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Panama Canal Treaty Negotiations: April 17, 1976 (2)
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Panama Canal Treaty Negotiations: April 17, 1976 (2)
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The original documents are located in Box 6, folder "Panama Canal Treaty Negotiations:
April 17, 1976 (2)" of the White House Special Files Unit Files at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 6 of the White House Special Files Unit Files at the Gerald R. Ford Presidential Library
DEPARTMENT OF TRANSPORTATION AND RELATED
AGENCIES APPROPHIATIONS FOR 1976
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
NINETY-FOURTH CONGRESS
FIRST SESSION
SUBCOMMITTEE ON THE DEPARTMENT OF TRANSPORTATION AND
RELATED AGENCIES APPROPRIATIONS
JOHN J. McFALL, California, Chairman
SIDNEY R. YATES. Illinois
SILVIO O. CONTE, Massachusetts
TOM STEED. Oklahoma
JACK EDWARDS, Alabama
EDWARD 1. KOCH. New York
BILL ALEXANDER, Arkansas
ROBERT B. DUNCAN, Oregon
THOMAS J. KINGFIELD, Staff Assistant
PART 4
DEPARTMENT OF TRANSPORTATION:
Federal Railroad Administration
Federal Grants to Amtrak
RELATED AGENCIES:
National Transportation Safety Board
Panama Canal
Printed for the use of the Committee on Appropriations
65
to
1
'acement of these boats
submit for the record both the questions that the committee forwarded
big
iner ships will be lost
as well as the response of the Congressional Research Service com-
11
1 continue to be due to
1 total traflic. Tugboat
piled by Dr. Cole.
masignments are constantly
[The information follows:
Basin or at Miraflores locks,
CONGRESS OF THE UNITED STATES,
Pedro Mignel or in the cut. Thus,
HOUSE OF REPRESENTATIVES,
çeographic area with a temporary
COMMITTEE ON APPROPRIATIONS,
show that the tugs are efficiently
Washington, D.C., March 4, 1975.
Mr. LESTER S. JAYSON,
traffic levels are towing locomo-
Director, Congressional Research Service, The Library of Congress,
items (as are tugboats to a lesser
Washington, D.C.
and the decision should not
DEAR MR. JAYSON : The Transportation Subcommittee has jurisdiction over the
in
traffic.
appropriations for the Panama Canal. Currently the canal is an important ele-
ment of our Nation's transportation system. Over 70 percent of the commerce
STILL
NEEDED
moving through the Panama Canal comes or goes to U.S. ports.
The committee feels that a thorough understanding of the economic ramifica-
still need those. These are for
tions of the canal is important for our consideration of future budget requests of
We still anticipate traffic of
the Panama Canal Co. The committee, therefore, would appreciate it if your
office would conduct, under contract, if necessary, a comprehensive examination
still larger ships.
of this issue and report to the committee, if possible, by July 1, 1975.
The following are some of the questions which we feel should be examined:
have a hearing this after-
(1) What kind of price increase in products shipped through the Panama Canal
can the American consumer, and consumers of allied nations, expect should the
cost of using the canal rise 10, 50. 100, or 2,500 percent above present costs?
(2) What is the probability that fees for use of the canal will rise, and to
what degree will they rise, should operation of the canal be in the hands of the
Panamanians?
(3) Assuming the loss of the Panama Canal to the U.S. transportation system,
what alternatives are now available for transporting goods which currently are
being shipped, or can be expected to be shipped, through the Panama Canal?
Given the present, and anticipated 1980 rail, truck, air freight, and inland water-
last January, I immedi-
ways capacities within the United States, is there sufficient slack in these trans-
Canal and familiarized
portation elements to pick np the additional burden of transporting products now
moving through the Panama Canal?
es the Kissinger treaty.
(4) Assuming that a transportation mode which does not make use of the
the
cipals agreed to on
canal must be employed to move products now being transported through the
hat the negotiations
canal, what will be the differences in transportation costs? The analysis of this
to
question should include oceanic shipping routes which do not include the canal,
ves in the Department
as well as transporting the products to the coastal regions involved via truck,
indicated very strongly
rail, inland waterways, air freight or some combination of these modes.
and the revenues that it
(5) What will be the differences in costs to U.S. consumers of products which
development goals of the
formerly moved through the Panama Canal when those products must be trans-
ported without the use of the canal?
the canal would be its major
(6) What effect will loss of the use of the canal have on the marketability of
revenues probably would be
U.S. products in international trade?
Such a policy of extracting
With best regards.
to support activities separate
Sincerely,
JOHN J. McFALL,
departure from the policy
Chairman, Subcommittee on Transportation Appropriations.
beginning of canal operations;
THE LIBRARY OF CONGRESS,
to cover the costs of main-
CONGRESSIONAL RESEARCH SERVICE,
Washington, D.C. 20540.
ECONOMIC RAMIFICATIONS OF FUTURE PANAMA CANAL CONTROL AND USE:
PROJECT
A SURVEY
and this present stated goal
(By Dr. Leon M. Cole, Senior Specialist in Transportation, April 3, 1975)
the Republic of Panama. As a
ommittee for approval, which
I. INTRODUCTION AND SUMMARY
'ongress. The Library of Con-
Negotiations between the Republic of Panama and the United States over the
Leon Cole. senior specialist in
future control and use of the Panama Canal have been underway intermittently
in part, and I would like to
for 11 years, and there are some indications that a draft treaty, to replace the
existing Treaty of 1903, will be announced in the near future. Presumably the
66
new treaty will be based on the joint statement of principles agreed to on
With regard to alternative lane
February 7, 1974, in Panama. (See appendix A.) In earlier negotiations, the
States. il large portion of the seal
Government of Panama indicated future intentions to rely on the canal, and
probably continue to use the same
the revenues it generates, to support general economic development goals of
and facilities, the only changes beir
the Republic, particularly since the canal would be its major national economic
trade through the canal, which pr
asset. The extra revenues probably would be generated by substantial toll
canal were closed. represents only :
increases.
from gulf ports to Asia, however, I
Such a policy of extracting larger revenues from canal operations to support
through the canal, could be shipped
activities separate from the canal itself would represent a sharp departure from
earried from producing regions to
the policy followed by the United States since the beginning of canal operations,
ramifications of these possible shi
viz, charging only those tolls necessary to cover costs of maintaining and operat-
section IV.
ing the canal. Questions arise, therefore as to what economic effects such toll
It should be noted that such gen
increases might have on the U.S. economy and consumer, and on world trade
specific or special cases quite diff
generally.
1111 in the aggregative consideratic
This report is a survey of the information and data contained in recent studies
tienlar problems of ports or shipp
and reports concerning the economic value of the Panama Canal and its opera-
gregate statistics. It seems unlike
tions. It also is a preliminary response to the six questions raised in the letter of
those represented by the reports S
March 4, 1975 (the questions are listed in appendix B).
their general economic conclusions
The six questions concern three underlying issues
(1) What inereases in domestic U.S. and allied nation commodity and product
II. PANAMA CA:
prices can be expected should Panama Canal tolls increase substantially over cur-
rent levels, and what is the probability that fees will rise, and how much, should
This brief summary of traffic t
the Republic of Panama assume full control of the canal? (Questions 1 and 2.)
place in context the volume of t
(2) What alternatives to the canal are available in the event of closure, and
U.S. and world seaborne trade ge
what would be the differential cost of such alternatives over present canal route
volumes and important commodi
costs? In addition, would there be any capacity constrains on U.S. domestic land
197 also provided.
transportation systems as alternatives to the canal in the event of closure? (Ques-
Some 5 percent of total annu
tions 3, 4 and 5.)
products. now transits the Pana
(3) What effect would the loss of use of the canal have on the marketability
totals. approximately 8 percent of
of U.S. products in international trade? (Question 6.)
While the canal is an important
A most important element in projecting future trade conditions resulting from
term of cargo passing through the
drastically increased tolls or canal closure is that of time. All of the analyses
trade. For example. whereas abor
surveyed agreed that short-run effects (6 months to 1 or 2 years) would be quite
world trade routes consists of pe'
different from longer term adjustments (5 to 10 years), and would incur higher
represented only about 22 percent
cost levels for a temporary period. This essential distinction between short- and
Canal is characterized as a gener
long-term effects is incorporated in the following disenssions.
rather than one or two major com
A brief profile of Panama Canal Traffic compared to total world and U.S. sea-
Was primarily an oil canal, or th
borne commerce is included as section II of this report to help place the present
of grains.¹
use of the Canal in a general economic context.
Table T shows the fiscal year 1
Summary
trade routes through the canal.
route also listed. Oriental trade
The conclusions to be distilled from the reports and data surveyed are that
trattie. The U.S. intercoastal rot
while the Panama Canal is indeed an important facility for world and U.S. com-
operations, now ranks sixth amo
merce, it is not of overwhelming or critical economic importance. According to
long tons of cargo in fiscal year
the reports, market conditions in origin and destination countries exert much
more influence on aggregate commodity and product prices than would increased
TABLE I.-MAJO
levels of Panama Canal tolls or even a complete closure, after an interim period
of adjustment in trade routes and markets. Canal traffic represents only a small
percentage of allied nations seaborne trade, same for a few Latin American
countries. The United States itself is the major user of the canal, but many
alternative trade routos now exist for the most important products and com-
modities, and more would become economically competitive if the canal were
East coast United States-Asia
closed. One estimate is that long term adjustments, because of route and market
Europe
Asia
substitutions, would stabilize at cost levels comparable to current costs through
West coast United States/Canada
Dat coast United States-West coast South Ame
the canal. The pending reopening of the Sucz Canal in June 1975 may provide
Purpe- West coast South America
even more competitive alternatives to routes through the Panama Canal.
US Intercoastal (including Alaska and Hawaii)
Technological trends also are reinforcing the economic competitiveness of
Empope Oceania
Est coast Canada-Asia
alternative trade rontes in several ways. Larger and faster ships, of course.
by coast United States/Canada-Oceania
reduce the past and present time and cost savings on some major canal routes. A
West coast South America-West Indies
newly developing class of ships in particular. oil-bulk-ore or O-B-O- ships, 100m
West coast United East coast South Am
Smith American Intercoastal
as formidable competitors. particularly as deep water ports off the United States
become operative In addition, larger and speedier container ships which take
Subtotal
All other routes
advantage of the time and cost savings represented by container technology are
Total
Panama Canal use.
Source: Panama Canal Company, annual rep
1 Reference 12, p. 15. See Appendix C.
I Reference 19, P. 5. See append
the Panama Canal Company.
67
bent
neiples agreed to on
With regard to alternative land transport system capacity in the United
A.)
"Her negotiations, the
States, a large portion of the seaborne trade now transiting the canal would
ntion
1y on the canal, and
probably continue to use the same ports and port hinterland transport systems
ecoi.
development goals of
and facilities, the only changes being in ocean routes and ship sizes. Intercoastal
d be its major national economic
trade through the canal, which probably would go overland in the U.S. if the
e generated by substantial toll
canal were closed. represents only a small volume. Grain and soybean shipments
from gulf ports to Asia, however. presently second only to petroleum in tonnage
from canal operations to support
through the canal, could be shipped eastward around the Cape of Good Hope, or
represent a sharp departure from
carried from producing regions to west coast ports for ocean shipment. Some
he beginning of canal operations,
ramifications of these possible shifts in transport are discussed more fully in
costs of maintaining and operat-
section IV.
what economic effects such toll
It should be noted that such general conclusions are in fact general. and that
d consumer, and on world trade
specific or special cases quite different from the general trends could be swept
up in the aggregative considerations. More specific analyses might reveal par-
1 data contained in recent studies
ticular problems of ports or shippers or carriers not readily identifiable in ag-
he Panama Canal and its opera-
gregate statistics. It seems unlikely however, that analyses more detailed than
x questions raised in the letter of
those represented by the reports surveyed could reverse or significantly change
lix B).
their general economic conclusions.
108:
? nation commodity and product
II. PANAMA CANAL TRAFFIC IN PERSPECTIVE
increase substantially over cur-
will rise, and how much, should
This brief summary of traffic through the Panama Canal is provided to help
the canal? (Questions 1 and 2.)
place in context the volume of trade and relative size of canal operations to
lable in the event of closure, and
U.S. and world seaborne trade generally. A cross section of major trade route
rnatives over present canal route
volumes and important commodity traffic transiting the canal in fiscal year
constrains on U.S. domestic land
1974 is also provided.
al in the event of closure? (Ques-
Some 5 percent of total annual world seaborne trade, including petroleum
products, now transits the Panama Canal. If petroleum is excluded from the
canal have on the marketability
totals. approximately 8 percent of the world's dry eargo moves through the canal.
on 6.)
While the canal is an important facility in world seaborne commerce, the pat-
e trade conditions resulting from
tern of cargo passing through the canal is not an exact representation of world
that of time. All of the analyses
trade. For example. whereas about half of total world seaborne commerce on all
is to 1 or 2 years) would be quite
world trade rontes consists of petroleum and its products. this commodity group
0 years), and would incur higher
represented only about 22 percent of canal traffic in fiscal year 1974. The Panama
al distinction between short- and
Canal is characterized as a general purpose canal. serving a wide range of goods
discussions.
rather than one or two major commodities as. for example, the Sucz Canal. which
ared
al world and U.S. sea-
was primarily an oil canal. or the Welland Canal, used largely for the shipment
re
help place the present
of grains.1
Table I shows the fiscal year 1974 cargo in long tons (2,240 pounds) by major
trade routes through the canal. with the cargo percentage for each major trade
orts and data surveyed are that
route also listed. Oriental trade. principally with Japan. now dominates canal
facility for world and U.S. com-
traffic. The U.S. intercoastal ronte. once dominant in the early years of canal
onomic importance. According to
operations. now ranks sixth among the major trade routes. with 4.647 thousand
destination countries exert much
long tons of cargo in fiscal year 1974, or about 3 percent of the total canal traffic.
duct prices than would increased
TABLE 1.-MAJOR TRADE ROUTES IN CANAL TRAFFIC
closure, after an interim period
hal traffic represents only a small
Fiscal year 1974
same for a few Latin American
(in thousands of
jor user of the canal, but many
tons) long tons
st important products and com-
cargo
Percent of total
ly competitive if the canal were
ents. because of route and market
East coast United States-Asia
56,935
38.5
Europe-Asia
8,500
5.8
marable to current costs through
Europe-West coast United States Canada
11,555
7.8
Canal in June 1975 may provide
East coast United States-West coast South America
8,498
5.8
Europe-West coast South America
4,782
3.2
rough the Panama Canal.
U.S. Intercoastal (including Alaska and Hawaii)
4,647
3.1
the economic competitiveness of
Europe-Oceania
3,588
2.4
wer and faster ships, of course.
East coast Canada-Asia
4,025
2.7
East coast United States /Canada-Oceania
4,005
2.7
on some major canal routes. A
West coast South America-West Indies
4,060
2.7
il-bulk-ore or O-B-O- ships. loom
West coast United States-East coast South America
4,462
3.0
water ports off the United States
South American Intercoastal
4,598
3.1
edier container ships which take
Subtotal
119,655
ented by container technology are
All other routes
28,252
19.1
Total
147,907
Source: Panama Canal Company, annual report, fiscal year 1974.
, Reference 19, p. 5. See appendix C. Statement by Hon. David S. Parker, president of
the Panama Canal Company.
:68
Commercial cargo to and from the Far East in fiscal year 1974 amounted in
41.2 percent of total canal cargo, with 37.1 percent of Japancse origin or
111. ECONOMIC EFFECTS OF P
destination.
to measure precisely eco
Table II lists the percent of international seaborne shipping transiting the
Canal toll charges are of cour
Panama Canal in fiscal year 1973 by country. While many countries use the
interrelated and dynamic ee
canal to some degree, certain Latin American nations are more dependent on
sensitivities to price of differ.
the canal than other foreign users. The United States remains the major user of
dupping and market arrangemer
the canal, however, with about 40 percent of all cargo transiting the caual orig-
Inating in the United States, and about 28 percent destined to the United States.
canal traffic
In total, about one-third of all canal cargo is U.S. oriented.2
because of the 20-percent toll
TABLE 11.-PERCENT OF INTERNATIONAL SEABORNE SHIPPING BY COUNTRY TRANSITING THE PANAMA CANAL,
Company (PCC) and put into e
FISCAL YEAR 1973
reports commissioned by tt
of toll increases on Panama C
Percent of
Percent of
value of the canal to the Unite
total trade
total trade
to answer questions of effec
through
through
of canal control by the Rept.
Country
canal
Country
canal
rerated is useful and relevant.
reports and projections were P
Algeria
0.2
India
.1
Angola
.1
Indonesia
of Los Angeles and Washing
1.5
Argentina
.4
Ireland
(1)
of Palo Alto. Calif., together
Australia
3.3
Israel
.5
list of references in appendix
Belgium
2.4
Italy
8
Brazil
1.0 Jamaica
5.6
reports are consistent, and 5
Canada
6.8 Japan
10.7
estimates contained in a re
Chile
34.3
Kenya
.1
(MarAd) in May 1974, do diff
China, Peoples Republic of
(1)
Korea, Republic of
11.9
China, Republic of
9.8
Mexico
16.6
below. estimates in the MarA
Colombia
32.5
Netherlands
1.5
of this survey report, t1
Costa Rica
27.2
New Zealand
15.7
to question 1 and 2 concern
Cuba
(1) Nicaragua
76.8
Denmark
4 Norway
6
stracted and summarized belo
Ecuador
51.4
Panama
29.4
note on question 2. With re
Egypt
.7
Peru
41.3
66.4
Philippines
8.8
controlled by the Republic of
EI Salvador
Finland
.6
Poland
2.3
acreases seems limited by econ
France
.9
Singapore
.6
that toll rate increases much I
Germany, Democratic Republic of
1.4 Sweden
.6
Germany, Federal Republic of
2.9
Thailand
.8
declining revenues earned b:
Ghana
.4
United Kingdom
1.6
producing potential of the
Greece
1.1
U.S.S.R
.3
Guatemala
30.9
United States
16.8
Guyana
1.4
7.4
generalizations about effects
Venezuela
Honduras
9.4
Vietnam, Republic of
12.8
the probable sensitivity
Hong Kong
3.7
Yugoslavia
1.3
compulity to another. Estimate:
toll rate increases shou
1 Data on international seaborne shipping not available.
account the highly specific
Source: Panama Canal Company, 1973.
new transiting the canal.
With respect to total U.S. seaborne commerce, about 264 million tons of carge
sensitivity study was prep:
were exported. and another 447 million tons imported in 1974, for a total of 711
distal Research Associates (I)
million tons in seaborne traffic. Of these amounts, about 17 percent transits
1972 by Economic Research
through the canal (refer to table II).
of trausit demand for
Principal commodity groups are shown in table III as percent of total canal
five tall rate increases of 15,
commercial cargo in fiscal year 1974.
updated in a subsequent
Canal" (December 1973). I1
TABLE III.-PRINCIPAL COMMODITY GROUPS TRANSITING THE PANAMA CANAL, SEABORNE COMMERCIAL CARGO
methodologies, the data
150 percent. "The effects
Fiscal year 1974
tripling of tolls, were not expli
Approximate
one commodity group, the
long tons
Percent of
(millions)
total cargo
the increase is that high. That
part of the higher toll rate is
Petroleum and products
32.0
21.6
Alan, specific numerical estin
Grains
24.0
16.3
Coal and coke
19.0
12.7
beyond 150 percent
Ores and metals
13.0
9.0
Nitrates, phosphates, and potash
9.1
6.0
IV shows the expected long-1
Manufactures of iron and steel
9.0
5.9
Miscellaneous agricultural commodities
8.2
5.6
group to each indicated toll
Lumber and products
7.9
5.3
be long-rim sensitivity shown
Canned and refrigerated foods
4.2
2.8
Chemicals and petrochemicals
3.5
2.3
Machinery and equipment
2.5
1.7
now are $1.08 per laden Pan:
Miscellaneous minerals
2.2
1.6
ballast, up from the former $0.90
All other
14.0
9.2
11. See Appendix C.
21.
18.
Source: Panama Canal Company, annual report, fiscal year 1974.
21.
2 Ibid., p. 4.
69
n fi:
1r 1974 amounted to
III. ECONOMIC EFFECTS OF PANAMA CANAL TOLL INCREASES
perce
Japanese origin or
Attempts to measure precisely economic effects of significant increases in
aborne
upping transiting the
Panama Canal toll charges are of course fraught with difficulties because of the
While many countries use the
intricate interrelated and dynamic economic patterns of world commerce, the
nations are more dependent on
varying sensitivities to price of differing commodities, and the numerous alter-
tates remains the major user of
native shipping and market arrangements for most commodities.
cargo transiting the canal orig-
it destined to the United States.
