Created: 8/28/1968

OCR scan of the original document, errors are possible


Document #



Panama: Prospects for Relations With the US

SubmHIod by




The following intelligence organizations participated in the preparation of this esfimatot

The Central Intelligence Agency and the intelligence organization* of theof State and Defense, and the NSA.

Mm. Rufus Taylor, Do poly Director, Central Intelligence

Mr.he Director of Intelligence and Research, Deportment of State

Vice Adm.owrance, for the Director, Defense Intelligence Agency

Lt. Gen. Marshall S- Carter, the Director, National Security Agency

Dr. Charles H. Relchardt, for the Assistant Genanager, Atomic Energy Corn-



Mr. William O. Cregar, for the Assistant Director, Federal Bureau of Investigation, the subject being outside of his jurisdiction.













C Longer Bon Ctniidcraboro




To assess the situation in Panama and the outlook for new canal treaties.


Arias, who is scheduled to take office asctober, is committed to securing canal treatiesappear more favorable for Panama than those negotiatedUS7 and to carrying out some part of his extensivedomestic reforms. His success in these exceedingly difficultindeed his tenure of office, wit) depend heavily on hisodus Vivendi with the hitherto hostileational Assembly strongly influenced bythe oligarchy.

believe that Arias, who was summarily deposedtwo previous terms as President, will initially move withon many sensitive domestic issues. Though he has aof being unfriendly to the US, he is now apparentlyreasonably harmonious relations are essential not only fornew canal treaties but for the overall success of his administration.

major areas of contention during negotiations willbe over issues of Panamanian sovereignty and the size of thethe primary sources of Panamanian resentment underarrangements. If Arias can present to the assembly0 treaties that appear to be more favorable than thoseby the preceding adnimistration, we believe the chanceswill be better than even. Proposals submitted afterhowever, would become involved in the election campaignand their chances sharply diminished.

treaties approved by Panama, under Arias or anyfailed of ratification by the US, relations betweencountries would become seriously strained for an extended period.

the longer run, whether or not Arias survives inwhether or not he obtains approval of new treaties, the USPanama will remain the central issue in that country's politicalfact, canal treaties approved by one administration wouldbe challenged in subsequent elections. Thus, over thefuture, there will probably be recurrent strains and crisesrelations, particularly during election years. Ifforced out of office, anti-US extremists would have angarner support among bis followers.



he Republic of Panama proclaimed its independence from Colombia. Onovember, Panama's plerripotentiary, the French promoter-engineer Philippe Bunau-VariUa,reaty granting the US the use and control, in perpetuity,anal zoneiles wide in returnaymentillion and an annual rental0 in gold.he Panamanian Government was organizedonstitution was drawn up.

ver since then, the country's special relationship with the US has been the key factor in its economic development, and has repeatedly been involved in its domestic politics. This is mainly because the Canal, which is owned, operated, and defended by the US, is both the country's most important economic asset (generating altogether at least two-fifths of Panama's gross national product and two-thirds of its foreign exchange)onspicuous reminder of itsstatus. Panamanians have always resented the terms under which tbe canal is operated, particularly tbe provision authorizing the US to act as it would "if it were the sovereign'* over the Canal Zone that cuts the country In two, "to tbe entire exclusion of tbe exercise by the Republic of Panama of any such sovereign rights, power, orhis resentment has served to imbue Panamanian politics with an intensity of nationalistic feeling which is unusual even for Latin America, and which is continually exploited by the oligarchy to divert attention from tbe excessive share it taxes of tbe material benefits derived from the Canal and other economic activity.

anamanian efforts to change this basic relationship have produced some modifications In the treatyor example, the US, which had previously sent troops into Panama on several occasions, relinquished its right to intervene to guarantee Panama's independence and adjusted the annual pay.

ment for use of the Canal Zonehe payment was increased"nd the US agreed to provisions extending substantial employment and commercial benefits to Panamanians. But such changes fell far short cf tbe hopes of the Panamanians both for Increased government revenue from the canal and for recognition of their sovereignty over this national asset.

