TESTIMONY OF RICHARD N. COOPER, UNDER SECRETARY OF STATE FOR ECONOMIC AFFAIRS

Secretary COOPER. Thank you, Mr. Chairman.

As you have indicated, I am here at your invitation to discuss arrangements for economic cooperation betwen the United States and Panama which will complement the process of implementing the new Panama Canal Treaties signed by President Carter and Panama's General Torrijos on September 7. Since the subcommittee's hearings are directed primarily toward the legal and constitutional implications of these arrangements, Mr. Herbert Hansell, the Department of State's legal adviser, is also present and will make a brief statement following my own. As requested in your October 28 letter to Secretary Vance, I will direct my remarks to the substance of the economic cooperation arrangements rather than to the related legal and constitutional questions.

The program of economic cooperation developed out of the canal negotiations but is separate and independent from the Panama Canal Treaty.

Perhaps it would be best to start with the background. At the start of the negotiations which led to the new canal agreements, the United States and Panama agreed, in the February 1974 Kissinger-Tack statement of principles, that Panama should receive a "just and equitable share of the benefits derived from the operation of the canal in its territory." Consistent with this principle, the United States maintained during the negotiations that Panama's share of the economic benefits from the canal should be drawn entirely from canal revenues; that is, that payments to Panama should reflect the canal's economic value as measured by its own revenue-generating capacity.

Panama's negotiators proposed that the United States pay Panama a large initial lump-sum payment and a very sizable annuity, either of which far exceeded the most optimistic estimates of gross canal revenues. The Panamanian negotiators sought to justify these proposals by assigning high economic value to the economic and security benefits derived by the United States from the canal, without comparable benefits to Panama. They further suggested that as a counterpart to U.S. investment in the Panama Canal, Panama had provided its unique geographic location and much of its prime land and water resources, as well as the labor of its people, to the canal effort. Panama also cited the low remuneration received by Panama under the present treaties and the value to our security interests of the military bases and the new neutrality arrangements.

Finally, the Panamanian negotiators stressed the importance to Panama of being able to obtain the resources to undertake rapid social and economic development with wide distribution of benefits to its people.

The final result, as you know, was that the new Panama Canal Treaty embodied the U.S. position. With regard to the canal enterprise, Panama is to receive annual payments which will be drawn entirely from canal revenue.

At the same time, the U.S. negotiators recognized that there was considerable merit, from the standpoint of the future U.S. interest in the canal, to giving attention to Panama's development needs. The United States and Panama under the new treaties would share a special relationship created by mutual interest in the canal. Panama's development could foster the stability which is the underpinning for an open, safe, efficient, and accessible canal before and after the expiration of the Panama Canal Treaty.

The U.S. negotiators therefore arranged for their Panamanian counterparts to meet with representatives of the Departments of State and the Treasury, the Agency for International Development, and the Export-Import Bank to consider Panama's development needs. In doing so, it was clearly understood that any arrangements to assist with Panama's development were to be separate from the canal agreements and were in no way to be tied to the rights and obligations of the United States under the Panama Canal Treaty and the Neutrality Treaty.

Out of these discussions emerged a program which was set forth in a diplomatic note signed by Secretary of State Vance on September 7. This program was designed to utilize financial assistance programs that are suitable to Panama's stage of development and directed at meeting Panama's present economic needs for low income housing and a revived private economic sector. It is undertaken on a best-efforts basis. It introduces no special assistance devices and is subject to all applicable procedures under existing programs. All of its elements fit within existing statutory authorization.

The components of the economic cooperation program are as follows:

First, up to $75 million in AID housing guarantees over a 5-year period.

Second, up to $200 million in Export-Import Bank loans, loan guarantees, or insurance over a 5-year period subject to approval by the Bank.

Third, a guarantee by the Overseas Private Investment Corporation of $20 million in U.S. private capital to the Panamanian National Finance Corporation, CÓFINA, for the use in productive projects in the private sector.