Effects on canal traffic
oriented."
Partly because of the 20-percent toll rate increase recommended by the Panama
Canal Company (PCC) and put into effect on July 8, 1974, there exists a series
COUNTRY TRANSITING THE PANAMA CANAL,
of recent reports commissioned by the PCC which examine and estimate the
effects of toll increases on Panama Canal traffie and measure the general eco-
Percent of
nomie value of the canal to the United States.¹ The analyses were not designed
total trade
directly to answer questions of effects on U.S. and allied nation consumers
through
or effects of canal control by the Republic of Panama, yet much of the informa-
canal
ntry
tion generated is useful and relevant.
The reports and projections were prepared either by Economic Research As-
.1
sociates of Los Angeles and Washington, D.C. or International Research As-
1.5
(1)
sociates of Palo Alto. Calif., together with economists from Stanford University
.5
(see the list of references in appendix C). While the projections and assessment
.8
in these reports are consistent, and seemingly objective and competent, short-
5.6
10.7
term cost estimates contained in a report prepared by the Maritime Adminis-
.1
tration (MarAd) in May 1974, do differ. For several reasons, discussed in more
11.9
public of
detail below, estimates in the MarAd report are somewhat questionable. For
16.6
1.5
the purpose of this survey report, the information in these available reports
ds
15.7
and
pertinent to question 1 and 2 concerning the economic effects of higher canal
76.8
tolls is extracted and summarized below.
.6
29.4
First a note on question 2. With regard to probable toll increases should the
41.3
canal be controlled by the Republic of Panama, the rational upper limit of prob-
8.8
es
2.3
able increases seems limited by economics not politics. All the recent studies
.6
agree that toll rate increases much beyond 150 percent of present tolls would
e
.6
result in declining revenues earned by the canal and thus would denigrate the
8.
1.6
revenue producing potential of the canal, regardless of who collected the
ingdom
.3
revenues.
16.8
tates
Broad generalizations about effects of toll rate changes are questionable, how-
7.4
a
12.8
ever, because the probable sensitivity of canal traflic to toll charges varies from
Rept
1.3
one commodity to another. Estimates of changes in traffic volume associated
ia
with different toll rate increases should be made only on a disaggregated basis,
taking into account the bighly specific conditions which prevail for each type of
cargo now transiting the canal.
Such a sensitivity study was prepared for the Panama Canal Company by
about 264 million tons of cargo
International Research Associates (IRA).2 Using the baseline projections of a
mported in 1974. for a total of 711
study in 1972 by Economic Research Associates,3 the IRA study projects prob-
nounts. about 17 percent transits
able tonnages of transit demand for 1975, 1980 and 1985 by commodity groups,
for effective toll rate increases of 15, 25, and 50 percent. The original IRA study
table III as percent of total canal
results were updated in a subsequent IRA study, "The Economic Value of the
Panama Canal" (December 1973). Incorporating more recent information and
ANAMA CANAL. SEABORNE COMMERCIAL CARGO
using similar methodologies, the data were extended to cover toll rate increases
of 100 and 150 percent. "The effects of toll increases larger than 150 percent,
Fiscal year 1974
e.g., a tripling of tolls, were not explicitly prepared since, with the possible ex-
Approximate
ception of one commodity group, the data indicate that total revenues decline
long tons
Percent of
when the increase is that high. That is, beyond a 150 percent increase, the rev-
(millions)
total cargo
enue impact of the higher toll rate is more than offset by the decline in traflic
32.0
21.6
volume. Also, specific numerical estimates of the probable change in traffic for
24.0
16.3
toll increases beyond 150 percent do not have an acceptable degree of
19.0
12.7
13.0
9.0
reliability."
9.1
6.0
Table IV shows the expected long-run sensitivity of traffic volume for each
9.0
5.9
8.2
5.6
commodity group to each indicated toll rate increase after transitory effects have
7.9
5.3
faded. The long-run sensitivity shown in table IV was derived by comparing the
4.2
2.8
3.5
2.3
1.7
1 Toll rates now are $1.08 per laden Panama Canal net ton, and $0.86 per Panama Canal
2.5
1.6
not ton in ballast, up from the former $0.90 and $0.72 respectively.
2.2
14.0
9.2
= Reference 14. See Appendix C.
3 Reference 21.
Reference 18.
& Ibid., P. 21.
70
7
expected level of a commodity's shipment through the canal in 1985 (assuming a
is the outer limit of the loss if the
given toll rate increase) to the expected 1985 level assuming no further toll rate-
world. The U.S. users share of this
increase. Using wheat as an example, table IV shows that an effective 50 percent
about $34 million annually. That is, tl
toll increase on wheat shipments would lead in the long run to a volume of wheat
average about $34 million a year in t
traflic that is 96 percent of the no-toll increase baseline level; a 100-percent in-
compared to the size of using industr
crease to one that is 74 percent of the baseline level, and an increase of 150 percent
dollar terms. This measurement. of ('
to a volume of 61 percent of baseline. Although the underlying analysis was not
after users have had the opportunity
done, the coefficient for a toll change of 200 percent, reading aeross the row for
the economic value (i.e., the loss assc
wheat, probably would be smaller than .61. That is, there is a strong presumption.
be higher than this."
that the response to a tripling in toll rates would cause wheat tonnage to drop at
least 50 percent, that is, have a coefficient of 5 or lower. "It is imperative to
IV. ALTERNATIVES
understand that these are the equilibrium or 'steady state' responses after users
and world markets have had time to adjust to the toll changes, and that they do
In discussing alternatives to the Pa
not measure immediate or transistory behavior. Time is the essential differen-
between short-term and long-term
fiating factor for example, 'even a tripling of tolls might have no effect on. wheat
prepared for the Panama Canal Co.
cargoes in ships already within sight of the eanal's channel markers.'
the list of references in appendix
and 5 (see appendix B) is extracted a
TABLE IV.-ESTIMATED LONG-RUN SENSITIVITY OF TRAFFIC TONNAGE, BY COMMODITY, TO SELECTED TOLL
INCREASES
Short-term cost estimates
Because of the diversity of commod
Percent by which present toll rate is increased-
there would be a larger number of al
Cargo
0
25
50
100
150)
of a canal closure, even in the short
States-Asia trade there would be alr
diversion of movements from U.S. At
Wheat
1
1.00
0.96
0.74
0.61.
Coarse grains
.98
.92
.76
.60
This diversion may be particularly pr
Bananas
1
.93
.73
.33
.20
the trend toward containerization UI
Sugar
1
1.00
.97
.70
.54
may also occur in the case of gral
Soybeans
.98
.94
.83
.68
Lumber
1
1.00
1.00
.84
.68
terms of tonnage accounted for or
Wood pulp, paper and paper products
1.00
1.00
.86
.70
fiscal year 1974. At the present tim
Phosphates
.96
.91
.76
.60
Fertilizers, potash, and fish meal
1.00
1.00
.83
.67
to develop economic grain and soybe
Iron ores
1
.88
.76
.39
.15
ports. The initial impetus for this
Miscellaneous ares;
1
1.00
.98
.91
.84
U.S. gulf ports which occurred durin
Scrap metal
1.00
1.00
.67
.50
Alumina and bauxite
1.00
1.00
.86
.71
economic basis for the plan is that
Miscellaneous metals
1.00
1.00
.81.
.67
ments via Pacific ports can be com
Coal
.94
.89
.61.
.37
the use of larger ships, and the avoi
Crude petroleum
.94
.88
.59
.33
Petroleum products
1
.94
.88
.68
.49
Land transportation may also 1)
Chemicals
1.00
1.00
.83
.66
Panama Canal in the case of U.S. int
Sulfur
1
1.00
1.00
.83
.66
Canada to the eastern United States.
Other nonmetallic minerals
1
1.00
1.00
.83
.66
Iron and steel manufacturers
.97
.95
.80
.65
In the case of some commodities,
Autos and trucks
1
1.00
1.00
.83
.65
is likely that some movements may
General cargo
1
.99
.98
.77
.66
shipment time of bananas, for instai
ripening. Therefore, any alternative
Note: Figures shown are (1985 tonnage associated with a specified toil increase) divided by (1985 tonnage projected
time in transit would not be feasibl
with no toll increase). Calculated from tonnage figures rounded to nearest 100,000.
Peruvian and Chilean ore to Europe
Source: International Research Associates, "The Economic Value of the Panama Canal, December 1973," p. 22.
and in the case of a Panama Canal
In the case of petroleum, alternate §
Aggregate effects on the U.S. domestic economy
replace alternate routing.2
According to the 1973 IRA report," canal tolls cannot have much aggregate
"The period of maximum impact
effect on the domestic U.S. economy simply because the magnitudes involved
be less than 6 months. By the end of
are too small. "This conclusion includes impacts on domestic U.S. employment,
tankers will have declined substant
whether national or regional, since again changes in PCC policies would not
in fact, have returned to their prior
have any significant impact on a U.S. civilian labor force of over 90 million
beginning of the transition from th
persons.
These conclusions apply not only to initial, first-round effects but
Costs of short-term alternatives
also to secondary effects through local industries and local labor markets, with
amount to $478 million or 8367 mill
the possible exception of the highly local and specialized group of canal pilots.8
collected for the year. Since the U.S
Another approach is to inquire about the total as opposed to the incremental
of the canal, it was estimated that i
importance of the canal to the U.S. economy. again looking specifically at par-
an additional cost of approximatel:
previously transited the canal."
4
ticular industries and labor markets. What would be the cost (using that word
in a general and total form) to U.S. industry of a closing of the canal? Ac-
cording to an IRA report, the net economic value of the canal was estimated to
9 Ibid., p. 36.
average $100 million per annum for the decade 1975-85 (in 1972 dollars). This
10 Reference 16, p. 4. See appendix C.
2 Ibid.
3 Reference 16, p. 5. See appendix C.
0 Ibid., P. 23.
4 Ibid., p. 8.
7 Reference 18, p. 35. See appendix C.
8 Ibid.
71
1985 through the canal in 1985 (assuming a
1
1 assuming no further toll rate
is the outer limit of the loss if the canal were to become unavailable to the
'N that an effective 50 percent
world. The U.S. users share of this $100 million flow is about 34 percent, or
ong run to a volume of wheat
alout 834 million annually. That is, the value to the U.S. commercial users will
line level n 100-percent in.
average about $34 million a year in the decade beginning in 1975. Again, when
and an increase of 150 percent
compared to the size of using industries, the canal is of limited importance in
underlying analysis was
dollar terms. This measurement, of course, is at the new equilibrium position,
percent. reading neross the row not
after users have had the opportunity to find alternatives: in the shorter term,
That is, there is a strong presumption for
the economic value (i.e., the loss associated with dislocations) can temporarily
would cause wheat tonnage to drop
be higher than this."
of 5 or lower. "If is imperative at
or 'steady state' responses after users to
IV. ALTERNATIVES TO PANAMA CANAL USE
to the toll changes, and that they do
Time is the essential differen-
In discussing alternatives to the Panama Canal, it is important to distinguish
of tolls might have no effect on wheat
between short-term and long-term costs and adjustments. Such analyses were
canal's channel markers.'
prepared for the Panama Canal Co. and by the Maritime Administration (see
the list of references in appendix C) and material pertinent to questions 3, 4
TONNAGE, BY COMMODITY, TO SELECTED TOLL
and is (see appendix B) is extracted and summarized here.
Short-term cost estimates
Percent by which present toll rate is increased-
Because of the diversity of commodities and trade routes transiting the canal,
there would be a larger number of alternative movements available in the event
0
25
50
100
150
of :1 canal closure, even in the short run. "For instance, with respect to United
States-Asia trade there would be almost from the very beginning a substantial
1.00
0.96
diversion of movements from U.S. Atlantic and gulf ports to Pacific coast ports.
.98
0.74
.92
0.F1
.93
.76
.73
.60
This diversion may be particularly pronounced in the case of general cargo where
1.00
.33
.97
.20
the trend toward containerization makes such diversion relatively easy. But it
.70
.98
.94
.54
1.00
.83
1.00
.68
may also occur in the case of grain and soybean shipments to Asia-which in
.84
1.00
.68
terms of tounage accounted for over 16 percent of all Panama Canal traffic in
1.00
.96
.86
.91
.70
.75
fiscal year 1974. At the present time. there is considerable effort being made
1.00
1.00
.60
.83
.88
.76
.67
to develop economic grain and soybean shipments to Asia via the coast
1.00
.39
.98
.15
ports. The initial impetus for this plan came from the massive at
1.00
.91
1.00
.84
1.00
.67
U.S. gulf ports which occurred during the 1972-73 upsurge of grain
The
1.00
.50
1.00
.86
.71
economic basis for the plan is that the additional rail haul required ship-
1.00
.94
.81
.67
.89
ments via Pacific ports can be compensated for by a shorter ship movement,
.94
.61
.37
.88
.59
.88
.33
the use of larger ships, and the avoidance of Panama Canal tolls."
.94
.68
1.00
1.00
.49
Land transportation may also be substituted for movements through the
1.00
.83
1.00
.66
Panama Canal in the case of U.S. intercoastal traffic, and shipment from western
.83
1.00
.66
.83
.66
Canada to the eastern United States.
.95
.80
1.00
.65
In the case of some commodities. such as petroleum. bananas and iron ore, it
.83
.65
.98
.77
is likely that some movements may be discontinued, even in the short run. The
.66
shipment time of bananas, for instance, is limited by the time available prior to
nearest toll increase) 100,000. divided by (1985 tonnage projected
ripening. Therefore, any alternative routing that would add substantially to the
time in transit would not be feasible. In the case of iron ore, the shipments of
of the Panama Canal, December 1973," p. 22.
Pernvian and Chilean ore to Europe and the United States are already marginal,
and in the case of a Panama Canal closure these may be completely terminated.
In the case of petroleum, alternate supply arrangements would to a large extent
tolls cannot have much aggregate
replace alternate routing.²
because the magnitudes involved
"The period of maximum impact and maximum transitional costs is likely to
pacts on domestic U.S. employment.
be less than 6 months. By the end of that period charter rates of bulk carriers and
changes in PCC policies would not
tankers will have declined substantially from their postclosure peaks, and may,
labor force of over 90 million
in fact. have returned to their prior level. That point can also be regarded as the
to initial, first-round effects but
beginning of the transition from the short-term to the long-term costs."³
and local labor markets, with
Costs of short-term alternatives were estimated in the 1974 IRA report to
specialized group of canal pilots.8
amount to $478 million or $367 million more than the tolls that would have been
total as opposed to the incremental
collected for the year. Since the U.S. traffic represents about one-third of the use
again looking specifically at par-
of the canal, it was estimated that in the first year the U.S. economy "would incur
would be the cost (using that word
an additional cost of approximately $122 million related to shipments that had
of a closing of the canal? Ac-
previously transited the canal."
of the canal was estimated to
1975-85 (in 1972 dollars). This
P Ihid., 11. 36.
10 Reference 16. P. 4. See appendix C.
2 Ibld.
3 Reference 16, P. 5. See appendix C.
Ibid., P. 8.
FORD
LIDERAL
72
Other estimates of short-term alternative costs
which are likely to be shipp
The Maritime Administration (MarAd) of the U.S. Department of Commerce
land transportation is even g)
prepared an analysis of the short term effects of Canal closure on toll increases
equipment, 5+ percent for m
entitled "The Panama Canal in U.S. Foreign Trade Impact of a Toll Increase and
for textile yarn and fabric. 1
Facility Closure." That report concluded that a closure of the canal would result
port-to-port movements need
in a $932 million increase in the yearly total delivered price of all exports, and a
via the Panama Canal becau
$583 million increase in the yearly total delivered price of all imports, including
involve the true origins or de:
$78 million for intercoastal deliveries. A toll increase of 100 percent would, accord-
Many import commodities
ing to the MarAd study, result in an "annual loss of export revenue" of $26.2
west coast ports of entry. At
million and an annual increase in cost to consumers of imports of $25 million.
on many container import sld
The analyses in the report, admittedly designed to present a "worst case," suffer
shipments beyond Cleveland
from several factual mistakes in shipping costs and toll rates per cargo ton, and
But with a Canal closure,
from some dubious assumptions about the operations of seaborne commerce. For
transportation of foreign trac
example, the MarAd analyses added in substantial cost increases by commodities
to be large. even to destina
and trade routes, as a result of toll increases, for a number of nonexistent or very
pointed out that rerouting 0
small trade movements. A cost increase of $23.6 million was included for grain
ports and rail transportation
shipments between the west coast of the United States and Europe, yet there are
The same alternatives WC
no measurable grain shipments on that route. Another cost increase of $18.3
United States to the Far E:
million was included for U.S. intercoastal grain shipments. yet again there are
machinery produced in Illine
no measurable grain shipments on that route through the canal.
more economical at present
A thorough critique of the MarAd study reveals numerous deficiencies in
extension of land shipments
concepts and factual errors, and places the usefulness and accuracy of the study
tional. costs, but nowhere near
estimates in question, particularly as they tend to increase the magnitude of the
b. On the west coast Ur
economic effect of higher Canal tolls and a Canal closure.
dominated by petroleum prod
nearly one-half of ++ milli
Long-term alternatives and cost considerations
accounted for by lumber, bor
It is not possible, of course. to predict precisely what the long-term, sustainable
iron and steel products and 111:
alternative for every present commodity movement through the Canal might be.
The likeliest alternatives f
It can be useful, however, to indicate alternatives available to buyers and
a rearrangement of sources
sellers by briefly reviewing (1) what principal commodities move on what trade
trade is dominated by com!
rontes; (2) what alternatives are available to the various buyers and sellers;
merous alternatives with res
and (3) how comparable in cost these alternatives would be."
these companies also engage
a. The east coust United States-Far East trade route is by far the most
facilities, it is obvious that ti
important U.S. trade route through Panama, with exports totaling 60 million
petroleum products from Los
tons and imports 10 million tons in fiscal year 1974. The composition of exports
With respect to general ca
and imports are quite different. Exports are dominated by bulk material, with
is likely to be ocean shipmen
grains, coal. phosphate and scrap accounting for nearly 45 million tons of the
ii should be emphasized that
total. Imports, on the other hand, are dominated by iron and steel products and
costs from ocean to land tra
general cargo shipments.
of combined ocean and land
The most economical alternatives available for bulk material exports involve
the growth of fishy back traff
the use of large bulk carriers of 100,000 tons or SO in movements around the
1.4 to 1.8 million tons (see-
Cape of Good Hope. Included here would be 0-B-O carriers of approximately
On lumber and canned for
the same size which are currently being built in large numbers.
ocean shipment to Europe SI
The Panama Canal is already experiencing competition from large-size bulk
noted that rail shipment ra
carriers. During 1973. approximately 2.5 million tons of coal were exported
discovered by U.S. intercoas
from the United States to Japan in large bulk carriers, going around the Cape;
most of its intercoastal lumbe
and as more large bulk carriers come into use, this bypass traffic is expected to
C. The east coast United
grow and involve not only coal, but grains and phosphates as well.
involves primarily imports 0.
which in 1974 accounted for
Bypass dry bulk charter rates to Japan via the Cape are fully competitive now
which totaled 3.3 million ton
The only disadvantage, from the buyer's point of view, is the large size of a
manufactured goods.
single shipment. Should a Canal closure occur. this is not likely to present a
Shipments of crude oil an
serious problem.
a cost that is very close to
As far as iron and steel manufactures and general cargo imports from the
shipments are made from Ec
Far East are concerned. the most economical alternatives are likely to be ocean
port facilities and permit us
shipments to West Coast ports and rail transportation from there. The recent
way to construct offshore oil
study of domestic and international transportation of U.S. foreign trade, con-
once 200,000-ton tankers em
dueted jointly by the Census Bureau and the U.S. Department of Transporta-
more economical than transit
tion. shows, for instance, that 41 percent of all imports have destinations more
Iron ore shipments from )
than 25 or more miles beyond the port of entry. For many manufactured goods,
increases. During dry period
draft and thereby lessens t1
5 Reference 13. See appendix C.
find it more economical to tal
6 Reference 13, pp. 1 and 2. See appendix C.
U.S. ports are capable of har
7 Reference 12. p. 13. See appendix C.
8 The following discussion is taken from Reference 12, pp. 16-19. See appendix C.
all of the iron ore traffic will
9 Reference 10.
73
72
which are likely to be shipped in containers, the percentage requiring ongoing
buid transportation is even greater. It is 61 percent for machinery and transport
Ad
e U.S. Department of Commerce
Canal closure on toll increases
equipment, 54 percent for miscellaneous manufactured articles and 74 percent
of
le: Impact of a Toll Increase and
for textile yarn and fabric. This study proved, in other words, that the present
ded 1.
d closure of the canal would result
port-to-port movements need not be reproduced in an alternative to shipment
total delivered price of all exports, and a
via the Panama Canal because the present ocean movements do not necessarily
al delivered price of all imports, including
involve the true origins or destinations.
