Order Code RL30981
CRS Report for Congress
Received through the CRS Web
Panama: Political and Economic
Conditions and U.S. Relations
Updated May 20, 2005
Mark P. Sullivan
Specialist in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Panama: Political and Economic
Conditions and U.S. Relations
Summary
With four successive elected civilian governments, the Central American nation
of Panama has made notable political and economic progress since the 1989 U.S.
military intervention that ousted the regime of General Manuel Antonio Noriega from
power. The current President, Martín Torrijos of the Democratic Revolutionary Party
(PRD), was elected in May 2004 and inaugurated on September 1, 2004. Torrijos,
the son of former populist leader General Omar Torrijos, won a decisive electoral
victory with almost 48% of the vote in a four-man race. He succeeded President
Mireya Moscoso of the Arnulfist Party (PA), elected in 1999, whose administration
was tainted by several high-profile corruption scandals. Torrijos’ electoral alliance
also won a majority of seats in the unicameral Legislative Assembly.
The most significant challenges facing the new government include dealing with
the funding deficits of the country’s social security fund; developing plans for the
expansion of the Panama Canal; and combating poverty (estimated at 40%) and
unemployment (estimated at about 12%). After more than eight months in office,
President Torrijos remains popular, with a 58% approval rating, although some
observers believe that support for the government could erode unless it makes
inroads into tackling unemployment and combating corruption, and some maintain
that the President’s popularity will be tested when he moves forward with plans to
reform the social security fund.
The United States has close relations with Panama, stemming in large part from
the extensive history of linkages developed when the Panama Canal was under U.S.
control and Panama hosted major U.S. military installations. The current bilateral
relationship is characterized by extensive cooperation on counternarcotics efforts as
well as U.S. assistance to help Panama assure the security of the Canal and its border
with Colombia. U.S. assistance to Panama has increased in the past several years
with the country receiving assistance under the Bush Administration’s Andean
Counterdrug Initiative (ACI) to help Colombia and its neighbors combat drug
trafficking. The United States provided Panama with $18.2 million in overall
assistance in FY2004, an estimated $18.6 million in FY2005, and the FY2006
request is for $17.4 million.
U.S.-Panamanian negotiations for a bilateral free trade agreement began in late
April 2004. Panama is seeking an FTA as a means of increasing U.S. investment in
the country, while the Bush Administration has stressed that an FTA with Panama,
in addition to enhancing trade, would further U.S. efforts to strengthen support for
democracy and the rule of law. Since Panama has a service-based economy, it
traditionally has imported much more than it exports to the United States. In 2004
the U.S. trade surplus with Panama was $1.5 billion, with Panama exporting $316
million in goods and importing $1.8 billion in merchandise. For additional
information, see CRS Report RL32540, The Proposed U.S.-Panama Free Trade
Agreement, by J.F. Hornbeck.

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Contents
Political Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Endara Government (1989-1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Pérez Balladares Government (1994-1999) . . . . . . . . . . . . . . . . . . . . . . 2
Moscoso Government (1999-2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Torrijos Government (2004-2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Human Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S. Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Drug Trafficking and Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Spillover From Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
U.S. Trade Relations and a Potential Free Trade Agreement . . . . . . . . . . . . 9
Operation and Security of the Panama Canal . . . . . . . . . . . . . . . . . . . . . . . 11
Historical Background and the Panama Canal Treaties . . . . . . . . . . . . 11
Canal Transition, Current Status, and Potential Expansion . . . . . . . . . 12
Privatization of Two Panamanian Ports and the China Issue . . . . . . . 13
Contamination of Firing Ranges and San Jose Island . . . . . . . . . . . . . . . . 15
Former U.S. Military Presence in Panama . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Former Role and Presence of U.S. Troops . . . . . . . . . . . . . . . . . . . . . . 17
Failed Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
U.S. Congressional Views on U.S. Military Presence . . . . . . . . . . . . . 19
Panamanian Views on U.S. Military Presence . . . . . . . . . . . . . . . . . . 20

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Panama: Political and Economic
Conditions and U.S. Relations
Political Conditions
Panama has made notable political and economic progress since the December
1989 U.S. military intervention that ousted the military regime of General Manual
Antonio Noriega from power. The intervention was the culmination of two and a
half years of strong U.S. pressure against the de facto political rule of Noriega,
commander of the Panama Defense Forces (PDF). Since that time, the country has
had four successive civilian governments, with the current government of President
Martín Torrijos elected in May 2004. Inaugurated on September 1, 2004, Torrijos is
the son of former populist leader General Omar Torrijos. His electoral alliance, led
by the Democratic Revolutionary Party (PRD), also won a majority of seats in the
unicameral Legislative Assembly.
Endara Government (1989-1994). Before the U.S. intervention, Panama
had held national elections in May 1989, and in the presence of a large number of
international observers, the anti-Noriega coalition, headed by Guillermo Endara,
prevailed by a three-to-one margin. The Noriega regime annulled the election,
however, and held on to power. By the fall, the military regime was losing political
power and relied increasingly on irregular paramilitary units, making the country
unsafe for U.S. forces and U.S. citizens. On December 20, 1989, President George
Bush ordered the U.S. military into Panama “to safeguard the lives of Americans, to
defend democracy in Panama, to combat drug trafficking, and to protect the integrity
of the Panama Canal Treaty.” Noriega was arrested on January 3, 1990, and brought
to the United States to stand trial on drug trafficking charges.1
As a result of the intervention, the opposition coalition headed by Guillermo
Endara that had won the May 1989 election was sworn into office. During his term,
President Endara made great progress in restoring functioning political institutions
after 21 years of military-controlled government, and under his administration, a new
civilian Public Force replaced Noriega’s Panama Defense Forces. But Endara had
difficulties in meeting high public expectations, and the demilitarization process was
difficult, with some police and former military members at times plotting to
destabilize, if not overthrow, the government.
1 After a seven-month trial, Noriega was convicted on 8 out of 10 drug trafficking counts
in U.S. federal court in Miami in April 1992, and he was sentenced to 40 years in prison. In
1999, a federal judge reduced Noriega’s prison term to 30 years because of disparity
between his sentence and his co-conspirators. The reduction makes Noriega eligible for
parole in 2007.

