V. P96//0.-93--C* 95th ConffreM 1 COMMITTEE PRINT 1st Session THE PANAMA (ANAL A REEXAMINATION A REPORT BY SENATOR MIKK GRAVEL i in: COMMITTEE ON ENVIRONMENT AND PUBLIC WOREJ3 CTNITED STATES SENATE .III.V L977 m SERIAL No. 95-6 \\^ Printed for the on "f the Boiftte Oommitl Environment and Public Work> 0.1 (.t'VKKNMKNT PRINTING OIIICI 92-447 WASUINliToN l'.»77 COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS JENNINGS RANDOLPH, West Virginia, Chairman EDMUND S. MUSKIE, Maine ROBERT T. STAFFORD, Vermont MIKE GRAVEL, Alaska HOWARD H. BAKER, Jr., Tennessee LLOYD M. BENTSEN, Texas JAMES A. McCLURE, Idaho QUENTIN N. BURDICK, North Dakota PETE V. DOMEN1CI, New Mexico JOHN C. CULVER, Iowa JOHN H. CHAFEE, Rhode Island GARY HART, Colorado MALCOLM WALLOP, Wyoming WENDELL R. ANDERSON, Minnesota DANIEL PATRICK MOYNIHAN, New York John W. Yago, Jr., Staff Director Bailey Guard, Miniority Staff Director Leon G. Billings and Harold H, Brayman (Minority), Senior Professional Staff Members Philip T. Cummin gs, Richard M. Harris, Richard E. Herod (Minority), and Katherine Y. Cudlipp (Minority), Associate Counsels Professional and research staff: Karl R. Braithwaite, Paul Chimes, E. Kevin Cornell, George F. Fenton, Jr., Randolph G. Flood, Kathaleen R. E. Forcum, John D. Freshman, Ann Garrabrant, Richard T. Greer, Wesley F. Haydex, Veronica A. Holland, Ronald L. Katz, Kathleen A. Korpon, Judy F. Parente, John B. Purinton, Jr., James D. Range (Assistant Counsel, Minority), Jacqueline E. Schafer, Charlene A. Sturbitts, E. Stevens Swain, Jr., Robert Van Heuvelen, Sally W. Walker, and Haven Whiteside (ID (M)NTKNTS ■f transmittal v IntroduotioD 1 Background to the pn 8 J' -nit statement on principlei 5 tion to the proposed new treaty 7 An historical sketch Justice of the L903 treaty Lfl Sovereignty 23 Economic importance <>f the canal 25 me ana the soniani 27 Operation <>f the canal 29 • implications :<1 Economic potential of the Panamanian Uthmui Conclusiona and recommendations. 43 : 45 (III) U. 9 S Commit iKK ON ENVIRONMENT and PUBLIC Work-. Washington, D.( 77. Hon. JENNINGS K LNDOLPH, and PiM c Work • 5 5 Washington, I ' Dear Mr. Chairman: During the period March 17 to 30 I traveled to four Latin American countries: Panama. Venezuela, Argentina, and Brazil. I was accompanied by my legislative assistant, William L. Bonman. In each of these countries I nun with numerous officials and private citizens to discuss a range of topics, especially those relevant to the work of inv Subcommittee on Water Resoui One subject in particular proved to he of overriding importance throughout my travels in Latin America: the Panama Canal and the present negotiations to achieve a new treaty. While many aspects "f this issue are not directly relevant to the jurisdiction of the ( "ommittee on Environment and Public Works, the very fundamental one of the day-to-day operation of a lock^ canal is relevant. This i- an area in which I have developed considerable expertise afl a result of my subcommittee's oversight responsibilities for the Ohio and Mississippi River lock-> systems, and I believe it has allowed me to brine: a new perspective to the operation and economic- of the Panama Canal. In particular. I was impressed during my stay in Panama with the desii ability of a sea-level canal through Panama to replace the lock- canal. Tin- possibility was examined in depth by the Atlantic-Pacific Interoceanic Canal Study Commission, which issued it- report in I believe it is now desirable for the Con g r ess to direct the Army < of Engineers to do an update of the 1<*7tor financial scandal, and finally even a tion when in 1912 the Democrats were returned to power in the B - But despite the intensity and protracted nature of the debate, it was never in doubt that the American people and their elected repre o e n tat »red the canal project. Th politi- cal realty was clearly perceived by Thomas Herran. the Colombian >ter who. even though recalled by ! oment, lingered on in W( . while the Senate debated rat . of the canal treaty. He wrote: . . . The debates will be lonlc in order to deprive him of the Presidential nomination to which he . . . some of the most vehement men in the opposition have declared that in the end they will approve the treaty, because they desire to assure the construction of the canal; but they want to put in evidence the fact Roosevelt is responsible for the iniquities committed in the isthmus, and that his reelection for the next term would be a threat to the country. They are not thinking of repairing the damages but simply placing the blame on Roosevelt . . .* All footnotes at end of report. BACKGROUND TO THE PRESENT CONTROVERSY Almost from the start, the Panamanians have been dissatisfied with the treaty. This is not hard to understand, It- terms errant to the United States '*in perpetuity the use, occupation, and control of a /.one of land and land under water for the construction, main- tenance, operation, sanitation, and protection 1 ' of ■ canal "of the width of 10 miles." The treaty further urant- to the United States "all the rights, power, and authority within the zone mentioned . . . which the United States would possess and exercise if it were the BOvereigD ... to the entire exclusion of the exercise by the Republic of Panama of any such sovereign ris:hN. power or authority." In return for these generous concessions the united States ■g ree d to nay the Republic of Panama $10 million and an annuity during the life of the treaty of 1250,000 raised to $1.9 million in 1955 and subsequently adjusted f<>r inflation in 1971 to $2.3 milli In an effort to improve relations with Panama, the United States revised the 1903 treaty in two subsequent treaties of 1936 and 1955. Hut the main disagreement over sovereignty remained unresolved, and Panamanian criticism of the treaty a- a vestige oi colonialism mounted. In November 1958 Panamanian natimiali-t- inarched on the Canal Zone to implant Panama's Has:, causing serious riot-. In September I960 President Eisenhower ordered that the Panama- nian Has: he raised next to the flae of the United Mate- in Shaler Triangle, ami m 1963 a joint I'.S. -Panamanian CommissioD decided that the two flags should he tlmvn together at most public buildings, excluding schools, where n<> flags would he tlown. In January 1964 Panamanian students attempted to raise the Republic's flair alongside the already raised American | high school in the ('ana! / and riot- broke out again, this time resulting in serious injuries and death- and a rupture in relation- with P. Uter relations were restored, President Johnson in December 1964 pledged to negotiate a new treaty with Panama. Since that pledge was made L3 year- rogress m the uegotiations ha- come in fit- and -tart-, hut no treaty ha- been ratified. Increasingly in recent year-. Latin American and world opinion generally ha- been brought to bear on the United S t a t es to make more rapid pro£re— toward a new tr- <3) JOINT STATEMENT ON PRINCIPLES Th€ most recent phase in the effort to negotiate i new t: initiate. 1 in September 1073 with the confirmation of Ambassador-at- Ellsworth Bunker as the United States new chief Panama Canal negotiator. Shortly bhereaftef S State Henry Kis- singer assed foi ■ "new dialog" with Latin America, and on ruary 7. n*74. Kissinger and Panamanian Foreign Minister Joan Antonio Tack met and agreed to ■ set of fundamental principles which would serve to guide the negotiators in concluding a ae The principles agreed to, on behalf of their r srnments, were a- follow l. The treaty of \\h\a and its smendmente will he abrog by the conclusion of an entirely now mteroceanic canal treaty. Ihf concept of perpetuity will be eliminated The treaty concerning the lock canal -hall hav< termination dal Termination of U.S. jurisdiction over Panamanian territory shall take place promptly in accordance with term- specified in the treaty. 4. The Panamanian territory in which the canal i- situated -hall ho returned to the jurisdiction of the Republic of Panama. The Republic of Panama, in it- capacity a- territorial sovereign, shall errant to the United State- of America, for the duration of the new mteroeeenk canal treaty and in accordance with what that treaty states, the rig-ht to use the land-, water-, and air-: which may he necessary for the operation, maintenance, pro- te< tion. and defense of the (anal and the transit of ships. iblic of Panama shall have a ju-t and equitable ^hare of the benefits derived from the operation of the canal in it- territory. It i- recognised that the geographic po-ition of it- territory constitutes the principal resource of the Republic of Panama. 6. The Republic of Panama -hall participate in the admini-- tration of the canal, in accordance win hue to be agreed upon in the treaty. The treaty shall also provide that Panama will assume onsibiUty for the operation of the canal upon the termination of the treaty. The Republic of Panama -nail grant to the United S of America the right- necessary to julate the tran-it of -hip- through the canal, and to under any other specific activity related to those end-, a- may be agreed upon in the treaty. :»li< of Panama -hall participate with the United States of America in the protection and defense of the canal in accordance with what 1 upon in the new treaty. B The Unit- - public of Panama, recognizing- the important (Ml vices rendered by the interoceani< Panama Canal to international maritime traffic, and bearing in mind the possibility that the pre-ent canal could become inade- quate for -aid traffic, shall agree bilaterally on provisions for new projects which will enlarg-e canal capacity. Such provisio: be incorporated in the new treaty in accord with the concepts established in princip REACTION TO THE PROPOSED NEW TREATY The U.S. public lit large -til! hold- to it- historical perception thai the Panama Canal is an important commercial and defense asset for the United State- and the world. But the Kissinger-Tack Joint Statement of Principles baa served to polarize the debate into Btatus (juo and protreatv force-.. The latter group argues that a new treaty which accommodate- Panamanian grievances is the surest way of guaranteeing the United State- basic interests in the continued fair, efficient, and neutral operation of the canal. 