During the first two years after the overthrow of Arias, while the Guard consolidated its control of the government and Torrijos rooted out his competitors within the Guard, the canal issue was downplayed and generally held in abeyance. By 1971, however, the negotiation of new treaties had reemerged as the primary goal of the Torrijos regime.

In the 1970s, about 5 percent of world trade, by volume, some 20 to 30 ships daily, were passing through the canal. Tolls had been kept artificially low, averaging a little more than US$10,000 for the 8- to 10-hour passage, and thus entailing a United States government subsidy. Nevertheless, canal use was declining in the 1970s, because of alternate routes, vessels being too large to transit the canal, and the decline in world trade.

The canal, nevertheless, was clearly vital to Panama's economy. Some 30 percent of Panama's foreign trade passed through the canal. About 25 percent of the country's foreign exchange earnings and 13 percent of its GNP were associated with canal activities. The level of traffic and the revenue thereby generated were key factors in the country's economic life (see Role of the Canal From 1903 to 1977 , ch. 3).

Under the 1903 treaty, the governor of the Canal Zone was appointed by the president of the United States and reported to the secretary of war. The governor also served as president of the Canal Zone Company, and reported to a board of directors appointed by the secretary of war. United States jurisdiction in the zone was complete, and residence was restricted to United States government employees and their families. On the eve of the adoption of new treaties in 1977, residents of the Canal Zone included some 40,000 United States citizens, two-thirds of whom were military personnel and their dependents, and about 7,500 Panamanians. The Canal Zone was, in effect, a United States military outpost with its attendant prosperous economy, which stood in stark contrast to the poverty on the other side of its fences.

By the 1960s military activities in the zone were under the direction of the United States Southern Command (SOUTHCOM). The primary mission of SOUTHCOM was defending the canal. In addition, SOUTHCOM served as the nerve center for a wide range of military activities in Latin America, including communications, training Latin American military personnel, overseeing United States military assistance advisory groups, and conducting joint military exercises with Latin American armed forces (see United States Forces in Panama , ch. 5).

Negotiations for a new set of treaties were resumed in June 1971, but little was accomplished until March 1973 when, at the urging of Panama, the UN Security Council called a special meeting in Panama City. A resolution calling on the United States to negotiate a "just and equitable" treaty was vetoed by the United States on the grounds that the disposition of the canal was a bilateral matter. Panama had succeeded, however, in dramatizing the issue and gaining international support.

The United States signaled renewed interest in the negotiations in late 1973, when Ambassador Ellsworth Bunker was dispatched to Panama as a special envoy. In early 1974, Secretary of State Henry Kissinger and Panamanian foreign minister Juan Antonio Tack announced their agreement on eight principles to serve as a guide in negotiating a "just and equitable treaty eliminating once and for all the causes of conflict between the two countries." The principles included recognition of Panamanian sovereignty in the Canal Zone; immediate enhancement of economic benefits to Panama; a fixed expiration date for United States control of the canal; increased Panamanian participation in the operation and defense of the canal; and continuation of United States participation in defending the canal.

American attention was distracted later in 1974 by the Watergate scandal, impeachment proceedings, and ultimately the resignation of President Richard M. Nixon. Negotiations with Panama were accelerated by President Gerald R. Ford in mid-1975 but became deadlocked on four central issues: the duration of the treaty; the amount of canal revenues to go to Panama; the amount of territory United States military bases would occupy during the life of the treaty; and the United States demand for a renewable forty- or fifty-year lease of bases to defend the canal. Panama was particularly concerned with the open-ended presence of United States military bases and held that the emerging United States position retained the bitterly opposed "perpetuity" provision of the 1903 treaty and thus violated the spirit of the 1974 KissingerTack principles. The sensitivity of the issue during negotiations was illustrated in September 1975 when Kissinger's public declaration that "the United States must maintain the right, unilaterally, to defend the Panama Canal for an indefinite future" provoked a furor in Panama. A group of some 600 angry students stoned the United States embassy.

Negotiations remained stalled during the United States election campaign of 1976 when the canal issue, particularly the question of how the United States could continue to guarantee its security under new treaty arrangements, became a major topic of debate. Torrijos replaced Foreign Minister Tack with Aquilino Boyd in April 1976, and early the next year Boyd was replaced by Nicolás González Revilla. Rómulo Escobar Bethancourt, meanwhile, became Panama's chief negotiator. Panama's growing economic difficulties made the conclusion of a new treaty, accompanied by increased economic benefits, increasingly vital.

The new Panamanian negotiating team was thus encouraged by the high priority that President Jimmy Carter placed on rapidly concluding a new treaty. Carter added Sol Linowitz, former ambassador to the OAS, to the United States negotiating team shortly after taking office in January 1977. Carter held that United States interests would be protected by possessing "an assured capacity or capability" to guarantee that the canal would remain open and neutral after Panama assumed control. This view contrasted with previous United States demands for an ongoing physical military presence and led to the negotiation of two separate treaties. This changed point of view, together with United States willingness to provide a considerable amount of bilateral development aid in addition to the revenues associated with Panama's participation in the operation of the canal, were central to the August 10, 1977 announcement that agreement had been reached on two new treaties.

Data as of December 1987