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CRS-2
Pérez Balladares Government (1994-1999). In May 1994, Panamanians
went to the polls to vote in presidential and legislative elections that observers called
the freest in almost three decades. Ernesto Pérez Balladares, candidate of the former
pro-Noriega Democratic Revolutionary Party (PRD), who led a coalition known as
“United People”, won with 33% of the vote. Placing a surprisingly strong second,
with 29% of the vote, was the Arnulfista Party (PA) candidate, Mireya Moscoso de
Gruber, heading a coalition known as the “Democratic Alliance.”
In the electoral race, Pérez Balladares campaigned as a populist and advocated
greater social spending and attention to the poor. He stressed the need for addressing
unemployment, which he termed Panama’s fundamental problem. Pérez Balladares
severely criticized the Endara government for corruption, and he was able to
overcome attempts to portray him as someone closely associated with General
Noriega. (Pérez Balladares served as campaign manager during the 1989 elections
for candidate Carlos Duque, who the Noriega regime had tried to impose on the
electorate through fraud.) Instead, Pérez Balladares focused on the PRD’s ties to the
populist policies of General Omar Torrijos, whose twelve-year (1969-1981) military
rule of Panama ended when he died in a plane crash in 1981.
President Pérez Balladares implemented an economic reform program and
worked closely with the United States as the date of the Panama Canal turnover
approached. Under his government, Panama and the United States held talks on the
potential continuation of a U.S. military presence in Panama beyond the end of 1999
(the date Panama was to assume responsibility for defending the Canal). Ultimately
negotiations ended without such an agreement. (For more see “Former U.S. Military
Presence in Panama” below.)
Although Panama’s constitution does not allow for presidential reelection,
President Pérez Balladares actively sought a second term in 1999. In 1997, the PRD
had begun studying the possibility of amending the constitution to allow a second bid
for the presidency in the May 1999 elections. Ultimately, a referendum was held on
the issue in August 1998 but failed by a large margin.
Moscoso Government (1999-2004). In her second bid for the presidency,
Arnulfista Party (PA) candidate Mireya Moscoso was victorious in the May 1999
elections. Moscoso, who was inaugurated September 1, 1999, for a five-year term,
captured almost 45% of the vote and soundly defeated the ruling PRD’s candidate
Martin Torrijos (son of former populist leader Omar Torrijos), who received almost
38% of the vote. Until March 1999, Torrijos had been leading in opinion polls, but
as the election neared, the two candidates were in a dead heat. A third candidate,
Alberto Vallarino, heading a coalition known as Opposition Action, received about
17% of the vote.
President Moscoso, a coffee plantation owner and Panama’s first female
president, ran as a populist during the campaign, promising to end government
corruption, slow the privatization of state enterprises, and reduce poverty. She also
promised to ensure that politics and corruption did not interfere with the
administration of the Canal. The memory of her husband Arnulfo Arias, a nationalist
who was elected three times as president, but overthrown each time, was a factor in

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CRS-3
the campaign, particularly since Arias was last overthrown in 1968 by General Omar
Torrijos, the father of the PRD’s 1999 and 2004 presidential candidate.
While Moscoso took the presidency, the PRD-led New Nation coalition won a
majority of 41 seats in the 71-member unicameral Legislative Assembly. Just days
before her inauguration, however, Moscoso was able to build a coalition, with the
support of the Solidarity Party, the Christian Democratic Party (which later became
the Popular Party), and the National Liberal Party, that gave her government a one-
seat majority in the Assembly. In August 2000, the Christian Democrats deserted the
coalition and formed an alliance with the principal opposition, the PRD. However,
corruption scandals in 2002 led to five PRD legislators defecting to support the
Moscoso government, once again giving the President majority support in the
Legislative Assembly.
As noted above, Moscoso was elected as a populist, with pledges to end
government corruption and reduce poverty, but her campaign pledges proved difficult
to fulfill amid high-profile corruption scandals and poor economic performance. As
a result, the President’s popularity declined significantly from a 70% approval rating
when she first took office in 1999 to only 15% in 2004.2
Torrijos Government (2004-2009). On May 2, 2004, Panama held
elections for president, as well as for a 78-member Legislative Assembly. In the
presidential race, Martín Torrijos of the PRD won a decisive victory with 47.5% of
the vote, defeating former President Guillermo Endara, who received 30.6% of the
vote, and former Foreign Minister José Miguel Alemán, who received 16.4% of the
vote. Torrijos’ electoral alliance also won a majority of seats in the unicameral
Legislative Assembly, 43 out of 78 seats, which should provide him with enough
legislative support to enact his agenda. Elected At 40 years of age, Torrijos spent
many years in the United States and studied political science and economics at Texas
A&M University. He served four years under the Perez Balladares government as
deputy minister of interior and justice, and as noted above, became the PRD’s
presidential candidate in the 1999 elections.
Leading up to the election, Torrijos had been topping public opinion polls, with
42-49% support. In the campaign, he emphasized anti-corruption measures as well
as a national strategy to deal with poverty, unemployment, and underdevelopment.
He was popular among younger voters and had a base of support in rural areas.
Torrijos maintained that his first priority would be job creation.3 He called for the
widening of the Canal, a project that would cost several billion dollars, and would
seek a referendum on the issue. During the campaign, all three major candidates
supported negotiation of a free trade agreement with the United States, maintaining
that it would be advantageous for Panama. Endara and Alemán appeared to
emphasize the protection of some sensitive Panamanian sectors such as agriculture,
2 “Toss Up Between Torrijos and Endara,” Caribbean and Central America Report,
February 17, 2004.
3 Frances Robles, “Ex-leader’s Son Wins Presidency in Panama,” Miami Herald, May 3,
2004.

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CRS-4
while Torrijos stressed that such an agreement would make Panama’s economy more
competitive and productive.4
The most significant challenges facing the new government include dealing with
the funding deficits of the country’s social security fund; developing plans for the
expansion of the Panama Canal; and combating poverty (estimated at 40%) and
unemployment (estimated at about 12%). After more than eight months in office,
President Torrijos remains popular, with a 58% approval rating, although some
observers believe that support for the government could erode unless it makes
inroads into tackling unemployment and combating corruption. Some maintain that
the President’s popularity will be tested when he moves forward with plans to reform
the social security fund.5
Human Rights. The Panamanian government generally respects human rights,
but, as noted by the State Department in its human rights report for 2004 (issued in
February 2005), serious human rights problems continue in a number of areas. Prison
conditions overall remained harsh, with reported abuse by prison guards. Prolonged
pretrial detentions remained a problem. According to the human rights report, the
judiciary is subject to political manipulation, and the criminal justice system is
inefficient and often corrupt.
Over the past several years, Panama has been criticized by the State Department
and international human rights groups for vestiges of “gag laws” used by the
government to silence those criticizing policies or officials, but in May 2005,
Panama’s legislature repealed these restrictive laws. The State Department’s 2004
human rights report asserted that the government at times does not respect the rights
of freedom of speech and of the press, and maintained that the Panamanian media has
been subject to political and economic pressure by the government. The U.S.-based
Committee to Protect Journalists maintained that Panama was known for its
institutionalized system of legal harassment against the press and that journalists face
“media laws that impose prison terms for defamation, criminalize criticism of public
officials, and permit prior censorship.”6 In August 2004, outgoing President Mireya
Moscoso pardoned many journalists charged with libel and related crimes, although
the State Department maintained that some 30 cases against journalists continued at
the end of 2004. On May 16, 2005, Panama’s legislature gave its final approval to
repeal the “gag laws” that restricted freedom of the press.
In an attempt to redress human rights abuses that occurred under military rule
and to prevent their reoccurrence, President Moscoso created a Truth Commission
in January 2001 to investigate violations under the military regime. The Truth
Commission (subsequently re-established as the Office of Truth Commission
Continuation) issued its report in April 2002, and its investigations have been used
by the government to reopen some past human rights cases. The Commission
4 “Panama: Presidential Candidates Remark on FTA with US,” La Prensa (Panama), Jan.
24, 2004, translated by Foreign Broadcast Information Service.
5 “Country Report, Panama,” Economist Intelligence Unit, April 2005.
6 Committee to Protect Journalists. Attacks on the Press in 2003.