'Idie status quo position, on the other hand, emphasizes the legitimacy of U.S. rights assured in the 1903 treaty. Proponent- of tin- position, while doubtless willing to fine tune the existing treaty, adamantly oppose negotiating a new treaty in accord with the i<>74 Principles. They raise the following particular objection-: The proposed new treaty would relinquish U.S. sovereignty in the Canal Zone, thus abandoning U.S. citizens there and diminishing U.S. power and standing abroad. 'The proposed new treaty would abandon huge U.S. capital investments in the Canal Zone, which rightfully belong to the American people. (3) The proposed new treaty would relinquish the U.S. ri^ht to operate the canal to the Panamanian-, w ho-e political in- ability and lack of technical and managerial -kill make them poor candidate- to assume the role 90 efficiently and impartially performed by the United States for the pa-t 60 years. (4) The proposed new treaty would abandon U.S. citizens in the Canal Zone, who for generations have given their live- to the canal'- construction and operation. (5) The proposed new treaty would threaten hemispheric defense and U.S. security, to which the canal i- vital. (6) The proposed new treaty would endanger the U.S & onomy by relmquishing operational control of the canal. The validity of these objections to a new treaty i-. of cour-e. subject to challenge. During my recent 3-day vi-it to Panama I pursued each of these issues in depth in conversations with Panaman- ian official-, academics, religious leader-, and other prominent citizen-: I S Embassy and military official-: American businessmen; Canal Zona labor leaders; and officials of the Panama ("anal Company. I upon these meetings and extensive further Btudy since leaving Panama. I have concluded tfiat in fact each of tfie-e objection- i-. in one way or another, invalid. I hope to -how that this i- SO in what follows. Let me fir-t point out. however, that each of these arguments against a new treaty contain- a suppressed premise: namely, that the preseni treaty i- fair and serves U.o. interests. If this premise i- fal-e. as I believe the evidence compel- us to conclude it is, then all of the above arguments fail. A\ HISTORICAL SKETCH From t lie time ( olunibu- first touched the Atlantic coa-t of Panama in 1602, explorers Bought to find ways through, over, «>r around, the isthmus. Balboa discovered the Pacific Ocean in 1513, and during the ensuing period of development under Spanish rule tremendous quantities of u r <>ld. silver, and other goods from the [net Empire and the Andean mine- were carried across the isthmus DJ human-, horses, mule-, and boats. In those days the trail led from the n the Atlantic coast. Panama lir-t became independent from Spain in 1821, along with the rest of South America. She Boon joined (Iran Colombia, then composed of Colombia, Venezuela, and Ecuador. This union was succeeded in L830 by the Republic <>f New Granada, later known as the Republic <>f Colombia. However. Panama never Lost her identity, and Colombia was never able to establish Becure sovereignty. Expres- sions of Panamanian nationalism took place m iv;i, ls4(). and 1861. The tie- with Colombia were, in fact, so weak that in 184=6 Colombia found it advantageous to enter into a Genera] Treat} of 1' Amity, Navigation and Commerce between the United Stat America and the Republic of New (iranada. whereby the Tinted >tate- obtained the right of fre aero— the isthmus -upon any mode- of communication that now exist, <>r that may be. here- after, constructed." In exchange, the United States guaranteed the neutrality of the isthmus and Colombia'- sovereignty over it. Colombia at the time wa- pressed to secure thi- guarantee of her reign ty not only against effort- at Panamanian independence, but al-o a- a hedge against British maritime interests in the area. Little did -lie -u-pect that more than half a century later the United - would reinterpret thi- treat} a- a justification for supporting the uprising which finally gave Panama her independence in In 1848, with the discovery of pold in California, many easier gold seekers from the eastern part of the United State- preferred t<> try id) California via the isthmus rather than take the long and dangerous trip around Cape Horn or overland across the -till unex- plored western plain- and mountains <>f the United State-. And. of course, hou-ehold gOoda« tool-, and other item- had to be -hipped to supply them. Recognizing the potential demand for transporta- tion across the isthmus, American ii. btained from Colombia in 1S50 a concession to build the Panama Railroad. These activities served to intensify a rivalrv between the United States and Britain which had begun to develop over control of the mo-t feasible route for construction of an interoceanic canal. President Taylor, not anxious to provoke a military showaWwa with I Britain which lie knew he could not win. was willing to compromise. In 1^50 the two powers checkmated each other bv sicrnincr the Clavton- Bulwer Treatv. wherein both asrreed never to obtain or maintain for itself any exclusive control over a ship canal acro-s Central America. (9) 10 Meanwhile, private American investors proceeded with construc- tion of the Panama Railroad. The last rails were laid joining the first transcontinental railroad on January 27, 1855. It had cost around $7 million — about $150,000 per mile. But even before the railroad was finished it had earned roughly one-third of its cost by trans- porting passengers and freight on the unfinished line. By the end of 1858 it had grossed over $8 million. The company had initially fixed what it thought would be prohibitive tariffs in the hope of controlling the number of users clamoring for its services. It set first-class rates at $25 gold and steerage passage at $10 gold. For $5 one could walk the track from sea to sea. These outrageous fares stood for 20 years. Changed circumstances and completion of the Union Pacific Rail- road across the Continental United States caused the Panama Rail- road to fall into disuse after a number of years. It did, however, give Panama tremendous advantage over other possible sites for an inter- oceanic canal. Its construction had given engineers intimate knowledge of the problems posed by the terrain and climate, and it was itself the most indispensable of all tools for digging a canal. Moreover, under the terms of its concession, the Panama Railroad had the right to exact "an equitable price" for the construction of any canal near its right-of-waj\ The first serious effort to dig a canal across the Panamanian isthmus got underway in 1881 when a Frenchman, Ferdinand De Lessens of Suez Canal fame, formed the Compagnie Universelle du Canal Interoceanique (later known as the Old Panama Canal Co.). Since the route selected by De Lesseps was subject to the Panama Rail- road's consent, he was first obliged to satisfy the P.R.R. This he did by buying up most of the companj^'s stock at the inflated rate of $20 million. But in spite of these bold beginnings, the French canal was not to be. It failed for several reasons: De Lesseps' insistence on building a sea level canal instead of a locks canal, which would have required much less excavation ; his inability to solve certain practical engineering problems; lack of knowledge of the cause of yellow fever and malaria, which felled 20,000 in a total labor force which averaged only 10,000 a year; and a series of financial scandals which reportedly took a considerable share of the $260 million sunk into the undertaking. By 1889 the Compagnie Universelle had suspended work and had been placed in the charge of a liquidator appointed by the French courts. After several more years of maneuvering, the French made one last valiant effort to salvage their investment in Panama, and on October 20, 1894 the Compagnie Nouvelle du Canal de Panama (later known as the New Panama Canal Co.) was incorporated. Although this effort too was ultimately unsuccessful, it has particular significance because of the role played by Philippe Bunau-Varilla, that remarkable Frenchman who, as we have already seen, later turned up in Washington to negotiate a canal treaty with the United States on behalf of the newly declared Republic of Panama. Bunau-Varilla at one time had been the chief engineer and a con- tractor for the now defunct De Lesseps canal company. Upon the organization of the Compagnie Nouvelle, he, his brother, and certain associates were obliged by the French courts to purchase 2,200,000 11 franca worth of th< tmpany's Btock in restitution i profiteering <>n their dealing- with the Compagnie Universelli ■ total Btock subscription of 60 million francs, this Bunau- Varilla approximate!) a 4-percent interest in ti • Tina tment, perhaps, coupled with a Frenchman's desire to clear hi- own good Dame while simultaneously bringing honor to 1 1 i — country, apparently provided Bunau-Varilla sufficient incentive to < • the Deal i'» years of his Kfe to a crusade for completion of the pn And more than anyone else he deserves the credit for eventually bringing together the forces of Panamanian nationalism and American interest in a waterway across the isthmus which happened to coincide at the turn of the century, and which finally brougnt to fruition the centuries old dream of joining the two great ocean-. The pure Machiavellian ireniu- by which he achieved tin- end surely qualities him a- one iA the greatest entrepreneuna :i century. A T ir-t the New Panama (anal Co. actually rejoined battle with the elements in the Panamanian jungles, and for several years some additional progress was made in the excavation. But French invi were by now more than a little leary of the canal undertaking, and in spite of frantic effort- by Bunau-Varilla. French interest in the project waned rapidly. B\ 1898 the Compaq VOtmg most of its attention to salvaging what it could by -ale of the canal. To this