power and his desire for fundamental change, Torrijos apparently does not yet feel sure enough of himself and of what he wants to do either to destroy the old order or to build a new one. He has evidently concluded that the creation of the New Panama will take a long time.

III. THE ECONOMIC SITUATION

8. The Panamanian economy has continued to recover from the effects of the turbulent election campaign and the subsequent Guard coup in 1968, which sharply reduced economic growth in that year. The rate of growth in 1970 was perhaps slightly higher than the 1969 level of 7 percent but still below the 8–9 percent annual average of the 1961–1967 period. Although private investment has increased since 1968–1969, the business community, still wary of Torrijos’ long-range intentions, has failed to renew the rapid expansion of private investment which characterized the earlier period.

9. The improved economic performance is due mainly to increased government spending. Expenditures on labor-intensive construction projects have helped considerably to accelerate the growth of production and incomes and to reduce unemployment. Recently the government has brought more of these projects under the control of its planning office. As a result of better coordination of highway construction, electrification projects, and programs to develop the agricultural infrastructure, the prospects for orderly economic growth have improved.

10. The government’s spending programs have been supported largely by deficit financing. In 1970, despite continued economic growth, improved tax administration, and a tax increase early in the year, increased spending caused the government’s deficit to rise to $64 million (including rollover of short-term debt). About two-thirds of the deficit was financed by funds from New York banks; the remainder by funds from various US, international, and domestic sources.³

11. Another government deficit of at least $54 million is in prospect for 1971. Torrijos’ financial experts will probably be able to arrange financing for a debt of this size. Several New York banks are now in the process of arranging a loan package of $30 million in new funds and $17 million to refinance obligations coming due this year. This, together with prospective drawings of $8 million on long-term loans already contracted from the World Bank, the Inter-American Development Bank, and US AID, should be enough to cover the deficit. Excessive government spending could push the debt beyond $54 million and require additional financing. Should the government be unable to arrange for new long-term or short-term funds to cover the larger amount, it might be forced to consider a request to the US for financial assistance.

12. It seems more likely, however, that the Torrijos government will keep the increase in its expenditures within limits which will enable it to finance its 1971 deficit from private foreign and domestic sources, without special US Government aid. The high level of government expenditures, plus the expected increase in private foreign investment in utilities, tourist facilities, and banana production should prevent a major drop in construction activity and forestall a politically unacceptable rise in unemployment. The government is thus likely to avoid insurmountable economic problems, for at least this year. Financial pressures will sharpen Torrijos’ desire for a substantial increase in income from the Canal, adding weight to the Panamanian position that this is needed to finance vital economic and social programs.⁴ But even without additional revenue from the Canal, Torrijos seems likely to be able to keep the economy going and to stave off serious economic pressures during the negotiating process.

IV. FACTORS AFFECTING THE NEGOTIATIONS

A. Key Substantive Issues

13. Torrijos is counting heavily on a major revision of the present Canal Treaty to provide a firm, long-term basis for building the New Panama. His maximum objectives are likely to be to gain (a) full Panamanian jurisdiction over the present Canal Zone, with the US maintaining administrative control of only those areas clearly required for the operation and defense of the Canal; (b) increased Panamanian participation in matters relating to the Canal’s operation and a cooperative role in its defense; (c) a substantial increase in Panama’s income from the Canal and from commercial enterprises located in the present Zone; and (d) a definite limit on the duration of a new treaty, after which the Canal would revert to Panama. On the latter point the Torrijos government would probably hope to key the time period of the treaty to a firm commitment and schedule for building a new sea-level canal.

14. In aiming for these goals, Torrijos and his advisors must be aware that their hopes that the US might be willing to make important concessions to Panama in order to get on with the building of a new sea-level canal have been undercut by the recent report of the US Canal Study Commission, which concluded that a new sea-level canal would not be needed before 1990, if then. In the meantime, the Torrijos government seems to accept the fact that it does not yet have the technical ability to run the existing Canal by itself nor the power to force the US out completely.

15. The really key issues for Torrijos are those of territorial jurisdiction and economic benefits. At a minimum he is going to demand concessions on these issues which can be presented to the Panamanian people as going beyond the terms of the 1967 draft treaties.⁵ He would thereby be able to claim that the new treaty represents clear progress in meeting Panama’s legitimate demands and hence justifies a temporary extension of US defense rights and control of the Canal.