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CRS-5
investigated 110 cases from 1969-1989 and concluded that 70 people were murdered
and 40 disappeared.7 In August 2004, the Moscoso government accepted
responsibility before the Inter-American Commission on Human Rights for certain
crimes committed from 1969-1989. This opened the possibility of compensation for
the victims’ families, according to the State Department’s human rights report.
With regard to worker rights in Panama, the State Department’s 2003 human
rights report noted that the government has issued decrees that have impeded
effective organization of unions in export processing zones (EPZs). The report also
noted that child labor was a problem, with violations occurring most frequently in
rural areas at harvest time. The 2004 human rights report appeared somewhat less
critical of Panama’s labor conditions in the export processing zones, although it
noted that the International Labor Organization had called for government “to amend
the EPZ labor regulations to conform with international norms.”
Economic Conditions
Before the December 1989 U.S. intervention, the Panamanian economy had
been severely damaged by two years of strong U.S. economic sanctions and
economic disruption caused by the political crisis. Gross Domestic Product (GDP)
declined about 25% between 1987 and 1989.
Since 1990, the economy has rebounded, registering real growth annually,
although the level of annual growth has varied a lot and slowed considerably in 2001
and 2002. While real economic growth averaged almost 6.6% from 1990 to 1994,
GDP growth declined to 1.9% in 1995 and to 1.5% in 1996. From 1997-1999,
economic growth picked up, with average annual growth of 4.1%. Under the
Moscoso government, economic growth slowed, falling from 2.5% in 2000 to 0.6%
in 2001, and 0.8% in 2002. Panama’s service-based economy — which is centered
on Panama Canal operations, shipping, container port operations, banking, and sales
and distribution in the Colon Free Zone — was hurt by the regional and U.S.
economic downturn. Since 2003, the economy has picked up, with estimated growth
rates of 4.3% and 6.2% in 2003 and 2004 respectively. The forecast for 2005 is
4.2%.8
Although the economy has improved considerably since 1990, poverty has
worsened over the past three years because of slow economic growth. With a per
capita income of $4,250 in 2003, Panama is classified by the World Bank as an
upper-middle-income developing country. Yet income distribution remains highly
skewed, with large disparities between rich and poor. High unemployment has been
a persistent problem; the official current estimate is about 12%, but it could be
several points higher, according to the Department of State.
7 U.S. State Department. Panama Country Report on Human Rights Practices, 2002. Mar.
31, 2003.
8 “Panama: Country Report,” Economist Intelligence Unit, April 2005.

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CRS-6
The administration of President Pérez Balladares (1994-1999) implemented an
economic reform program that included liberalization of the trade regime,
privatization of state-owned enterprises, the institution of fiscal reform, and labor
code reform. Tariffs were reduced to an average of 8%. The Moscoso government
partially reversed the trade liberalization process by raising tariffs on some
agricultural products, some of which reached the maximum rate allowed under
Panama’s World Trade Organization obligations. Overall, however, Panamanian
tariffs remain quite low, ranking among the lowest in Latin America.9
A significant challenge facing the Panamanian government is the issue of
dealing with the funding deficits of the country’s social security fund (Caja de Seguro
Social, CSS). While the Moscoso government had pledged to draft legislation
reforming the CSS, reform proposals in 2003 provoked strikes by workers protesting
any efforts to raise the retirement age or increase employee contributions. Some
programs could face bankruptcy in less than 10 years. Potential solutions could
include increasing the retirement age, increasing worker and employer contributions,
and extending the number of years needed to retire, all of which are politically
contentious.
Although Panama has traditionally eschewed economic linkages and integration
schemes with its Central American neighbors (largely because of its privileged
relationship with the United States), it has joined with Mexico and Central American
states in a regional economic project known as the Puebla-Panama plan. The plan,
which has the goal of spurring development in the region, will improve highways,
standardize customs procedures, and join power grids to improve the quality of life
in the region.
As part of its strategy of increasing its global trade and investment links, and
accentuating its role as a global transportation hub, Panama has pursued free trade
agreements (FTAs) with several countries, including the United States (see “U.S.
Trade Relations and a Potential Free Trade Agreement” section below). In June
2003, an FTA with El Salvador entered into force, and in March 2003 Panama
negotiated a framework agreement with the five Central American countries that
reportedly will help Panama benefit from CAFTA. Beyond the Western Hemisphere,
Panama negotiated an FTA with Taiwan that entered into force in January 2004, and
in April 2005, Panama and Singapore announced the conclusion of talks for a free
trade agreement.
9 United States Trade Representative, 2005 National Trade Estimate Report on Foreign
Trade Barriers, p.471.

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CRS-7
U.S. Relations
Overview
The United States has close relations with Panama, stemming in large part from
the extensive history of linkages developed when the Panama Canal was under U.S.
control and Panama hosted major U.S. military installations. Today, about 25, 000
U.S. citizens reside in Panama, many retirees of the former Panama Canal
Commission. The current U.S. relationship with Panama is characterized by
extensive cooperation on counternarcotics efforts as well as U.S. assistance to help
Panama assure the security of the Canal and the security of its border with Colombia.
Panama was one of several Latin American nations that publicly supported the
United States during the war with Iraq as a member of the “coalition of willing.” As
noted above, U.S.-Panamanian negotiations for a bilateral FTA began in April 2004.
Panama is seeking an FTA as a means of increasing U.S. investment in the country,
while the Bush Administration has stressed that an FTA with Panama, in addition to
enhancing trade, would further U.S. efforts to strengthen support for democracy and
the rule of law.
The United States turned over control of the Canal to Panama at the end of
1999, according to the terms of the 1977 Panama Canal Treaty, at which point
Panama assumed responsibility for operating and defending the Canal. All U.S.
troops were withdrawn from Panama at that time and all U.S. military installations
reverted to Panamanian control. Under the terms of the Neutrality Treaty, however,
the United States retains the right to use military force if necessary to reopen the
Canal or restore its operations.
Before the turnover of the Canal and the closure of U.S. military bases in 1999,
the United States conducted negotiations with Panama beginning in 1995 for a
Multinational Counternarcotics Center that would have extended the U.S. military
presence in Panama for a 12-year period with an explicit focus on drug interdiction.
Although a tentative agreement was reached in 1997, the negotiations ultimately
broke down in 1998, largely because of Panama’s internal politics. An issue that
received considerable attention in the U.S. Congress before the turnover of the Canal
and U.S. bases in 1999 involved allegations that China could threaten the operation
of the Panama Canal because of its links to a Hong Kong company operating ports
at both ends of the Canal. Both State Department and Department of Defense
officials have indicated that the port operations do not constitute a threat to the Canal.
Panama did not agree to a continued U.S. military presence, but the country does
cooperate extensively with the United States on counternarcotics efforts. In 2002,
the two countries signed an agreement to conduct joint patrols for drug interdiction.
While the government has made significant efforts to strengthen its anti-money
laundering regime since 2000, the State Department’s March 2005 International
Narcotics Control Strategy Report maintains that money laundering remains a
serious problem and “a potential threat to the stability of the country’s legitimate
financial institutions.”