end. the ever-re-oun eful Bunau-Varilla made it his business to meet every American with an interest in isthmian affairs who came to Paris. Out of one such encounter came an invitation for him to lecture on hi- favorite subject in the United S :id in January 1901 he arrived in New York to I ka of speaking and touring: During thai time he met a number of influential American- who u en 1 later to serve hi- cause well, including the power- ful Senator Mark Banna, who :• before had made history by raising an unprecedente v lllion for the Presidential campaign of William McKinley. When Bunau-Varilla first arrived in the United 3 I here wa- inten-e interest in an interoceanic canal, but it was far from deter- mined that the route should be through Panama. In fact, the United State- had long -how n a predilection for canal. At the urging of S John I Morgan, ranking Democratic mem] 1 ommittee on Foreign Relations and a stockholder in the Maritime Canal i'o. which had started . canal I succumbing to the financial panic of 1803, the Senate had in : a bill approving the Nicaraguan route. C^uick concurrence in the House had bee: I, but plans were upset at the test moment when an amendment ■ ted and then adopted in conference committee to create a study commission to inv< il feasible routes for a canal, including Panama. This time-buymg compromise pparently the handiwork of William romwell, a cunninc ami well connected New York attorney who had been retained by the New Panama Canal Co. to represent it< it the Unit The battle for the Panamanian route was far from over, however. The Walker Commi-. for an amount not to < . and provided further he could obtain from Colombia "perpetual" control of ■ 6-mile-wide strip of land; if these conditions could not be me1 within a "reasonable time he was to return to the plan to build a Nicaraguan canal. Once the Bpooner Act was signed into law, all barriers to the ne- gotiation of a canal treaty with Colombia were down. The French company had agreed to sell for MO million, and the only other ob- stacle—the l ^ ") t ) Clayton-Bulwer Treaty with Great Britain — had hem specifically superceded in February 1902 with the proclamat the Hay-Pauncefote Treaty, which withdrew all restrictions against complete control by the United State- of any canal it might construct. ons with Colombia proved somewhal sticky, but when on January 21, 1903, Secretary of State John Hay made his "final" offer HO million payment and a $250,000 annuity thereafter, Colom- tninister Tomas Herr&n accepted. Other term- of the treaty included: (1) A 100-year lease, renewable at the sole option of the l 4 a /one of land K) kilometers wide; 2 a guarantee to the United the exel lit to construct, maintain, operate, and protect the canal; recognition of Colombia's sovereignty over the canal: and establishment of three types of judicial tribunals— Colom- bian, United State-, and j< With unusual speed, the u.S Senate ratified the Hay-Herran Treaty on March 17. In the Colombian Senate, however, it rougher sledding: Colombian lawyer- believed that the "perpetual control" demanded by the Spooner Act would amount to an aliena- tion of part of the national territory and thus would vio- late the constitution which nowhere granted any such power to either the executive or the legislature. Hay \\a- sufficiently impressed 1»\ this point to attempt to work • an accommodation. The treaty, therefo te III did not use the word "perpetual" hut -p>>!> m of 101) year-, renew ahle at the sole and absolute 0] the ted States, for periods of similar duration so 'he United State- in -lomhian lawyer-, under- standly, found tin- wording a distincl tnout a different Colombian public opinion had become aware of the vast distinction between granting a canal concession to a foreign private concern and leasing a -trip of territory in perpetuity to a foreign governmei August 12 the Colombian Senate unanimously rejected the treaty. In Panama, where the flames of nationalism always burned not far beneath the surface, partisans of the canal did not -it idly by to watch their fat* 4 he sealed in Washington and BogotA. While the Colombian Senate debated the treaty during the hot summer of talk of revolution was abroad in the land. Curiously enough, a majority 14 of the conspirators were connected with the Panama Railroad Com- pany, and circumstantial evidence strongly suggests they were greatly encouraged in their cause by none other than William Nelson Crom- well, who was not only attorney for the New Panama Canal Co., but also legal counsel to the railroad. Be that as it may, by August it was clear that Colombia was not going to ratify the Hay-Herran Treaty, and the revoluntionary junta sent one of its number, railroad physician Dr. Manuel Amador Guerrero, to Washington to sound out the administration on the possibility of securing support for Panamanian secession. He was unable to see Roosevelt or Hay, as the administra- tion was unwilling to be publicly associated with conspirators against a friendly state. Amador therefore turned to Cromwell, who was in a position to handle such matters more discreetly. Apparently they had several successful meetings, and Amador was encouraged until suddenly Cromwell disappeared from the scene, having set sail for Paris to consult with his client. It seems that the Colombians learned of the revolutionary plotting, and Cromwell was either warned or sur- mised they would cancel the railroad concession if his involvement continued. At this point Bunau-Varilla reappeared on the scene and sent word that he wished to meet with Amador. Although it has never been proved, circumstantial evidence is overwhelming that there had merely been arranged a change in handholders. In any case, Amador confided in Bunau-Varilla that he had been seeking a secret loan of $6 million to buy arms for the revolution, but was now at a loss with Cromwell gone. Bunau-Varilla promised to see what he could do, whereupon he flew into a flurry of activity with the determined purpose of winning U.S. support for the ripening rebellion. Through contacts with influential friends he quickly learned that the Govern- ment was contemplating some type of action on the isthmus. Then, on October 9, he paid a call on his good friend Francis B. Loomis, who was at the time Under Secretary of State. Loomis took him to the White House to meet President Roosevelt, and the two men apparently hit it off well. Roosevelt later stated that neither he nor an}^ member of his administration gave Bunau-Varilla any assurances that the rebels' cause would be assisted. But the President also wrote a friend after it was all over that he assumed Bunau-Varilla was telling the Panamanians that help would be forthcoming. "He would have been a very dull man indeed had he been unable to forecast such interference, judging simply by what we had done the year before." 4 On October 13 Bunau-Varilla returned to New York, summoned Amador and unveiled the revolutionary plan which he had drawn up since the two last met. The rebels were to seize the cities of Panama and Colon and the rail line linking them. The United States would prevent Colombia from putting down the rebellion and would imme- diately recognize the new republic. It would all be over very quickly and they would not need the $6 million at all. A dubious Amador asked how they were to carry out this plan with 500 Colombian troops on the isthmus. Bunau-Varilla was ready with his reply. He knew the soldiers had not been paid in months and they could cer- 15 tainl> be bribed. For thi onally would lion had occurred, on that he would b< ated minister to the United 5t _- Amador in something of a whirl. Bunau-Varilla returned to Washington where he met with Secretary Hay and i him to expect the outbreak of a revolution. Hay merel} acknowl- : that he ed trouble, and indicated that cruisers on their waj to the Gull of Panama. This gave Bunau-Varilla all he needed to know, and he rushed ha- rk for another n with Amador. This time he announced that the Americans definitely would help, hut the rebels would have to make the fir-t move. With this hit of encouragement Bunau-Varilla a^ked Amador "t him the following Tuesday before sailing for Colon, at which time he would he presented with a flag, a declaration of independ -titution. ami a secret communications code. T :itial> for any rebellion were duly delivered oi and Am lesrin the revolution. Only 2 day- after Amador t foot on Panam i the word that more tl ditional Colombian troops would h«' arriving on the isthmus days B In a it kmador fabled Bunau-Varilla in the • • he had been provided: "Send a steamer lanau- Varilla. «»f course, had absolutely no control over U.S. war- but he took thi shington t<» pay a call on his frien After latiou to the I'm - tary he received do -. but from the drift of the i on he went _- the l'i : rould intervene. He then b 5: and happened to read that the U.S.S -ail for an u: : port. II the -i ;nated its that a -hip would ar \\ed it for Bunau-Varilla with the revolut doubt- they may U -team- they 1 that I 3 ired and that Bunau- la was truly an insider in v\ »n. - planned. Colom- bian soldiers in the city of Panama were neutralized by bribery, and mbian tr< h had landed d were prevented from thmus by Panama Railroad official- ip by the ; S N v. There ouple of day-' delay I ol6n, but a- further l" 9 warsl d on the -cene the Colombian commanding general decided it would be withdraw. of champagne, provided by Bunau-Varilla. The revolution was completed with hardly a hitch and only * - — an inr. Chine>e and a donkey. The next day. November 6, th. -tate- officially r Panama. Bogota hardly had even heard there had been an u: :ig of November 6 the ; al junta of the Govern- ment of Panama appointed Bunau-Varilla th» iter Pleni- potentiary, as he had demanded. At fir>t they had been reluctant to do so. naming him only "confidential airent" before the I -tates. 