A toll increase of 100 percent would. accord-
Many import commodities could most economically be shipped via rail from
"annual loss of export revenue" of $26.2
west coast ports of entry. At the present time, west coast ports have an advantage
to consumers of imports of $25 million.
on many container import shipments with destinations as far east as Cleveland;
lly designed 10 present a "worst case," suffer and
shipments beyond Cleveland are currently more economical via east coast ports.
But with a Canal closure; and the competitive conditions that exist in the
ping costs and toll rates per cargo ton, For
transportation of foreign trade cargo, the increase in transport cost is not likely
in substantial cost increases by commodities
the operations of seaborne commerce.
to be large, even to destinations on the eastern seaboard. It also should be
creases. for a number of nonexistent or very
pointed out that rerouting of import cargo from the Far East via west coast
ase of $23.6 million was included for grain
ports and rail transportation from there produces a saving in transport time.
the United States and Europe, yet there are
The same alternatives would apply to exports of general cargo from the
that route. Another cost increase of $18.3
United States to the Far East. Already, on export shipments of construction
oastal grain shipments, yet again there are
machinery produced in Illinois and Wisconsin, shipment via west coast ports is
more economical at present than shipments from east or gulf coast ports. The
hat route through the canal."
Ad study reveals munerous deficiencies in
extension of land shipments from points farther east would involve some addi-
the usefulness and accuracy of the study
tional costs, but nowhere near the costs indicated in the study.
they tend to increase the magnitude of the
b. On the west coast United States-Europe route exports to Europe are
dominated by petroleum products, primarily petroleum coke, which accounts for
and a Canal closure.
nearly one-half of 4.4 million tons shipped in fiscal year 1974. The rest is
accounted for by lumber, borax, and canned food. Imports consist primarily of
msiderations dict precisely what the long-term. sustainable be.
iron and steel products and manufactured goods.
odity movement through the Canal might and
The likeliest alternatives for the petroleum product shipments would involve
dicate alternatives available to buyers trade
a rearrangement of sources and markets. As is well known, petroleum product
at principal commodities move on what
trade is dominated by companies with worldwide operations, who have nu-
available to the various buyers and sellers;
merous alternatives with respect to crude and product shipments. In addition,
alternatives would be.⁸
these companies also engage in product swaps with each other. Given these
s-Far East trade route is by far the most
facilities, it is obvious that the least cost alternative would not require shipping
Panama. with exports totaling 60 million
petroleum products from Los Angeles around the Horn to Europe.
fiscal year 1974. The composition of exports with
With respect to general cargo imports from Europe, the least cost alternative
xports are dominated by bulk material,
is likely to be ocean shipment to east coast ports and rail shipment West. Again,
g for nearly 45 million tons of the
it should be emphasized that containerization has greatly reduced the transfer
acco
ted by iron and steel products and
eosts from ocean to land transport and therefore increased the competitiveness
are
of combined ocean and land transportation. Evidence of this can be found in
ble for bulk material exports involve
the growth of fishy back traffic. which between 1964 and 1972 has increased from
100,000 tons or SO in movements around the
1.4 to 1.8 million tons (see Transport Economics, ICC, Oct.-Nov. 1973).
would be 0-B-0 carriers of approximately
On lumber and canned food exports. land shipment to east coast ports and
ocean shipment to Europe seems to be the least cost alternative. It should be
being built in large numbers.
ately 2.5 million tons of coal were exported
experiencing competition from large-size bulk
noted that rail shipment rates for lumber are very competitive, as has been
discovered by U.S. intercoastal shipping, which in the last 10 years has lost
in large bulk carriers, going around the Cape; to
most of its intercoastal lumber business.
come into use. this bypass traffic is expected
e. The east coast United States-west coast of South America trade route
involves primarily imports of crude oil, iron ore, nitrates, copper, and bananas,
grains and phosphates as well.
which in 1974 accounted for 5.3 million tons. Exports from the U.S. east coast,
Japan via the Cape are fully competitive now
which totaled 3.3 million tons, consisted primarily of grain. fertilizer, coal, and
be buyer's point of view, is the large size of a a
manufactured goods.
closure occur, this is not likely to present
Shipments of crude oil and iron ore would be made in larger size vessels at
a cost that is very close to current transport cost via the canal. The crude oil
aufactures and general cargo imports from be ocean the
shipments are made from Ecuador where work is currently underway to deepen
and rail transportation from there. The con-
economical alternatives are likely to recent
port facilities and permit use of larger size tankers. Similarly, plans are under-
way to construct offshore oil terminals in the United States. It is expected that
ional transportation of U.S. foreign trade.
once 200,000-ton tankers can be used, shipments around the Horn would be
urcau and the U.S. Department of Transporta- more
more economical than transit in smaller vessels via the canal.
percent of all imports have destinations
Iron ore shipments from Peru and Chile are currently very sensitive to toll
port of entry. For many manufactured goods,
increases. During dry periods, when the Panama Canal reduces the maximum
draft and thereby lessens the carrying capacity of ships, some iron ore ships
find it more economical to take the Horn route. It is generally expected that once
U.S. ports are capable of handling ships with drafts of 60 feet or so, practically
pendix C.
C. from Reference 12, pp. 16-19. See appendix C.
all of the iron ore traffic will disappear from the canal.
74
Iron ore and crude oil account for about 3 million tons. Of the remainder,
Petroleum.-A pipeline would i
banana shipments from Eenador would probably be eliminated and substituted
tive. This, of course, would app
for by increased shipments from the Caribbean area. Similar arrangements
Canal. In the short run, most pet
might be made with sugar imports. (In view of the fact that the Pacific basin
the use of product exchanges.
area, including the Far East, Oceania and the west coasts of North and South
Bananas.-These movements V
America, is showing the highest economic growth rate of any such large area
coast of South America would at
in the world, producers in that area would have no problem finding substitute
Other bulk cargo.-For iron or
markets.)
Magellan would be the indicated
As to exports, there is a likelihood that in case of Canal closure some U.S.
General cargo.-Movement via
wheat exports would be shifted from gulf to west coast sources. As for the
Magellan are the indicated altern
remainder, alternate routing would probably represent the least cost alternative.
IT. U.S. Intercoastal Trade.-
d. The west coast United States-east coast South America route involves
movement, with the exception 0
primarily the movement of petroleum products from Venezuela to California.
pipeline.
Total imports on this route were 4.3 million tons in 1974. of which 4 million
1. Europe-West Coast U.S. an
tons are petroleum products, with ores accounting for most of the remainder.
to shipments via east coast pc
Exports total less than 300 tons and are primarily in maunfactured goods.
rerouting, perhaps through use of
VI. Occania-U.S. East Coast.-
A Canal closure would probably eliminate all petroleum shipments through a
realinement of sources and markets. Incidentally, such elimination is likely, under
General cargo.-Shipments vi:
any circumstances, with the start of large-scale Alaskan oil production which will
Magellan are the likely long-rm
Bulk cargo.-The most econon
make the west coast an oil surplus region.
e. U.S. intercoastal shipments totaled 4.4 million tons in 1974. They are com-
through the Straits of Magellan.
"Given the very large number
prised of lumber (411,000 tons), iron and steel products (509.000 tons), chemi-
cals (841,000 tons) and petroleum products (1,354,000 tons). U.S. intercoastal
through the Panama Canal, th
would initially involve many se1
shipping was once a flourishing industry, which as recently as 1960 earried a total
of nearly 6.8 million tons between the east and west coasts of the United States.
years. the most economical alto
Among the commodities carried, lumber shipments in 1953 amounted to more than
modity would undoubtedly emer
1.5 million tons. Now they are down to 411,000 tons in 1974. Shipments of cauned
.1 note on grain and soybean exp
food amounted to 616,000 tons in 1953: they have been completely eliminated.
At the present time, practica
Petroleum product shipments totaled 1.5 million tons in 1965; they were 1,354,000
Far East are made via gulf eo
tons in 1974, up from 615,000 tons in 1973.
the shipment of wheat grown i
What caused the decline of intercoastal shipping was competition by land trans-
Portland.
portation, particularly the railroads. The railroads outperformed the shipping
In terms of transport costs, €
companies in terms of rates and quality of service. with the result that railroads
ally been the most economical.
today carry a far larger share of trauseontinental traffic in the very same com-
for grain movement from Kan
modities that constituted the bulk of traffic for intercoastal shipment. According
opportunities for barging grain
to Carload Waybill Statistics (Department of Transportation. 1969). trans-
natural cost advantages have 1
continental shipments of lumber (shipments from mountain-Pacifie to official and
the gulf coast area.
sonthern territories) amounted to about T million tons; and shipments of primary
Until 1972-73, this concentra
metal products totaled 1.5 million tons."
10
in that year the Russian wh
Summary of Long-Term Alternatives by Major Trade Routes 11
mainland China. as well as stro
I. U.S.-Far East Trade (other than grain exports) General cargo.-For most
to an unprecedented increase
general cargo movements. the long-run alternative will probably be shipment via
tion at gulf ports such as Hot
the Pacific coast. Most general cargo on this route is already containerized and
gestion greatly increased the
now has led to the search for
shipment of containers via the Pacific coast is already being promoted under the
"minibridge" scheme.
soybeans, primarily via Pacific
Coal, phosphate and other bulk cargo.-Shipment in large bulk carriers via the
basis for the alternative is sit
Cape of Good Hope. A rapidly growing development here is the use of multiple
braska. or Minnesota would h:
commodity bulk earriers, such as oil-bulk-ore ships. These ships engage in the
700 miles longer than to gulf I
simultaueous movement of several commodities which share the total transport
stantially shorter ocean yoyaj
cost. For instance, such a carrier may take on a cargo of coal in Virginia, load
carriers larger than Panama
iron ore in Brazil and erude oil in Nigeria, all for movement to Japan via the
way of avoiding the continued
Cape of Good Hope. (Such movements are already occurring and diverting cargo
At the present time. such st
from the Panama Canal.)
railroads have not yet establis
II. Europe-Far East and Occania-Europe.-All commoditics.-These movements
Pacific coast ports lack facili
are quite marginal, even at present with the Suez Canal being closed. For all these
and initiative these difficulties
movements the long-rm alternatives will be shipments via the Cape of Good
Hope or the Suez Canal. once the latter is reopened.
III. East Coast U.S.-West Coast South America.-
U.S. international trade effect
Grain.-For grain shipments from the the gulf coast. the long-run alternative
As can be seen from the d
will also be shipments via the Pacific coast.
precise and detailed answer t
conclusion in the reports sur
10 Reference 12, p. 20. See appendix C.
11 These summary conclusions are extracted from reference 16, pp. 11 and 12.
12 Reference 16. D. 12. See apper
13 Extracted from reference 16,
75
3
in tons. Of the remainder,
Petrolcum.-A pipeline would in all likelihood be the most economical alterna-
eliminated and substituted
rive. This, of course, would apply to all petroleum shipments via the Panama
2a. Similar arrangements
Canal. In the short run, most petrolenm movements might be eliminated through
(
act that the Pacific basin
the use of product exchanges.
the 1. coasts of North and South
Bangnas.-These movements would probably stop and bananas from the west
growth rate of any such large area
coast of South America would attempt to find markets in the Pacific area.
have no problem finding substitute
other bulk cargo.-For iron ore, fishmeal, et cetera, rerouting via the Straits of
Magellan would be the indicated long-run alternative.
in case of Canal closure some U.S.
General cargo.-Movement via the Pacific coast or rerouting via the Straits of
to west coast sources. As for the
Magellan are the indicated alternatives.
represent the least cost alternative.
11. U.S. Intercoustal Trade.-This would in all likelihood be replaced by rail
coast South America route involves
movement, with the exception of petroleum traffic, which would be shipped by
duets from Venezuela to California.
pipeline.
tons in 1974, of which 4 million
I'. Europe-West Coast U.S. and Canada.-Much of this traffic would be shifted
counting for most of the remainder.
to shipments via east coast ports. For bulk cargo, the alternative would be
imarily in manufactured goods.
reronting, perhaps through use of multiple commodity ships.
all petroleum shipments through a
VI. Occania-U.S. East Coast.-
such climination is likely. under
General cargo.-Shipments via the Pacific coast or rerouting via the Straits of
Alaskan oil production which will
Magellan are the likely long-run alternatives.
Bulk cargo.-The most economic alternatives would involve reronting, probably
million tons in 1974. They are com-
through the Straits of Magellan.
products (509,000 tons), chemi-
"Given the very large number of companies and organizations involved in trade
(1,354,000 tons). U.S. intercoastal
through the Panama Canal, the search for long-run alternatives to the canal
as recently as 1960 carried a total
would initially involve many separate and diverse undertakings. But after 5 to 10
and west coasts of the United States.
years, the most economical alternatives for each trade ronte and for each com-
ments in 1953 amounted to more than
modity would undoubtedly emerge and find general acceptance."
tons in 1974, Shipments of canned
.1 note on grain and soybean export alternatives 13
have been completely eliminated.
At the present time, practically all corn, wheat, and soybean shipments to the
tons in 1965: they were 1,354,000
Far East are made via gulf coast ports. The only significant exception involves
ipping was competition by land trans-
the shipment of wheat grown in the Northwest, which is shipped via Seattle or
Portland.
railroads outperformed the shipping
service, with the result that railroads
In terms of transport costs, export shipment via gulf coast ports has tradition-
inental traffic in the very same com-
ally been the most economical. In addition to relatively low rail rates available
for intercoastal shipment. According
for grain movement from Kansas, Iowa, Illinois, and SO forth. there are ample
of Transportation. 1969). trans-
opportunities for barging grain down the Missouri and Mississippi Rivers. These
from
ntain-Pacific to official and
natural cost advantages have led to a strong concentration of all grain exports in
the gulf coast area.
and shipments of primary
Until 1972-73, this concentration of exports presented no serious problems. But
in that year the Russian wheat sale, and resumption of grain shipments to
Trentes"
mainland China, as well as strong export demand from many other countries, led
General cargo.-For most
to an unprecedented increase in grain exports as well as to a massive conges-
will probably be shipment via
tion at gulf ports such as Houston, New Orleans, and Galveston. And this con-
route is already containerized and
gestion greatly increased the cost of shipments through gulf coast ports and
already being promoted under the
now has led to the search for alternatives. The proposed shipments of corn and
soybeans, primarily via Pacific coast ports is one such alternative. The economic
in large bulk carriers via the
basis for the alternative is simply this: corn and soybeans grown in Iowa, Ne-
elopment here is the use of multiple
braska, or Minnesota would have a rail haul to the Pacific coast which is 500 to
ships. These ships engage in the
7(1) miles longer than to gulf ports. However. in exchange. there would be a sub-
which share the total transport
stantially shorter ocean voyage to the Far East and opportunities to use bulk
a cargo of coal in Virginia. load
carriers larger than Panama Canal maximum size, with lower unit costs, and a
all for movement to Japan via the
way of avoiding the continued congestion at gulf coast ports.
fready occurring and diverting cargo
At the present time. such shipments cannot be made economically because the
railroads have not yet established any competitive rates for such movements, and
commoditics-These movements
Pacific coast ports lack facilities for handling such movements. But with time
Suez Canal being closed. For all these
and initiative these difficulties can be overcome.
shipments via the Cape of Good
pened.
V. CONCLUSION
U.S. international trade effects
gulf coast, the long-run alternative
As can be seen from the discussions in sections III and IV of this report, a
precise and detailed answer to question 6 in appendix B is difficult. The general
conclusion in the reports surveyed is, however, that transport cost increases on
reference 16, pp. 11 and 12.
12 Reference 16. P. 12. See appendix C.
13 Extracted from reference 16, p. 9. See appendix C.
76
specific commodities resulting from a sudden loss or closure of the canal could
APPI
possibly be large in the short term, but would adjust downward in the longer run
SO that most U.S. commodities now shipped via the canal in significant volumes
STATEMENT OF PRINCIPLES BETWEEN
would remain competitive in world commerce.
PANAMA AGREED 1
With regard to Panama Canal impacts on the U.S. balance of payments, two
reports surveyed concluded that while Panama Canal tolls from non-U.S. per-
Joint Statement by the Honorable
sons currently contribute to net U.S. exports as a demand for dollars, they do
the United States of America, ane
not do SO to a significant extent when compared to the total U.S. exports of
ister of Foreign Affairs of the Re
goods and services, which amounted to over $100 billion in 1973.1
Panama)
Capacity of land transport alternatives
The United States of America are
None of the reports surveyed examined explicitly the potential capacity of
gaged in negotiations to conclude an
U.S. land transport alternatives systems for carrying commodities now transit-
Canal, negotiations which were made
ing the Panama Canal, although the tacit assumption seemed to be that ca-
the two countries of April 3, 1964, ag:
pacity would expand to meet any increased demand for services caused by
Council of the Organization of Amer
higher canal tolls or a closure. Valid questions exist on the availability, es-
gan of Consultation. The new treat:
pecially in the near term, of additional capacity of rail and highway systems in
1903 and its subsequent amendment:
the United States, as revealed in hearings on the subject in the 93d Congress.
a modern relationship between the
Two unknowns underly this issue: (1) The capacity increase over present ca-
mutual respect.
pacity that would be demanded if commodities now being shipped through the
Since the end of last November,
canal were shifted to U.S. land transport; and (2) does slack capacity now exist
governments have been holding imp
which could relatively easily meet any increased demand for services in the
agreement to be reached on a set of
short term?
guide the negotiators in the effort to
Concerning the first unknown, present U.S. intercoastal traffic through the
inating. once and for all, the causes
canal seems quite small compared to total U.S. coast-to-coast land freight ship-
The principles to which we have
ments. Any needed capacity increase for such intercoastal traffic probably would
ments. are as follows:
be only incremental.
1. The treaty of 1903 and its amer
A much larger commodity flow through the canal is the grain and soybean
of an entirely new interoceanic canal
movement. Some of this traffic, in the event of higher tolls or a canal closure,
2. The concept of perpetuity will b
would continue to use present ports and hinterland facilities, but different ocean
lock canal shall have a fixed terminat
shipping routes. Another portion of this trathic no doubt would be shipped over-
3. Termination of U.S. jurisdicti
land to west coast ports. The capacity of land transport modes to handle such
place promptly in accordance with t
an increase in flow is not presently known in detail. A general view representa-
4. The Panamanian territory in wl
tive of the administration however, is that U.S. ports and waterways face no
the jurisdiction of the Republie of I
overall capacity restrictions, except for a few special situations involving the
pacity as territorial sovereign, shall
expansion of dock facilities and the need to develop facilities for deep draft
the duration of the new interoceanie
ships [and] existing physical plant of The railroads has much greater eapacity
that treaty states, the right to use t1
than will be needed for any forseeable demand for rail freight service.2
necessary for the operation, mainte
Summary
and the transit of ships.
In summary. the conclusions of the reports surveyed agreed that the Panama
5. The Republic of Panama shall
Canal is a major inter-ocean facility by which nearly $600 million of capital-
fits derived from the operation of th
at book value-and nearly 15.000 employees provide world seaborne commerce
the geographic position of its territo
with specialized transport services at a toll cost of over $120 million in fiscal
Republic of Panama.
year 1974. The annual value of these services was estimated to be about $185
6. The Republic of Panama shal
million in 1972 and projected to increase to around $280 million by 1985-in
canal, in accordance with a procedur
1972 dollars.*
shall also provide that Panama will
In the 60 years of its operations, the canal has had a significan effect on the
of the canal upon the termination 0
volume and pattern of world production and trade. According to the reports and
grant to the United States of Americ
data. the relative impact of the canal should be measured, however, against the
of ships through the canal and oper
even larger context of total U.S. and world trade and output. In particular it
and to undertake any other specific
must be measured against the capacity of the world to adapt to changing tech-
sgreed upon in the treaty.
nology, markets and costs. In this larger context, the long-run economic role of
1. The Republic of Panama shall I:
the canal will continue to be important, but it eannot in any sense be regarded
:1: the protection and defense of the
as either overwhelming or crucial.
in the new treaty.
$ The United States of America
1 References 14 and 18. See appendix C.
suportant services rendered by the
2 Former Transportation Secretary Claude S. Brinegar, in National Transportation
maritime traflie, and bearing in 11
Policy, Department of Transportation and related agencies appropriations for fiscal year
could become inadequate for said
1975, Transportation Subcommittee of the House Committee on Appropriations, Mar. 5,
1974, P. 32.