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CRS-8
U.S. assistance to Panama has increased in the past several years with the
country receiving some assistance under the Bush Administration’s Andean Regional
Initiative to help Colombia and its neighbors combat drug trafficking.10 The United
States provided $8.2 million in total foreign assistance to Panama in FY2001, $16.2
million in FY2002, $16.7 million in FY2003, $18.2 million in FY2004, and an
estimated $18.6 million in FY2005. The Administration’s FY2006 request is for
$17.4 million, including $4.5 million in ACI assistance, $6.6 million in development
assistance, $2 million in Economic Support Funds, $1.1 million in foreign military
financing, and $2.6 million for a Peace Corps program.
A sensitive issue in U.S.-Panamanian relations has been Panama’s desire to
have the United States clean up three contaminated firing ranges in Panama as well
as San Jose Island, which was contaminated with chemical weapons used in training
exercises during World II. With regard to the firing ranges, U.S. officials maintain
that the United States has already met its treaty obligations to clean up the ranges.
With regard to the cleanup of San Jose Island, Panama rejected a U.S. offer in
September 2003 that would have provided equipment and training so that Panama
could clean up the island; the Panamanian government maintains that it did not want
to sign any agreement releasing the United States from liabilities.
Drug Trafficking and Money Laundering
An important concern for U.S. policymakers over the years has been securing
Panamanian cooperation in anti-drug-trafficking and anti-money-laundering
measures. Panama is a major drug-transit country for illicit drugs from South
America to the U.S. market because of its geographic location and its large maritime
industry and containerized seaports. Moreover, the country’s service-based economy,
with a large banking sector and trading center (Colon Free Zone), make Panama a
significant drug money laundering center. The county is also a small-scale producer
of coca leaf in the remote Darien province area that borders Colombia.
The State Department’s March 2005 International Narcotics Control Strategy
Report asserts that bilateral U.S.-Panamanian anti-drug cooperation is excellent and
that the Torrijos government is building upon its predecessor’s policies of close
cooperation with the United States. The United States has provided equipment,
training, and information to enhance Panama’s interdiction and eradication
capabilities. According to the Department of State, in light of Panama’s budget
constraints, continuation of U.S. assistance is crucial in order to ensure effective
Panamanian anti-drug efforts.
In early March 2005, Panama joined with other Central American nations to call
for the creation of a special regional force to combat drug trafficking, terrorism, and
other threats. President Torrijos also met with Colombian President Alvaro Uribe in
mid-March 2005. Discussions included improving border security between the two
countries in order to act against drug-traffickers, guerrillas, and paramilitary groups
in the Darién jungle area.
10 For more information, see CRS Report RL32337, Andean Counterdrug Initiative (ACI)
and Related Funding Programs: FY2005 Assistance, by Connie Veillette.

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CRS-9
The State Department also maintains that even though Panama has made
significant progress in strengthening its anti-money laundering regime since 2000,
money laundering remains a serious problem in Panama and a potential threat to the
stability of the country’s legitimate financial institutions. After Panama was cited in
June 2000 by the Financial Action Task Force (FATF), a multilateral anti-money
laundering body, as a non-cooperative country in the fight against money laundering,
the government took action to improve its laws. The government undertook a
comprehensive effort to improve its anti-money laundering regime; it enacted two
laws and issued two decrees in 2000. As a result of these efforts, the FATF removed
Panama from its non-cooperative country list in June 2001.
Spillover From Colombia
There has been concern in recent years about the spillover effects of Colombia’s
civil conflict into Panama. Panama has been affected negatively by the civil conflict
in Colombia, including refugees and armed incursions by guerrilla and paramilitary
groups into the Darien region of Panama.11 In May 1999, several hundred guerrillas
of the Colombian Revolutionary Armed Forces (FARC), in flight from Colombian
paramilitaries, crossed into the dense jungle Darien province region of Panama. In
November 1999, two tourist helicopters were hijacked near Panama City by armed
men claiming to be FARC guerrillas. In 2001, an arms smuggling operation was
discovered in which AK-47 assault weapons were smuggled from Nicaragua, via
Panama, to the paramilitary United Self-Defense Forces of Colombia (AUC); a
subsequent Organization of American States investigation into the case concluded
that Panamanian authorities had no involvement in the smuggling. In January 2003,
several Panamanian Indians were killed and three journalists (including two
Americans) were kidnaped by the AUC making incursions into Panama.
The United States has provided economic and military assistance and defense
equipment to Panama in order to improve its security on the border with Colombia.
In April 2003, Panama and Colombia signed a border security pact to strengthen
security and prevent incursions by Colombian guerrillas and paramilitary forces.
Over, 1,900 refugees are registered in Panama, mostly Colombians in the Darien
region, who receive some support from the U.N. High Commissioner for Refugees
(UNHCR). In 2003, UNHCR had expressed concern about the deportation of more
than 100 Colombians, including many children.12
U.S. Trade Relations and a Potential Free Trade Agreement
Panama and the United States began negotiations for a free trade agreement
during the last week of April 2004. Then U.S. Trade Representative Robert Zoellick
had formally notified Congress in November 2003 that the Administration expected
11 U.S. Department of State, FY2004 Congressional Budget Justification, Foreign
Operations, p. 482.
12 “UNHCR Concerned over Deportation of Colombians from Panama,” Apr. 23, 2003,
UNHCR press release.

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to launch such negotiations during the second quarter of 2004. Zoellick maintained
that negotiating an FTA with Panama would further U.S. efforts to strengthen support
for democracy and “shared fundamental values” throughout the region. He
maintained that the agreement would enhance trade, promote respect for
internationally recognized worker rights, greater respect for the rule of law,
sustainable development, and accountable institutions of governance. Zoellick
asserted that strong anti-corruption and transparency requirements in the agreement
would help combat corruption.13
Panama was not a part of the negotiations for a U.S.-Central America Free
Trade Agreement (CAFTA)14 completed in December 2003, although Zoellick had
indicated in April 2003 that Panama might be able to join the agreement through a
possible “docking mechanism.”15 Instead, the Administration chose to negotiate a
separate bilateral FTA with Panama.
With the exception of two years when the United States was applying economic
sanctions on Panama under General Noriega’s rule, Panama has been a beneficiary
of the U.S. preferential import program known as the Caribbean Basin Initiative
(CBI) since its inception in 1984. The program was amended several times and made
permanent in 1990. CBI benefits were expanded in 2000 with the enactment of the
Caribbean Basin Trade Partnership Act (CBTPA) (Title II, P.L. 106-200), which
provided NAFTA-like trade benefits, including textile and apparel benefits, to certain
CBI countries, including Panama, until September 2008.
In the FTA being negotiated with the United States, Panama is looking for a
permanent extension of CBI benefits, which Panamanian officials believe would spur
U.S. investment in the country, and 10-15 year tariff phase-out periods for certain
sensitive agricultural products such as rice, sugar, and corn. Panamanian officials
acknowledged that Panama needs to make improvements in its enforcement of the
protection of intellectual property rights and in its protections for U.S. investors.
They also maintain that the FTA would lead to Panama easing some of its sanitary
and phytosanitary restrictions currently in place.16 USTR maintains that obtaining
Panama’s recognition of the U.S. meat inspection system will be a primary focus of
the FTA negotiations.17
13 Office of the United States Trade Representative, “USTR Notifies Congress of Intern to
Initiate Free Talks with Panama,” Press Release, Nov. 18, 2003.
14 For information on CAFTA, see CRS Report RL31870, The U.S.-Central America Free
Trade Agreement: Challenges for Sub-Regional Integration, by J.F. Hornbeck, and CRS
Report RL32322, Central America and the Dominican Republic in the Context of the U.S..-
Central America Free Trade Agreement (CAFTA), coordinated by K. Larry Storrs.
15 “Zoellick Says Central America FTA Talks Are “On Track” for Conclusion This Year,”
International Trade Reporter, Apr. 17, 2003.
16 “Panama Seeks Permanent CBI Extension in Free Trade Deal with U.S.” Inside U.S.
Trade, Dec. 19, 2003.
17 United States Trade Representative. 2004 National Trade Estimate Report on Foreign
Trade Barriers. Apr. 1, 2004.