16 But Bunau-Varilla, not one to be outmaneuvered; withheld funds the junta desperately needed and simply refused to teke any formal actions on the new government's behalf until he had been accorded the powers he felt proper to his station. Once they were in hand he quickly set about taking necessary steps for the negotiation of a canal treaty. Meanwhile, back in Panama the members of the junta were taking what the}* regarded as necessary steps to assure their interests were properly represented by their French Minister. On November 9 they appointed Amador and Federico Boyd delegates of the Republic of Panama and provided them written instructions to carry to Bunau- Varilla. He was to negotiate a treaty, "all clauses" of which were to be "previously consulted" with Amador and Boyd. "You will proceed in everything," the junta directed, "strictly in agreement with them." And the treaty's provisions "must not be any less favorable for Panama than were those of the Hay-Herran treaty for Colombia." 5 With these documents in hand, the Panamanian delegates sailed for New York on November 10. Bunau-Varilla having received word of the Amador-Boyd mission, knew his time was short. He arranged to be formally received by President Roosevelt on Friday, November 13. That day, as he left the White House reception, he turned to Secretary Hay and delivered a warning: For 2 years you have had difficulties in negotiating the Canal Treaty with the Colombians. Remember that 10 days ago the Panamanians were still Colombians and brought up to use the hairsplitting dialectic of Bogota. You have now before }*ou a Frenchman. If you wish to take advantage of a period of clearness, in Panamanian diplomacy, do it now! When I go out, the spirit of Bogota will return. 6 Hay acknowledged that he understood and promised an early draft of a treaty. The Frenchman did not have long to wait. On Sunday the 15th Hay's draft was delivered to his room at the Willard Hotel. It was essentially the Hay-Herran Treaty with a few minor changes. Bunau- Varilla set to work feverishly. He felt the Hay-Herran Treaty carried the stigma of the long struggle with Colombia and must be changed. As he himself was to write later: "I reached the conclusion that in order to succeed it was necessary to draft a new treaty so well adapted to the American requirements that it could defy any criticism in the Senate." The amounts were to remain the same — a flat $10 million plus a $250,000 annuity — but the zone was to be increased from 10 kilometers to 10 miles, and it was to be "granted," not leased, to the United States "in perpetuity." Moreover, the United States was to be given even greater attributes of sovereignty than in the Hay-Herran Treaty, even though this was the very point on which the Colombian Senate had unanimously rejected the earlier document. By 10 o'clock on the night of the 16th Bunau-Varilla had finished his task. Despite the late hour he proceeded to Hay's home, but finding it darkened he had to return the next morning. On Novem- ber 17 he presented Hay his draft and expressed his willingness to 17 . the fi rms the i . • a call, but on tin* 1 8th i ma would ■struct the. r VI _ht of the 17th Bunau-Vanlla . that hi > the nation ha- not arrived in W on, I shall I ieal with you alone, pr >'ie ers. When they arrive. I -hall no . fact. I ma\ perhaps no longer be here Il:i\ v. than wil 1 meet in? rp <»f influential Senator-, he rer; ;nau- Varilla to call at hi- home at 6 p.m. :nber 18, 19n;. the Hay-Bunau-Varilla Treaty w _ e Panamanian wa- pi D the ent. lU-Varilla had achieved his L r oal non» evening at 10 p. in 3 from Y<>rk. When Bunau-Vanlla met their train them the the Pan- amanian • it tempted to reopen negotiations with tl ment - but they failed. Hay. not to mention Bunau-Vanlla. had now turned his attention to the treaty ratified. Both men ted the Panamanian ratify the document on the but they demum 'hey had no -uch authorit - on November -4 Bunau-Vanlla dispatched the treaty to Panai: Be then pressured the junta to ratif; mediately darkly that if th» h the 3 tion had no such intention, rui I in Panama that I nn it- I- ind the junta : for the i :>led their wil ratify the tre;. : ;>er 2, they did -o after having had the A'. ■< ument only 20 hour<. and only an English v< hurdle of tl all that r While il never in aerious trouble, there were a few tense day-. On -Tanuary 18 inmittee adopted three amendment- relating to harbor improvement initary m rful of the Pand' : - wrote t<» Senator •.nuary 20 as lolloi As taiai on as the Senate v iall have a treaty in the main y advent to the Unite - ;t nd we mu-t confe— . with what face we 18 can muster, not so advantageous to Panama. If we amend the treaty and send it back there some time next month, the period of enthusiastic unanimity, which, as I said to Cullom, comes only once in the life of a revolution, will have passed away, and they will have entered on the new field of politics and dispute. You and I know too well how many points there are in this treaty to which a Panamanian patriot could object. If it is again submitted to their consideration they will attempt to amend it in many places, no man can say with what result, then they will feel that we had passed definitely upon the main subject; that the treaty was safe; that their independence was achieved, and that now it was time for them to look out for a better bargain than they were able to make at first. 9 Not surprisingly, the committee managed to see the essential logic of this position, and on January 26 the amendments were withdrawn. On February 23, 1904, the treaty was approved by the full Senate. Philippe Bunau-Varilla's mission was accomplished. JUSTICE OF THE 1903 TREATS The foregoing rather lengthy historical sketch is, I hope, helpful in putting the present Panama Canal Treaty in perspective. As I have already indicated, any reasonable effort to come to terms with the objection- to b new treat) raised by status quo forces must first of all assess the overall fairness of the existing arrangement, [f upon examination we are forced to the COnclllsioD that the L903 treat) IS fundamentally unfair, then Burely we must abandon our objections to recasting it iu more equitable term-. And quite frankly, the more I learned of the history of our present relation-lnp, the more con- i I became that simple, elemental just almost totally lacking from the equation. The historical record is unequivocal on this point. Our own Secre- tary of State at the tune de-enbed the treaty a- "va-tly advant BgeOUS to the United States" and "not so advantageous to Panama.*' These inequitable arrangements were, moreover, effectively imposed under a state of duress. Panama's very existence a- a uation bung in the balance between her consent to the treaty and continued U.S. pro- tection from Colombia. She was encouraged to believe that without the one, the other would also fail. Under such circumstances -he was pressured to ratify the treaty virtually sight unseen. Panama*- agent and -poke-man in all tin- was a Frenchman who failed at almost every turn to act ,u the Panamanian interest. Their rights were, therefore, alienated by a man not even their country- man, acting purely in hi- own self-interest, and who repeated] gaged in deceit to win approval lor actions detrimental to the i manian national interest What is more, U.S. officials at the I me were aware of, and therefore COmplicitOUS in, these injust lenl Roosevelt so characterized it himself in 1911 when he stated, "I took the isthmus . . ." : a statement upon which he later elaborated by explaining he took it "because Hunan Var 11a brought it to me on a silver platter." u We must try to put ourselves in the Panamanians' -ho.--, u it a- they do. The best way I know to do th id analogy which has great currency ,n Panama. It has been succinctly stated by Wayne I). Bray: To get an idea of how th on look- to the people of Panama in 197 of land extending "> m on each side of the Mississippi River within which a power, by virtue of treaty rights granted under suspicious circumstances in 178 sea complete control a- "if it were sovereign" and through which a resident of Dlini must pass to go to M ssouri, during which passage h< subject to arrest by a foreign power and trial in a fore court under a foreign system of lav (19) 20 Of course, we would not tolerate such a situation within our borders. Tha Panamanians have no choice. The United States is a superpower and they are one of the world's weakest countries. Our military forces stationed in the Canal Zone are equal in size to Panama's entire Na- tional Guard. It is no match at all. On their side the Panamanians have only logic. They ask us to negotiate a new treaty. They point out that total U.S control over a portion of Panamanian territory is a vestige of colonialism. They ask us to understand how it offends their national honor and pride as a people to have a U.S. police force, U.S. courts, and U.S. jails enforcing U.S. laws on Panamanian citizens within their own country. They show us how total U.S. control over land area in the Canal Zone limits the urban growth of their two largest cities, how U.S. control of all deepwater port facilities restricts the productivity of their country, and how U.S. commissaries unfairly compete with local businessmen. How do we answer these charges The most common way of justifying the present treaty arrangements is to cite the benefits which have accrued to Panama. The most important of these, it can be conceded, is her independence. Without the United States she would not have had it. Admittedly, a certain turpitude may attach to the United States motives in guaranteeing it, but to the Panamanians, who had hankered after their freedom for some three quarters of a century, it is certainly a great blessing. What is doubtful is that this justifies an arrangement under which she signed away "in perpetuity" the most important part of her birthright. To say that it does is like saying that the United States should be forever indebted to France, without whom her own revolution could never have succeeded. That is history now, and the United States has profited immensely in the interim. The relevance of that history for today is that it shows the very structure of the relationship from the beginning was one in which we