S-Panamanian relations continued gradually to worsen, and ln4 it minor incident involving sovereignty In tho Canal Zone triggered serious riots In Panama City and Colon. The riots, and Panama's subsequent breaking of relations with the US, dramatically underscored the need for changes in tbe existingrrangements. By4 the two governments had agreed to seek prompt elimination of the causes of friction, and diplomatic relations were restored. At first, progress was facilitated by the cooperative attitude of the administration ol President Marcos Bobles (elected in May and, and the assurances of President Johnsonhai tlie US was willing to negotiate new treaties with the Government of Panama. But it took untilo negotiate them; what emerged were proposals for three new treaties for tbe operation of tbe present lock canal, for die buildingew sea-lcvel canal, and for the defense of theurthermore. Bobles* inept presentation and defense of tbe proposals were quickly exploited by those opposing them' this fact and the approach of the election8 made it impossible toonsideration of tbe proposals on their merits.

lie Panamanian elite groups that bad supported Bobles4 split over his attempt lo impose David Samudio. bis Minister of Finance, as bis successor. While some oligarchs accepted Samudio. despite his profession of liberal and reform-minded ideas, others came to terms with their traditional opponent. Aroulfo Arias, whoan of considerable wealth is also the leader of Panama's onr/ mass-based party. Despite the all-out efforts of thein an election campaign markedegree of violence, fraud, and official Inlerference unusual even for Panama, Arias won theubstantial margin. Ills victory was made official only afler General Bolivar ValLarino, head of (he country's defense and police force, the Cuardia Nacional. shifted from obvious support for Samudioosition of insistingeasonably honest count of the ballots.ynicism typical ofpoliticians, the Samudio forces, which earlier had supported the treaty proposals, now denounced AriasS puppet, imposedS-dominated Guardla Nacional to secure new treaties more favorable to the US than to Panama. There is still an outside chance that Arias may not be permitted to take officectober a* scheduled


s president. Arias will lace major problems In three different butvpheres: (a) in his relationship with General Vauarino and the Cuardia Nacional, which remains Panama's final political arbiter, (b) in maintaining

' SewKey Aipect* ofreaty PropoMib "

supportational Assembly strongly influenced by tbe oligarchy; (c) incanal treaties with the US on terms which at least appear better than tbe Robles government couldyet are still acceptable to both countries. Serious miscalculations or missteps in any one of thcso spheres would probably cost him bis chance for success in thecould indeed abruptly end his bold on power.

rias* previous record as president of Panama gives little basis farin his ability to overcome these various challenges, or to establish fruitful relations with the US. Arias was president on two previous1ach time he was charged by powerful opponents with arrogance and emotional instability and was removed from office after bo had attempted to override certain constitutional restraints. He sought to keep Panama neutral in World War II, has cooperated with anti-US forces on other occasions, and has charged the US with supporting his removal from office in both his previous administrations. Arias has also indicated that the treatynegotiated with the Boblet admuustration must be renegotiated to bear his personal stamp.

h. We do not know whether Arias has learned from experience; he hasbehaved more arbitrarily and unpredictably when in office than when out of it. Particularly in the last several years hc has behaved with notableAt the thne of the4 riots, he restrained his followers rather than exploiting the situation for short-term political profit. Throughout the long negotiations on new treaties, he confined his attacks to assertions that the Robles government was illegal, and he was noticeably restrained with respect to the substantive issues being negotiated. During the recent campaign, hean extensive but relatively moderate program of administrative, economic, and social reforms closely in line with the concepts of the Alliance for Progress. Hc declared his intention to seek advice and assistance from all sectors interested in the general welfare and has set up committees to study specific problems and to consult on them with US representatives. Ate realizes that this is his last chance to make his mark in Panamanian history. and apparently feelseasonably harmonious relationship with the US is essential to that end-Finally, he Is aware that tbe presence of the Guardia and the strength of tbe conservative forces in the National Assembly provide restraints on Us freedom of action.