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CRS-11
To date, eight negotiating rounds have been held, with the most recent
concluding in early February 2005. There had been expectations that the negotiations
would be completed in early 2005, but the last round reflected continued contention
over several issues. These include market access for agricultural products considered
sensitive by Panama (such as rice, poultry, onions, potatoes, pork, beef, dairy
products, soybean oil, and vegetable oil); procurement provisions for the Panama
Canal Authority regarding expansion activities; access to Panama for large U.S. retail
stores; and verification that textile exports from Panama meet the agreement’s rules
of origin.18
Since Panama has a service-based economy, it traditionally has imported much
more than it exports to the United States. In 2004, the U.S. trade surplus with
Panama was $1.5 billion, with Panama exporting $316 million in goods and
importing $1.8 billion in merchandise. Panama was the 48th largest U.S. export
market in 2004.19 Panama’s major exports include fish and seafood (accounting for
one-third of its exports to the United States), and sugar, coffee, and other agricultural
products, while major import include oil, consumer goods, foodstuffs, and capital
goods. Almost half of Panama’s exports are destined for the United States, while
almost one-third of its imports are from the United States.20
The stock of U.S. foreign investment in Panama was estimated at $6.5 billion
in 2002, up from $5.8 billion in 2002, which surpassed the combined U.S. foreign
investment in the five other Central American nations.21
Panama is a supporter of the Free Trade Area of the Americas (FTAA). From
March 2001 until February 2003, Panama served as the temporary secretariat for the
Free Trade Area of the Americas (FTAA), and is vying to become the permanent
headquarters of a future FTAA secretariat (other contenders include Miami and
Atlanta in the United States and Port of Spain in Trinidad and Tobago).
Operation and Security of the Panama Canal
Historical Background and the Panama Canal Treaties. When Panama
proclaimed its independence from Colombia in 1903, it concluded a treaty with the
United States for U.S. rights to build, administer, and defend a canal cutting across
the country and linking the Pacific and Atlantic oceans. The treaty gave the United
States rights in the so-called Canal Zone (about 10 miles wide and 50 miles long) “as
if it were sovereign” and “in perpetuity.” Construction of the canal was completed
in 1914. In the 1960s, growing resentment in Panama over the extent of U.S. rights
in the country led to pressure to negotiate a new treaty arrangement for the operation
18 “U.S., Panama Again Fail to End FTA Talks, No Date Set for Next Round,” Inside U.S.
Trade, February 11, 2005.
19 United States Trade Representative, 2005 National Trade Estimate Report on Foreign
Trade Practices.
20 “Panama: Economic Structure, EIU ViewsWire, Mar. 23, 2004.
21 United States Trade Representative, 2005 National Trade Estimate Report on Foreign
Trade Barriers.

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CRS-12
of the Canal. Draft treaties were completed in 1967 but ultimately rejected by
Panama in 1970.
New negotiations ultimately led to the September 1977 signing of the two
Panama Canal Treaties by President Jimmy Carter and Panamanian head of
government General Omar Torrijos. Under the Panama Canal Treaty, the United
States was given primary responsibility for operating and defending the Canal until
December 31, 1999. (Subsequent U.S. implementing legislation established the
Panama Canal Commission to operate the Canal until the end of 1999.) Under the
Treaty on the Permanent Neutrality and Operation of the Panama Canal, or simply
the Neutrality Treaty, the two countries agreed to maintain a regime of neutrality,
whereby the Canal would be open to ships of all nations. The U.S. Senate gave its
advice and consent to the Neutrality Treaty on March 16, 1978, and to the Panama
Canal Treaty on April 18, 1978, both by a vote of 68-32, with various amendments,
conditions, understandings, and reservations. Panama and the United States
exchanged instruments of ratification for the two treaties on June 16, 1978, and the
two treaties entered into force on October 1, 1979.
Some treaty critics have argued that Panama did not accept the amendments,
conditions, reservations, and understandings of the U.S. Senate, including the
DeConcini condition to the Neutrality Treaty. That condition states: “if the Canal is
closed, or its operations are interfered with, the United States of America and the
Republic of Panama shall each independently have the right to take such steps as
each deems necessary, in accordance with its constitutional processes, including the
use of military force in the Republic of Panama, to reopen the Canal or restore the
operations of the Canal, as the case may be.” However, others argued that Panama,
in fact, had accepted all U.S. Senate amendments. The State Department asserted
that Panama expressly accepted all amendments, conditions, and understandings to
the two treaties, including the DeConcini condition. The United States and Panama
signed the instruments of ratification for both treaties, which incorporated all the
Senate provisions. The two countries cooperated throughout the years on matters
related to the canal and established five binational bodies to handle these issues.
Two of the bodies were set up to address defense affairs and conducted at least
sixteen joint military exercises between 1979 and 1985 involving Panamanian and
U.S. forces.
Canal Transition, Current Status, and Potential Expansion. Over the
years, U.S. officials consistently affirmed a commitment to follow through with the
Panama Canal Treaty and turn the Canal over to Panama at the end of 1999. That
transition occurred smoothly on December 31, 1999. The Panama Canal Treaty
terminated on that date, and the Panama Canal Commission (PCC), the U.S. agency
operating the Canal, was succeeded by the Panama Canal Authority (ACP), a
Panamanian government agency established in 1997.
Under the terms of the Neutrality Treaty, which has no termination date, Panama
has had responsibility for operating and defending the Canal since the end of 1999.
As noted above, both Panama and the United States, however, in exercising their
responsibilities to maintain the regime of neutrality (keeping the Canal secure and
open to all nations on equal terms) each independently have the right to use military