consciously took advantage of the Panamanians. All the real sacrifices were on their side. They yielded up, forever, their nation's greatest resource — the land over which the canal was constructed. What should have been theirs has become ours. Some would suggest that Panama has been adequately compen- sated for this "use" of her territory by the $10 million the United States paid when the treaty was signed, plus the annuity she has been granted since. The facts belie the truth of this assertion, however. The annuity, for years set at $250,000 per annum, is today only $2.3 million per year. This is a mere pittance when compared, for instance, with the Panama Canal Company's fiscal year 1976 total operating revenues of more than $250 million. What is more, the U.S. Government has always set Panama Canal tolls at a breakeven level. The Panama Canal Company does not lose money, but neither does it make a profit. This revenue policy of the Panama Canal Company (PCC) has been analyzed by International Research Associates (IRA) of Palo Alto, Calif, in a report entitled "The Economic Value of the Panama Canal." The study concludes that "over the past 60 years (PCC) has chosen to operate the canal as an international public utility and has followed a revenue policy which just provides for recovery of 21 annual costs, including depreciatioo of tanj ets, and a moderate rate of interest on investment funds originally advanced by the I S Treasury." M The effect of this policy baa been to produce b surplus to users of an amount equal to the difference between the maximum possible revenues recoverable under an alternative tolls policy and tin 1 breakeven costs actually recovered. The I KA Btudy project- that lor 1975 the magnitude of the surplus would be ('(pud to approximately 55 percent ox the revenue recovered under present toll structures. 14 Applying this to the I RA-projected l ( .J~."> toll revenue figure of $119.5 million, we see that the Burplus which could have been recovered wras on the order of another st,.").") million. The benefits of this surplus, rather than going to t he people of Panama, now accrue to three groups: ill those who purchase commodities that pass through the canal; (2) tho-e who produce BUCfa commodities; and Cli those who move the commodities from producer- to punlm Rightfully, th million should have gone to Panama as its earning on it- fundamental resource. To hotter appreciate the significance this $65.5 million could have had for Panama, it is worth noting some additional statistics. In 1975 the total revenue- of Panama'- central government were only |462 million; an additional $65.5 million would have increased the national budget by 14 percent. Still another way to look at thi> figure i- in relation to Panama'- debt -erv;cc COStS, which constitute ■ crippling dram on the national economy. In 1975 internal and external debt service w a- $64.8 million, or approximately the -aine a- the toll revenue Panama lost due to policies pur-ued by the United State-. Finally, the sti.")..") million may be compared with the total direct income Panama ha- in fact received from the canal: That figure i- only sf>7 million for the entire life of the canal, including the initial $10 million payment. A- Startling :i- these figures are. they probably do not give the true picture of the revenue Panama ha- forfeited through I > operation of the canal. This IS 90 becau-e the Operating expen-e- of the Panama Canal Company include not only actual costs of running the i but al-o large subsidies for education and other social »••• ('anal Zone employees, even though these employer- paj taxe- for that purpose. For instance, included in the P( ( '- l'.*;.", operating expen-e- 5 million for functioning of the ("anal Zone Government. While not all Bucb expenses could be eliminated through Panamanian operation of the canal, substantial -:: could be expected through the integration of duplii >vern- mental function- on the one hand and the introduction of free market efficiencies to replace certain present governmental responsibilities on the other. Great inflation ;n COSl ated with the Panama Canal appear to arise from the fact thai it- op prated with the local economy. The Panama (anal Company maintains an entire governmental and economic infrastructure, winch cannot help but be inefficient. Clearly, there is a great deal ol -la< k in the Panamanian operation. One final way to measure the economic injustice of the pn annuity arrangement^ 1- to examine what we pay for use of military facilities in other countrie-. Just la-t year the I 22 signed a treaty of friendship and cooperation which grants the United States the right to use military facilities at Torrejon, Zaragoza, and Moron Air Bases; the Rota Naval Base; the Bardenas Reales firing range; and 18 other minor installations. In turn, the United States guaranteed Spain 190 million dollars' worth of military grants and credits over the 5-year life of the treaty. Similarly, in 1947 we entered into a 99-year, rent-free agreement with the Philippines for the use of Clark Airfield, Subic Bay, and the Naval Air Station at Cubi Point. In 1959 we found it necessary to renegotiate this agreement, at which time we agreed that it should have a term of 25 years. We are now renegotiating it again, and while no agreement has yet been reached, discussions have centered around a proposal for a 5-year treaty, in return for which we would provide $1 billion, split equally between economic and military aid. These agreements may be compared with the mere $2.3 million annuity we pay Panama for the use of the canal. We have never compensated Panama for our military presence. It can, of course, be argued that Panama has received extensive indirect economic benefits from the canal, as well as improved health conditions, sanitar}' facilities, etc., all of which must be taken into account in assessing the present treaty. All these things are indis- putably true, but they completely miss the point. They alone cannot make the arrangement either just or unjust. It is unjust b} T the fact that it prevents Panama from reaping the economic advantage of her primary resource. Moreover, it does so almost gratuitously. Panama could be returned the control over her resource without it materially affecting our own economic or strategic interests. In truth, our strength and greatness will lie not in continuing to demean ourselves by insisting upon some legalistic interpretation of our ''rights," but in recognizing that an injustice has been done and acting to correct it. It is time we quit priding ourselves on how much we have done for the Panamanians in order that we may see what we took from them in the process. SOVEREIGNTY The most confused, but perhaps the most popular, objection r ■moii of the 1 ( .">;; treaty l- that to do bo would entail relinq iy that is as much a part of the United States ae the territon acquired by the L Purchase or the Alaska temton purchased from Kufi could be more wrong. In the language of the treaty, the Uniti : ranted ^hts which are d as the sort the Ui irould have "if it were t! Surely, the commonsense me of this is that the United States - not the sovereign. This contrasts markedly with the treatment of nty in the cases of Louisiana and Alaska. In 1803 Prance ceded the Louisiana Territory to the d State- "forever and in full BOi " All public lands transferred and all inhabitant- v. ship. The same is true in the case of Alaska. Russia ceded tl ites all it> >rj ou the American i ontinent, including all rights and prn ►usly bel< oging to 1 1 o the cho returning 1 R i within 3 years or 1 3 sens. In i. case was provision made for an annuity or any other sort of continuing relationship regard og matters covered in the agreement Thn »naJ points ma> be cited as evidence thai tl Mate- doe- QOl have the attribute of d Zone: : 1 A person born in the ('anal Zone of Panamanian i not a U.S. citiaen as he or she would be if born in KM l'lir exen ise of power and authority by the in the Canal Zone is dependent upon the use to which the terri- tory is put. If :t ceased to be used for the opera! on of i anal. jurisdiction would r. Panama. I States has no authority to rodo the Canal to a third sovereign power, as tisly would if the own. ECONOMIC IMPORTANCE OF THE CANAL Despite widespread impressions to the contrary, the Panama ('anal is qoI of anj great economic significance to the United States. It i- often said that approximately 70 percent of canal traffic either originates or terminates in U.S. ports, thus making the canal vital to thi onomy. While this figure is correct, the manner in which it i- usually presented tends t<» misrepresent the truth. The "approximately 70 percent" figure is derived l>\ adding the 40 percent of cargo tonnage originating in the United States to the *_ ,s > percent terminating here. But it i- incorrect then to conclude that the United State- aid. unt- for 68 percent of the tonnage passim? through the canal. The United States, both a- shipper and receiver, i- on only one end of the transaction. Therefore thi- figure must he halved, revealing that only "> I percent or one-third of all canal cargo is U.S. oriented. But even tin- figure doe- not provide a proper measure of the economic importance of the canal. We have to ask, 34 percent of what? If the Panama ('anal 1- largely not used, then the fact that 34 percent of its use is attributable to the United States becomes rather mean- ingless. The United State- is, in fact, the major User of the canal, hut many alternative trade route- now exist for the mo-t important product- and commodities, and more would become economically competitive if the canal were dosed. In term- of overall importance, the canal is much more significant to certain Lai n American coun- particularrv those on the west coast of South America, than it •he United Mate-. For instance, In L972 only 16.8 percent <>f raterborne commerce passed through the canal. For Nicaragua the figure was 76.8 percent, for Panama 29.4 percent, for Peru 41.:-? percent . for < Ihile 3 1.3 percent, and for ( Colombia 32.5 percent. Increasingly, the