In addition to these economic programs, the Secretary's note of September 7 also proposed issuance of repayment guarantees under our foreign military sales program not to exceed $50 million over a 10-year period. These guarantees are to assist Panama in meeting its responsibilities to contribute to canal defense under the Panama Canal Treaty.

Let me add a few comments about each of the components in the cooperator program.

The AID housing program is directed toward housing for lower-tomedium income groups in less developed countries. The program provides full faith and credit U.S. Government guarantees to private U.S. lenders who make loans for housing projects in less developed countries.

The 5-year program for Panama would fit within existing authorization. The guarantee program, which began in the 1960's, is designed to be self-sufficient and has not required congressional ap

propriations. Total current housing guarantee authority is $1.055 billion. The proposed Panama program would conform to the statutory limitations of $25 million per year to any one country and an average annual face value of $15 million.

As for the Export-Import Bank component, Panama is expected to become an expanding market for U.S. exports after the canal issue is settled and investment in Panama accelerates. This projected market expansion is expected to give rise to more applications for Eximbank support, but at a minimum Eximbank has indicated that its business in Panama could well amount to the $200 million we have been discussing over the next 5-year period.

The portfolio risk to Eximbank as a result of this offer will be small. With an additional $200 million to Panama over 5 years, exposure in Panama will amount to less than 1.37 percent of Eximbank's total existing portfolio. Projected risk will be controlled in the usual manner, since each transaction will be subject to normal Eximbank financial, legal, and engineering criteria, including the Eximbank's statutory requirement to find a reasonable assurance of repayment.

Concerning the Overseas Private Investment Corporation guarantee, this will be the first instance in which OPIC has participated in financing the expansion of a government-owned development bank, although OPIC is permitted to do so by longstanding OPIC Board policy guidelines. The Panamanian Development Bank, COFINA, is engaged in supporting the development of private enterprises in Panama through project lending. The guarantee of borrowing by COFINA would therefore be wholly compatible with OPIC's mission and in accord with our view that OPIC should help strengthen the private sector of Panama's economy. The guarantee would raise OPIC's exposure in Panama to only 8.5 percent of its total existing portfolio, which we believe to be a reasonable risk. A Panamanian Government guarantee will further reduce OPIC's risk. OPEC has stipulated that its offer to Panama depends on terms being negotiated which are acceptable to OPIC's Board.

Finally, the military sales guarantees, like other components of the cooperation program, are not grants to be financed by the American taxpayer. The only appropriations required would be to cover 10 percent of the annual program in the form of deposits in a special

reserve account.

These, then, are the components of the United States-Panamanian cooperation program which developed from the canal negotiations. They rely on existing programs which are proven tools for furthering U.S. interests abroad. All offers of assistance under this program are subject to compliance with legal and managerial requirements of the institutions involved and to the availability of funds. They are separate from the Panama Canal Treaty because they do not relate to our rights and obligations under that treaty. But we expect them to make a positive contribution to the successful implementation of the new United States-Panamanian partnership in the canal enterprise which will grow out of the new treaties.

Thank you, Mr. Chairman.

Senator ALLEN. Thank you, Secretary Cooper.

I believe it would be a more orderly procedure if we heard at this time from you, Mr. Hansell, so that then we might direct questions

to both of you or either of you, as the case might be. Therefore, please proceed with your testimony.

TESTIMONY OF HERBERT J. HANSELL, LEGAL ADVISER OF THE DEPARTMENT OF STATE

Mr. HANSELL. Thank you, Mr. Chairman.

It is a pleasure to appear before you this morning to discuss the legal status of the note regarding economic and military cooperation which was transmitted to the Ambassador of Panama by the Secretary of State on September 7 of this year.