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CRS-13
force to reopen the Canal or restore its operations. This is delineated in condition (1)
of the Neutrality Treaty.
The secure operation of the Panama Canal remains a U.S. interest since about
13-14% of U.S. ocean-borne cargo transits through the Canal. The United States
provides assistance to Panama to improve its ability to provide security for the Canal
and to enhance port and maritime security. In March 2003 congressional testimony,
SOUTHCOM Commander in Chief General James Hill stated that Panama was
“capable of defending the Canal” and noted that the Canal was “operating very
efficiently.”22 During a November 2004 visit to Panama, Secretary of Defense
Donald Rumsfeld praised the Panama’s efforts to protect the Canal.23
Headed by Alberto Alemán Zubieta, the Panama Canal Authority has run the
Canal for more than five years and has been lauded for increasing Canal safety and
efficiency. Nevertheless, international shipping organizations strongly opposed a
sharp tolls increase announced by Panama in February 2005 that will raise tolls by
60% over three years beginning in May 2005. The increase would help Panama fund
a planned expansion of the Canal that could cost an estimated $5-8 billion. The
prospective expansion would add a third channel and require new locks so that the
Canal could accommodate giant container cargo ships. The Canal expansion is also
subject to a national referendum, which is expected later this year.
Privatization of Two Panamanian Ports and the China Issue. A
controversy that arose in U.S.- Panamanian relations in 1996 and continued through
1999 relates to the privatization of two Panamanian ports at either end of the Panama
Canal, Balboa on the Pacific and Cristobal on the Atlantic. In July 1996, the
Panamanian government awarded the concession to operate the ports to a Hong Kong
company, Hutchison International Port Holdings, one of the world’s largest container
port operators and a subsidiary of the Hutchison Whampoa Limited Group. The
company operates the concession in Panama as the Panama Ports Company, S.A.
Then U.S. Ambassador to Panama William Hughes complained about the lack
of transparency in the bidding process in which several U.S. companies competed.
The Panamanian government responded with a communique describing the process
by which Hutchison was awarded the 25-year concession. Panamanian officials
maintain that Hutchison had the highest bid, agreeing to pay Panama $22.2 million
annually over the life of the concession. In May 1997, six U.S. Senators charged in
a letter to the Federal Maritime Commission that irregularities in the bidding process
denied U.S. companies an equal right to develop and operate terminals in Panama.
After a review of the issue, the Commission responded that while the port award
processes were unorthodox and irregular by U.S. standards, it saw no evidence that
U.S. companies were subjected to discriminatory treatment. A May 1997 Senate
22 Hearing of the Senate Armed Services Committee, “Testimony of Unified and Regional
Commanders on Military Strategy and Operational Requirements in Review of the FY2004
Defense Authorization Request,” Mar. 13, 2003, Federal News Service.
23 Thom Shanker, “Rumsfeld Praises Panama Canal Security,” New York Times, November
15, 2004.

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CRS-14
Foreign Relations Committee staff report on the issue also concluded that while the
bidding process was unorthodox, U.S. officials found no evidence of illegality.24
In addition to the privatization process, some press reports in March 1997 raised
the issue of Hutchison’s relationship with the Chinese government and the China
Ocean Shipping Company (COSCO) and suggested that China would gain control
of the Panama Canal or threaten the operation of the Canal. Over the years, U.S.
officials, however, have consistently confirmed that Hutchison’s operations of the
ports does not constitute a threat to the Canal. The same May 1997 Senate Foreign
Relations Committee staff report mentioned above concluded that legal safeguards
in the Panama Canal Treaties and Panamanian law guarantee the continued operation
of the Canal and ensures its access to all nations. (Also see CRS Report 97-476, Long
Beach: Proposed Lease by China Ocean Shipping Company (COSCO) at Former
Naval Base.)
In early August 1999, Senator Trent Lott raised questions about Chinese
influence over the Canal in a letter to Defense Secretary William Cohen.
Subsequently, both the State Department and the Department of Defense made
statements responding to the concerns raised about potential Chinese influence in
Panama. In an August 12, 1999, press briefing, the Department of Defense noted that
it does not consider Hutchison’s ownership of two port facilities as a threat to U.S.
security. DOD asserted that “the company does not have any ability to stop or
impede traffic through the Canal” and noted that under the Neutrality Treaty, “the
United States has a unilateral right to maintain the neutrality of the Canal and reopen
it if there should be any military threat.” The State Department, in an August 12,
1999, press briefing, noted that it has seen “no capability or interest on the part of the
People’s Republic of China, a major user of the Canal, to disrupt is operations.”
According to September 29, 1999, congressional testimony by Peter Romero,
then Acting Assistant Secretary of State for Western Hemisphere Affairs (before the
House International Relations Committee, Subcommittee on the Western
Hemisphere), the U.S. intelligence community also studied the question of the
influence of China in Panama as a result of the concession. Romero testified that,
after reviewing the study, the State Department concluded that the Hutchison
concession “does not represent a threat to canal operations or other U.S. interests in
Panama.”
On October 22, 1999, the Senate Armed Services Committee held a hearing on
Canal security. Officials from the Department of Defense, the Panama Canal
Commission, the SOUTHCOM, and the Department of State testified, and all
concluded that the Hutchison’s port operations did not constitute a threat to the
Canal. Ambassador Lino Gutierrez, Principal Deputy Assistant Secretary of State for
Western Hemisphere Affairs, stated that the Department found no information to
substantiate the allegation that Hutchison is a front for the People’s Republic of
China. He noted that Panama’s contract with Hutchison (Law 5) does not give China
any role in determining which ships will pass through the Canal or in which order
24 Senate Committee on Foreign Relations. Staff Report on the Privatization of Panamanian
Ports. May 1997.

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they will travel, and it does not give Hutchison any control over Canal pilots.
Alberto Aleman Zubieta, Administrator of the Panama Canal Commission, stated
that “Hutchison has no authority whatsoever to interfere with, dictate or influence the
operation of the Canal, nor will it ever be allowed to do so.” Gen. Charles Wilhelm,
SOUTHCOM Commander in Chief, stated: “We are not aware of any current internal
or external threats to the Panama Canal, and we have no evidence that it has been
targeted by terrorists or foreign governments.”
More recently, in April 2004, the issue of Hutchison’s operations of the ports
was raised during a hearing of the Senate Armed Services Committee. In response
to a question, General James T. Hill, Commander of SOUTHCOM, asserted that
Hutchison’s operations of the ports in Panama have not had a negative impact on the
security of the Canal.25
Contamination of Firing Ranges and San Jose Island
Another issue in relations has been Panama’s desire to have the United States
clean up three former firing ranges (Empire, Piña, Balboa West) used by the U.S.
military for live-fire exercises and testing of ground explosives during its tenure in
the country. The Piña range was turned over to Panama in June 1999, while the
Empire and Balboa West ranges were turned over in July 1999. Some 60,000
Panamanians live in areas surrounding the ranges, and reportedly at least 24
Panamanians have been killed in the last two decades by coming into contact with
the explosives.26 Estimates of the cost to clean up the unexploded bombs and other
contaminants range from $400 million to $1 billion.27
U.S. officials maintain that it is not possible to remove the unexploded
ordinance without tearing down the rain forest and threatening the Canal’s watershed.
They also point to a Canal treaty provision which states that the United States is
obligated to take all measures “insofar as may be practicable” in order to ensure that
hazards to human life, health and safety were removed from the defense sites
reverting to Panama. In response to a press question while attending Panama’s
centennial celebration in November 2003, Secretary of State Colin Powell maintained
that the United States had already met its obligations to clean up the ranges.28
The controversy over the U.S. cleanup of the ranges at times has been an irritant
in the bilateral relationship but at this juncture appears to be somewhat of a dormant
issue. Officials of the Pérez Balladares government (1994-1999) believed that the
25 Hearing of the Senate Armed Services Committee, “Defense Authorization Request for
Fiscal Year 2005,” April 1, 2004, Federal News Service.
26 “No Home on Panama’s Range, U.S. Munitions Scattered Over Canal Training Zones,”
Washington Post, Jan. 10, 2000; Vanessa Hua, “U.S. Weapons, U.S. Mess? Panama,”
Bulletin of the Atomic Scientists, July 1, 2002.
27 “An Expensive Farewell to Arms: The U.S. Has Abandoned 51 Military Sites in Canada.”
The Gazette (Montreal),. Apr. 28, 2001.
28 U.S. Department of State. International Information Programs. Washington File. “Colin
Powell Hails Panama’s 100 Years of Independence,” Nov. 3, 2004.