Panama ('anal is becoming outmoded. I. and raster snips, as well as innovat ons such as container technology, are making alternatives to the canal more and more attractive. The shipbuilding industry in constructing supertankers increasingly ints the canal, which cannot handle their -ize. More than 1,300 vessels are now too large to pass through the canal, and another 1,700 mpany town bo be found anywhere in the world. It consists of a lO-mile-wide Bwath of land, running the full 50-mile width of this small country. I' square miles is the heartland and most valuable economic an Panama. But it contains do Panamanian enterprises, do Panamanian farms, and do Panamanian officials. It i< wholly controlled and admin- istered by the United States, in the corporate person of the Panama ( 'anal ( lompany ( Government. It has it- own Governor, it- own courts, it- own police force, it- own transportation facilities, it- own bousing units, and it- own public utilities. It also operates it- own retail -ti»r<'-, food service units, gasoline stations, theaters, and howling alleys. It is, in fact, a colonial-SocialisI enclave under the American U.S. eiti/.en- have resided in the ('anal Zone for three generations now. Understandably, the\ do not want to give up their life there. But ju-t a- certainly, the present arrangements cannot be allowed to continue. First of all. the socialistic enclave of the zone cannot he squared with our own commitment to a free enterprise economy as the most efficient and democratic social structure. In addition, the /one constitutes a direct affront to the national integrity of Panama. which cannot with honor tolerate a foreign governmental and legal structure imposed upon it- people. The l\>. citizens who live in the zone will, of course, Dave to he protected. A- individual- they are not responsible for the action- of their government. They have acted in good faith in accepting the arrangements which exist today, and it would he unfair to leave them without recourse. In all probability, when the ("anal Zone and it- operation are returned to the Panama- nian-, these American- w ill find suitable employment and livii ments under Panamanian auspices. But should they he unahle | should any of them choose not to. provision should he made for their relocation to the United States with a guarantee for appropriate new employment, job training, ami vested retirement. While even this will no doubt he somewhat unsettling to these 3,000 or 4,000 individual-. it i- the only way that we can reasonably proceed a- a matter of national poh<\ . i OPERATION OF THE CANAL Americans are understandably proud of their role over the last 70-eome-odd years in the construction and operation of the Panama ("anal. When the canal u a- built at the beginning of the century it was the engineering marvel of the day, much a- the Moon Landing 18 in our own tune. And since it- completion in 1914, the canal ha- been efficient^ and impartially operated for the benefit of the whole world. Unfortunately, this pride in our accomplishments ha- led some American- to believe that only we can operate it, and that Catastrophe would befall were tin- responsibility turned over to the Panamanian-. There is, however, absolutely no factual basis for this contention. It i- not particularly difficult to operate a canal. Certain highly -killed workers are, of course, required; but the} can be employed by the Panamanians just a- they are now emp'oyed by the United State-. And even now the ('anal Company's work force l- 7:; percent Panamanian, including large numbers of individuals in highly -killed job-. Some opponents of returning the canal to the Panamanians have raised the additional -pecter that the present government m Panama ha- communistic leanings and cannot be trusted to keep the canal Open to all nation- on an impartial basis. My recent visit to Panama convinced me that these concerns are completely groundless. The Panamanian people of all socioeconomic -trata conveyed an un- kably genuine affection for the United State- in spite of their resentment of the present treaty arrangements. An amicable accom- modation of them with a new treaty could only serve to reinforce tin- close bond they already feel. Finally, it mu-t be pointed out that it could only serve Panama'- own economic interests to keep the canal open to all comer-. (29) DEFENSE IMPLICATIONS The Panama ('anal, while certain!} of military significance, is 1>\ no mean- vital to our national defense. It- primal*} military value lies In it- contribution to strategic and logistical mobility — the ability easih to shift military forces and supplies between tin lantic and Pa< ific Oceans, and to onset the shortage <»f U.S. port facilities on the Pacific coast. This important contribution the canal make- to our defense ha- been well described by John P. Sheffey, ,iive Director of the Atlantic-Pacific Enteroceanic Canal Study Commission: The key defense issue i- that the United States i- de- pendent upon the Panama ('anal for logistical support of military operation- in the Pacific of the tonnage for all our Pacific war-: World War II. Korea, and Vietnam went through the canal. We do not have the i capacity in the u • to support even a Vietnam-sized war from there, and we do not have access to the merchant shipping to support a Pacific war around South America or Africa. It would take twice a- many -hip- and twice much tonnage of materiel in transit to have the same daily deliveries on the far end without the canal a- with it. We don't have either the ships or the materiel.- 1 The availability of the canal [dyes u- an elasticity for rapid expansion of our maritime capability. Without it we could be delayed months if not year- in developing the major thrust for a war effort. The capital Investment to build this versatility into easting ports and other element- of our transportation network would run into the billion- of dollar-, and it- use, except in time- of y. would be uneconomic. The canal i- certainly the preferable alternative. Military planner- point out. however, that an\ fixed facility BUch a> the canal must be considered quite vulnerable to attack, and its availability therefore discounted. U.S. strategy ha-, in fact, pro- ceeded on the assumption of the canal'- nonavailability, and ha- maintamed two virtually separate navies In the An d the Pacific. The changed nature of naval ve— el- over the yean ha- al-o significantly reduced the strategic value of the canal. Our aircraft carrier- are too large '<« pa-- through, and submarines must surfi transit it. which make- it totally unpractical for them to use in the event of hostilities in this hemisphere. The vulnerability of the (anal arises from the fact that it laces for 50 mile< through the jumrle- of Panama and could be rendered inoperative for a- lone a- 2 yean by such f a substant ial finan- cial r.-K In spite of these generally positive findings, the Commission did not amend immediate construction of a -ea-level canal, primarily because a cloud of uncertainty hung over United States-Panamanian relation- in the absence <>f a new canal treaty. Needle-- to say, that cloud i- -till present toda^ . However, I believe that new attention to a sea-level canal 1- warranted by the following live fact-: 1. Present and projected oil and _ klaska have the potential of va-tly improving the economic viability of a -ea-level canal. 2. A new -ea-level canal, fully owned by the Panamas ha- the potential of resolving the 'Id stalem anal treaty negotiations. Construction «>f a -ea-level canal will give the I : State- needed flexibility to avoid increasing dependence on fa] energy -our 4. The availability of a -ea-level eanal could save the United States billion- of dollars of investment in new energy tran— mission infrastructure-. (33) 34 5. At relatively marginal costs, a sea-level canal would greatly enhance U.S. defense capabilities. Each of these reasons alone probably constitutes justification of further examination of the sea-level canal possibility. Together they certainly do. An} 7 final decision to construct a sea-level canal will be arrived at only after balancing a number of factors. The temptation is always to assume that the only matter to be evaluated is the strict financial feasibility of such an undertaking: Namely, will a sea-level canal pay for itself in a reasonable number of years? But as the Canal Study Commission pointed out, other factors, such as defense and foreign policy considerations, must enter into the equation. A sea-level canal might, all things considered, be a good buy even if we were certain it could never pa}* for itself in conventional economic terms. Nonetheless, its financial feasibility will be central in the decision to build a sea-level canal, if for no other reason than to determine what portion of costs might have to be written off for other purposes. According to the Canal Study Commission's report, a reasonable basis for assessing financial feasibility is to determine if construction costs can be amortized over a 60-year period. To make this deter- mination it is necessary to find those combinations of operating costs, payments to the host country, interest rates, canal opening dates, traffic levels, and toll rates which would permit recovery of capital costs from toll revenues. To assess the financial feasibility of the preferred canal route, at a construction cost in 1970 dollars of $2.88 billion, the Commission assumed payments to Panama of 22 cents per long ton of cargo and then projected both a potential and a low traffic growth rate. Their conclusions are shown as follows in tabular form : 25 TABLE 1. AVERAGE TOLL REVENUES PER LONG TON OF CARGO REQUIRED FOR AMORTIZATION OF CAPITAL COST IN 60 YEARS WHILE PAYING PANAMA A ROYALTY OF $0.22 ON EACH TON Traffic growth ng date rate and canal Average annual interest on debt open 4 percent 5 percent 6 percent 7 percent 8 percent Potential: 1990.... 1995.... 2000.... Low: 1990 . . 0.69 .65 .62 .98 97 .95 0.81 .75 .70 1.20 1.15 1.10 0.96 .87 .81 (0 1.14 1.02 .93 (0 (0 0) (0 1.22 1.07 (0 (0 (0 1995.... 