(or new projects which will enlarge
3 Reference 14, p. 36.
proporated in the new treaty in accor
4 Ibid.
12-720
75
THE ECONOMIC VALUE OF THE PANAMA CANAL
By: James E. Howell
Ezra Solomon
Prepared for:
PANAMA CANAL COMPANY
BALBOA HEIGHTS, CANAL ZONE
December 1973
International Research Associates
554 MADISON WAY
PALO ALTO, CALIFORNIA 94303
THE ECONOMIC VALUE OF THE PANAMA CANAL
By:
James E. Howell
Ezra Solomon
Prepared for:
PANAMA CANAL COMPANY
BALBOA HEIGHTS, CANAL ZONE
December 1973
International Research Associates
554 MADISON WAY
PALO ALTO, CALIFORNIA 94303
CONTENTS
PREFACE
ii
I. INTRODUCTION
1
II. BASIC CONCEPTS
4
Economic Value
4
Maximum Possible Revenue
4
Users Surplus Value
7
Profit or Subsidy
7
The Three Value Concepts
10
Economic Value to the United States
12
Actual, Estimated, and Potential Revenue
15
III. MEASURING ANNUAL NET ECONOMIC VALUE
19
Time Dimension
19
Alternatives to the Canal
20
Measuring Traffic Sensitivity
21
Maximum Revenue Potential in 1975
23
Maximum Revenue Potential, 1980 and 1985
26
Cost and Economic Value
28
Net Economic Value, 1975-1985
29
Deriving Users Surplus
30
IV. THE ECONOMIC IMPORTANCE FOR THE UNITED STATES
31
Its Share of Users Surplus
31
The United States as Owner of the PCC
34
Impact on the Balance of Payments
34
Impact on the Domestic Economy
35
REFERENCES
37
PREFACE
The idea for a study to measure the economic value of the Panama Canal
originated within the Panama Canal Company during 1973. There was a need
for a soundly based judgment about the economic value of the Canal which
could serve as a guide for the policy options which the U.S. government
is facing with respect to the Panama Canal.
As is noted in the introductory section of the paper, the only two
existing sources regarding the economic value of the Canal are the accounting
records of the Panama Canal Company and a study entitled Panama Canal
Revenues and Estimates of Savings to Users, prepared in 1971 by CEPAL, also
known as Economic Commission for Latin America (a U.N. organization). The
accounts of the Panama Canal Company are a historical record of revenues
and costs, but given the unique nature of the Canal, they are of limited
help in determining the economic value of the Panama Canal. The CEPAL
study was intended to establish an estimate of the economic value of the
Canal. However, its usefulness was impaired by lack of adequate data and
some theoretical misconstructions.
At the request of the Panama Canal Company, Ely M. Brandes, President
of International Research Associates, Palo Alto, Calif., organized a research
team consisting of Dr. James E. Howell, Professor of Economics, Graduate
School of Business, Stanford University, and Dr. Ezra Solomon, Dean Witter
Professor of Finance, Graduate School of Business, Stanford University, to
conduct an economic value study of the Canal. Both Dr. Howell and Dr. Solomon
are well known economists, with broad experience in research and consulting,
as well as teaching.
The objective of the study was to develop a definition of economic
value of the Panama Canal in accordance with accepted economic principles,
and to prepare estimates consistent with this definition. In preparing the
actual estimates, use was to be made of the latest Panama Canal traffic pro-
jections and sensitivity estimates. The traffic projections completed by
Economic Research Associates during November 1973 were then used by Inter-
national Research Associates to prepare traffic sensitivity estimates.
ii
While this study confines itself to the economic value of the Canal,
there was no intent to deprecate the strategic or political value of the
Panama Canal. Rather, the issues surrounding the Panama Canal are best
understood by maintaining separate identities for the various roles which
the Canal fills and not by confusing economic value with military or
political value.
In the course of this study certain key issues emerged and it became
apparent that the value of the findings here would depend greatly on the
resolution of these issues.
The first of these issues concerns the proper definition of the
various value concepts that must be considered in a study of this kind,
and their relation to each other. Annual economic value of the Canal is
related to maximum possible revenues which in turn is related to users'
surplus value and owners' profit. Beyond this, economic value can be
associated with world commerce, the United States or any other country.
In addition, there are distinctions to be made between economic benefits
accruing to the users of the Canal as opposed to the owners. Each of these
concepts and their relationship to each other must be precisely defined, yet
in a way that is intelligible to the layman.
The second issue is that of making these concepts operational by de-
veloping actual value estimates. Of necessity, the research team could
not develop the data on which these value estimates are based; instead it
relied on existing data sources. However, this reliance on data developed
by others in no way lessened the responsibility of the research team with
respect to the findings.
The third and perhaps most important issue relates to time. It was
recognized at the very beginning of the project that the estimates of annual
economic value should be made on a long-run basis. If the results of this
study are to be used for policy decisions, the estimates of maximum revenue
should reflect the conditions that are likely to prevail after transitional
effects have disappeared. It is recognized, for instance, that the short-
run maximum revenue potential may be far greater than the level that can
be regarded as sustainable.
Although a preference for the long-run view is logically correct,
the public impression of the magnitude of events and the attendant costs
is often set by the very same short-run considerations that this study
iii
has sought to avoid. For instance, if some sudden and unforeseen event
were to force the closing of the Panama Canal, the cost of providing
alternative transportation and supply services would, in the short run,
far exceed any estimate contained here. And the public officials who
must deal with the short-run aspects of the problem would need to estimate
the costs on the same basis. But long-run policy decisions should be
based on long-run considerations of value and cost.
The study itself was conducted by Drs. Howell and Solomon, and the
findings and conclusions of this report are primarily theirs. Mr. Brandes
acted as project manager and consultant to the team.
Officials of the Panama Canal Company were most helpful to the study
team by making necessary data available, and that assistance is greatly
appreciated.
iv
I. INTRODUCTION
The Panama Canal has been a multi-faceted undertaking combining
engineering, political and military elements on a heroic scale that has
captured the attention of history. Of course, it has also been viewed
from its inception as an economic asset subject to most of the economic
forces and constraints typical in such cases. This is reflected unmis-
takenly in its organization, operating policies, and personnel. The
Canal is owned by a public corporation, the Panama Canal Company (PCC),
which in turn is owned by its stockholder, the United States government
(nominally through the Secretary of the Army). The PCC is charged inter
alia with holding and operating the Canal as an economic facility open
to all comers, but at a price which will at least cover all costs, including
recovery of the stockholder's original capital investment through appropriate
amortization.
That the PCC is a publicly owned corporation with assets to be managed
according to certain economic instructions laid down by its stockholder-
owner differentiates it from government agencies such as the FBI or govern-
ment assets such as the Washington Monument. It is perfectly sensible
in such a setting to ask about the economic value of the Canal, the Company's
primary asset, and the only one of concern here.
There are several general reasons why an owner might inquire about
the value of a business asset, quite beyond the initial one of simply wanting
to know what is owned. One is the wish to be prepared to make an informed
decision about additional capital investments in this same venture, in a
different but similar one, or in one totally dissimilar but which competes
for capital. Another use of accurate information is evaluation of the
long-run effectiveness of operating policies or of the management. Finally,
knowledge of current asset value is useful in making decisions about the
future disposition of that asset.
More specifically, the Canal's owners are currently facing important
issues such as user charges, capital improvements related to developments
1
such as larger and faster ships and to the possibility of traffic reaching
Canal capacity by 2000, the changing composition and pattern of world
trade, and the political questions associated with the Treaty of 1903.
In all these cases accurate information about the economic value of the
Canal is useful if not indispensable. This is attested to by the words
of Congressman Leggett, Chairman of the Panama Canal Subcommittee of the
Merchant Marine and Fisheries Committee as reported in the Congressional
Record (H5881) of July 10, 1973: "The economic value of the canal to our
country and to the other user nations of the world has never been measured
It is one thing to record the tonnage of the some 15 thousand ships and
the type and value of the cargoes which pass through the canal on an annual
basis but the real value of this most important international waterway to
the economies of the nations concerned is a far different matter
I feel
very strongly that we must have the best understanding possible as to the
real value of this canal to our country and to the other user nations of
the world."
It is not the assignment here to go further into the potential uses
of an estimate of the value of the Canal. Rather it is to develop a theoret-
ically, economically, and operationally sound definition of Economic Value,
and then to give it empirical content based on current and projected economic
conditions. The numerical estimate is needed not only for its own sake as
described in the previous paragraph, but also as a demonstration of the work-
ability of the conceptual apparatus. Finally, the report will show how
Economic Value, as developed and measured here, is related to the United States
both as owner and as user of the Canal, and, in addition, how these conclusions
relate to U.S. employment and balance-of-payments objectives. All military
and political considerations are explicitly excluded from consideration.
A fortunate corollary of the economic character of the Canal has been
a tradition of strong economic analysis. The outstanding example is the
work of Emory R. Johnson, Special Commissioner on Panama Canal Traffic
and Tolls, in 1913. After many years the results of that work are both
fresh and, to the delight of economists, accurate and relevant. Hopefully,
the present work will be a worthy part of this tradition.
This raises explicitly the question of antecedent studies. That is,
can the present report build on prior definitions and measurements of the
worth of the Canal? In general, the answer is no. Of course, PCC accountants
2
have careful records of worth in the sense of book value, and each annual
report by the PCC begins with a review of exactly that. For example, in 1973
the PCC reported that the book value of U.S. ownership in the Canal was some
$530 million. Valuable for some purposes, this simply is not what an
economist would define as the economic value of the PCC's exotic asset, and
thus it is not the appropriate information for many of the strategic
decisions that the PCC and the U.S. government must make regarding the
Canal.
One study which certainly attempts to define and then estimate economic
value is that prepared by the Economic Commission for Latin America: CEPAL
(to use the Spanish initials of the Commission), Panama Canal Revenues and
Estimates of Savings to Users, 1971. That effort and the present one agree
on the critical importance of knowing economic value, and both see "maximum
obtainable revenues-alternative cost" as the proper approach, but from that
point on the two studies diverge dramatically, so necessarily their numerical
results differ. The present authors naturally think their theoretical work
the sounder, but it is necessary in fairness to point out that they had the
advantage of coming later and thus are able to benefit from both the strengths
and weaknesses of the CEPAL study. The only other known effort is an in-
ternal memorandum in early 1973 by the PCC's own economist. The ideas pre-
sented here go well beyond that brief, explanatory paper, but the two are
certainly consistent.
3
II. BASIC CONCEPTS
Economic Value
The annual net Economic Value of the PCC can be viewed as the differ-
ence between the resource cost of operating the Canal and the resource
cost of providing equivalent services in the most economical alternative way.
This concept, a comparison of the levels of resources needed to provide
a given service through two alternative systems is directly independent
of such things as toll level or owner's profit. It changes significantly
over time only if Canal costs change relative to the cost of users' alter-
natives, referring in both instances to economic costs (including the
cost of capital). It is based on a fundamental axiom of benefit theory:
when not set by market forces, prices cannot be used as a measure of benefit
or value. This is, the only economic alternative to the use of price as a
value measure is the resource cost of providing service which is equivalent.
On this basis, current net Economic Value of the Canal is approximately $80
million per annum (Figure 1), as will be more precisely explained below.
Maximum Possible Revenue
Inextricably linked to Economic Value is the concept of maximum Canal
revenues and, as a means thereto, the revenue-maximizing toll structure.
In fact, Maximum Possible revenue, also on an annual basis, is exactly what
was meant immediately above by the words, cost to users of securing alter-
natives to the Panama Canal - the $185 million in the illustration of
Figure 1. It is useful to redisplay this fact in another diagram, Figure 2,
where the revenues associated with a number of conceptually feasible revenue
policies are compared with one another. As explained later, only transit
revenues are considered in this report.
This formulation makes explicit that, despite an impression in some
minds of economic indispensability to world commerce, the Panama Canal exists
today in a world in which there are many potential substitutes for it. One
need only look at the recent history of the Suez Canal to see the force of
the point. Most Panama Canal users also have alternatives which are not too
4
Net Economic Value
$80
of the Canal
$185
Cost to Users
of Alternative
$105
Economic Cost
of Providing
Panama Canal
Service
(Illustrative Figures in Millions)
Figure 1. Annual Economic value of the Panama Canal
5
(Illustrative Figures for 1975 in Millions)
$0
$105
$185
"Free Good"
Recover Costs
Maximum Pos
("Breakeven")
Revenues
Figure 2. Long-run Transit Revenues Associated with Alternative Tolls Poli
6
remote when viewed on the all-important dimension of economic cost. In
fact, the largest amount of long-run revenue that can be recovered by
the PCC from any particular class of users is precisely the cost to them
of the cheapest long-run alternative to using the Canal. This is maximum
potential revenue, ignoring for the moment both the transitional revenues
available in the short-run and the frictions and slippages which prevent
long-run realization of any theoretical maximum, as shown in Figures 1 and 2.
Users Surplus Value
It is useful to combine the concepts of Economic Value (Figure 1) and
alternative revenue policies (Figure 2) so as to define and display a new
value concept, that of Users Surplus (Figure 3). In particular, taking
their viewpoint, Users Surplus is defined as the difference between the value
to users of the Canal's services and what they actually must pay for them.
From the viewpoint of the PCC, users surplus value is the amount of poten-
tially collectible revenue left in the hands of users. Of course, it is
greatest if the Canal is free to users and zero if the revenue level is
at the maximum of $185 million of Figure 1. For example, under PCC's 1972
revenue policy, the surplus value which will be enjoyed by users in 1975 is
about $65 million.
Profit or Subsidy
Users surplus must not be confused with the direct out-of-pocket sub-
sidy to Canal users that exists when revenues are set at a level less than
full costs. Users surplus is the difference between actual revenues and
maximum possible revenues, whereas direct subsidy is the excess of actual
costs over actual revenues. Of course, when revenues exceed costs the
subsidy is negative and is more conveniently called operating profit.
Figure 4 compares alternative revenue policies (ignoring for the moment
the effect of lower traffic associated with higher tolls) in order to display
graphically the subsidy to users if revenues are less than the amount re-
quired to recover full costs, and the profit to the owner if they are higher
than that. Under current law, the PCC is required to follow a revenue
policy such that all costs are recovered, i.e., that operating losses (overt
subsidies to users) be avoided.
7
$
Revenue Line
Cost of Alternatives
Users Surplus
Maximum Possible Revenue
$
Alternative Revenue Policies
Figure 3. Users Surplus Enjoyed by Canal Users
8
$
Revenue Line
Profit to Owner
Canal Costs
Subsidy to Users
"Breakeven" Policy
$
Alternative Revenue Policies
Figure 4. Costs, Alternative Revenue Policies, and Resulting Subsidy or Profit
9
The Three Value Concepts
Three value concepts - Net Economic Value, Users Surplus, and
Owner's Profit - have now been presented. To summarize, they have been
derived by comparing pair-wise three concepts, one revenue and two cost,
as follows (all in annual amounts):
Annual Net Economic
=
Annual Cost of Alter-
- Annual Cost of
Value of the PCC
natives as Measured by
Providing Canal
the Theoretical Revenue
Services
Maximum
Annual Users Surplus =
Annual Cost of Alter-
- Actual Annual
Value
natives as Measured by
Revenues Collected
the Theoretical Revenue
by PCC
Maximum
Annual Profit to
=
Actual Annual Revenues
- Annual Cost of
Owner
Collected by PCC
Providing Canal
Services
The exact relation of these concepts is shown in Figure 5 which is simply
a summary of the diagrams presented thus far. Note that the first two
concepts are equal if a "breakeven" revenue policy is pursued. With such
a breakeven policy, there is no subsidy to users, but they nonetheless con-
tinue to enjoy some surplus (equal to the economic value of the Canal) since
the owner is foregoing claiming any of the potential profit. It is important
to note further that Net Economic Value is independent of the revenue policy
adopted (measured on the horizontal axis in Figure 5), although the surplus
enjoyed by users certainly is not.
How relevant are the simple conceptual definitions developed thus far?
The answer is that they are both reasonably realistic and quite useful.
However, proof of this will be demonstrated only later when the concepts
are given operational content. It suffices here to warn that functional
relationships have not been presented thus far, and that those relationships
implicit in the definitions have been suppressed. An example of an important
relationship thus far ignored is that of costs to revenue policy since the
latter is a partial determinant of traffic volume, which in turn affects
costs. Such interrelationships will be carefully considered later in
connection with putting numbers on the definitions.
10
$
Revenue Line
Cost of Alternatives
Net Economic Value
Users Surplus
Profit
Canal Costs
Subsidy
"Breakeven"
Maximum Possible
$
Alternative Revenue Policies
Figure 5. Three Concepts of Value
11
Economic Value to the United States
The total annual net economic value of the Canal as defined is the
value to all users. What of the economic value to the United States?
Before making any definitive statements about the Canal's impact on
or value to the United States, one must distinguish carefully among
several perspectives:
- the U.S. as one of the major users of the Canal
- the U.S. government as the sole stockholder and operator
of the PCC
- the impact of the PCC on the U.S. balance of payments and the
U.S. domestic economy.
Each perspective will be examined.
The first perspective of importance for the United States is that
of the United States as a major user of the Canal. The value of the
Canal to U.S. users is measured by the share of U.S. users in total users
surplus (Figure 3), i.e., their share of the cost advantage of the Canal
over alternatives. That is, it is the difference between what U.S. users
would and do pay. As pictorially represented in Figure 6 this is unequivocal
enough, at least conceptually. But it is no simple task to differentiate
U. S. and non-U.S. users. To do so requires decisions about who actually
pays transit costs and who actually enjoys the users surplus when it exists,
as it certainly does now. Only then can one establish the geographic
identity - U.S. or not - of those users who would lose surplus value if
a more aggressive revenue policy were adopted by the PCC. Who pays the
tolls and enjoys users surplus when it exists - the shipping company who
pays the transit fees, the originator of the cargo, or the ultimate cus-
tomer? If the PCC is conferring benefits on users through a breakeven
revenue policy, is it the owner of the ship that transits with a load of
Japanese cars who enjoys that benefit, or is it the Japanese companies who
made and own the cars, or is it the European customers who will buy them?
And so on. This, of course, is the classic economic problem of how costs
are shifted, a subject which has been central for decades to the tax
theorist.
There is no unequivocally definitive way to handle this question short
of a detailed investigation of all the final markets for all goods transit-
ing the Canal. Theoretically, with enough information about demand
12
U.S. Users
Users Surplus
Set by
Revenue Policy
Revenues
Non U.S. Users
Economic Value of the Canal
Figure 6. Allocation of the Economic Value of the Canal
13
elasticities and pricing behavior, one could judge reasonably well at
least the first-order shifting. This intensive a look is neither possible
nor desirable here, and the present analysis will be limited to making a
reasonably sensible division of the distribution of users surplus among
U.S. and non-U.S. users. This can be done in two ways: by origins and
destinations of cargos and on the basis of elasticity estimates for each
of the major commodity groups.
In addition to its role as a major user, the United States is also
the sole owner and operator of the PCC. Over the past sixty years it has
chosen to operate the Canal as an international public utility and has
followed a revenue policy which just provides for recovery of annual costs,
including depreciation of tangible assets, and a moderate rate of interest
on investment funds originally advanced by the U.S. Treasury. As owner,
the United States could institute a different revenue policy. For example,
it could, through higher transit charges, capture some or all of the
surplus which now accrues to users, including U.S. users of the Canal.
The flow of revenues that would be generated by higher tolls, less the
total annual costs associated with servicing the traffic associated with
the higher toll structure, would represent profit. Such profits could be
used to compensate the U.S. government, as owner, for its initial invest-
ment and risk; it could be used to expand and improve the PCC's physical
assets; or it could be used to support a higher level of annuity payment
to the host country.
The third way in which the PCC is of economic importance to the United
States, is that the U.S. as a nation has economic and social objectives with
respect to its gross domestic output, employment, and balance of payments.
Does the Panama Canal contribute significantly to the national policy of
maintaining high levels of domestic output and employment? It does not if
one looks at the number of PCC and Canal Zone government jobs held by U.S.
nationals: currently about 2000 and 1500 respectively. But the more im-
portant question concerns the output and employment impact on U.S. industries
which are linked to the use of the Canal. More particularly, would a change
in revenue policy have any significant employment effects in the United
States, and if so, in what industries and in what regions? This question
will be addressed later. At the same time, an estimate will be made of the
impact of the Canal on the U.S. balance of payments, with both revenue and
trade effects considered.
14
In summary, the U.S. interest in the PCC must be examined separately
from that of value in general, although of course the Canal's economic
value to the world community is important. Further, U.S. interests must
be treated from three perspectives: the United States as owner of the
Canal; the value of the Canal to U.S. users, which requires consideration
of the shifting problem; and the impact of the Canal on the public policy
objectives of the United States with respect to its own level of output,
employment and balance of payments. This report provides estimates and
conclusions from all three perspectives.
