His parents were in the Canal Zone BECAUSE his father was engaged in official business of the US government on orders of the POTUS through the DoD and the DoN.
Further, McCain was not "born abroad," anymore than someone born in a US embassy is "born abroad." Congress clarified this seventy some odd years ago.
At the time of McCain's birth (of two American parents, one on official business), the Canal Zone was an "unorganized US territory."
McCain was, in effect, born in the USA.
See: http://en.wikipedia.org/wiki/Panama_Canal_Zone
Money quote (gotta read the whole thing, full of twists and turns):
Although the Panama Canal Zone was legally an unincorporated US territory until the implementation of the Torrijos-Carter Treaties in 1979,[citation needed] questions arose almost from its inception as to whether it was considered part of the United States for constitutional purposes, or, in the phrase of the day, whether the Constitution followed the flag. In 1901 the US Supreme Court had ruled in Downes v. Bidwell that unincorporated territories are not the United States.[26] On July 28, 1904, Controller of the Treasury Robert Tracewell stated, "While the general spirit and purpose of the Constitution is applicable to the zone, that domain is not a part of the United States within the full meaning of the Constitution and laws of the country."[27] Accordingly, the Supreme Court held in 1905 in Rasmussen v. United States that the full Constitution only applies for incorporated territories of the United States.[28] Until the rulings in these so-called Insular Cases, children born of two US citizens in the Canal Zone had been subject to the Naturalization Act of 1795, which granted them statutory US citizenship at birth. With the ruling of 1905, persons born in the Canal Zone became US nationals, not full citizens.[29] This no man's land with regard to US citizenship was perpetuated until Congress passed legislation in 1937 that corrected this deficiency. The law is now codified under title 8, section 1403.[30] It not only grants statutory and declaratory born citizenship to those born in the Canal Zone after February 26, 1904, of at least one US citizen parent, but also does so retroactively for all children born of at least one US citizen in the Canal Zone before the law's enactment.[31]
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