I believe it is important to understand at the outset that this instrument does not constitute an agreement. It is in the form of a unilateral diplomatic communication from the Secretary of State to the Panamanian Ambassador. No response to the document was requested or received from the Panamanian Government. The penultimate paragraph of the document clearly states that "the undertakings of the United States provided for herein will enter into force upon an exchange of notes to that effect between our two Governments." Therefore, the document will establish no obligation in a legal sense until such time as the United States and Panama enter into an agreement to bring it into effect. Rather, the document constitutes an assurance of intent to enter into a specific agreement at a future date.

I would now like to describe briefly the nature of the obligations the United States would assume once such an exchange of notes takes place. As the document clearly provides, the various undertakings set forth are to be within the limitations of U.S. law and subject to compliance of the contemplated programs with all applicable legal requirements. Thus, upon entry into force of the undertakings, the commitment would be that the United States would take the necessary measures within the authority conferred by law to bring into being the specified programs of economic and military cooperation. There would be no legal obligation to do anything not authorized by U.S. law. Moreover, each of the programs described is either made subject to applicable administrative and statutory criteria or is subject to terms to be approved by a U.S. Government agency responsible for the program. Each proposed project or transaction will be subject to review in the same manner as other similar proposed projects and transactions.

I now propose to take up a question in which I understand this committee has expressed particular interest: Why were these arrangements set forth in the form of a diplomatic note rather than as part of the Panama Canal Treaty?

In addressing this question, I believe it would be useful to recapitulate briefly a bit of the background of these arrangements about which Under Secretary Cooper has already testified in some detail.

During the negotiation of the treaties, the parties recognized their mutual interest in assuring the continued soundness and stability of Panama's economy, to enable it to carry out its new responsibilities in an effective manner. Understanding was reached that the United States would consider with Panama how it might cooperate in this regard under programs authorized by existing U.S. legislation. Arrangements were made for exploration of the possibilities for cooperation by officials of both governments other than the treaty negotiations.

It was not considered appropriate or desirable to link these potential arrangements in any way with the rights and responsibilities of the parties under the new treaties. For the same reason to avoid any implication of a legal linkage between the cooperative programs and the rights and obligations of the parties under the treaties-it was considered important that the treaties should not mention such programs and that the note describing the programs should not refer to the treaties.

The relevant documents reflect these considerations. The legal rights and obligations established by the treaties are not in any way dependent upon the fulfillment of the intentions of the parties reflected in the note. Irrespective of what may occur with respect to these cooperative arrangements, the Panama Canal treaties, once ratified, stand independently and cannot be affected.

The understandings of the parties with respect to the contemplated economic and military cooperation programs have been set forth in a form which is entirely appropriate and highly desirable from the standpoint of the United States. There is no question as to the authority of the executive branch under existing law to enter into such understandings.

Mr. Chairman, that concludes my presentation. I will be pleased to join Under Secretary Cooper in responding to any questions the committee may have.

Thank you, Mr. Chairman.

Senator ALLEN. Thank you very much, Mr. Hansell.

Secretary Cooper, would you describe briefly your present duties for the Department of State and tell how long you have been in your present job?

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Secretary COOPER. Yes; I went to work for the Department of State my current job in practice in January but, in fact, I was not finally confirmed until sometime in April of this year, 1977.

As my title suggests, I have overall responsibility for foreign economic policy of the United States insofar as that is lodged in the State Department. There are parts of foreign economic policy for which other departments of the Government have the principal responsibility. In those instances I act as a liaison between the State Department and those other departments.

I have no formal line responsibility.

Senator ALLEN. Were you with the Department of State prior to your appointment as Under Secretary of Economic Affairs?

Secretary COOPER. About 12 years ago I spent 1 year at the Department of State.

Senator ALLEN. There was a hiatus of some 12 years?
Secretary COOPER. Yes, that is right.

INFORMAL MEETINGS WITH BARLETTA

Senator ALLEN. You did participate in certain of the negotiations here in Washington with Minister Nicholas Barletta of the Republic of Panama, the Minister for Economic Planning and Development there, did you not?

Secretary COOPER. I participated in three meetings with Minister Barletta. We made clear to the Panamanians that we did not regard those meetings as negotiations.