16. Torrijos seems likely to be most adamant on the question of jurisdiction. He will probably be willing to permit the US to continue to exercise effective control over the operation and defense of the Canal in a reduced area for a fixed period. But he will demand complete Panamanian control over the remainder of what is now the Canal Zone. Similarly he will reject the bi-national court system proposed in the 1967 drafts. He will push hard for full Panamanian legal jurisdiction in principle, though he will probably be willing to negotiate guarantees for the rights and security of personnel working on the Canal and at military bases. He will certainly want to preclude the use of US-controlled areas as sanctuaries for political opponents of the regime—a practice which has often aroused Torrijos’ anger at the US.

17. Torrijos will insist on eliminating the perpetuity clause of the 1903 Treaty. Under the 1967 drafts, Panama’s takeover of the present Canal and related facilities around the year 2000 was based on the assumption that a new sea-level canal would be constructed and remain under joint control until 2067. The existing Canal was to become Panamanian property on 31 December 1999 if no sea-level canal was built. While Torrijos may reluctantly accept a postponement of the decision to build a sea-level canal, it will be extremely difficult for him to agree to a new treaty which provides for indefinite unilateral US control of the present Canal.

18. On the economic side, Torrijos will insist that commercial activities located in the Zone be opened up to Panamanian participation and regulation. Above all, he will want a substantial boost in the $1.93 million Panama now receives from the US as an annual payment. As long as the US meets his overall financial demands on this point, he is not likely to insist on a particular mode of payment, e.g., whether Panama’s share should continue as a fixed annuity, be calculated as a proportion of revenue from tolls, or be based on some combination of these. Whatever the formula, he is certain to insist on a guaranteed minimum amount which will exceed the nearly $20 million annually which would have been provided to Panama under the 1967 treaty drafts.

B. Torrijos’ Personal Role

19. On the critical issues in the treaty talks Torrijos’ personal views and idiosyncrasies are likely to be decisive. Torrijos is inclined to react impulsively; he does not plan ahead or think things through carefully. He tends to make hard decisions only when confronted with unavoidable problems or an actual crisis. Basically an authoritarian personality, he is distrustful of the intentions of others and is fearful of being misled. He likes to run his own show and to feel that he is in full control of events.

20. Torrijos seems, however, to have no fixed ideology or plan for achieving his objectives. A shrewd pragmatist, he frequently changes his mind and switches tactics when convinced a policy is unworkable or doomed to failure. His basic distrust of the US and his strong nationalistic desire to create a better Panama indicate he will go as far as he can to break Panama’s 70-year dependence on the US. But he probably has no firm strategy in mind to achieve his goal.

21. As Torrijos has gained confidence and stature as a political leader, he has become more self-assured about making the big decisions. He has, however, a strong distaste for administrative detail and diplomatic niceties. As a result, though he does not hesitate to assert his authority on even minor details if the spirit moves him, he has come to relinquish considerable control over day-to-day matters to subordinates and advisors. His granting of wide responsibility for running the administrative machinery of government to his close personal friend, President Demetrio Lakas, is the major example.

22. It is thus likely that Torrijos will set the tone and make the important decisions on Panamanian demands and tactics in the treaty talks. He will rely heavily on experts and advisors, however, to carry on the day-by-day negotiations. Within limits set by Torrijos, the negotiators are likely to have considerable leeway to work out specific details. In addition to Lakas, whose personal knowledge and experience with the US and its political processes are likely to prove valuable to Torrijos, the major Panamanian figures in the negotiations will probably be Foreign Minister Tack and the Panamanian Ambassador to the US de la Ossa. Both men tend to share Torrijos’ generally hard-line attitude toward the US. Beyond this immediate circle, Torrijos may also draw occasionally on the experience and possibly more moderate views of those experts who were involved in the 1965–1967 negotiations—men like Galileo Solis, Fernando Eleta, and Roberto Alemán. He may discuss some of the issues informally with his colleagues in the Guard, and he will listen to individuals and delegations representing business and other private interest groups. In the end, however, Torrijos himself will make the final decisions, and much will depend on his personal reactions as the negotiations proceed.

23. The constraints applied by his various advisors will nevertheless constitute a braking influence on Torrijos’ rasher impulses. During the early phases of the discussions, Torrijos is likely to stop short of a flat challenge to the US on any major issue. Outside the negotiating process he will probably try to avoid provoking the US to the point where the talks are jeopardized. But he will want to keep the pressure on. Misgivings about the good faith of the US and his fear of being maneuvered into a bad bargain will prompt him to maintain a tough public stance. He is likely to keep the government-controlled media well supplied with official pronouncements and unofficial leaks to maintain popular support for Panama’s objectives and general negotiating position. As long as the talks appear to be going well, however, he is unlikely to permit specific issues to be aired publicly and he will probably keep the government’s propaganda campaign in low key.

24. In one sense, negotiating with the Torrijos government will be easier for the US than dealing with the Robles government on the 1967 drafts. Under the Torrijos government partisan political activity is at a virtual standstill. Torrijos does not have to worry about political pressures—at least in the short run. There will be no public attacks on his negotiating position by opponents in the public media trying to force him off balance. Though outside groups and politicians will try to exert pressure on Torrijos behind the scenes to protect their special interests, they will not be openly vying with one another to advance their objectives or to demonstrate their anti-US nationalist credentials. To the extent he chooses to do so, Torrijos can control all public media, keep the details of the negotiations private, and build a consensus to support any agreement which he can show significantly advances Panama’s nationalistic goals.

V. VARIOUS POSSIBLE OUTCOMES

25. It is possible that an early and comprehensive agreement can be reached. As noted earlier, Torrijos seems willing to accept the two basic requirements of the US—control of the Canal and responsibility for its defense—provided he can get concessions on jurisdiction and economic benefits significant enough for him to claim a major advance toward Panama’s goal of full and effective sovereignty over the Canal Zone. He will certainly try hard to reach such an agreement. If he achieves it, he would probably have little problem in arranging for some type of popular ratification.

26. The complexity of the issues involved in drafting a new treaty, however, plus the difficulty for the US in going much, if any, beyond the concessions made in 1967, will be important obstacles to a quick agreement. On the Panamanian side, the various specific negotiating problems are complicated by Torrijos’ volatile personality, his determination to extract major concessions, and the emotional coloration which the whole question carries for Panamanians. There would seem to be a strong chance, therefore, that a new treaty covering all the aspects of the Canal issue cannot be completed within a year or so as presently desired by both parties. It also seems unlikely that Torrijos, given his sense of urgency, will be content to have the talks drag on for any extended period of time, or be suspended, even if US domestic political considerations were to make such a slowdown desirable.

27. If it becomes clear that will not be possible to reach agreement on a comprehensive treaty within a year or so, there is a reasonable chance that Torrijos would be willing to accept a package of US concessions, short of complete replacement of the 1903 Treaty, which he could present convincingly to the Panamanian people as a major national achievement. Such a package would have to include a significant increase in income from the Canal and expanded jurisdiction over certain Canal Zone installations and territory, e.g., the transfer to Panama of some such areas and facilities as the Cristobal Port, Old France Field in Colon and the Canal Zone schools for Panamanians, and the opening up of the Canal Zone to private business under Panamanian law. It would have to enable Torrijos to claim plausibly that he had made impressive gains and, at the same time, to maintain that he was continuing to push for a new treaty which would fully meet Panama’s national aspirations. Such an arrangement could give the US a few more years of tolerable if uneasy relations with Panama under the basic 1903 Treaty, perhaps until a decision on a new sea-level canal had to be made.

28. On the other hand, if an impasse developed in the negotiations, and particularly if Torrijos concludes that the US negotiators are stalling, he would be likely to shift to a hard line. In such circumstances he would probably align himself with rising anti-US sentiment elsewhere in the hemisphere. He would seek support for Panama’s position from other Latin American governments engaged in anti-US actions of their own. He might even make some gesture toward establishing relations with the Soviet Union or Cuba, though cooler heads would advise him that such actions might be more likely to harden US public opinion against a new canal treaty.

29. Torrijos might also decide at the same point to take action against one or more local enterprises in which US business has investments. He seems satisfied that US private interests—mainly in bananas, petroleum refining, utilities, banking, and small commercial enterprises—are performing adequately. For the most part, these enterprises are either too small, too remote from Panama City, or too vital to the Panamanian economy to provide an exploitable target. Torrijos may still hope, however, to publicize certain real or imagined problems to increase pressure on the US. The Panama Power and Light Company (Compania Panamena de Fuerza y Luz), a wholly-owned subsidiary of Boise Cascade, might furnish such an opportunity. The government has already been exerting pressure on this company with respect to utility rates. Torrijos could step up his harassment by imposing new stiffer regulatory measures or by staging some sort of public demonstration against the company, or both. However, he would probably stop short of expropriation.

30. By taking—or perhaps simply by threatening—such actions as these, Torrijos would probably hope to impel the US to a more forthcoming position, either in the context of an interim agreement or a comprehensive one. But pressure tactics of this sort have a certain dynamic of their own; it is quite possible that what Torrijos had initiated as a controlled crisis would get out of hand and lead to a complete breakdown of negotiations. In this event, Torrijos would try to structure the situation so that the US would be blamed for the rupture. His moderate advisors would seek to play a go-between role and to find some basis for agreement. But the growing anti-US pressures around him would reinforce his personal inclination to strike back at the US.

31. In these circumstances, Torrijos personality and basic attitudes, his nationalistic desires for Panama, and his preparations for putting pressure on the US—all would push him toward a violent confrontation with the US. Ultimately he would probably decide to follow the pattern of 1959 and 1964 and to encourage student and other extreme nationalist elements to mount demonstrations against the Canal Zone. He would be almost certain to adopt such a course if the impasse with the US were the result of Congressional repudiation of an agreement reached by the negotiators which was acceptable to him.

32. If, as is always possible in the volatile atmosphere of Panama City, such demonstrations began to get out of hand, Torrijos would be reluctant to order the Guard to take effective control measures for fear of losing his popular support. In these circumstances, Torrijos might decide he has no choice but to plunge ahead with his challenge to the US. With the backing of the Guard and the nationalistic response of the masses, he could probably sustain a confrontation in one form or another for some weeks. In opting for such a drastic course, he would hope that the US would be willing to make further concessions rather than face the public storm over continued bloody clashes along the Canal Zone border.

1. Source: Central Intelligence Agency, NIC files, Job 79–R01012A, Panama and the Canal Treaty Negotiations. Secret.
2. The CIA reviewed key political and economic events in Panama during President Torrijos’s regime and concluded that Torrijos will demand more concessions for Panama than were contained in the 1967 treaty drafts. For the Panamanian leader, the key issues were jurisdiction over the Canal and a substantial increase in economic benefits for Panama.
3. About $41 million of the deficit was financed with short-term and medium-term funds from New York banks. Another $13 million was obtained from domestic sources, including bond issues. The remaining $10 million was financed with long-term, low-interest bearing loans from US AID, the Inter-American Development Bank, and the World Bank.
4. Panama receives a $1.93 million annual annuity from the US under the present Canal Treaty. Panama’s gross income from wages and services in the Canal Zone totaled approximately $161 million in 1969, or almost 18 percent of gross national product.
5. The 1967 draft treaties granted Panama a number of significant concessions. First, Panama was to receive more money. Instead of a fixed annuity of $1.93 million, it was to be allotted a share of Canal revenues amounting to almost $20 million annually. Second, Panama was to gain territory. Some of the land that is now part of the Canal Zone was to revert to Panama. From the remaining territory a Canal Area and a number of US-controlled defense areas would be created. Third, Panama was to gain a voice in the administration of the Canal Area and in the operation of the Canal. Instead of the present Canal Zone government, the drafts proposed a bi-national administration governed by a board of five Americans and four Panamanians. Instead of US courts with exclusive jurisdiction over all crimes committed within the Zone, a Canal Area court system was to be established with an equal number of US and Panamanian judges. Finally, the perpetuity clause of the 1903 Treaty was to be abolished. Panama was to receive the present canal and related facilities around the year 2000; it would receive the projected new canal by 2067.