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United States was reneging on its treaty commitment and wanted to press the United
States to clean up the firing ranges regardless of economic cost. The Moscoso
government raised the issue during her October 19, 1999, meeting with then
President Clinton in Washington. At the time, President Clinton stated that the
United States had met its treaty obligations to clean up the ranges to the extent
practicable, but did say that the United States wanted to stay engaged and work with
Panama on the issue. The issue also came up during then Secretary of State
Albright’s visit to Panama on January 15, 2000. In a December 2001 letter to
Secretary of State Colin Powell, Panama’s Foreign Minister reiterated his county’s
call to clean up the three firing ranges.29 In April 2003, Panamanian Foreign Minister
Harmodio Arias asserted that the issue of clearing the firing ranges was not dead.30
On another sensitive issue, U.S. Embassy officials in Panama announced in May
2002 that a plan was being prepared to clean up Panama’s San Jose Island, which
was contaminated with chemical weapons used in training exercises during World
War II.31 The Organization for the Prohibition of Chemical Weapon (OPCW) had
confirmed in July 2001 that there were several live chemical bombs on the island,
and Panama evacuated residents of the island.32 In September 2003, however,
Panama rejected a U.S. offer for the environmental cleanup of the island that would
have reportedly offered more than $2 million in equipment and training so that
Panama could clean up the island. According to Foreign Minister Harmodio Arias,
Panama rejected the offer because it did not want to sign a document releasing the
United States from all liabilities.33 A provision in the FY2004 Foreign Operations
appropriations measure (P.L. 108-199, Division D) would have permitted Foreign
Military Financing for the San Jose Island cleanup.
During a November 2004 visit to Panama, Secretary of Defense Donald
Rumsfeld indicated that issues involving both the firing ranges and San José Island
were considered closed.34 Panamanian officials, however, maintained that both are
pending bilateral issues.35
29 “Panama Asks U.S. Military to Clean Up Former Bases,” Agence France Presse, Dec.
27, 2001.
30 Foreign Broadcast Information Service, Highlights: Central America Press, Apr. 8, 2003
(“Panamanian Foreign Minister Says Firing Range Cleanup Not Dead Issue,” La Prensa)
31 “U.S. Creates Chemical Weapon Clean-up Plan on Panamanian Island.” EFE News
Service, May 27, 2002.
32 “Panama-U.S. Panama Clears Isle After Finding World War II Chemical Weapons.”EFE
News Services, Sept. 6, 2001.
33 Victor Torres, “Foreign Minister Explains Why Panama Rejected U.S. San Jose Island
Cleanup Offer,” La Prensa (Panama), Oct. 12, 2003 (as translated by Foreign Broadcast
Information Service).
34 “Donald H. Rumsfeld Holds Joint News Conference with the Panamanian Minister of
Government & Justice,” FDCH Political Transcripts, November 13, 2004.
35 “Donald Rumsfeld in Panama Says Contaminated Firing Ranges ‘Closed Case,’” BBC
Monitoring International Reports, November 14, 2004.

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Former U.S. Military Presence in Panama
Under the terms of the Panama Canal Treaty, all U.S. military forces withdrew
from Panama by December 31, 1999, since no mutual agreement was reached to
continue their presence. At that time, Panama assumed responsibility for defending
as well as operating the Canal. Nevertheless, under the terms of the Treaty on the
Permanent Neutrality and Operation of the Canal, often referred to as the Neutrality
Treaty, the United States will have the right to use military force to reopen the canal
or restore its operations.
Former Role and Presence of U.S. Troops. Over the years, U.S. military
forces in Panama had several functions. The primary purpose of the troops was to
provide for the defense of the Panama Canal, as set forth in the Panama Canal
Treaties, until December 31, 1999. Another function served by the presence of the
U.S. military in Panama stemmed from its activities throughout Latin America. Until
late September 1997, Panama served as the headquarters of the U.S. Southern
Command (SOUTHCOM), a unified command responsible for all U.S. military
operations south of Mexico. In March 1995, President Clinton announced that
SOUTHCOM headquarters, located at Quarry Heights in Panama, would be moved
to Miami. The move began in June 1997 and was completed by the end of
September 1997. U.S. bases in Panama provided assistance to Latin American
nations combating drug trafficking with aerial reconnaissance and counter-narcotics
training. Howard Air Force Base in Panama provided secure staging for detection,
monitoring, and intelligence collecting assets. Panama also provided unique
opportunities and facilities for military training, including the Jungle Operations
Training Center (which was deactivated on April 1, 1999) at Fort Sherman, Panama.
By the end of December 1999, all U.S. forces had withdrawn from Panama, and
all of the U.S. bases and facilities had reverted to Panamanian control. Ten major
installations were returned to Panama over a four-year period: Fort Davis and Fort
Espinar in early September 1995; Fort Amador, at the Pacific entrance to the Canal,
on October 1, 1996; Albrook Air Force Station on October 1, 1997; Galeta Island (a
former U.S. Naval Security Group Activity that passed to Army control in 1995) on
March 1, 1999; Rodman Naval Station on March 11, 1999; Fort Sherman, on the
Atlantic side, on June 30, 1999; and Howard Air Force Base, which ceased air
operations in May 1999, was officially turned over to Panama on November 1, 1999,
along with Fort Kobbe. Finally, Fort Clayton and was turned over on November 30,
1999.
Failed Negotiations. In September 1995, President Clinton and President
Pérez Balladares met in Washington and announced that the two countries would
begin informal discussions to determine if there was mutual interest in the United
States maintaining a military presence in Panama beyond the end of 1999. Those
talks never materialized, but instead there were a series of bilateral talks regarding
a U.S. contribution to a Multinational Counternarcotics Center (MCC). President
Pérez Balladares had announced in July 1996 that Panama would be willing to allow
the United States to use Howard Air Force Base, at no cost, as an international drug
interdiction center. He stated that Panama would “provide the facility free of charge
as part of our contribution to the drug war.”