Actual, Estimated, and Potential Revenues
Revenues and costs as reported by the PCC for fiscal years 1972 and 1973
1973 are shown in Table 1. Tolls and other transit charges (e.g., pilotage
tugs, line handlers) provide over sixty percent of reported gross revenues,
with sales of other services, including sales to employees, providing the
rest.
Table 1
Tolls, Revenues, and Costs
(millions)
Fiscal 1972
Fiscal 1973
Revenues
Tolls
$101.5
$113.4
Other Transit Revenues
14.7
19.4
Total Transit Revenues
$116.2
$132.8
Net Revenue on Other Activities
2.2
0.6
Total Revenue
$118.4
$133.4
Costs of Operating the Canal
117.7
134.7
Net Operating Revenue
$ 0.7
$ (1.3)
For this analysis it would be incorrect to include as revenues and
costs the gross flows associated with non-transit activities - for example,
the $30,415,784 of sales to employees and the corresponding operating costs
of $30,415,784 associated with those sales. The net, if there had been any,
might be relevant (especially if a true cost), but certainly the gross
figures are not. Thus, Table 1 is presented to show revenues and costs
15
on a basis suitable for use here: the net revenue, of course, is not
affected. Costs (including all expenses) were approximately the same
as total revenues, so net revenue was a nominal $0.7 million (profit) in
1972 and a minus $1.3 million (subsidy to users) in 1973.
Since toll rates have remained essentially unchanged over the nearly
sixty years of Canal operation, increase in toll revenues has come exclu-
sively from traffic growth. Other user charges are adjusted from time to
time, so usually the PCC has been able to cover costs or even have a small
net operating profit as it did in 1972. In other words, the PCC, in spite
of unchanging toll rates, has been able to meet the legal requirements that
revenue be sufficient to cover costs through the combined effect of traffic
growth, non-toll user charges, and cost control programs. Beyond avoiding
losses, the PCC appears to have followed essentially a breakeven revenue
policy, something it can do even though not all variables are under its con-
trol. The existence of relatively small profits or losses is consistent with
this characterization since, from a broader point of view, those profits -
small relative to what they could have been - can be considered a safety
margin against incurring a loss in the future or as a contribution to
owner's unallocable overhead costs (e.g., supervisory and policy-making
costs in Congress or the Department of Defense).
Clearly the PCC has been following a policy of offering the Canal to
world users esssentially at cost. Can it continue to do so in the future?
Should it? The second question is not to be answered here, but the analysis
elsewhere in this report shows that the present policy certainly confers a
substantial surplus value upon Canal users. As for the first question, it
can be expected that in the next decade even a breakeven policy will
require higher tolls since the other user charges simply cannot bear the
full burden of rising costs that most observers expect.
Figure 7 shows, on the same basis as Table 1, Canal toll revenues
through 1972 and a projection through 1985 on assumptions of unchanged toll
rates. Base-line projections were prepared by Economics Research Asso-
ciates (ERA) in their report Perspectives of Panama Canal Commodity Flows,
Transits and Tolls through 1985 (Los Angeles, 1972) and updated November 1973.
Canal users were classified by commodity shipped, origin, destination, and
shipping route. Each user group so identified was then studied intensively
in order to learn how its use of the Canal would change between now and
16
Millions of Dollars
180
160
Actual
Projected
140
120
100
80
60
40
20
0
50
55
60
65
67
69
71
73
75 76
80
85
Fiscal Years
Figure 7. PCC Toll Revenues, Past and Projected
17
1985. Estimates were made on the assumption that tolls would not change
but that other user charges would be adjusted to reflect specific and
identifiable cost increases. That is, they reflect the present toll
structure.
Even if present toll rates are maintained unchanged, the flow of
commercial toll revenues is expected to rise from $98.8 million in 1972
to $168.4 million in 1985, or by 4.2 percent per annum. Users surplus,
or the annual extra volume of commercial tolls users would be willing to
pay rather than by-pass the Canal, would also rise between now and 1985.
The critical task to which this report now turns is an estimate of users
surplus for 1975, 1980 and 1985.
It is worth noting that the traffic forecasts underlying Figure 7
show that there is little possibility of capacity being reached by 1985.
It may or may not do so in the succeeding decade, that of the 90's, depend-
ing on how much ingenuity the PCC is able to bring to bear on modifying
or removing some of the constraints - e.g., availability of water -
that currently define capacity.
18
III. MEASURING ANNUAL NET ECONOMIC VALUE
The annual net economic value of the Panama Canal has been defined
as the difference between the maximum sustainable revenues available
from transit operations and the corresponding economic cost of accommodating
the implied volume of traffic (Figure 1, above).
Time Dimension
The time element in both the revenue and cost measures needs precise
definition before numbers can be developed. In the first place, both
maximum revenue and cost are certain to grow over time as the volume of
world output and trade expand; thus economic value itself is a function of
time and must be estimated with reference to a particular year. This study
covers three years: 1975, 1980 and 1985.
The concept of "long run" implied in the definitions by the word
"sustainable" covers another dimension: it refers to equilibrium conditions
of revenue and cost which are likely to prevail after transitional effects
are eliminated. For example, if tolls are doubled, revenues may double,
but this would be transitional. For in the longer run, some five to ten
years depending on the commodity, some users would adapt by using more
economical alternative arrangements, and the level of long-run revenue
(excluding the effect of growth) would stabilize at some lower level, but
still one which is higher than that which prevailed before the toll changes.
It is this latter, non-transitory level which provides the appropriate
estimate of the maximum sustainable revenue. The maximum revenue potential
of the Canal, in any selected year, is equal to the cost of providing the
world economy with the equivalent service in the most economical alternative
way: Thus, each concept can be measured by measuring the other.
The same problem exists on the cost side of the equation. In any parti-
cular year there may be transitory factors affecting cost. For example,
there may be a sharp change in traffic patterns, or unusual operating
difficulties, or, if accounting cost is used as a proxy for economic cost,
a change in accounting practices. The concept of "long-run" cost ignores
19
such transitional effects and seeks instead to measure the more enduring
or non-transitory level of costs which would prevail in equilibrium.
Alternatives to the Canal
A straightforward, but misleading approach to the measurement prob-
lem which is sometimes used is to ask what it would cost to move the com-
modity flows now transiting the Canal via alternative ocean routes. The
answer would be a larger dollar number, and it would be an exaggeration
of the true economic value of the Canal. The reason is simply that the
most economical alternative, in the long run, is not one which will involve
moving identical commodities between identical points using identical
ships but merely by-passing the Canal. In some cases, alternative ocean
routes may provide the best available long-run alternative to the Canal,
but this is only one of many, more complex and interrelated adaptations
available to world commerce. Other equally important alternatives exist.
At 1972 costs and Canal Tolls, a dry-bulk carrier of 12,500 DWT could
breakeven by sailing about 1000 miles extra in order to avoid Canal tolls;
for one of 37,500 DWT the extra available distance is 1600 miles, and for
a larger vessel of 67,500 DWT (which is subject to draft limits as far as
present Canal passage is concerned), the figure is twice as high. The
economical alternative to shipping via the Canal would not be to use iden-
tical ships on alternative routes but to use much larger ships, and this
significantly reduces the cost of alternative routes.
Another substitute to rerouting ships would be to reroute traffic via
alternative modes of transport. Land transport is a significant alternative
for a considerable portion of current Canal traffic. For example, land
shipment of lumber, canned goods, and steel products between the U.S. west
and east coasts have already made large inroads into what was previously
Canal traffic. Even more important is the rerouting of shipments whose
origin or destination is somewhere in the interior of the United States,
via the "alternate" coast. For example, exporting agricultural products
to the Far East via the west coast instead of the Gulf.
A third alternative to the simple rerouting of ships would be some
rearrangement of the present pattern of commodity movements. The emergence
of Japan as a major supplier and buyer and the relatively rapid economic
growth of the North American west have greatly increased the potential
for such a rematching of sources and markets. Different patterns of resource
20
development and plant location provide yet another adaptive alternative
to the simple rerouting of current commodity flows. The rapid growth
which is occurring in world output and trade increases the possibility
of this form of adaptation.
Finally, consumption patterns can adapt to the new structure of cost
and availability which would be caused by significant changes in Canal
tolls.
Measuring Traffic Sensitivity
The probable sensitivity of Canal traffic to toll changes varies from
one commodity to another, and no easy generalizations are possible.
Rather, estimates of changes in traffic volume associated with different
toll rate increases can only be made on a disaggregated basis, taking into
account the highly specific conditions which prevail for each type of
cargo now transiting the Canal.
Such a sensitivity study has been prepared for the Panama Canal Company
by International Research Associates (IRA), Panama Canal Toll Rate Increases,
(Palo Alto, 1972). Using the base-line projections of the ERA study cited
earlier, the IRA study projects probable tonnages of transit demand for 1975,
1980 and 1985 by commodity group, for effective toll rate increases of 15,
25, and 50 percent. The original 1972 IRA results have been updated to in-
corporate more recent information and using similar methodologies, the data
have been extended to cover toll rate increases of 100 and 150 percent. The
effect of toll increases larger than 150 percent, e.g., a tripling of tolls,
were not explicitly prepared since, with the possible exception of one com-
modity group, the data indicate that total revenues decline when the increase
is that high. That is, beyond a 150 percent increase, the revenue impact
of the higher toll rate is more than offset by the decline in traffic volume.
Also, specific numerical estimates of the probable change in traffic for toll
increases beyond 150 percent do not have an acceptable degree of reliability.
Table 2 shows the expected long-run sensitivity of traffic volume
for each commodity group to each indicated toll rate increase after trans-
sitory effects have faded. The long-run sensitivity shown in the table has
been derived by comparing the expected level of a commodity's shipment
through the Canal in 1985 (assuming a given toll rate increase) to the
expected 1985 level assuming no toll rate increase. Using wheat as an
21
Table 2
ESTIMATED LONG-RUN SENSITIVITY OF TRAFFIC TONNAGE,
BY COMMODITY, TO SELECTED TOLL INCREASES
PERCENT BY WHICH PRESENT TOLL RATE IS INCREASED:
CARGO
0%
25%
50%
100%
150%
Wheat
1.00
1.00
.96
.74
.61
Coarse Grains
1.00
4
.98
.92
.76
.60
Bananas
1.00
.93
.73
.33
.20
Sugar
1.00
1.00
.97
.70
.54
Soybeans
1.00
.98
.94
.83
.68
Lumber
1.00
1.00
1.00
.84
.68
Wood Pulp, Paper &
Paper Products
1.00
1.00
1.00
.86
.70
Phosphates
1.00
.96
.91
.76
.60
Fertilizers, Potash
& Fish Meal
1.00
1.00
1.00
.83
.67
Iron Ores
1.00
.88
.76
.39
.15
Misc. Ores
1.00
1.00
.98
.91
.84
Scrap Metal
1.00
1.00
1.00
.67
.50
Alumina & Bauxite
1.00
1.00
1.00
.86
.71
Misc. Metals
1.00
1.00
1.00
.81
.67
Coal
1.00
.94
.89
.61
.37
Crude Petroleum
1.00
.94
.88
.59
.33
Petroleum Products
1.00
.94
.88
.68
.49
Chemicals
1.00
1.00
1.00
.83
.66
Sulfur
1.00
1.00
1.00
.83
.66
Other Non-Metallic
Minerals
1.00
1.00
1.00
.83
.66
Iron & Steel Mfrs.
1.00
.97
.95
.80
.65
Autos & Trucks
1.00
1.00
1.00
.83
.65
General Cargo
1.00
.99
.98
.77
.66
NOTE:
Figures shown are (1985 tonnage associated with a specified toll
increase) ÷ (1985 tonnage projected with no toll increase).
Calculated from tonnage figures rounded to nearest 100,000.
22
example, the table shows that an effective 25 percent toll increase on
wheat shipments would have no long-run effect on wheat traffic through
the Canal; a 50 percent increase would lead in the long run to a volume
of wheat traffic that is 96 percent of the no-toll increase base-line
level; a 100 percent increase to one that is 74 percent of the base-line
level, and an increase of 150 percent to a volume of 61 percent of
base-line. Certainly, although the underlying analysis has not been done,
one must expect that the coefficient for a toll change of 200 percent,
reading across the row for wheat, would be smaller than .61. That is, there
is a strong presumption that the response to a tripling in toll rates
would cause wheat tonnage to drop by at least 50 percent, i.e., have a
coefficient of .5 or lower. It is imperative to understand that these are
the equilibrium or "steady state" responses after users and world markets
have had time to adjust to the toll changes, and that they do not measure
immediate or transitory behavior. Time is the essential differentiating
factor: for example, even a tripling of tolls might have no effect on wheat
cargos in ships already within sight of the Canal's channel markers!
Table 3 shows the level of sustainable toll revenue available ITOM
each commodity for each toll-rate increase covered in Table 2, from which
it is derived. As an example, for bananas, toll revenues reach a long-run
maximum with a toll rate increase of 25 percent; beyond this, revenues
decline as production and commerce adapt. For five commodity groups (sugar,
iron ore, scrap metal, coal and crude petroleum), toll revenue increases
with toll rate increases up to 50 percent. Beyond this the expected shrinkage
in transit volume more than offsets the increase in toll rate. For seven
commodity groups the toll rate increase which provides the maximum revenue
flow is 100 percent; for 10 groups it is 150 percent, or possibly more.
While specific data for changes above 150 percent have not been calculated,
the pattern of sensitivity shown in Table 2 indicates that 150 percent is in
fact the probable maximum for nine of these, and probably for the tenth as
well. In any case the volume of maximum obtainable revenue for these ten
groups cannot be significantly above that achievable through an effective
toll rate increase of 150 percent.
Maximum Revenue Potential in 1975
Table 4 combines the data in Table 3 with the base-line projections
from Table 2. The second column of Table 4 shows the expected toll revenue,
23
Table 3
ESTIMATED LONG-RUN SENSITIVITY OF REVENUE COLLECTIONS,
BY COMMODITY, TO SELECTED TOLL INCREASES
PERCENT BY WHICH PRESENT TOLL RATE IS INCREASED:
CARGO
0%
25%
50%
100%
150%
Wheat
1.00
1.25
1.44
1.48
1.53
Coarse Grains
1.00
1.22
1.38
1.52
1.50
Bananas
1.00
1.16
1.10
.66
.50
Sugar
1.00
1.25
1.45
1.40
1.35
Soybeans
1.00
1.23
1.41
1.66
1.70
Lumber
1.00
1.25
1.50
1.68
1.70
Wood Pulp, Paper &
Paper Products
1.00
1.20
1.50
1.72
1.75
Phosphates
1.00
1.20
1.37
1.52
1.50
Fertilizers, Potash &
Fish Meal
1.00
1.25
1.50
1.66
1.67
Iron Ore
1.00
1.09
1.14
.78
.38
Misc. Ores
1.00
1.25
1.47
1.82
2.10
Scrap Metal
1.00
1.25
1.50
1.34
1.25
Alumina & Bauxite
1.00
1.25
1.50
1.72
1.78
Misc. Metals
1.00
1.25
1.50
1.62
1.67
Coal
1.00
1.17
1.33
1.22
.92
Crude Petroleum
1.00
1.18
1.32
1.18
.83
Petroleum Products
1.00
1.17
1.32
1.36
1.22
Chemicals
1.00
1.25
1.50
1.66
1.65
Sulfur
1.00
1.25
1.50
1.66
1.65
Other Non-Metallic
Minerals
1.00
1.25
1.50
1.66
1.65
Iron & Steel Mfrs.
1.00
1.21
1.42
1.60
1.62
Autos & Trucks
1.00
1.25
1.50
1.66
1.63
General Cargo
1.00
1.24
1.47
1.54
1.65
NOTE:
Figures shown are (1985 revenue collections associated with specified
toll increase) ÷ (1985 revenue collections projected with no toll
increase).
Calculated from revenue collections rounded to thousands.
24
Table 4
ESTIMATED MAXIMUM TOLL REVENUE COLLECTIONS AVAILABLE
Toll revenues
Estimate of probable
Optimal
with present toll rates
1975 toll revenues
Toll-Rate
applied to projected
if optimal toll rates
Increase
1975 tonnages (a)
had been in effect (b)
(thousands of $)
(thousands of $)
+25%
Bananas
25%
$ 4,422
$ 5,130
+50%
Sugar
50%
3,605
5,227
Iron Ore
50%
1,472
1,678
Scrap Metal
50%
1,620
2,430
Coal
50%
8,736
11,619
Crude Petroleum
50%
10,751
14,191
+100%
Coarse grains
100%
7,853
11,937
Phosphates
100%
2,769
4,209
Petroleum Products
100%
8,107
11,026
Chemicals
100%
2,908
4,827
Sulfur
100%
623
1,034
Other Non-Metallic
Minerals
100%
738
1,225
Autos & Trucks
100%
8,641
14,344
+150%
Wheat
150%
1,663
2,544
Soybeans
150%
3,603
6,125
Lumber
150%
4,849
8,243
Wood Pulp, Paper,
etc.
150%
2,933
5,133
Fertilizers,
Potash, etc.
150%
2,723
4,547
Misc. Ores
150%
2,385
5,008
Alumina & Bauxite
150%
995
1,771
Misc. Metals
150%
1,298
2,168
Iron & Steel Mfrs.
150%
6,571
10,645
General Cargo
150%
30,256
49,922
TOTAL
$119,521
$184,983
(a) This is the Economic Research Associates projection for 1975 toll collections
for each commodity.
(b) This estimate is made by multiplying the 1975 ERA projection for 1975 toll
collections by the long-run sensitivity ratio appropriate to the optimal
toll increase for each commodity as shown in Table 3.
25
by commodity group, from present toll rates. The total expected level
is about $120 million annually. The third column shows the toll revenue
for 1975 that would be generated if optimum level of toll rates had been
set for each commodity. "Optimum," of course, is from the PCC viewpoint,
not that of users. The total expected level, which is the maximum obtain-
able revenue for 1975, is about $185 million annually.
It must be made explicit that $185 million is not an estimate of
revenues in 1975 if the increases are put into effect in, say, 1974. Given
that a significant part of the expectable volume adaptation requires time,
actual tolls in 1975 would be well above $185 million if toll rates were
increased only in 1974 as indicated. Rather, $185 million is the level at
which toll revenues would have stabilized in 1975 had the new toll structure
been in effect long enough to permit commerce to adapt. Underlying secular
growth will, of course, occur beyond 1975. (See Fig. 8.) The $185 million
report, the Net Economic Value of the Canal.
Maximum Revenue Potential, 1980 and 1985
Procedures similar to those used for 1975 can be used to derive esti-
mates of maximum potential toll revenues for 1980 and 1985. The basic
sensitivity estimates are used to develop estimates of the maximum potential
toll revenues which would be available for non-selective toll rate increases,
i.e., uniform, across-the-board increases of 50, 100 or 150 percent. Such
uniform increases do not produce as high a revenue as that which can be
obtained by the optimal selective toll rate changes shown in Table 4. The
economic value of the Canal to world commerce in 1980 and 1985 is higher
than for 1975 due to the expected normal growth in production and trade.
The base-line revenue projections shown in Figure 7 indicate a long-run
growth rate of 4.2 percent a year to 1985. This rate provides one basis
for an estimate of the growth in the Canal's economic value. On this basis,
and using today's prices, maximum achievable transit revenues would be $228
million in 1980 and $280 million in 1985.
The estimates for 1980 and 1985 are subject to potential errors over
and above those attaching to the $185 million estimates for 1975. One
source of error is that the basic data on which all of the estimates are
derived implicitly assume future alternatives to the use of the Panama Canal
that are highly similar to the set of potential alternatives now available.
For example, it is implicitly assumed that the Suez Canal will remain
26
$
Revenues with Toll Increase
$185
Sustainable Level
Users Surplus
$92
Revenues before Change
Years
Year of Toll Increase
5 to 10 Years Later
Figure 8. Toll Revenues after Increase to Maximum Level
27
closed. Thus, the reopening of the Suez, or the development of some new
transport technology not now understood, could significantly increase the
sensitivity of Panama Canal traffic to toll rate increases, and thus
reduce the maximum level of revenue. On the other hand, if long-run inflation,
including ship construction costs, ship operating costs (especially fuel
prices), and the general price level of commodities proceeds at a higher
pace than historical experience indicates, the long-run sensitivity of
Panama Canal traffic to a given get of toll rate increases will be lower
than those indicated in Table 3, and the maximum achievable level of
revenues will be correspondingly higher.