III. INTERNAL PROBLEMS A. The Guardia Nactonal

he most urgent internal problem facing the new administration is Itswith tbe Guardia National Arias and the Guardia have beenenemies. Vallarino only reversed his commitment to Samudio when it became apparent that Arias wasajority too large to be easilyby manipulation of the election returns. Moreover, in the counting of the votes for seats in the National Assembly, Vallarino and Arias each intervened

directly in in effort to ensure the election" of deputies favorable to bisinterest.

he role played hy the Cuardia Nacional in the election campaign8 marked the cod of an ra tended period during which it had abstained from direct and forceful intervention in national polities. Since overthrowing Ariasts leaders had served as the loyal supporters of subsequent administration*the oligarchy, and had concentrated On using US assistance to improve the professional skills and equipment of tbe Cuardia- Though Vallarino and other key officers eventually acquiesced in the election of Arias, they stillhim and frar that he Intends to bring the Cuardia under lus direct control. Thus Arias will face formidable opposition from both the Cuardia and the oligarchyttempts to dorninate the Guardia nnd to end its role as the final arbiter of Panamanian politics. Or to force reform measures through the Nutiortal Assembly.

U. Tho way In which Arias handles the Guardia will be crucial to his survival io office. If he attempts to make changes not acceptable to its leaderslup, there is at least an even chance that the Guardia will take steps to remove him. The outcome might then depend oo whether Arias could bring his followers Into the streets in large enough numbers to face down the Cuardia. On the other rand. If Arias moves dowry and carefully with the Guardia leaden, he can probablyodus vnendi with them. But this would be atragile truce, and the Guardia would con tin ne toestraining influence oo Arias.

B. The National Assembly

The National Assembly is scheduled to convenectober, but the manipulation of !hr election returns and award of seata are ttill In progress. It appears possible that Arias' National Union coalition may wind up with as many as two-thirds of theeats. Although his PanameflUta Party Is the largest political movement in Panama, it wiU probably hold not more thaneats. The romulnder of Arias' support will be divided among the lour small political parties that Itrokewtth the Bobles administration. Now that tho election Is over, the coalition partners are much more concerned with advancing their particular interest* tliau with assuring the success of Arias' program. Thus Arias will be faced with the necessity of making arrangements with party leaders and Individual deputies to secure the necessary majority on each measurelegislative approval.1

The most important of the four parties in the political coalition opposing Arias is Samudio's National Liberal Party. Samudio has maintained anattitude toward Arias and will almost oertainly continue to oppose him. The other parties io the opposition, however, have uroited followings

' Son* -neeM-ntt requireiforCy of the tScponec prewii while other* most acctae mo absolute) of the laexbenAip. Trsatiei appear to fall In Uwategory, but aome irijiie dial treaties may be affected by procedural role* of ihe Aaaombly which could require approval bytwo-thirds vote of the total membeabip.

and also axe primarily vehicles lo serve the Interests of their leaders. At least some of them arc likely to seek an arrangement with the new administration to protect these interests.esult Arias will have some bargaining power with them, particularly in the first years of his administration.1

C. The Economic Situation

The Panamanian economy has been expanding fairly rapidly in recent years, but most of the population still lives at ox near the subsistence level1 Also, though Ihe rate of unemployment has been decreasing, it continues at aboutercent fn tbe most important cities. Panama City and Colon, where there is also considerable underemployment. It is, of course, these cities that show the most conspicuous contrasts between the poor on the one hand and tho wealthy Panamanians and the US.dozens in the Canal Zone on the other. Aboutercent of the country's population Is engaged fn agriculture; half the farmers are essentially outside the money economy and are ill fed, clothed, and housed. These problems are intensifiedercent annual rate of growth in population. The population, nowillion, has doublednd will probably double again

During the first half8 the unsettled political situationlowdown in private investment and tourism. The new administration probably willepleted national treasury but will have availableillion in US aid previously authorized and not yet disbursed. Moreover, much of the momentum for economic growth follows automatically from activitieswith the canal. Thus, unless there Is prolonged or recurrent political unrest that continues to discourage investment and tourism, tbe economy will probably resume its rapid expansion. Vet even if the Arias administration carriesumber of its proposed programs in behalf of the poor, the reduction of the widespread poverty will proceed only slowly.

IV. RELATIONS WITH THE US A. Outstanding Problems

basic and continuing problem in relations with the US is thatinstitutions and leadership are inadequate to deal rationally withas charged with hypernationalism as the canal issue. The populationfrom ejdsllng trealy arrangements; the oligarchy, handsomely so.canal Is viewed by Panamanians generallyort of treasure trovehave been sequestered by foreigners and which must be retrieved. Thus

' Panama has alao various extreme leftist. pro-Castro! te. and Communist groups that have tiled, with little success, either to infiltrate the pro-Arias farces or to spur opposition to Arioj. These ara all small in numbers, and have been important only in their ability toituation such asone of them Ishe National Assembly.