2000 i Required tolls exceed an average of $1.30 per ton, the rate estimated to produce the maximum revenue from tolls. For example, if we assume an opening date of 1990, an interest rate of 6 percent (which the Commission deemed reasonable), and the higher potential traffic growth rate, we see that the capital cost of constructing a sea-level canal could be amortized in 60 years if tolls averaging $0.96 per cargo ton were charged. Such a toll rate is by no means unreasonable. Actual 1970 tolls were $0.86 per ton, and in 1976 they were $1.16 per ton. 26 86 Tli- data would seem stronelv to suggest that a sea-level canal is financially feasible in its own right. A Dumber of caveata an m i however. First, inflation in this type of construction has been approxi- mately 80 percent Bince 1970. According to the ( lorps of Engineers, the original $2.88 l»illi<>n estimate must be raised to $6.29 billion.-" This means the toll revenue figures in table l must !><• I substan- tial I \ to amortize costs. ( )f course, inflation will also have affected the level of sustainable tolls, so what maj have been an excessive ra L970 e . anything over $1.30 per ton) would not Qecessarilj be bo today. Whether or not inflation in other sectors (especially shi] has kept puce with construction costs is something thai can be deter- mined only bj extensive economic analysis. Presumptively, inflation rate- will be comparable and construction costs will not seriously have outstripped the ability of tolls to amortize these costs. Two other caveats are in order regarding financial feasibility. The per ton royalty payment to Panama is almost certainly not a valid assumption today. Based on royalty figures being proposed by Panama today in canal negotiations, tin- figure ma} well have to be raised This would mean thai cadi toll figure in table l must be increased 1>\ $0.16. Moreover, there is some question whether we may reasonably expert traffic growth rate- at the higher level projected by the 1970 study. Traffic level- in the past 6 years have not. in fact, home out this high projection. 'I his shortfall is arguably due to the worldwide recession of the early 1970's, from which w< only now beginning to emerge, But it is too earlj to tell if t 1 indeed the case. If the trend is long term, the consequences are - cant, for as table l -how-, a sea-level canal is not justifiable on finan- cial grounds alone if we accept the low traffic growth rate and an interest cos1 of 6 percent. The only way to assess this with any preci- sion i- thoroughly to update the 1970 study, An important factor m any reassessment of a sea-level canal's feasibility will !>c potential traffic growth deriving from mem as of oil and gas in Alaska, much of which will be surplus to the energy need- on the west coast. Beginning .June of this year, oil began to Bow from Alaska's North Slope, and by January 1078 the production level should reach 1.2 million barrels per day. A- the North Slope*- Kuparuk and Lisburne reservoirs are brought on lino, daily production will rise to 1.6 million barrels. E the lower 1.2 million harrel level, a WOSt coast surplus of 400. noil 600,000 barrel- per day i- projected; and this figure is based on the assumption that production at Klk 11:11- Petroleum Reserve in California will he held at the presenl level of In."), ooo harrel- per day, rather than being increased to its potential 350,000 barrel-. Their :- every likelihood that these figures, a- high a- they are. will at lea-t double m the next -everal years. The probability that quantities of oil will be recovered from the Alaskan Gull tional Petroleum Reserve NO. 1. and other area- of Ala-ka. both on and off shore, is very high. A to conservative projections by the Q.S. Geological Survey QSGS . recoverable i n the State may be five tune- a- large a- already demonstrated Te- as shown m the following table: TABLE 2. ALASKAN OIL RESERVES [Billions of barrels] Demonstrated or measured and indicated Undiscovered recoverable 10 6-19 Offshore .15 3-31 In addition to its oil reserves, Alaska also has massive gas reserves, as shown in table 3. TABLE 3. ALASKAN GAS RESERVES (Trillions of cubic feet] Demonstrated or measured and indicated Undiscovered recoverable 32 16-57 Offshore .. .15 8-80 As these Alaskan oil and gas reserves are brought to production, a sea-level canal should become increasingly attractive. If this oil and the accompanying gas is to reach U.S. markets where it is needed, it must be transported by tanker to the Gulf of Mexico and the east coast, or else it must be moved inland by pipeline from the west coast. The latter alternative has considerable drawbacks. The Nation's pipeline infrastructure for the delivery of oil and gas runs south to north, fanning out from the Gulf Coast States to serve other regions of the country. (See maps 1, 2, and 3.) 38 39 40 This infrastructure represents a $7 billion capital investment in the case of oil lines and $12.7 billion for gaslines. There is also an invest- ment of approximately $19 billion in gulf coast refinery capacity. If it were to become necessary in the next several }'ears to move our energy supplies from west to east, rather than from south to north, much of this infrastructure would have to be replaced at capital costs much higher than the original investment. The other alternative, shipment by tanker to gulf and east coast ports, avoids these problems but raises others of its own. The cost of transporting oil around Cape Horn is $3.14 per barrel if ships of 265,000 deadweight tons (dwt) are used. Distance, and therefore cost, are greatly reduced by transiting the Panama Canal, but the present canal cannot handle ships larger than 65,000 dwt. This is incompatible with the vessels which will be used to transport Alaskan oil and gas, which range in size from 70,000 to 189,000 dwt. Thus, the canal can be transited only by lightering to smaller ships. According to Arthur D. Little, Inc., the cost per barrel of oil for this operation breaks down as follows : Valdez to Panama (via 165,000 dwt tanker) $1. 27 Transshipment . 13 Col6n to Houston (via 60,000 dwt tanker) 1. 06 Total cost 2. 46 For at least the next 2 to 3 years there is no real alternative to using the canal for transporting west coast surplus oil to regions of the country which have a crude oil deficienc} 7 . But transit charges on this route are sufficiently high that pipeline alternatives become attractive. A number of such projects have been proposed to deliver surplus oil to markets in either the Central or Gulf States. The most important of these are shown in table 4, which displays their com- parative capacities, startup times, capital investments, and total transport costs from Valdez to market. In addition, table 4 indicates the value of a barrel of Arabian light crude in both the Chicago and Houston markets, from which the value of a barrel of Alaskan crude at Valdez can be derived by subtracting the appropriate transport costs. Finally, table 4 also compares the combined pipeline-marine transport costs with the solely marine transport costs of the Panama Canal and Cape Horn routes. 29 TABLE 4. TRANSPORTATION ALTERNATIVES, ALASKAN CRUDE WEST COAST SURPLUS (JANUARY 1977) Project Through- out* Projected startup Capital invest- ment 2 Transport costs by route' (per barrel) Chicago Houston Market price 3 (per barrel) Chicago Houston Crude value fob Valdez 3 (per barrel) Trans-Guatemala 1,200 165 600 800 500 January 1981. January 1979. January 1981. January 1984. January 1979. Immediate do 934 115 1,630 3 118 472 $2.52 2.30 2.78 $2.16 $13.76 13.76 13.76 $13.40 $11.24 11.46 Northern tier: 10.98 Phase II Sohio: Phase 1 Panama transshipment.. Cape Horn 2.29 2.83 3.53 2.06 2.46 3.14 13.76 13.76 13.76 13.40 13.40 13.40 11.34-11.47 10. 93-10. 94 10.23-10.26 • Thousands of barrels per day. 2 Millions of dollars. 3 Incremental. Source: A.D. Little, Inc. 41 An ivxiiiiuiitii ion of table 4* reveals that transportation coat i In- oombined pipeline-marine routes varj from $2.06 to 12.78 per barrel of crude. To be competitive, transport costs through i sea-level canal would have to fall within tl Apparentrj thej do. Calculations l>\ Arthur I). Little, Inc. indicate that transportation truly inestimable, but we may he certain it would run into the billions of dollar-. A sea-level canal would enable us to meet these dome-tic energy need- with Alaskan gas, and thus provide us a . ileal more foreign policy flexibility. 42 From a more strictly military point of view, a sea-level canal offers quite significant strategic and logistical advantages over the present canal. It would be almost totally invulnerable to long-term interruption by military attack, whereas the present locks canal can be incapacitated for as long as 2 years with relative ease. This means that the canal's important role in providing logistical support to military operations in the Pacific area would be wholly dependable. To get some sense of what this would be worth in dollar values, we may observe that since its inception in 1904 the U.S. Government has expended $5.31 billion — or approximately six times the net civilian investment in the canal — to defend the canal. These defense expend- itures, as important as they are for the present locks canal, could be greatly reduced for a sea-level canal because of its invulnerability. In addition, a sea-level canal could be transited by our aircraft carriers, which are too large for the present facility. The strategic flexibility this would provide our Navy would be equivalent to adding an entire carrier task force to our arsenal. In effect, this would provide us an additional $20 billion in defense capability at no extra cost to the taxpayers. Taken together, the military and foreign policy values, the savings from retaining existing energy delivery infrastructures, and the re- duced transportation costs of a sea-level canal would appear to justify such a project even in the absence of strict financial feasibility, which, as we have seen, is not itself obviously lacking. But there is even one further advantage of a sea-level canal. It has the potential of finally resolving the 