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Talks on a potential MCC began in late November 1996 and ultimately led to
a tentative agreement, announced December 24, 1997, on the establishment of a
MCC with the United States contributing troops for the center. Despite the tentative
accord, progress on a final agreement was stymied during 1998, and on September
25, 1998, both countries announced that they were ending the MCC talks without a
final accord.
As described in the press, the MCC would have involved about 2,000 U.S.
troops operating at Howard Air Force Base, Rodman Naval Station, and Fort Kobbe
on the Pacific side of the Canal. Other facilities reportedly to be utilized would have
been communication facilities at Galeta Island and Corozal. Panama would have
provided free use of the bases, while the United States would have been expected to
pay for such facilities as housing. The MCC reportedly would have been established
for a 12-year period, renewable for additional five-year periods, with the potential
participation of other Latin American nations. Reportedly the MCC would have had
a Directors’ Council made up of the foreign ministers of participating countries and
presided over by Panama’s foreign minister. If the United States and Panama had
agreed on the MCC, the next step would have been for Panama’s Legislative
Assembly to approve the agreement, which then would have been subject to a
national referendum in Panama.
As early as April 1998, the Clinton Administration had expressed concern that
negotiations would have to be concluded soon, or the United States would be forced
to locate the U.S. anti-drug operations elsewhere. Although the text of the draft
MCC accord was not made public, press reports indicated that one problem in the
negotiations was a provision that would permit U.S. soldiers to engage in other
missions beyond counter-narcotics. Panama and several Latin American nations
expected to join the MCC expressed reservations about this aspect of the accord, with
concerns centered on the potential for U.S. military intervention in the region. U.S.
officials, however, maintained that U.S. military activities beyond anti-narcotics
work would consist of such benign activities as search and rescue and disaster relief.
Another reported problem in the negotiations was the U.S. rejection of Panama’s call
to allow a change in the agreement, whereby the center could be dissolved after three
years if the drug trafficking problem diminished.
Some participants, including former Ambassador Thomas McNamara, the lead
negotiator in the talks with Panama, believe that the main reason that an agreement
was not reached was Panama’s internal politics. While Panamanian opinion polls
overwhelmingly favored a continued U.S. military presence, the President appeared
concerned about vocal opposition, even from within his own party, to the proposed
center. Moreover, President Pérez Balladares was actively seeking a constitutional
change for a second term of office, and this appeared to have influenced the MCC
negotiations.
In early December 1998, U.S. officials announced that they had begun talks with
several Latin American countries to find new bases of operation in Central and South
America for the anti-drug missions formerly undertaken in Panama. Short-term
interim agreements were concluded in April 1999 to have Forward Operating
Locations (FOLs) in Ecuador, Aruba, and Curaçao for U.S. aerial counternarcotics
missions. Subsequently, the United States concluded longer-term 10-year agreements

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with Ecuador and with the Netherlands (for Aruba and Curaçao) for the anti-drug
FOLs. An additional FOL site also was being sought in Central America, and on
March 31, 2000, a 10-year agreement was signed with El Salvador.
In 1999, some Members of the U.S. Congress and politicians in Panama
suggested that there was still an opportunity for the United States to negotiate the use
of facilities in Panama for U.S. anti-drug flights, similar to the FOLs negotiated with
Ecuador, Aruba, and Curacao. Press reports suggested that President-elect Moscoso
was interested in allowing the U.S. military to use Panama as a staging area for anti-
drug flights. In 2000, however, President Moscoso turned down a request from the
United States for a visiting military forces agreement. On September 26, 2000, she
announced that Panama would not participate in a visiting forces agreement with the
United States.
U.S. Congressional Views on U.S. Military Presence. Before
December 1999, Congress had twice gone on record favoring negotiations to consider
a continued U.S. presence in Panama beyond the end of 1999, and in the 104th
Congress the Senate approved a non-binding resolution on the issue. In 1991,
Congress enacted legislation (P.L. 102-190, Section 3505) expressing the sense of
Congress that the President should begin negotiations with Panama to consider
whether the two nations should allow the permanent stationing of U.S. forces in
Panama past 1999. Twelve years earlier, Congress had approved the Panama Canal
Act of 1979 (P.L. 96-70, Section 1111) which states that “it is the sense of the
Congress that the best interests of the United States require that the President enter
into negotiations” with Panama “for the purpose of arranging for the stationing of
United States military forces after the termination of the Panama Canal Treaty.” And
on September 5, 1996, the Senate approved S.Con.Res. 14, expressing the sense of
Congress that the President should negotiate a new base rights agreement with
Panama, while consulting with Congress regarding any bilateral negotiations that
take place.
In the 106th Congress, numerous measures were introduced relating to a
continued U.S. military presence in Panama as the Canal turnover approached, but
no legislative action was taken on these measures. The measures would have urged
the President to negotiate a new base rights agreement with Panama to permit U.S.
troops beyond December 31, 1999 (S.Con.Res.59, S.J.Res.37, H.Con.Res. 233);
expressed the sense of the Congress that the United States should negotiate security
arrangements with Panama to protect the Canal and to ensure Panama’s territorial
integrity (H.Con.Res. 186/S.Con.Res.61); authorized and directed the President to
renegotiate the Panama Canal Treaties to provide for the security of the Canal (H.R.
2244); and expressed the sense of the Senate that the President should negotiate
security arrangements with Panama regarding the protection of the Canal and that any
attack on or against the Canal would be considered an act of war against the United
States (S.Res. 257). One measure (H.R. 3452) would have provided that unpaid
balances of the Panama Canal Commission be payable to Panama only upon
completion of an agreement that leases half of Howard Air Force Base to the United
States.
In the second session of the 106th Congress, H.R. 3673, introduced by
Representative Benjamin Gilman, and reported by the House International Relations

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Committee (H.Rept. 106-803, Part I), would have provided Panama with certain
benefits if Panama agreed to permit the United States to maintain a presence there
sufficient to carry out counternarcotics and related missions from Panama. The
benefits would have been preferential trade access to the U.S. market; a scholarship
program for Panamanians to study in the United States; and assistance for
infrastructure construction. Supporters argued that the bill offered an opportunity for
the United States to regain its traditional military presence in Panama and restore full
U.S. military capability to perform anti-narcotics missions in the region. Opponents
argued that Panama had not expressed interest in regaining a U.S. military presence
in the country and believed that it could jeopardize talks underway with Panama for
a “visiting forces” agreement. The State Department expressed opposition to the bill
for several reasons. It maintained that there was a lack of credible support in Panama
for any agreement to re-establish a U.S. military presence there; that the quid pro quo
nature of the offer to Panama would give the appearance of the United States paying
rent for the right to establish a military presence, and U.S. policy was not to pay rent
for foreign bases or base rights; and that the trade benefits offered for Panama could
violate the most-favored-nation obligation of the World Trade Organization. State
Department officials also pointed out that trade benefits for Panama and other
Caribbean Basin countries had been enacted into law in May 2000 as part of the U.S.-
Caribbean Basin Trade Partnership Act (Title II of P.L. 106-200).
In the 107th Congress, just a single resolution was introduced related to the
stationing of U.S. troops in Panama, but no legislative action was taken on the
measure. H.Con.Res. 296, introduced by Representative Bob Barr on December 20,
2001, would have urged the President to negotiate a new base rights agreement with
Panama in order for U.S. Armed Forces to be stationed there for purposes of
defending the Canal.
In the 108th Congress, H.Con.Res. 9, introduced by Representative Virgil
Goode, is identical to H.Con.Res. 296 introduced in the 107th Congress described
above. The resolution would urge the President to negotiate a new base rights
agreement with Panama for the purposes of defending the Panama Canal.
Panamanian Views on U.S. Military Presence. Prior to the departure of
U.S. troops at the end of 1999, public opinion polls in Panama cited overwhelming
support for a continued U.S. military presence. Some Panamanians focused on the
importance of continuing a U.S. military presence to help conduct counternarcotics
operations in Panama and in the region. They pointed with concern to incursions of
Colombian narco-traffickers into the Darien jungle region of Panama. Despite the
polls, Panamanian opponents to the MCC were vocal and staged protests at various
times. In 1997, there were several protests by student, human rights, and labor
groups who opposed a continued U.S. presence. An umbrella organization was
formed known as the Organizations Against Military Bases, which included some
30 labor, peasant, and student groups. In early 1998 another umbrella organization
against U.S. military presence was formed, the National Movement for the Defense
of Sovereignty, consisting of labor, student, and professional organizations. These
groups argued for the need to break what they regarded as Panama’s dependent
relationship with the United States and recover its own national identity.

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