' Panama's CNP has been mcteasmg by about eight percent per year. Per capita CNF (estimated at0s already weD above the average for La (Jo America.

hisseek terms acceptable to Panamanianat the risk of disrupting the economic benefits that flow from tbe present US-Panamanian relationship.

In renegotiating the canal treaties, the issues involving sovereignty will probably be more serious than the size of the payments to Panama and the day-to-day details ofanal In fact, eventual Panamanian control of the canal and an early substantial increase in Panama's role in itsare Issues on which no Panamanian politician can give much ground and long survive. Many Panamanians resent the presence of US personnel employed in the Zone, whose jobs, wages, and standard of living contrast sharply with their own.

The arrangements for the defense of the present canal and of any future sea-level canal arearticularly sensitive Issue for the Panamanians. The political leaders generally recognize the need for US forces to protect the lock canal, but public opinion is strongly in favoreduction in the large US military presence. The traditionally close relationship between the US defense forces and tho Guardia Nacional also becomes involved in domestic politicsthe Guardia takes action some political group considers hurtful to itsThe small size (feweren) and relative weakness of the Guardia reinforce the impression, held not only by the Guardia itself but by most Panamanians, that ultimate power and control over Panama rest with the military forces of the US stationed in the country.

Other Latin American countries are also interested in Ihe results of the negotiations for new canal treaties- Although the Latin American countries generally tend to sympathize with Panama, few if any are inclined to subordinate their own interests to those of Panama. The west coast countries, particularly Peru and Chile, are concerned lest new treaties result in sharply increased tolls for transit of their exports and imports. Fromoercent of thetrade of Chile, Ecuador, and Peru passes through tbe canal, aboutercent of Bolivia's, andoercent of Colombia's. Colombia is concerned that new treaties will disrupt its special transit rights throughincidentally are another bone of contention between the US and Panama.

The Panamanians appear confident that the US will construct the new sea-level canal in Panamanian territory, but the site has not beenS team has beenoute through the eastern part of the isthmus (the Sasardl-Mortin area so sparsely populated that the use of nuclear devices In excavation of the site is being considered (seese of nuclear explosive devicesanal, however, would require an amendment to the Test Ban Treaty5 Such an amendment is not likely to be adopted soon enough to permit specific agreement on nuclear excavation ofanal to be reached during the Arias administration. Other sea-level routes are also

'An amendment requires the concurrenceajority of the stgaatortcs, including the US. the USSR, and tlie UK.

being considered; one in the Zone, one in Panama near the Zone, and one in Colombia.*

B. Short-Term Prospects

Arias* majority in the National Assembly is large bat tnherendy unstable. We think that while Arias will attempt to enact some portions of his domestic program, including less controversial aspects such as construction of public housing, schools, and roads, he will husband his majority for consideration of the treaties he expects to negotiate with the US. If the treaty proposals can be submitted before the latter partnd if Arias is able to show that be has obtained more favorable terms than Robles, thereetter than even chance that the National Assembly will give approval. If not, the chances for approval will be slim and the treaties are apt to be delayedny proposals submittedven if they included more favorable terms, would almost certainty become involved In the presidential campaign

We believe that Arias willigh priority to his acmunistration's relationship with the US because he realizes that if he can secure treaties with more favorable terms his personal prestige will be considerably erihanced and his chances for carrying out domestic reforms improved. He appreciates the considerable impetus the Panamanian economy would receive, at least In the short run, from tbe initiation of activities involved inea-level canal.

In sum, we judge that the administration scheduled to assume office3etter chance of securing approval of new treaties and of certain aspectsomestic reform program than obtainedr would obtain under any likely successor, We think that Arias' interest in the smooth progress of relations with the US willoderating Influence upon his actions. If he attempted to move too rapidly or too arbitrarily the Guardia would probably remove him from office with the approval of the Panamanian elite.