Just how these two sets of countervailing forces will actually operate
cannot be predicted accurately. In effect the estimates developed in this
study - $185 million for 1975 and $280 million for 1985 - ignore these
two opposing influences, which is equivalent to assuming they will tend to
be of approximately the same magnitude, thus cancelling each other.
Cost and Economic Value
The crucial concept of net economic value for 1975 is the difference
between $185 million and the resource cost of providing the services required
to accommodate the implied volume of transits. The only available measures
of the cost of operating the Canal are those provided by the PCC's accounting
and financial statements. It is possible to quarrel with the concepts on
which these statements are based, and therefore to question the estimates on
which they lead.
For example, it might be argued that the United States should recover,
over some reasonable period, all of the initial costs associated with
developing and excavating the Canal itself: about $330 million. At present,
no provision is made for this. The only annual charge is $12 million to
cover interest on unrecovered outlays, which in addition to the $330 million
mentioned includes a further amortizable balance of $425 million. In
economic terms, provision for a fair annual interest return, even at an
arbitrary rate of six percent, would require something closer to $45 million.
In short, it might be argued that present accounting practices understate
the true cost of both capital recovery and return on investment.
An opposing argument with almost equal validity is that the "sunk"
costs of building the Canal are no longer relevant, i.e., that it is not
28
appropriate to allow for any recovery of capital except for capital
assets that actually require periodic replacement. There is no simple
answer to the problem of measuring true economic costs for a facility as
complex as the Canal and for which no external market value exists. The
simple resolution is to accept the present accounting data as reasonable
"best" estimates of present economic costs. This becomes the base for
estimating costs associated with alternative traffic projections, as is
done in the next section.
Net Economic Value, 1975-1985
It is easy to compute the expected volume of commercial traffic which
would be associated with the $185 million of sustainable revenue expected
in 1975. It would be about 104 million long-tons. By contrast the actual
transit volume in 1972 was 109 million tons. The theoretical shift to a
higher toll structure leads to lower tonnage in 1975 in spite of a tendency
for volume to grow over time. The total cost of Canal operations in 1972
was $117.7 million; of this total $17.4 million represents costs which are
an integral part of transit operations, but which are billed and collected
outside the toll system. Thus the cost of operating the facilities asso-
ciated with commercial toll revenues was $100.3 million.
The next step is to estimate the level of cost for 1975 which is
analagous to the $100.3 million figure for 1972. On the one hand, the
actual tonnage transited in 1975 is expected to be lower than in 1972, by
about 5 percent, and this should result in slightly lower operating costs.
The evidence shows that variable costs - those which vary with traffic
volume - account for about one-third of total cost, and on this basis a
fall of 5 percent in tonnage, on average, should produce a cost saving of
about $1.6 million. On the other hand, the cost of operating the Canal is
sensitive to changes in wage-rates, and between 1972 and 1975 net wages,
after allowing for productivity growth, are likely to rise by somewhat more
than the cost saving of $1.6 million. Thus, an approximate measure of eco-
nomic cost in 1975, with maximum tolls, would be about $105 million. This
gives $80 million as a "best estimate" of the annual net economic value of
the Canal in 1975, excluding transitory effects that can be expected to
fade as traffic flows adapt.
Corresponding estimates for 1980 and 1985 can be developed in two
ways. One way is to estimate costs for each of those years, but this approach
29
implies a forecasting precision which is unjustified. The alternative
approach is to assume that the Canal's net economic value will rise at
the same pace as its gross value, or 4.2 percent per annum. On this basis
the estimates for 1980 and 1985, corresponding to the $80 million estimate
for 1975, are $98 million and $120 million. The figure for the decade
1975-1985 is about $1 billion, or an average of $100 million per annum,
the final best estimate and the one which should be used in policy dis-
cussions.
Deriving Users Surplus
Users surplus, as defined earlier, is the difference between the
maximum amount users would pay to use the Canal and what they would actually
pay for a corresponding volume of transits, under the present toll structure.
The first figure has already been estimated at $185 million for 1975. The
second figure can be estimated by applying the present level of tolls to
the volume estimate of 104 million long-tons which would be associated
with the maximum revenue figure of $185 million - which amounts to
$92 million. Thus users surplus in 1975 is estimated at $93. The corre-
sponding estimates for 1980 and 1985 are $117 and $141 respectively.
30
IV. THE ECONOMIC IMPORTANCE FOR THE UNITED STATES
As indicated in the conceptual section of this report, the United
States has three separate interests in the Panama Canal: it is the major
user of the Canal, it is the sole owner and operator of the Canal, and
finally the level of Canal tolls and traffic may affect the nation's
output, employment and balance of payments.
Its Share of Users Surplus
Although the net annual economic value of the Canal to the world
economy in 1975 is about $80 million, the Users Surplus collectively enjoyed
annually by the world is $93 million. This should rise, as was just seen,
to about $141 million annually by 1985. For the 1975-85 decade as a whole,
Users Surplus would thus be about $1,170 million if present toll rates are
maintained. What is the share of the United States in the Users Surplus
currently being enjoyed by users? Alternatively, if toll rates are changed
so as to capture all of the $93 million for the PCC and its owner, how
much would it cost U.S. users?
The answer to either question requires a basis for allocating the
$93 million among U.S. and non-U.S. users of the Canal. This, in turn,
requires an answer to one of the least tractable problems in economics:
who benefits if a tax on transportation is lowered and who suffers if it
is raised?
Clearly, the "benefit" of users surplus now available because the
Canal prices its services below full economic value accrues to one of three
groups: those who purchase commodities that pass through the Canal, those
who produce such commodities, or those who actually move the commodities
from producers to purchasers. The difficult question concerns the propor-
tions in which the three groups share the estimated benefit.
It is realistic and correct to simplify the issue by assuming that
the shipping industry generally is sufficiently competitive that it is
forced to pass on all of its potential share in the users surplus to either
the producer or consumer groups, just as those same market pressures would
31
cause an increase in costs to be passed on. This leaves two groups -
purchasers and producers - and the U.S. economy participates in Canal
traffic in both capacities.
A rough estimate of the U.S. share in the available users surplus can
be developed from overall commodity flow data. In 1972 about 109.3 million
long tons of commercial traffic passed through the Canal. Of that total,
the United States imported 26.9 million tons from the rest of the world,
exported 40.1 million tons, and shipped 3.7 million tons between U.S. ports.
Assuming that half the users surplus benefitted buyers, and half the
sellers, a rough estimate of the U.S. share in the available users surplus
can be calculated. U.S. buyers bought 30.6 million tons of the cargo that
transited the Canal, 26.9 million tons fromforeign sellers, and 3.7 million
from U.S. sellers. This was 28 percent of the total cargo shipped to buyers;
so that the U.S. share of the buyers' half of the $93 million users surplus
estimated for 1975 would be $13 million. Similarly, U.S. sellers accounted
for 43.8 million tons (40.1 million to foreign buyers and 3.7 million to
U.S. buyers) or 40 percent of the total tonnage; so that the U.S. share
of the sellers' half of the users surplus would be $18.6 million. Strictly
on a tonnage basis, the U.S. share of the users surplus would be given by
the sum of the two or about 34 percent. Thus for the estimated level of
users surplus in 1975, $93 million, the U.S. share would be about $32 million.
A more refined approach to allocating the users surplus of $93 million
among U.S. and non-U.S. users would be to analyze individual commodity flows,
assigning users surplus between buyers or sellers depending on demand and
supply conditions prevailing in each particular market. This approach,
using a judgmental partitioning of the estimated surplus for each commodity
flow as between U.S. and non-U.S. beneficiaries, is described in Panama Canal
Toll Rate Increase: Effects on the U.S. Economy, an earlier report by IRA.
It yields results very close to the 34 percent estimate derived from the
simpler, overall approach.
In summary, if the PCC were to raise tolls selectively to the optimal
levels shown in Table 4, it could capture about $93 million a year on a
sustainable basis from users who now collectively enjoy a users surplus
of this amount. Of this, $32 million or 34 percent would be borne by U.S.
users of the Canal. The remaining $61 or so million would be paid by
non-U.S. persons. The transitory windfall revenues realizable by the PCC
during the period of adjustment are not included in these estimates.
32
The United States as Owner of the PCC
Under existing policies, the United States, as owner of the PCC,
derives no financial gain from Canal operations on balance, since revenues
approximately equal costs. In theory, there are two alternative approaches
available. One policy alternative would be to stay with the basic principle
of pricing Canal services at a level just sufficient to recover total cost,
but to redefine "cost." As redefined, "cost" would include: some or all
of those sunk costs not now being amortized and hence not counted; and an
appropriate rate of return on all unrecovered capital investment.
A second alternative would go further and price services at a level closer
to the Canal's annual economic value, i.e., to capture for the owner the sur-
plus now accruing to users. As estimated in a previous section, the amount in-
volved is part of an additional $93 million in 1975, rising to about $141 million
in 1985. (No feasible toll structure could capture all of the user surplus.)
Is this amount of money significant to the U.S. government? Probably not,
but it is hard to think of any argument why U.S. taxpayers should be this
generous to private users of the Canal, foreign or domestic. It is a policy
question, however, to be answered by Congress. The most that can be done
here is to point out that the value to the United States as owner is presently
nil, and that it could be around $35 to $70 million annually over the next ten
years through a more aggressive toll structure, with approximately 66 percent
of the increase coming from non-U.S. persons.
Impact on the Balance of Payments
The sale of PCC services, including transit services, to non-U.S.
Canal users appears in the U.S. balance of payments as a demand for dollars,
i.e., as an export-type item. To the extent these costs to non-U.S. persons
are shifted forward to U.S. customers or backward to U.S. producers, the
benefit to the U.S. balance of payments is reduced. Note the asymmetry here,
because tolls paid directly by U.S. persons do not appear at all in the
U.S. balance of payments unless they are shifted forward or backwards to
non-U.S. persons. In the absence of contrary evidence, standard national
income accounting procedures require that shipping costs be imputed to the
importing country regardless of the appearance of who signs the check, the
country of origin, or the nature of the commodity.
Following this convention, PCC transit charges on U.S. outbound and
on foreign-to-foreign shipments would be imputed in balance of payments
33
accounting to non-U.S. countries, and thus the dollar amounts would appear
in the U.S. balance of payments as an export item, i.e., as a demand for
dollars. The other two categories of traffic, U.S. intercoastal and U.S.
inbound, by this procedure have no impact on the U.S. balance of payments.
Tonnage data, already presented in this section, can be used to
provide estimates of the actual balance of payments impact for 1972. Thus,
about 72 percent of 1972 transit income of $98.8 million, or $71 million,
can be imputed to non-U.S. persons, and thus represents a contribution to
net U.S. exports. For 1975, the two toll estimates presented earlier,
$120 million (at present toll rates) and $185 million (at maximum toll
rates) would imply net U.S. exports of $86 and $133 million, respectively,
using the 72 percent rule. But since the higher toll rates would have an
asymmetrical impact on traffic adjustments, the best guess is that the
latter number would be somewhat smaller, so the net differential, balance
of payments effect from higher tolls would be not $47 million but perhaps
$25-$35 million. An improvement of that magnitude in U.S. export figures,
and thus in the U.S. balance of payments, is too small to be significant
in the light of the fact that U.S. exports of goods and services in 1973
were over $100 billion. As a practical matter, one must conclude that
Panama Canal tolls, while contributing positively to the demand for dollars,
do not do so to a significant extent, not even when the larger, hypothetical
maximum toll levels are considered.
Using a different method of analysis, one based on a commodity-by-
commodity scrutiny of market conditions, International Research Associates
in its Panama Canal Toll Rates Increases: Effects on the U.S. Economy
(Palo Alto, 1972), gets essentially the same results for the balance of
payment impact.
PCC operations affect the U.S. balance of payments in ways other than
through tolls and shifting of transit costs. In particular, purchases by
PCC of services and materials from non-U.S. sources are a balance of payments
drain to the extent that the amounts are not respent in the United States or
in the Canal Zone. The largest element here, of course, is the non-U.S. work
force, about 10,000 people in 1972, with a wage bill of about $62 million. No
information is available on how much is respent on U.S. goods and services and
thus the net negative effect cannot be determined. In the same way, although
salaries to U.S. personnel are not balance of payment drains, those amounts
34
which U.S. employees spend outside the United States and outside the
Zone, i.e., mainly in the Republic of Panama, are indeed a drain. Again,
although no information exists for meaningful estimates, it can be said
with confidence that all of these effects when added together show a net
positive contribution to the demand for dollars, i.e., a positive balance
of payments effect, although it must be remembered that it is not large
enough in absolute terms, now or in the foreseeable future, to be signif-
icant within the larger context within which balance of payments phenomena
must be judged.
Impact on the Domestic Economy
Increased toll payments would represent an addition to the U.S. Gross
National Product since they are an increase in the value of a service
(transiting the Canal) being sold. However, the increased value is in price,
not volume. That is, the increase is in nominal rather than real product.
For certain purposes this can be described by analogue with tax flows, but
for this report this is unnecessary. Thus, to put empirical content in
the elementary statement, raising toll revenues by the maximum possible
amount, some $93 million under the conditions described earlier, would
increase the U.S. trillion dollar GNP only trivially. It is manifest that
PCC revenue policies cannot be an instrument of general economic policy
for the United States as far as domestic economic objectives are concerned
simply because the magnitudes are too small.
This conclusion includes impacts on domestic U.S. employment, whether
national or regional, since again changes in PCC policies would not have any
significant impact on a civilian labor force of over 90 million persons. Even
on the smaller figure of unemployment, some four million people this year,
the impact would be trivial. These conclusions apply not only to initial,
first-round effects but also to secondary effects through local industries
and local labor markets, with the possible exception of the highly local
and specialized group of Canal pilots. Easy verification can be made by
comparing probable changes in traffic of particular commodities to and from
the United States with actual production as reported in standard government
publications.
A different question is to inquire about the total as opposed to the
incremental importance of the Canal to the U.S. economy, again looking
specifically at particular industries and labor markets. In dramatic and
35
extreme form, what would be the cost (using that word in a general and
total form) to U.S. industry of a closing of the Canal? This is part
of the question asked earlier about the net economic value of the Canal
which is estimated to average $100 million per annum for the decade
1975-1985. This is the outer limit of the loss if the Canal were to become
unavailable to the world. The U.S. users share of this $100 million flow
is about 34 percent (derived earlier), or about $34 million annually. That
is, the value to the U.S. commercial users will average about $34 million
a year in the decade beginning in 1975. Again, when compared to the size
of using industries, the Canal is of limited importance in dollar terms.
This measurement, of course, is at the new equilibrium position, after
users have had the opportunity to find alternatives: in the shorter term,
the economic value (i.e., the loss associated with dislocations) can
temporarily be higher than this. Employment effects are even more diffused
than direct industry effects, groups such as Panama Canal pilots aside.
In summary, the Panama Canal is a major interocean facility through
which about 530 million dollars of capital (at book value) and over 10,000
employees provide world commerce with specialized transit services at a
toll cost of just over $100 million in 1972. The estimated value of these
services is around $185 million a year and can be expected to rise to
around $280 million by 1985.
Over the past half century the existence of the Canal has had a signif-
icant effect on the volume and pattern of world production and trade. How-
ever, the relative impact of the Canal must be measured against the even
larger backdrop of total world output and trade. In particular it must
be measured against the capacity of the world to adapt to changing technology,
markets and costs. In this larger context, the long-run economic role of
the Canal will continue to be important, but it cannot in any sense be
regarded as either overwhelming or crucial. The empirical estimates of the
annual economic value of the Canal derived by the present study both reflect
and illustrate this point.
36
REFERENCES
Brandes, Ely M. and Neil T. Houston, Panama Canal Toll Rate Increases:
Effects on the U.S. Economy (prepared for the Panama Canal Company),
International Research Associates, Palo Alto, California, 1972.
Brandes, Ely M. and Alan E. Lazar, Economic Impacts of Panama Canal Toll
Increases (prepared for the Panama Canal Company), Stanford Research
Institute, Menlo Park, California, June 1968.
Brandes, Ely M., Analysis of Panama Canal Traffic and Revenue Potential
(prepared for the Panama Canal Company), Stanford Research Institute,
Menlo Park, California, March 1967.
Economics Research Associates, Projections of Panama Canal Commodity
Flows, Transits and Tolls Through 1985 (prepared for the Panama Canal
Company), Los Angeles, California, June 23, 1972.
Economics Research Associates, Panama Canal Forecast System Output Report
(prepared for the Panama Canal Company), Los Angeles, California,
November 24, 1973.
Johnson, Emory R., Reports of the Special Commission on Panama Canal
Traffic and Tolls, 1913.
Panama Canal Company, Balboa Heights Canal Zone, Annual Reports.
U.N. Economic Commission for Latin America, Panama Canal Revenues and
Estimates of Savings to Users, 1971.
37
**
5
SECRET
RIMENT OF DEPENSE
OFFICE OF THE SECRETARY OF DEFENSE
WASHINGTON, D. C. 20301
UNITED STATES OF OF AMERICA
16 APR 1976
MEMORANDUM FOR THE DEPUTY ASSISTANT TO THE PRESIDENT FOR NATIONAL
SECURITY AFFAIRS
SUBJECT: Panama Canal Treaty Negotiations
In response to your query concerning the Panama Canal Treaty Negotiations,
the following information and comments are provided:
Strategic Importance of the Panama Canal. During February 1974, the
Joint Chiefs of Staff initiated a study (attachment 1) on the strategic
importance of the Panama Canal. The study concluded that:
a. The Panama Canal is a major defense asset, the use of which
is necessary to enhance U.S. capability for timely reinforcement in
Asia and Europe during periods of conflict. Its strategic advantage
lies in the economy and flexibility it provides to accelerate the shift
of military forces and logistic support by sea between the Atlantic
and Pacific Oceans and to overseas areas.
b. A lock canal or a new sea-level canal will continue to be of
importance to national security.
C. Panama has the capability to threaten the Panama Canal itself,
but the probability of such action is low at present.
d. A potential threat will continue to exist to the longer alter-
nate ocean lines of communication around Africa and South America.
At the present time, the Soviet Union is considered the only nation
with such a capability.
The strategic importance of the Panama Canal is under constant review;
nonetheless, it is considered that the conclusions of this study remain
valid.
Military Necessity for Negotiating a New Treaty with Panama.
A U.S. unilaterally operated and defended Canal is an anachronism in
the modern world. To attempt to protect the Canal in a highly
probable confrontation with Panama, should negotiations fail,
Classified by
Mil Asst to the Sec Def
5'
CT TO GENERAL DECLASSIFICATION SCHEDULE OF
REVOLUTION
FIVE ORDER 11652. AUTOMATICALLY DOWNGRADED
AT
TWO YEAR INTERVALS. DECLASSIFIED ON 31Dec84
AMERICAN
BICENTENNIAL
SECRET
1191
1776-1976
KBH 7/5/89
Sec Def Cont Nr.
X
SECRET
2
would require the deployment of thousands of U.S. troops to Panama
(thereby invoking the requirements of the War Powers Resolution),
would likely result in loss of lives on both sides, and most importantly,
would not necessarily guarantee the safety or effective use of the
Canal itself. A new treaty relationship with Panama which provides
for the participation of Panama in the defense of the Canal will give
us the best defense possible.
A new treaty relationship which provides for eventual assumption of
operating responsibilities by Panama, coupled with a program of increasing
participation of Panamanian management and full guarantees of continued
efficient, non-discriminatory transit of U.S. ships at reasonable tolls
will result in a partnership that could best insure U.S. strategic
interests in the Panama Canal.
M. Stater Holoomb
Rear Admiral, USN
Attachment
Military Assistant
a/s
SECRET
SECRET
JCSM-46-74
13 February 1974
APPENDIX
)
THE STRATEGIC MILITARY IMPORTANCE OF THE PANAMA CANAL (U)
2
A. General
3
1. (U) The Panama Canal is of military importance to the
4
United States because of its ability to facilitate the move-
5
ment of military forces between the Atlantic and Pacific Oceans
6
Ships which pass through the canal avoid the long interoceanic
7
route around Cape Horn and save about 30 days of transit time.
8
The canal was built to serve world trade and US national
9
security. It was a logical step in the growing military and
10
economic power of the United States and was justified on the
11
basis of national interest.
12
2. (U) Since it was opened in 1914, the Panama Canal has contrib-
13
uted significantly to US security. During World War II, 14,000
14
vessels, including warships and troop and cargo carriers, passed
15
through the canal. More than 3,300 ships carrying 12 million tons
10
of supplies transited the canal in support of UN Forces during the
17
Korean conflict. The canal served military operations in the
18
Southeast Asia conflict as well. For example, during FY 1968,
19
cargo shipped through the canal in support of US efforts in
20
Southeast Asia was about 7.2 million tons or about 6.8 percent
21
of the total annual cargo tonnage transiting the canal.
22
3. (U) The Panama Canal makes a major contribution to US
23
strategic mobility, but it is too narrow to permit the passage
24
of aircraft carriers and large tankers. This restriction
25
impacts unfavorably on the facility with which these vessels can
26
be moved between the Atlantic and Pacific Oceans.
27
Classified by Director, J-5
SUBJECT TO GENERAL DECLASSIPICATION
SCHEDULE OF EXECUTIVE ORDER 11652
AUTOMATICALLY DOWNGARDED AT TWO
YEAR INTERVALS
DECLASSIPIED ON DECEMBER 31, 1982
SECRET
1
Appendix
KBH 7/5/89
SECRET
B. Military Force Deployment and Logistic Support
1
(S) Current US defense strategy relies to an extent on
2
4.
the use of the Panama Canal for the timely surface deployment/
3
redeployment and support of US Forces in the conduct of both
4
European and Pacific operations. The denial of the canal in
5
either case could cause dolays and could necessitate changes
6
7
in the ementation of national strategy.
8
5. (U) The logistic support requirements for military
9
operations have steadily increased to present levels. Ocean
10
shipping accounts for the vast majority of total overseas
deliverios. The volume" of the world's ocean cargo tonnage
11
12
transiting the canal since World War II has been relatively
13
stable. However, during periods of conflict (Korea and
14
Southeast Asia), its increase was highly significant.
15
6. (U) If the ocean traffic noted above had been denied
16,
the use of the Panama Canal and routed around Cape Horn or
the Cape of Good Hope, the distance and steaming time would
17
have been significantly increased. Therefore, the advantage of
18
a shorter sea route through the Panama Canal represents not only
19
a monetary saving but an enhancement to the timely delivery
20
of critical supplies in support of allies and deployed US Forces.
21
7. (S) The military utility of the Panama Canal during
22
wartime under full mobilization conditions can be illustrated
23
by comparison of projected US sealift delivery capabilities
24
in scenarios assuming both the canal opened and closed.
25
a. Par East Conflict. For the Far East deployment
26
scenario, loss of the Panama Canal seriously aggravates
27
US delivery capability. Cargo outloaded from the east and
28
gulf coast ports would require more than 1,200 transits
29
through the canal. Canal closure would add nearly 14,000 miles 30
and 30 days to each round trip between Korea and cast coast
31
SECRET
2
Appendix
CONUS ports. With the canal closed during the initial 180-
1
day period, significant amounts of critical cargo would not
2
reach the theater of operations within that timeframe. By
3
about D+45, most surface deliveries of equipment and supplies
4
to Korea would begin to exhibit the impact of canal closure,
5
particularly in POL and ammunition. Outloading constraints
6
at the single west coast ammunition port and the proximity
7
of ammunition origins to the three east coast ports forces
8
about 75 percent of the sealifted ammunition to be outloaded
9
at the east coast ammunition ports. A major source of POL
10
for support in Korea is in the Caribbean. Therefore, a re-
11
quirement to rerouto tankers around South America for onloads
12
of POL at Aruba and at the eastern CONUS ports would add a
13
delay due to the increased distance. The tables and charts
14
in the Annex hereto illustrate the impact of Panama Canal
15
closure on cargo deliveries for the Far East conflict.
16
b. European Conflict. Loss of the canal would have
17
considerably less impact on the logistic support of a
18
European conflict than a Far East conflict. However,
19
delivery capability with the canal closed would be lessened
20
in the early period of the conflict due to increased transit
21
time for repositioning. This could well be a critical
22
time period in the European conflict scenario.
23
C. Military Importance of Canal Expansion Options
24
8. (11) Feasible options for canal expansion are the construction 25
of a third set of locks for the present canal or the construction
26
of a sea-level canal. A third set of locks would not permit
27
transit of aircraft carriers and large tankers. However, the
28
addition of a third set of locks would increase the annual
29
transit capacity by approximately 8,000 ships. Third locks
30
construction would not reduce the vulnerability of the lock
31
canal to interruption by military attack or sabotage.
32
SECRET
3
Appendix
9. (U) A sea-level canal would contribute to US national
1
security by facilitating the movement and support of forces
2
in wartine. Ship passage would be faster, and it could accommodate
3
larger vessels, thus speeding intertheater deployment/redeployment
4
and support of US Forces.
5
10. (v) The lesser vulnerability to certain threats of a
6
sca-level canal over a lock canal is a distinct advantage
7
in canal defense planning and execution.
8
11. (U) A sea-level canal would help satisfy the continuing
9
requirement to shift military power to meet changing situations
10
and threats as well as the need for logistic support by
11
sea to overseas forces during peacetime and wartime.
12
D. Threats Associated with the Panama Canal
13
12. (S) Potential for Interdiction of Approaches to the Canal
14
and Sea Routes Around Africa and South America by Hostile Nava'
15
Forces and Land-Based Aircraft. Alternate trade routes around
16
the Cape of Good Hope and Cape Horn, now used by ships too large
17
to pass through the canal and which would be used by other ships
18
if the canal were closed, will continue to be subject to potential
19
interdiction. The Soviet Union is considered to be the only
20
nation with a capability to pose a potentially effective
21
interdiction threat to these routes. The Soviets could threaten
22
shipping in the Caribbean Sea as well but at the cost of more
23
vulnerability to themselves. The major deterrent to Soviet
24
interdiction operations would be the transit distance from
25
Soviet bases and the resultant requirement for mobile logistic
26
support in a sustained interdiction effort. A limited
27
capability of the Soviet Union to interdict the sea routes
28
around Africa and South America adds to the strategic importance
29
of the only alternate east-west sea route--the Panama Canal.
30
SECRET
4
Appendix
E. Panama's Capability for Threatening the Canal
1
13. (S) Three possible threats to the canal from Panama are:
2
(a) a conventional attack by the Panamanian National Guard;
3
(b) mob violence directed at the canal; and (c) sabotage
4
efforts.
5
a. Conventional Attack. The 7,135-man National Guard is
6
an internal security force which also has a military mission.
7
It would face critical problems if required to operate in a
8
military role because of its police orientation, small size,
9
and unsophisticated weaponry. Only 10 small tactical units,
10
with a total of approximately 1,100 men, are trained and
11
equipped for conventional warfare. The National Guard
12
might achieve a temporary initial advantage by a surprise
13
attack on US installations in the Canal Zone, but it could
14
not cope with US defensive forces. Furthermore, hostile action
15
would probably be detected in advance by US elements and
16
quickly neutralized. In any event; an overt conventional
17
attack by the National Guard on the canal itself or vital
18
canal facilities is unlikely.
19
b. Mob Violence, The Panamanian Government is capable of
20
promoting anti-US demonstrations and mob violence against
21
the Canal Zone. Such action, however, would likely be directed
22
against US military or Canal Zone facilities rather than
23
the waterway.
24
C. Sabotage. The Panana Canal is vulnerable to sabotage
25
because its banks and vital installations are largely unguarded.
26
A group, or even an individual, could disrupt operations
27
or close the canal by damaging one or more lock components
28
or by causing a landslide at a vital point. A ship could
29
be scuttled in a lock or other vital location, or a lock
30
gate could be damaged by mines or other type explosive
31
from a transiting vessel. By damaging a sensitive spillway,
32
SECRET
5
Appendix
Gatun Lake could be lowered to 2 level preventing canal
passage for about 1 year to vessels of more than 25-100t
draft. Damage resulting in a draining of the lake could
close the canal for as long as 2 years. In spite of this
vulnerability, however, sabotage by Panamanians would be
more likely directed against other US facilities in the Canal
Zone rather than the canal or its vital installations.
14. (S) Potential Threat to the Canal from a Possible Leftist-
Oriented Government in Panama. Panama may continue to experience
a degree of political instability and activism by radical student
10
groups and Communist factions, but an extreme leftist government
11
is unlikely in the foreseeable future. In any event, hostile
12
anti-American actions by pro-leftist groups would probably be
13
directed against US military and commercial facilities in the
14
Canal Zone rather than the canal or installations vital to
15
canal operation.
16
15. (S) The Military Risks of a Power Vacuum in Panama Should
17
the United States Withdraw, A hypothatical withdrawal of the
18
United States from the Canal Zone would not likely create
19
a power vacuum. Considering Panamanian nationalism, it is most
20
unlikely that another foreign power could easily step into the
21
breach created by a US withdrawal. More likely, Panama itself would,2
in the short term, occupy the vacuum even though the National
23
Guard, in its present state, could not simultaneously protect the
24
canal and key Panamanian facilities against widespread insurgency.
25
Presently, the United States does not intend to withdraw military
26
protection of the Panama Canal for the duration of any treaty
27
which may be negoitated with Panama. Therefore, any consideration
28
of a power vacuum at this time would appear premature.
29
SECRET
6
Appendix
SECRET
]
2
F. Conclusions
3
16. (U) The Panama Canal is a major defense asset, the use
4
of which is necessary to enhance US capability for timely
5
reinforcement in Asia and in Europe during periods of conflict.
6
Its principal strategic military advantage lies in the economy
7
and flexibility it provides to accelerate the shift of military
8
forces and logistic support by sea between the Atlantic and
9
Pacific Oceans and to overseas areas.
10
17. (U) A lock canal or a new sea-level canal will continue
11
to be of importance to national security.
12
18. (S) Panama has the capability to threaten the Panama
13
Canal itself, but the probability of such action is low at present.
14
19. (S) A potential threat will continue to exist to the
15
longer alternate LOCs around Africa and South America. At the
16
present time, the Soviet Union is considered the only nation
17
with such a capability.
SECRET
7
Appendix
MILLIONS OF
Chart 1
SHORT TONS
5
TOTAL CARGO MOVEMENT FOR KOREAN DEPLOYMENT
4
DELIVERY CAPABILITY:
PANAMA CANAL OPEN
BE
A
B
CANAL CLOSED
E
3
2
1
30
60
30
120
150
180
DAYS (D+)
Table 1
Total Cargo Deliveries
KOREAN Deployment (Short Tons)
Canal
Canal
By D+
Open
Closed
Difference
10
43,742
43,742
0
20
104,108
102.343
-1,765
30
197,405
198,432
+1,027
45
526,455
334,981
-191,474
60
1,071,459
688,346
-383,113
75
1,424,409
1,163,651
-260,758
90
1,780,952
1,507,549
-273,403
120
2,658,970
2,141,054
-517,906
150
3,392,512
2,855,600
-536,912
180
4,703,905
3,530,713
-1,173,192
SECRET
8
Annex
SPORTIT
Chart" 2
AMMUNITION MOVEMENTS FOR KOREAN DEPLOYMENT
MILLIONS OF
SHORT TONS
2,5
2.0
DELIVERY CAPABILITY:
PANAMA CANAL OPEN
1,5
QUID PANAMA CANAL CLOSED
1.0
,5
30
60
80
120
150
180
(DAYS (D+)
Table 2
KOREAN Devloyment (Short Tons)
Canal
Canal
Closed
Difference
By D+
Open
531
0
10
531
20
531
531
0
30
2,614
2,621
+7
45
96,959
13,603
-83,356
60
245,044
137,153
-107,891
75
422,260
310,471
-111,789
90
522,152
485,429
-36,723
120
821,330
646,604
-174,726
150
1,189,902
920,924
-268,978
180
1,881,754
1,182,867
-698,887
SECRET
9
Annex
Chart j.
BULK POL MOVEMENT FOR KOREAN DEPLOYMENT
MILLIONS OF
BARRELS
50
40
DELIVERY CAPABILITY:
O
PANAMA CANALOPEN
30
SELD PANAMA CANAL CLOSED
4
20
10
30
60
90
120
150
180
DAYS (2:)
Table 3
KOREAN Denloyment (Thousands of Borrels)
Canal
Canal
By D+
Open
Closed
Difference
10
0
0
0
20
258
258
0
30
2,153
2,153
0
45
6,640
3,429
-3,211
60
12,727
8,338
-4,389
75
16,645
14,061
-2,584
90
20,641
16,655
-3,986
120
30,646
25,498
-5,148
150
38,841
34,038
-4,803
180
45,186
42,779
-2,407
10
Annex
6
The Sovereignty and Ownership Question
Statements have been made recently that the Canal
Zone is just like Alaska and Louisiana. But the status
of the Canal Zone is far more complex than that.
France "ceded" sovereignty over the Louisiana
Territory to the U.S.
Russia "ceded" Alaska to the U.S.
But Panama did not cede the Canal Zone to us.
Rather, it granted us the "use, occupation, and control
of the Zone for the Construction, operation, and main-
tenance and protection of the Canal." Further, it
granted to the U.S. administrative "rights, power, and
authority within the [Canal Zone] which the U.S. would
possess and exercise if it were the sovereign."
Now just how these rights should be characterized
legally is a complex question. But it is clear that
to assert that the Canal Zone is just like Alaska or
Louisiana is simply incorrect.
Our international treaties and agreements with
Panama place continuing restrictions and obligations
on us, and have been amended and revised through
previous negotiations with Panama. This is clearly
not the case with respect to Alaska or Louisiana. We
are obligated by treaty to make a payment to Panama
each year as compensation for our rights in the Canal
Zone. We are obligated by treaty not to permit the
establishment of private businesses in the Canal Zone
6
2
unless they have a direct relation to the operation,
maintenance, or protection of the Canal. Residence
in the Canal Zone is restricted by treaty to persons
actually employed there. If a person is no longer
employed in the Zone, he and his family must promptly
move out. The U.S. has no such continuing obligations
to France or Russia with respect to Alaska or Louisiana,
nor have we entered into new agreements concerning
those territories.
Leaving aside its international status, the U.S.
has treated the Canal Zone quite differently from
Louisiana or Alaska as a domestic matter.
The U.S. Supreme Court has considered the Canal
Zone to be U.S. territory for some purposes, and to be
foreign territory for others. I am not aware that the
Supreme Court has ever treated Alaska or Louisiana as
foreign territory for any purpose.
078938
The Congress of the United States has treated the
Canal Zone both as U.S. territory and as foreign terri-
tory. Under U.S. law, children born in the Canal Zone
are not U.S. nationals unless one of their parents
happens to be an American. U.S. statutes define the
Canal Zone as a foreign territory for purposes of
applying U.S. Customs duties. Again, I doubt that the
Congress would consider a State of the United States
to be foreign territory for any purpose.
3
Thus, it is clear that whatever its precise legal
status, the Canal Zone is treated substantially
different from Alaska or Louisiana or other territory
of the U.S.
The courts treat it differently.
Congress treats it differently.
Our international agreements and treaties give it
a very different status.
In practice and in law it is an area which is
devoted to the operation, maintenance, and defense of
the Panama Canal. It can have no permanent population
nor any commerce or industry apart from activities
related to the Canal.
Thus, it is our national interest in the Panama
Canal that we are seeking to protect through our
negotiations with Panama. We have no independent
interest in the Canal Zone.
To say that altering our arrangements with Panama
in any way would be like giving Alaska back to Russia
or Louisiana back to France is to ignore both the facts
and the real issue involved. That issue is how we can
best protect our future interests in the Panama Canal.
We have no interest in maintaining the status quo for
its own sake.
L/ARA:MGKozak:js
4/16/76
International Agreements:
Alaska and Louisiana were "ceded" to the U.S. without
any continuing obligations or restrictions.
The 1703 Convention of Cession of Louisiana from
France to the United States reads as follows: "the
first Consul of the French Republic does hereby cede
to the
U.S. forever and in full sovereignty the
terri-
tory with all its rights and appurtances
"
That
Convention also includes articles which place all public
lands in the cession, which provide that all archives,
papers, and documents relative to the sovereignty shall
be transferred to U.S. possession and which provide that all
inhabitants shall enjoy the rights, privileges and immunities of
U.S. citizens.
The 1867 cession of Alaska from Russia to the U.S.
is stated as follows:
"The Emperor of all Russia agrees to cede to the U.S. by
this Convention, immediately upon ratifications thereof,
all the territory and dominions now possessed by His
Majesty on the Continent of America and the adjacent islands. "
Cession hereby made conveys all rights, franchises and
privileges now belonging to Russia in the said territory."
That instrument also had provisions for the inclusion of all
public lands in the cession and for the enjoyment of the in-
habitants of all rights and privileges of U.S. citizenship
unless they elected to return to Russia within three years.
2
Neither the Alaska or Louisiana cessions provided
for a continued annuity as part of the form of payment.
With respect to the Canal Zone, however, the U.S.
was granted the use, ,occupation and control of the
Canal Zone in perpetuity under Article II Article III states:
"The Republic of Panama grants to the U.S. all the
rights, power and authority within the zone mentioned and
described in Article II of this Agreement and within
the limits of auxilliary lands and waters mentioned and
described in said Article II which the U.S. would possess
and exercise if it were the sovereign of the territory within
which saild lands and waters are located to the entire
exclusion of the exercise by the Republic of Panama of any
such sovereign rights, power or authority.' "
Article XIV of the 1903 Treaty reads as follows:
"As the price or compensation for the rights, powers
and privileges granted in this convention by the
Republic of Panama to the United States, the Government
of the United States agrees to pay to the Republic of
Panama the sum of ten million dollars ($10,000,000)
in gold coin of the United States on the exchange of the
ratification of this convention and also an annual payment
during the life of this convention of two hundred and
fifty thousand dollars ($250,000) in like gold coins,
beginning nine years after the date aforesaid.
The provisions of this Article shall be in addition to
all other benefits assured to the Republic of Panama under
this convention.
3
But no delay or difference of. opinion under this
Article or any other provisions of this treaty shall affect
or interrupt the full operation and effect of this
convention in all other respects. II
The annuity to Panama was increased in Article VIII
of the 1936 Treaty of Friendship and Cooperation to $430,000.
It was again increased in Article I of the 1955 Treaty
of Mutual Understanding and Cooperation to $1,930.000.
The 1936 Treaty of Friendship and Cooperation
imposed conditions on the United States concerning
persons who could reside in the Canal Zone and businesses
which could be established.
Section (2) of Article III of the 1936 Treaty
restricted residency in the Canal Zone as follows:
"(2) No persons who is not comprised within the following
classes shall be entitled to reside within the Canal Zone:
(a) Officers, employees, workmen, or laborers in the
service or employ of the United States of America, the Panama
Canal or the Panama Railroad Company, and members of their
families actually residing with them;
(b) Members of the armed forces of the United States of
America and members of their families actually residing
with them;
(c) Contractors operating in the Canal Zone and their
employees, workmen and laborers during the performance
of contracts;
4
(d) Officers, employees, or workmen of companies
entitled under Section (5) of this Article to conduct
operations in the Canal Zone;
(e) Persons engaged in religious, welfare, charitable,
educational, recreational and scientific work exclusively
in the Canal Zone;
(f) Domestic servants of all the beforementioned
persons and members of the families of the persons in classes
(c) (d) and (e) actually residing with them. "
Section (5) of Article III of the 1936 Treaty
restricted the establishment of new private business
enterprises within the Canal Zone as follows:
" (5) With the exception of concerns having a direct
relation to the operation, maintenance, sanitation or protection
of the Canal, such as those engaged in the operation of
cables, shipping, or dealing in oil or fuel, the Government
of the United States of America will not permit the establish-
ment in the Canal Zone of private business enterprises other
than those existing therein at the time of the signature
of this Treaty."
U.S. Courts
The U.S. courts have considered the Canal Zone to be
U.S. territory for some purposes and foreign territory
for others.
The U.S. Supreme Court in the case Wilson V. Shaw
(204 US 24 (1907)) considered the Canal Zone to be a
territory of the U.S. for the purposes of enabling the
Federal Government to expend U.S. funds for the construction
of an interoceanic ship canal.
Similarly, in the case of U.S. V. Husband R. (Roach),
453 F. 2d 1054 (1971), Cert. Den. 40€ U.S. 935 (1972)
the Fifth Circuit Court of Appeals equated the Canal Zone
with territory of the U.S. for the purpose of authorizing
the Governor of the Zone to regulate traffic conditions
within the Zone.
However, in the case of Luckenbach S.S. Co. V. United States
(280 U.S. 173, 1929), the Supreme Court decided that ports
in the Canal Zone should continue to be regarded as foreign
ports for purposes of the transportation mail. In that
case, Chief Justice Taft said that "whether the grant in the
[the 1903] treaty amounts to a complete cession of
territory and dominion to the U.S. or is so limited that it
leaves at least titular sovereignty in the Republic of Panama
is a question which has been the subject of diverging opinions
U.S. Statutory Law
The Congress has considered the Canal Zone as
territory of the U.S. for some purposes and as foreign
territory for others.
