Foreign Relations of the United States, 1977–1980, Volume XXIX, Panama

65. Minutes of a Policy Review Committee Meeting¹

Washington, July 22, 1977, 11 a.m.

SUBJECT

• Panama Canal Negotiations

PARTICIPANTS

• State

  • Secretary Cyrus Vance
  • Richard Cooper
  • Terence A. Todman

• Negotiators

  • Ambassador Ellsworth Bunker
  • Ambassador Sol Linowitz

• Treasury

  • Secretary Michael Blumenthal
  • Arnold Nachmanoff

• Defense

  • Charles W. Duncan
  • H. Juckly

• Office of the Secretary of the Army

  • Clifford Alexander
  • Lt. Colonel William S. Carpenter

• Joint Chiefs of Staff

  • Lt. General William Y. Smith
  • Lt. General Welborn Dolvin

• CIA

  • Dr. Robert Bowie
  • [name not declassified]

• NSC

  • Zbigniew Brzezinski
  • David Aaron
  • Thomas Thornton
  • Robert Pastor (Notetaker)

SUMMARY

The Last Round of Negotiations

Ambassador Bunker began by reviewing the latest round of the negotiations, which has focused on economic arrangements. The Panamanians began with a proposal which called for extremely large payments to the Panamanians; they have since reduced their claims by about half, although it still remains too high for us. Our Negotiators informed their counterparts that the President would only accept compensation by way of toll increases, and they offered 25 cents per canal ton (requiring approximately a 25 percent increase in tolls). They have since increased their offer to 30 cents. This could probably generate about $50 million in revenues to Panama, though no one can be certain. It is possible that a further increase in tolls (two increases in the past three years have totalled 50 percent) would generate lesser revenues, perhaps a deficit. While raising tolls does not require Congressional approval. Undersecretary Cooper pointed out that Congressional approval might be necessary to get the increased revenues transferred to Panama.

Lands and Waters

In response to a question by Secretary Vance on whether the part of the treaty dealing with the transfer of lands and waters to Panama was completed, Deputy Negotiator General Dolvin explained that the Panamanians had just reopened that issue and made demands for bases (including all those on the Atlantic side), which the JCS consider essential for the defense of the Canal. Ambassador Linowitz explained that Torrijos feels that he needs the complete support of the National Guard to defend the neutrality treaty, and thus he appointed Colonel Contreras to the negotiating team, and Contreras has just upped the ante.² There are also other labor-related issues which have been raised recently, and remain to be negotiated.

Sea-level Canal

Linowitz said that the President’s remarks in Yazoo City introduced a complicating factor into the negotiations.³ During the last round, the Panamanians asked to be compensated for the right to an option to build a sea-level canal. The Negotiators rejected that proposal, but in the light of the President’s remarks, they believe the Panamanians will ask for more money for the sea-level canal option. They are also concerned that it will hurt our efforts to persuade Congress, which will wonder why a new treaty for an obsolete canal is necessary. Bunker agreed with Linowitz that it will delay negotiations, and that Gravel’s proposal for enabling legislation to transfer some facilities to Panama would delay and conceivably jeopardize the negotiations and ratification of the final treaty.⁴ Moreover, debate on the “enabling legislation” would raise all the questions—in particular, jurisdiction—that a new treaty would raise, only it would call for two battles instead of just one.

Vance said he was not aware of Gravel’s desire to delay the signing of the treaty, and he felt that Gravel’s proposals for a sea-level canal were not yet finalized. Both Vance and Brzezinski said that the President’s remarks could conceivably strengthen rather than weaken our bargaining position vis-a-vis Panama. If a sea-level canal will be valuable and if Panama cannot finance it without our guarantee, then our hand will be strengthened, particularly when Panama realizes the money that will flow into Panama during construction.

Economic Arrangements

Cooper outlined the “ideas” which were suggested to Panamanian negotiators as a way to be responsive to their economic demands. In addition to the annuity of $50 million through the increase in the tolls, the “package” has come to include:

1. A pre-commitment by the Export-Import Bank to loan up to $200 million (the Panamanians were told about only $100 million, and the Export-Import Bank subsequently increased it) for specific projects over a five-year period after a treaty is ratified.

2. Investment guarantees for up $20 million from OPIC.

3. Up to $75 million in AID Housing Investment Guarantees over five years.

4. An increase in $5–10 million in AID loans to Panama. (AID opposes this as well as the Housing Guarantees (HIG) because Panama already receives much more in loans than its size or per capita income would warrant. Representative Fascell would need to be consulted on the HIGs because he is opposed to using it for resource transfer.)

5. Use $10 million of the interest payments to co-finance with Panama up to $200 million in capital development projects in the Zone.

This summed to $495 million in loans and guarantees (without the AID loans). Treasury Secretary Blumenthal said he favored the OPIC guarantees least since Congress would view it as backdoor financing. The housing guarantees were O.K. with him. Blumenthal said that the data on Canal revenues were not adequate to judge how much a 30 cent per ton increase would provide in revenues, and he asked who would pay for the deficit. He recommended that we tell the Panamanians that we will not guarantee any revenues to them.

Linowitz said that Barletta expected that the $200 million loan (which would be financed by $10 million in interest payments) would become a grant, and all agreed that he should be disabused of that impression immediately. Linowitz said that our Ambassador in Panama, Bill Jorden, is trying to do that.

Cooper also said that the Panamanians have asked for rent for U.S. military bases, but we have not responded yet. Lt. General Smith (JCS) said we should not pay for bases which we use to help defend them.

Congress

Secretary Vance reminded everyone that the President has not yet approved any of this proposed package. With the exception of the AID loans, he thought that the package would require Congressional consultations, but not appropriations. Though Congress has not yet been consulted comprehensively, he had a preliminary reaction based on conversations with several Senators:

1. Loan money does not bother them.

2. Grants of money to disturb them.

3. They see some justification for paying for bases, though they believe the payment should be small.

Linowitz said that Congress would accept the 30 cents per ton annuity.

Blumenthal said that he had just received a letter from Senator Allen asking him to testify on July 29 on whether it is permissible to conclude an economic package separate from a treaty. Allen clearly believes that it should be part of the treaty, and all at the PRC meeting agreed that for political purposes, it would be perceived as part of a package, even though it might be legally separable.

Negotiating Strategy

Blumenthal asked the Negotiators about the best kind of strategy to deal with the Panamanians: Should we be flexible, giving up our position reluctantly and by increments, or should we present our final, bottomline proposal to them, and make crystal clear, that that is it? Bunker recommended the latter strategy, and said that Panamanian Ambassador Lewis had said as much to him. Linowitz said that we should present a firm proposal but retain a little flexibility at the bottom.

Brzezinski wondered whether we should not pause from negotiations to analyze the economic proposals in greater detail, to assess the implications of the President’s remarks, and to take soundings on the Hill.

Linowitz said that a pause might be interpreted as a break-off of negotiations, and it could very easily provoke riots in Panama. Blumenthal said that we should not take a risk by pausing or stopping, but should continue negotiations.

Presidential Letter to Torrijos/Consulting with Other Latin Americans

Linowitz and Bunker said that they believed there was an urgent need for the President to send a letter to Torrijos basically stating support for the general positions taken. Vance and David Aaron questioned whether a letter would be useful now before soundings were taken on the Hill or before the President reviewed the whole package. General Smith said that the letter should also refer to the lands and waters issue. Clifford Alexander said the letter might be useful for Torrijos: “he needs a victory to get the heat off of him.”⁵

On the question of whether we should communicate with the other Latin American Presidents like Oduber, Lopez Portillo, Perez, and Lopez-Michelsen, Linowitz said he thought it would be counterproductive at this time since Torrijos might perceive it as an attempt to put direct pressure on him.

Summary

Vance summarized by saying that it was “the reluctant consensus” that we ought to recommend to the President that we give serious consideration to a loan-type package, though there is some question about the exact elements and quantities. The memorandum should include a comment on the likely Congressional reaction to this package and also whether the Panamanians will accept it.

Brzezinski said that he felt we had been pushed too quickly to accept the package, and we should pause to reconsider it. Linowitz said that if we can justify it on its merits—basically the need to contribute to Panamanian development so that they can be a complete, stable, and mature partner in the operation of the Canal—then we can sell it. Brzezinski said that we should be sure Congress will accept it before proposing it to the Panamanians.

Vance said there were three questions which needed answering:

1. Will the Congress accept it?

2. Will Panama accept it?

3. Will it be O.K. with the Latin Americans?

Linowitz and Bunker felt that the loan package would be acceptable to the Latin Americans, but they were not sure if it was enough for the Panamanians (and whether it was too much for the Congress).

Cooper said that there were various ways to improve the chances that the Panamanians would accept, though he recognized that these proposals—an income tax on U.S. citizens in the Zone ($7–10 million), bases rental of $10 million, interest payments of $10 million, plus $50 million from toll increases = $80 million—would make it more difficult to sell it to Congress. Blumenthal said that the taxes would be a bad precedent, and would only yield $3–5 million.

Vance concluded the meeting by saying that the letter for the President would be ready by the weekend and the memorandum by next Tuesday.⁶

1. Source: Carter Library, National Security Council Institutional Files, Box 63, PRC 027 Panama 7/22/77. Secret. The meeting was held in the White House Situation Room. All brackets are in the original except those indicating text that remains classified.
2. See footnote 3, Document 61.
3. In his remarks in Yazoo City on July 21, Carter discussed the treaties and stated that, “in the future, I would say that we will need a sea level Panama Canal that can handle our large warships and the large tankers and freighters that are part of international commerce now.” (Public Papers: Carter, 1977, Book II, pp. 1326–1327)
4. See footnote 2, Document 64.
5. See Document 72.
6. July 26. See Document 67.