C. Longer Run Considerations

hether or not Arias survives in office, and whether or not he obtains approval of new treaties, the US presence in Panama will remain the central issue in that country's political life. If Arias is not abla to secure that approval, the Panamanian political system is not likely to produce another leader who can, at least for some yean to come. Approval of the treaties by an administration controlled by the Guardia would be regardedetrayal of Panamanian interests, especially as the Cuardia has frequently been depicted in Panama as

"Colombia has alao undertaken rtudiesdetermine the feaslbiUry ofolti-purpoee protectock-type canal, bat thb would only ewve ablpa oi Umitedoute througho longer being considered; construction by conventional methods would cuit upwardsillion, and nuclear excavation would require the resettlement of One million people.

controlled by the US Government Furthermore, i( Arias were removed by the Guardia, anll-US extremists wouldavorable opportunity to garner support among his followers. This might result in the emergenceass political movement under virulently anti-US leadership.

As we havo Indicated, the constructionew sea-level canal wouldonsiderable impetus to the economy. But once the new canal became operational, perhapsears after agreement, the indirect benefiuea-level canal would significantly decrease, because it would require much smaller forces to operate and defend it If the new canal is remote from the two large cities which prosper from the location of the present canal, their economic problems will becomehus measures to case the effect on theeconomy, such as increased US assistance for development of other sectors of tbe economy, would probably be required before the new canal opened

If the Panamanian Government approved more favorable treaty terms, and those terms then failed of ratification by tbe US. there wouldroadly based and bitter anti-US reaction in Panama, and US-Panamanian relations would probably be variously strained for an extended period.

The chances for ratification by Panama of treaties dealing with such vital mailers as canals and bases will decline sharply if not disposed ofanamanian election campaign begins. Even then, the provisions of treaties arranged with ono administration almost certainly will be condemned asby the opposition and made an issue in the noxt election. In short, wc expect that over the foreseeable future there will be recurrent strains and crises in US-Panamanian relations, particularly during election years.

' Nearlyercent of urban employment in Panama City and Colon Lt related directly or indirectly to operations of the present canal,


There are three proposed treaties: the Lock Canal Treaty, to govern all aspects of tie present canal; the Sea-Level Canal Treaty, toew mterocean canal; the Defense Treaty, to provide for the security and neutrality of both canals.

Tho Lock Canal Treaty would supersede all presently existing treaties.areas needed for operation of the canal are designated as the Canal Area, which is to be administeredoint Administration. Other areas areas Defense Areas pursuant to, and administered under, the Defense Treaty. All other parts of the present Canal Zone revert to Panama.

The Administration of the Canal Area will be governedoard of nine members, five appointed by tbe President of the US, four by the President of Panama. The chief executive officer of tie Administration willeputy; one willS national, theanamanian. The Administration hasrights and powers in connection with operation of the canal and theof the Canal Area, and can make laws relating thereto. Certain criminal laws can be enacted onlywo-thirds vote of the Board. Legal matters within the Administrations Jurisdiction wiD be negated In courtsby the Administration. With respect lo all other matters, Panamanian law applies and Panamanian courts have Jurisdiction. The treaty continues certain rights and benefits enjoyed by employees of tho present Panama Canal Company and Canal Zone Government as well as specified privileges toby such US agencies as the Public Health Service, Smithsonian Institution, and Coast and Geodetic Survey.

The canal, the Canal Area, the Admmistration, and ships passing through the canal will (with minor exceptions) be exempt from Panamanian taxes andduties. Employees of the Administration and residents of the Canal Area will not (again with certain minor exceptions).

Tolls, payable in US dollars, will be established by the Administration. Panama is to receiveents per long ton of commercial cargo, rising in five years toents (this could have providedillion in fiscal. The US is toents per ton, increasing in two years toents.proceeds from the Administration's revenues arc to be shared equally between Panama and the US.

The canal will remain neutral and open to vessels of commerce and of war of all nations on nondiscriminatory terms.

The Lock Canal Treaty will expire at the end9 unless superseded by the Sea-Level Canal Treaty. Property not needed for the sea-level canal will revert to Panama.