The Congress in 1912 extended to the Canal Zone
the laws of the U.S. relating to extradition and the
rendition of fugitives from justice (36 Stat. 569).
That Act declared that for such purposes "and such purposes
only" the Zone should be treated as an organized
territory of the U.S.
On the other hand, in 1905 the Congress enacted
a provision which treated the Canal Zone as foreign
territory for customs purposes.
Chapter 1311 of 33 Stat. 843 reads as follows:
"Be it enacted by the Senate and House of Representatives
of the United States of American in Congress assmebled,
That all laws affecting imports of articles, goods,
wares, and merchandise and entry of persons into the
United States from foreign countries shall apply to
articles, goods, wares, and merchandise and persons
coming from the Canal Zone, Isthmus of Panama, and
seeking entry into any State or Territory of the
United States or the District of Columbia."
In 1916, the Congress provided that laws of the U.S.
relating to seamen of vessels of the U.S. "on foreign voyages"
should apply to seamen of all vessels of the U.S. when in the
Canal Zone. (39 Stat. 529)
The Congress has not treated the Canal Zone as a
territory of the United States for purposes of the citizenship
of children born there. Children born within the U.S. or
2
its territories are automatically citizens of the U.S.
regardless of the citizenship of their parents, except
for children born to persons present in the U.S. in
diplomatic status. Children born in the Canal Zone are
not citizens of the U.S. unless one of their parents
is a U.S. citizen.
8 USC 1403 provided as follows:
"$1403. Persons born in the Canal Zone or Republic
of Panama on or after February 26, 1904.
(a) Any person born in the Canal Zone on or after
February 26, 1094, and whetehr before or after the
effective date of this chapter, whose father or
mother or both at the time of the birth of such
person was or is a citizen of the United States, is
declared to be a citizen of the United States.
(b) Any person born in the Republic of Panama on or
after February 26, 1904, and whether before or after
the affective date of this chapter, whose father or
mother or both at the time of the birth of such
person was or is a citizen of the United States or by
the Panama Railread Company, or its successor in
title, is declared to be a citizen of the United States. "
DEPARTMENT OF STATE
Washington, D.C. 20520
Honorable Gene Snyder
House of Representatives
Washington, D. C. 20515
Dear Mr. Snyder:
Thank you for your letter of November 14 regarding
my recent briefing of the Republican Conference on
the Status of the Panama Canal Treaty Negotiations.
As you note, following my remarks your assistant
and I had an interesting discussion concerning the
legal status of the Canal Zone. The Office of the
Legal Adviser has provided the following information
in response to the questions concerning that subject
which are raised in your letter.
Article II of the 1903 Treaty grants to the United
States "the use, occupation and control" of the Canal
Zone, and Article III authorizes the United States to
exercise therein "all the rights, power and authority
which it would possess and exercise if it were
the sovereign of the territory
to the entire
exclusion of the exercise by the Republic of Panama
of any such sovereign rights, power or authority. "
The question posed is whether this grant of rights
had the effect, under international law, of trans-
ferring the territory comprising the Canal Zone from
Panamanian sovereignty to that of the United States.
In other words, is the international legal status of
the Canal Zone that of Panamanian or of United States
territory?
It is clearly established under international law that
a state may grant to a foreign state the right to exercise
exclusive sovereign powers within portions of its territory
without effecting a cession of its own sovereignty over that
territory. For example, during the latter part of the 19th
Century China's leases of naval bases to France, Germany
- 2 -
and Russia included creants to the lossees of rights to
exercise sovereien powers within the leased areas. (I
Machurray, Treaties and Agreements with and Concerning
China, 1094-1919, at 112, 119, and 128). Similarly,
Article III of the U.S.-Cuba Agreement of February 16, 1903
relating to Guantanano Naval Station provides:
"While on the one hand the United States recognizes
the continuance of the ultimate sovernignty of the
Republic of Cuba over the above described areas of
land and water, on the other hand the Republic of
Cuba consents that during the period of the
occupation by the United States of said aroas under
the terms of this agreement the United States shall
exercise complete jurisdiction and control over and
within said axeas.
11
(TS 418; 6 Bovann 1113).
A more recent example of one nation being granted sovereign
rights within the territory of another is found in Article
III of the Treaty of Peace with Japan (3 UST 3169; TEAS
2490) which authorized the United States to "exercise all
and any powers of administration, legislation and juris-
diction over the territory and inhabitants of [the Ryukyu
and Daito islands]" while Japan retained what Secretary
Dullen termed "residual sovereighty" over those arous.
(The rights of the nutted States under Article III vere
terminated by the U.S.-Japan Treaty of June 17, 1971).
With respect to the Canal Zone, the United States has
consistently recognized that Panama retains "titular" sov-
ereighty over the area.
If
The truth is that while we have all the attributes
of sovereienty necessary in the construction, nain-
tonance, and protection of the Canal, the very form in
which these attributos. are conforred in the treaty
[of 1903] scems to preserve the titular sovereignty
over the Canal Zone in the Republic of Panama
(Letter
from Secretary of War William II. Taft to President
Thoodore Roosevelt, January 12, 1905.)
*
Conference for the Conclusion and Signature of the Treaty
of Peace with Japan: Record of Proceedings 78 (Department oi
State Pub. 4392 (1951)
FORD LIBRASE
- 3 -
In casence, while the United States accuired extensive
treaty rights to use the Canal Zone and to exercise
sovereign powers within it, the area technically remains
part of the territory of the Republic of Panama.
"The rights of the United States in the Panama Canal
Zone offer an example of the most complete transfer
of jurisdiction over a territory without its being a
cossion in the technical international law senso... "
(Vali, Servitudes of International Law (2d ed.,
1958) 254.)
This distinction between the right to exercise jurisdiction
within the Some area and its intornational status was
recognized in Article III of the Treaty of Friendship and
Cooperation of March 2, 1936 (53 Stat. 1807; TS 945), which
refers to the Zone as "territory of the Republic of Panama
under the jurisdiction of the United States. 11 (This is
the provision I mentioned to which you refer in your letter.)
Perhaps the most clear description of the nature of the
rights the U.S. acquired in the 1903 treaty is that of
M. Phillipe Dunau-Varilla, the principal drafter of the
document:
"I decided to grant to the United States, in the
interior of the zone, all rights, nower and authority
that she would have 3.2 who were sovereign, to the
ontire chell ion or the 11:10 0: any one: richts, nower
and authority by the sovereien Republic or Privana.
The United States, without becoming the sovereign,
received the exclusive une OZ the rights of covereignty,
while respecting the covercienty ituolf of the Panama
Republic," (Italics in original.) (Eunau-Varilla,
From Panama to Verdun (1940) 158.)"
With respect to the donestic law of the United States, the
Canal Zono has been treated in various ways for the
purpose of defining the applicability to the Zone ef speci-
fic legislative provisions. Fox example, the Canal Zone is
considered to be an organized territory of the U.S. for pur-
poses of extradition (37 Stat. 569, 48 USC 1330). On the
other hand, it is treated as foreign territory for purposes
of. customs duties (33 Stat. 843, 19 USC 126) and its ports
are considered foreign ports for purposes of the transpor-
tation of mail (Luckenbach Steemship Co. V. U.S. 280 U.S.
173 (1930) )
GERRAD 10K3
- 1 -
Thus, U.S. domestic legialation and court decisions vould
not appear to provide a basis for any definitive con-
clusions with respect to the intornational status of the
Canal Zone, por are they intended to. Rather, such
definitions are made for the sole purpose of extending
the effect of a specific provision of U.S. law to the
Canal Zone or of exempting the Zone from its application.
The often cited case of Wilson V. Shaw (204 U.S. 24 (1907))
must be considered in this context. That case was taken
to the Suprome Court by a taxpayer who maintained that
the Federal Government could not continue to expend funds
lawfully for the construction of an interocoanic ship
canal in Panama. No sought an injunction against any
further expenditures on the grounds that the U.S. did not
have a suffiont legal interest in the Canal Zone to author-
ize the expenditure of tax money there. The Suprome
Court hold that the Federal Government did have broad enough
power to encompase expenditure of funds for the construction
of the Canal and refused to issue an injunction. In speak-
ing of the legal interest of the U.S. in the Zone, the Court
said,
"It is hypercritical to contend that the title of
the United States is imporfect, and that the terri-
tory described doss not belong to this Mation,
because of the omission of some of the technical
terms used in ordinary conveyances of real estate."
Thus, the Suprome Court did equate the Canal Zone with
territory belonging to the United States, but in the context
of establishing the authority of the Federal Covernment to
expend funds and to engage in construction work in the Sone.
As notedabove, the Court has subsequently held the Zone TO
be foreign territory for other purposes (Luckenbach Steawahin
Co. V. U.S. (380 U.S. 173 (1930), and such interprotations
of the status of the Canal Zone under domestic U.S. law for
the purpose of determining the applicability of specific
statutes therein are not determinativo as to its international
status.
I hope this information respecting the legal status of the
Canal Zone is responsive to your questions. T. should add,
however, that in my judgment the fundamental question
which must be addressed in considering whether a new treaty
with Panama is desirable is not that of sovereignty. Rather,
the question is whether a new treaty would or would not serve
- 5 -
United States interests. The fact that the United States
has consistently recognised that the Canal Zone remains
territory of the Republic of Panama is no argument in
favor of altoring our existing treaty relationship with that
country. Rather, it is the judgmoni: that that relationship
is no longer suited to protecting United States commercial,
military and foreign relations interests which has led the
United States to enter into negotiations with Panama.
Ambassador Bunker, General Dolvin and I would welcome
further opportunities to exchange views on the Canal Nego-
tiations with you. Mr. KoMaK of the Office of the Legal
Adviser, who is serving as Assistant Negotiator in the
Panama Regotiations, is prepared to meet with members of
your staff concerning the legal aspects of the matter, should
you consider that desirable.
Sincerely,
S. Money Bell
Minister
Deputy United States
Negotiator
GLEATED 1089 NEBRAST
DISTRICT OFFICER
4TH DISTO T. KENTUCKY
310 EDERAL BUILDING
COVINGTON, Kr. 41011
606-491-0105
RAYBURN HOUSE OFFICE BLDG.
TEL.: 202-225-3465
CONGRESS OF THE UNITED STATES
125 CHENOWETH LANE
HOUSE OF REPRESENTATIVES
ST. MATTHEWS, Kr. 40207
COMMITTEES:
502-895-6949
PUBLIC WORKS
WASHINGTON, D.C. 20515
HANT MARINE AND
FISHERIES
November 14, 1975
Mr. Morey Bell
Deputy Negotiator
Panama Canal Sector
Department of State
Washington, D. C.
Dear Mr. Bell:
At the Republican Conference briefing yesterday, in answer
to a question by my assistant as to why the State Department
could say the Canal Zone is Panamanian territory -- especially
in view of the 1907 Supreme Court decision in Wilson V. Shaw --
you said it is because of the terms of the 1936 treaty which
is the law of the land, and that the State Department has legal
opinions to this effect.
I am not aware of any language in the 1936 treaty, nor is
anyone else of my acquaintance, which could provide a basis for
opinions you referred to, that would repudiate the perpetual
grants to the U.S.A. by Panama of territorial sovereignty over
the Canal Zone, or overturn the above-mentioned decision which
specifically stated:
"It is hypercritical to contend that the title of the
United States is imperfect, and that the territory de-
scribed does not belong to this Nation
On the contrary, in my opinion, Article II of the 1936 Treaty
serves to reinforce that original grant.
Because the State Department's rejection of U. S. sovereignty
over the Canal Zone is central to the new treaty it proposes, and
to the Congressional debates over that treaty which recently have
taken place, and will continue to rage, it is vital that you
promptly furnish me with a copy of the legal opinion or opinions
to which you referred yesterday.
I will be most grateful for your immediate attention and com-
pliance with this request.
Sincerely yours,
Gene Snyder
GERALD
GS:mjn
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
November 28, 1971
Ownership OF the Canal Zone
You have requested background on two points concerning
the various claims of treaty opponents that the U.S.
"owns" the Canal Zone; that the Zone is "U.S. territory";
that the United States is "sovereign over the Canal
Zone"; and the like. The first point concerns the
holding in the 1907 Suprome Court case of Wilson V. Shaw
and its significance in determining the status of the
Zone; the second is a comparison of the 1903 Treaty with
the treaties under which the U.S. purchased Louisiana
from France, and Alaska from Russia, as an aid in
determining what was purchased. under the 1903 Treaty.
1. Wilson V. Show
The 1907 care of Wilson V. Shinv VAS Culton to the
Supreme Court by a taxpayer who maintained that the
Federal Government could not continue to expend funds
lawfully for the construction of an interoccanic ship
canal in Panama. He sought an injunction against any
further expenditures on the ground that the U.S. Gd not
have a sufficient legal interest in the Canal Zone to
authorize the oxpenditure of tax money there. The
Supreme Court hold that the Federal Government did
have broad enough power to encompass exponditure of
funds for the construction of the Canal and refused
to issue an injunction. In speaking of the legal
interest of the U.S. in the Zone the Court said,
"It is hypercritical to contend that the
title of the United States is imperfect,
and that the territory described does not
belong to this Nation, because of the
omission of some of the technical terms
used in ordinary conveyances of real
GENERA FORD LIBRARY
estate."
It is correct, then, that the Supreme Court did equate
the Canal Zone with territory of the United States for
the purpose of establishing the authority of the
Federal Government to expend funds and engage in con-
struction work in the Zono. However, such interpretations
2.
of the status of the Canal Zone under domestic U.S.
law for the purpose of determining the applicability
of specific statutes therein are not uncomman.
For example, the Canal Zone is considered to be an
organized territory of the U.S. for purposes of ex-
tradition (37 Stat. 569, 40 USC 1330). On the other
hand, it 10 treated as foreign territory for purposes
of customs dution (33 Stat. 843, 19 USC) and its
ports are considered foreign ports for purposes of
the transportation of mail (Luckonback Co. V, U.S.,
280 U.S. 173). Thus, no dofinitive conclusions may
be drawn with respect to the international status of
the Zone as a result of such domestic court decisions,
In the case of Wilson V. Shaw the court decided only
that our rights and authority over the Canal Zone are
close enough to ownership for practical purposes as to
present an insignificant difference for the question
of whether Federal tax funds could be expended there.
Moreover, the holding in the case in not a determination
of the nature of U.S. rights in the Zone, but an inter-
protation of the circumstances under which the Federal
Government can spend money abroad. It is doubtful that
anyone would arque today that the Federal Government
must own the proporty abroad upon which it expends.
funds, or have anything even close to ownership.
Thus, Wilson V. Shaw does not even speak to the inter-
national local status of the Canal Zone. Rather, the
question addressed by the Court was whether the rights
acquired by the U.S. under the 1903 Treaty were surfi-
cient under U.S. domontic law to justify the expenditure
of Federal funds there.
With respect to the international logal status of the
Zone, the United States has consistently recognized
that Panama retains at least "titular" sovereignty over
the area.
"
The truth is that while we have all
the attributes of soveroignty necessary in
the construction, maintonance, and protection
of the canal, the very form in which those
attributes are conferred in the treaty [of
1903] neems to preserve the titular sovereignty
over the Canal Zone in the Republic of Panama
If (Letter from Secretary of War William
H. Taft to President Theodore Roosevelt,
January 12, 1905.)
3
Another example of this interpretation appears in
Article III of the 1936 Treaty between the U.S. and
Panama, which was duly ratified by the United States.
That provision refers to the Canal Zone as "territory
of the Republic of Panama under the jurisdiction of
the United States.
The weight of scholarly opinion supports the view that
the U.S. acquired smmething less then full sovereignty
over the Canal Zone and that Panama retained an
interest in the area.
"The rights of the United States in the
Panama Canal Zone offer on example of the
most complete transfer of jurisdiction
over a territory without its being a
cessiton in the technical international
law sense . is (Vali, Servitudes of
International Law (2d ed., 1958) 254)
"There remains a scintilla of sovereignty
- a reversionary sovereignty still in the
Republic of Panama." (Woolsey) (AJIL,
Vol. XX (1926), P. 117.) (Also see Professor
Baxter's views, copy attached.)
Perhaps the most clear description of the nature of
the rights the U.S. acquired in the 1903 Treaty is
that of M. Phillipe Bunau-Verilla, the principal
drafter of the document:
"I Cocided to grant to the United States,
In the interior of the sone, all richts,
powers and authority that she vontorhave
10 she were sovereien, to the ontire or
clusion oz the use OE any such rights, powers
and authority DV the sovereign Republic or
Panama.
"The United States, without becoming the
sovereien, received the exclusive use or
the rights of sovereignty, while respect-
ing the sovereignty itself of the Panama
Republic." (Italics in original.) (Bunau-
Varilla, From Panama to Verdun (1940) 150.)
Thus, the treaty opponents' argument that the Statement
of Principles, by acknowledging that the Zone is territory
4
of Panama, was in contravention of the Supreme Court
decision in Vilcon V. Shaw, is not supported by the
case itself, or under the purtinent principles of
international and domestic law.
2. What did the U.S. Buy under the 1903 Treaty?
Article XIV of the 1903 Treaty specifics that the
United States shall pay Panama $10 million upon the
exchange of ratifications of the Treaty, and $250,000
per year thereafter, beginning nine years after the
ratification of the Treaty. This two-pronged payment
is specified as commensation for all the rights,
powers, and privileges granted to the United States
under the convention. The most important of those
rights were, of course, the use, occupation, and
control of the land which would comprise the Canal
Zone in perpetuity and the exercise of all rights,
power and authority over the Zone which the U.S.
would exercise if it were the sovereign over the
territory. (i) Other significant rights were involved
in the grant, however, including Panama's grant to
the U.S. of its claim to a reversionary interest,
after 1966. to the Panama Railroad, and its claim to
$250, 000 por year drom the until that no-
version in 1966, and Ponama's grant of the authority
to the United States to exercise the right of eminent
domain over Panamanian lands outside the Mose which
might be judged necessary for Conal purposes. However,
both facets of the compensation payment were in CX-
change for all these and other rights in the Conven-
tion. The $250,000 cunuity payment was, in DO manner,
specifically linked to any rights the U.S. acquired
in the railroad, or its lands, as the treaty opponents
argue.
Thus, the United States acquired continuing treaty
rights over Panamanian territory - a unique combination
of power and authority over the sovereign territory of
another country - but not ownership of land under the
1903 Treaty. The U.S. got no ownership rights to land
under the Trenty except the right to the reversionary
interest in the railrond land. (Wo acquired the conces-
sion right to use of the railroad land until 1966, when
we purchased the assets of the New French Canal Company
subsequent to the 1903 Treaty.) The rights of other
private land owners in the Zone wom specifically pro-
served under Article VI of the Treaty. Pancmanian
5
public Lands in what because the Zone vere turned over
to the use, occupation, and control of the United
States, but technically remain public lands of the
Republic of Panama subject to U.S. rights.
By way of contrast, the 1703 cession of Louisiana from
France to the United States reads as follows:
"The first consul of the French Republic
does hereby code to the
U.S. for
ever and in full sovereignty the
...
territory with all its rights and
appurtances
"
The Convention also has articles which include all
public lands in the cession, which provided that all
archives, papers and documents relative to the sovereignty
shall be transforred to U.S. possession and which pro-
vide that all inhabitants shall enjoy the rights,
privileges, and immunities of U.S. citizens.
The cession of Alaska from Russia to the United States
is stated in similar conclusive terms:
"The Emperor of all Russia agrees to code
50
upon ratifications thereof, all the terri-
tory and dominions now possessed by his
Majesty on the Continent of America and in
the adjacent islands."
"
the cession herchh mdde, conveys
all rights, franchises and privileges now
belonging to Russia in the said torritory."
That instrument also had provisions for the inclusion
of public lands in the cession and that the inhabitants
could either return to Russia within three years or
acquire all the rights and priviloges of U.S. citizens.
In neither case was there a continuing annuity as part
of the form of payment; the agreements also do not con-
template a continuing relationship between the countries
involved over the subject matter of the agreements.
Although, as stated, the 1903 Treaty specifically
preserved the rights of private property owners in the
Zono, it did not endow them with the rights and priv-
ileges of U.S. citizenship. In fact, under U.S. law
G
today, children born of non-U.S. citizen parents in the
Canal Zone are not born with U.S. citizenship. Any
child born within the United States or its territories
automatically acquires U.S. citizenship at birth un-
less his parents are in a status which carries diplomatic
immunity under present U.S. law.
Had the parties intended the 1903 Treaty to work a
cession of the Canal Zone to the United States, unquestion-
ably they would have drafted language similar to one of
these examples to forestall any question, and presumably
would not have provided for a continuing annuity payment.
Attachment:
As stated