13-year-old stalemate in canal treaty negotiations. The United States — perhaps in conjunction with other interested parties such as the State of Alaska, the international oil companies, Japan, Mexico, Venezuela, and countries on the west coast of South America — could guarantee the bonds to finance a new sea-level canal fully owned and operated by the Panamanians, It would be strictly a business arrangement with a Panamanian guarantee of access and reasonable tariffs as the only quid pro quo. This would provide Panama the economic control over her resources she demands, and would at the same time defuse the controversy over the present canal. The United States, for her part, would obtain the economic advantages already pointed out, and would achieve her ultimate goal of a de- fensible canal available to all at reasonable rates. CONCLUSIONS AM) RECOMMENDATIONS The success of canal treat) negotiations and the ultimate ratifica- tion of ■ new treaty arc dependent, first of all. upon the perceptions of the American and Panamanian people. Pananamians are con- vinced that the canal rightfully is thru-, and that for years they have been dealt with unfairly by the United States, which has used her great power and the peremptory provisions of a 70-year-old treat} to treat them a- second-class citizens within their own country. American-, on the other hand, are inclined to believe that the canal belongs to the United States, that it is vital to our interests, and that if anything, Panamanian agitation over the issue in recent years prove- that Panama cannot he trusted to run the canal alone. ( "learly. for both parties it is a very emotional issue, and one m which national pride plays no -mall part. Hut when the emotion l- stripped away, the Panamanian- have the better side of the argument, a- I am con- vinced most American- would agree if they only had the fact-. Be that a- it may. after a careful examination of the Case, I find the following conclusions compelling: 1. The Panamanian- are justified in their demand that we relinquish the canal to their control, and we perpetuate an historic mju-t long as we fail to do SO. 2. The United State- in no legal sense own- the Canal Zone: we would not be forfeiting U.S. territory to return it- control to Panama. 3. The economic value of the canal l- mini-cule in term- of the entire U.S. or world economy; failure to re-olve the canal issue in fact causes us great economic harm by exacerbating relations the Third World. 4. The ('anal Zone, a- currently operated, is a colonial— ocialistic enclave and thus incommensurate with the American taxpayers' ideal- and national L r oal-. 5. The canal, while -till militarily significant, is by no mean- vital to our national defense. It is almost indefensible against either sabotage or overt attack, and military contingency plans must allow I blockade at any time. 6. The Panamanian- could a--ume operation of the canal in a very few years; they could easily contract for any -kill- they do not already posse 7. The construction of a sea-level canal aero— Panama appears to be a very viable and COSt-effective alternative for moving Alaskan oil and gas surpluses to market- on the ea-t and golf coast. Such a canal could also save the United State- co-tly new investment in energy supply infrastructures, provide important foreign policy flexibility, and greatly enhance our defense capability while simul- taneously reducing defense costs. These advantages which could accrue to the United State- through construction of a sea-level canal make it well worth our while to maintain the ltooc! will of the Panama- nians, which I feel certain can be clone if we secure a fair treaty. I 48 1 44 I therefore reommend that the Congress authorize the Army Corps of Engineers to update the 1970 report of the Canal Study Commission so we may properly assess the sea-level canal option in a timely fashion. NOTES I. hn quoted In Lawrence O. Bali nian Canal (University Park, The Pennsylvania State university Press, 1971), p. ♦>■'<. Imeringer. "The Panama ('anal Lobby of Philippe Bunau- Varilla and William Nelson Cromwell," 1% Will (January 1963 . pp. 347 B. .i. Wayne 1). Bray, The Common Low / sma.' .1 Com Study m Re- ception (San Juan, Inter-American University Press, 1977), p. 81. ' quoted by Bernard A. Weisberger, "The Strange Affair of the Taking of the Panama Canal Zone," American Heritage, XXVII (October 1976 , p. 72. ."). Charles D. Ameringer, "Philippe Bunau-Varilla: New Light on the Panama Canal Treaty/' The Hispanic American Historical Review, XLVI February Lb quoted In Weisberger. p. 75. 7. As quoted in Bray, p. B, \» quoted in c,. a. Mellander, The United 8tak tmanian Politics (Danville, Illinois, The Interstate Printer- and Publishers, Inc., L971), p. 40. - quoted In Report on Unit* lelations With Panama, Subcommittee <>n Inter-American Affair- of the Committee on Foreign Affairs, U.8. ll' lentatives. Eighty-Sixth Congn ion, pp. 10 li. 10. A- quoted in Paly, p II. A< quoted in Philippe Bunau-Varilla, The Cheat Adventure of Panama ., Doubleday, 1 54. 12. Bray, p. w. 13. James E. Howell and Esra Solomon, "The Economic Value of the Panama Canal," International Research AsSOCiat* UtO, California 'December D. 14. 14. This figure i- derived from Table 4 on page -•"> of the IRA study. 15. HoWell and Solomon, p. 31. H">. Helen C. Law, "The Panama Canal Treaty in Perspective," The 0\ Development Council, Washington, \\(\ (1976), p. 4. 17. Bray. pp. 128 and 130. 18. As quoted in "Is the Panama Canal Worth It?", Business Week (D her 6, 1971 19. Howell and Solomon, p. .'Jo. Ibid. 21. Letter to Senator Mike ( '.ravel from John P. Sheffey [April 25, L977), p. 4. Attachment to oator Mike Gravel from Colonel Lawrei Jackley, special Assistant, Panama Canal Treaty Negotiations, Office of the ant Secretary Of Defense, International Security Affaire i April 1"). 19' 23. Genera] George S. Brown, "On the Defer of the United 3 for Fiscal Year l I lary 20, 1976), rransmittal, /' studies t970, Report of the Atlantic-Pacific Interoceanic Canal Study Commission (Washington, Q.8. rnment Printing Office, 197 teeemic ( anal Studios u*70, p. 93. \ctu illy, tolls through the Panama Canal are charged 00 "nua-urement rather thai as." Toll- per cargo ton can l>e determined onrj "effective rate.'' Effective rates vary by commodity, and commoditk - through the canal vary over tune. Thus, overall effecth ton vary from to period. - to Senator Mi From General Ernest i Army Corps of Engfa This assumes that the Panamanians will expect an income of $40 to $50 million from toll rathe through the canal amounted to 117.4 million cargo tons, which a* pel ton rate would have produced a revenue of S44.0 million. Traffic in l'.'Tti was, how. suit of the wor'. greater revenue- than th unption. For instance, UNIVERSITY OF FLORIDA 111 40 3 1262 09116 5653 in 1974 traffic through the canal reached 149.7 million cargo tons, which would have produced revenue of $56.9 million at the $0.38 rate. Of course, the ultimate rate to be charged is flexible and will depend upon the availability and cost of alternative means of cargo transportation. 29. Data in Table 4 are derived from "Economic Analysis of Alternative Trans- port Systems for the Disposal of Surplus Alaskan Crude Oil", prepared by Arthur D. Little, Inc. for the California Public Utilities Commission and the Port of Long Beach, California (April 1977). 30. These figures were provided by Arthur D. Little, Inc. and are derived fro n the same computer model as those in Table 4 (cf. note 29). 31. This figure is derived as follows: Assume that the sea-level canal would open in 1990, that interest on debt would be 6 percent, and that canal traffic growth rates would reach the "potential" level projected by the Interoceanic Canal Study Commission. From Table 1 we may then calculate a toll of $0.96 per long ton at 1970 prices. Then further assume that inflation in sustainable toll levels is equal to inflation in canal construction costs, which were estimated to be 80 percent. When $0.96 is increased by 80 percent we get 81.73. To this amount must be added $0.16 in additional royalty payments, as discussed earlier in the text. This provides us a toll of $1.89 per long ton. There are 7.46 barrels in a long ton, so the toll per barrel of oil will be $0.25. Since each laden transit must be matched by a ballast transit, this figure must be increased a proportionate amount to derive total transit costs. If we assume the costs of ballast and laden transits in a new sea-level canal will bear the same proportion to one another as in the present canal, the ballast transit cost chargeable to each barrel of oil will be $0.19 since the current toD rates are $1.29 per net ton for laden vessels and $1.03 for vessels in ballast. Therefore the total transit cost per barrel of oil will be $0.44. It should be noted that the assumptions upon which this transit cost or "tariff" through the canal are based differ from those used to derive the tariffs for the pipeline projects discussed in this report. When Arthur D. Little, Inc. calculated tariffs for North Slope crude transportation alternatives, they assumed a 20 year amortization period, 9 percent interest on long-term debt, and assumed that any pipeline would earn 14 percent pretax return on investment. The Interoceanic Canal Study Commission, on the other hand, assumed a 60 year amortization, 6 percent interest on debt, and assumed that the canal would break even after paying an operating royalty to Panama. These different assumptions may at first appear to result in an applies to oranges comparison. But it must be remembered that the functions and flexibility of a canal are vastly different from those of a pipeline. The latter can be used to move only one product, in only one direction at a time. The former can be used to transport any number of commodities, is multi-directional, does not depreciate, and has military and foreign policy values in no way attributable to a pipeline. Therefore it is not only inappropriate, but impossible to use exactly the same assumptions in deriving pipeline and canal tariffs. o