The Sea-Level Canal Treaty is considerably looser. It gives the US the right toea-level Interocean canal; the US must give notice of its intent lo

do so withinean of lie entry into force of tbe treaty. The US cannot construct an intcroccan canal in any other country duringyear option period, unless by notice to Panama it surrenders its option. And during tbe option period, Panama may not construct, or agree to let othersanal in Panama. The US is responsible for design and construction of the canal and may, subject to Panama's agreement, use nuclear excavation methods consistent with IAEA standards. The US, after consultation with Panama, may let other states, organizations, and individuals participate In financing canal construction. Or Panama, in agreement with the US, can undertake the financing.

Within general areas defined by the treaty, Panama will provide the use of land and water areas needed to construct and operate the canal. Where there Is no private interest on the date the treaty is signed, Panama will provide the necessary areas without cost; otherwise the US will pay compensation as part of the construction cost.

The canal will be operated and maintainedommission, governedoard of nine members, five appointed by the President of the US, four by the President of Panama. If others participate in the financing, provision can be made for their representation on tbe Board. Either the chief executive officer of the Commission or his deputy willS national, the other will be Panamanian,

The Commission's rights and powers are spelled out in some detail. They are designed to provide the necessary authority to operate and maintain the canal. Panama Is to be the preferred source of certain specified goods and services, provided quality and cost ore satisfactory. Panama Is responsible for law enforcement; security is covered by the Defense Treaty; the Commission may "adopt measures for the protection of tbe sea-level canal installation."

Broad exemptions from Panamanian taxes and customs duties ore provided for both construction and operation of the canal, though the Commission must pay Panamanian taxes on commercial enterprises it operates.

Canal tolls and payments to Panama are to be fixed in the agreements for financing construction; the treaty Itself merely specifies certain factors to be considered:contribution by Panama of its territory, resources contributed by others, the interests of world commerce.

Provisions for neutrality and nondiscrimination arc like those in the Lock Canal Treaty.

The treaty remains in force forean from the opening of the canal (though not, or until the option to build it expires or Is surrendered. All property and rights then revert to Panama.

Tbe Defense Treaty gives the US the right to use for Canal Defense (which is defined) certain specified areas. These are essentially the same installations now existing in the Canal Zone, though some are to be relinquished, and though

Ihe list Is subject to revision by mutual agreement if and when the sca-lovel canal is built. The operational rights given to the US are in substance those it presently enjoys.

The status of US armed forces and accompanying civilians Is to be roughly as provided in the NATO status-of-forces agreement. Exclusive US jurisdiction over US personnel in the Canal Zone and exclusive Panamanian jurisdictionthe Zone are to be replacedountrywide system of concurrent jurisdiction.

Th* Defenseerminates Sve years after termination of tho Lock Canal Treaty, or until the US no longerreaty obligation to Panama to defend an inleroceanic canal in that country, whichever is later.

A separate exchange of notes gives tha US tlie use of training and maneuver areas at Rio liato forears, renewable for successive one-year periods.



document wa* disseminated fay the Central Intelligence Agency. Thisfor the information and trie of the recipient and of persons under his jurisdiction onbasis. Additional essential dissemination may ba authorized byofficials within their respective departments!

of Intelligence and Research, for the Department of Stole

Defense Intelligence Agency, for the Office of the Secretary of

Defense and Ihe organization of tho Joint Chiefs of Staff

Chief of Staff for Intelligence, Department of the Army, for Ihe

Department of the Army

Chief of Naval Operationsor the Departmenl of the


Chief of Staff, Intelligence, USAF, for the Department of the Air


of Intelligence, AEC, for the Atomic Energy Commission

Director, FBI, for the Federal Bureau of Investigation

of NSA, for ihe National Security Agency

of Contra! Reference Service, CIA, for any other Deportment or


This document may he retained, or destroyed by burning in accordance with applicable security regulations, or returned to the Central Intelligence Agency by arrangement with the Central Reference Service, CIA.

When this document is disseminated overseas, iho overseas recipients may retain iteriod not in excess of ono year. At tho end of this period, the document should either be destroyed, returned to the forwarding agency, orshould be requested of the forwarding agency to retain ft In accordance with2



National Security Council Department of Stat* Deportment of Defense Atomic Energy Commission Federal Bureau of Investigation

title of this document when used separately from the text should be clas-

Original document.

Comment about this article or add new information about this topic: