Order Code RL32540
The Proposed U.S.-Panama Free Trade Agreement
Updated July 3, 2007
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

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The Proposed U.S.-Panama Free Trade Agreement
Summary
On June 28, 2007, the United States and Panama signed a free trade agreement
(FTA) after two and half years and ten rounds of negotiations. Negotiations were
formally concluded on December 16, 2006, with an understanding that further
changes to labor, environment, and intellectual property rights (IPR) chapters would
be made pursuant to detailed congressional input. These changes were agreed to in
late June 2007, clearing the way for the proposed FTA’s signing in time to be
considered under Trade Promotion Authority (TPA), which expired on July 1, 2007.
TPA allows Congress to consider trade implementing bills under expedited
procedures.
The most visible changes include the adoption of enforceable labor standards,
compulsory adherence to select multilateral environmental agreements (MEAs), and
an easing of restrictions on developing country access to generic drugs. In each case,
the proposed U.S.-Panama FTA goes beyond provisions in existing multilateral trade
rules and even those contemplated in the Doha Development Round negotiations.
Panama is a small U.S. trade partner, but benefits from significant U.S.
investment and unilateral trade preferences. These preferences would be replaced
and made permanent by the reciprocal FTA. The FTA had to reconcile the needs of
a relatively small developing country with those of a large developed one. For
Panama, this meant addressing multiple trade liberalization goals, including
expanding its globally competitive services sector, repositioning its much smaller
manufacturing sector, and easing slowly into the international market its more
protected and less competitive agricultural sector. For the United States, it meant
building on a long-standing strategic military and commercial relationship, while
accommodating the concerns of sensitive domestic sectors and industries.
The proposed U.S.-Panama FTA is a comprehensive agreement. Some 88% of
U.S. commercial and industrial exports would become duty-free right away, with
remaining tariffs phased out over a ten-year period. About 50% of U.S. farms
exports to Panama would achieve duty-free status immediately. Tariffs and tariff rate
quotas (TRQs) on select farm products are to be phased out by year 17 of the
agreement. Panama and the United States agreed to a separate bilateral agreement
on SPS issues that would recognize U.S. food safety inspection as equivalent to
Panamanian standards, which would expedite entry of U.S. meat and poultry exports.
The FTA also consummates understandings on services trade, telecommunications,
government procurement, and intellectual property rights (particularly with respect
to pharmaceutical products), while supporting trade capacity building.

Congress may take up implementing legislation this fall, but even with the
recent changes to the FTA “template,” FTAs remain a controversial issue. This
report will be updated as congressional action and other developments warrant.
Related information may be found in CRS Report RL30981, Panama: Political
and Economic Conditions and U.S. Relations, by Mark P. Sullivan.

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Contents
Panama’s Canal and Economic Relations with the United States . . . . . . . . . . . . . 1
Early U.S.-Panama Economic Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Canal and U.S. Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Panamanian Trade Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Structure and Direction of Panamanian Trade . . . . . . . . . . . . . . . . . . . . . . . . 6
The Colón Free Zone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
U.S.-Panama Merchandise Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
U.S. Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Summary of Trade Negotiations and the Proposed U.S.-Panama FTA . . . . . . . . 10
Market Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Agricultural Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Sanitary and Phytosanitary Standards (SPS) . . . . . . . . . . . . . . . . . . . . 14
Textiles and Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Government Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Pharmaceutical Data Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Labor and Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Labor Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Panama’s Labor Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Environmental Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Trade Capacity Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Appendix 1. Chronology of U.S.-Panama FTA Negotiations . . . . . . . . . . . . . . 27
Appendix 2. Panama: Selected Economic Indicators . . . . . . . . . . . . . . . . . . . . 28
Appendix 3. U.S.-Panama Tariff Rates for Selected Products . . . . . . . . . . . . . . 29
List of Figures
Figure 1. Map of Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Panama Direction of Trade, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
List of Tables
Table 1. Panama’s Current Account Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 2. U.S.-Panama Merchandise Trade, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 3. U.S. Investment in Panama, Mexico, and Central America . . . . . . . . . 10

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The Proposed U.S.-Panama Free Trade
Agreement
On June 28, 2007, representatives of the United States and Panama signed a free
trade agreement (FTA) after two and half years and ten rounds of negotiations (see
Appendix 1 for a chronology of events). Negotiations were formally concluded on
December 16, 2006, with an understanding that further changes to labor,
environment, and intellectual property rights (IPR) chapters would be made pursuant
to detailed congressional input. These changes were agreed to in late June 2007,
clearing the way for the proposed FTA’s signing in time to be considered under
Trade Promotion Authority (TPA), which expired on July 1, 2007. TPA allows
Congress to consider trade implementing bills under expedited procedures.1
The proposed U.S.-Panama FTA incorporates changes based on principles
outlined in the “New Trade Policy for America,”2 a bipartisan policy position crafted
jointly by congressional leadership and the Bush Administration. First, the five basic
labor rights defined in the United Nations International Labor Organization’s (ILO)
Fundamental Principles and Rights at Work and its Follow-up (1998) Declaration
have been incorporated as unequivocal obligations, fully enforceable through the
dispute settlement mechanism. Second, obligations to sign and adhere to numerous
multilateral environmental agreements (MEAs) are now included. Third,
pharmaceutical IPR provisions have been altered in ways that may hasten Panama’s
access to generic drugs. Congress may take up implementing legislation this fall,3
but even with the recent changes to the FTA “template,” FTAs remain a controversial
issue. This report will be updated as events warrant.
Panama’s Canal and Economic Relations with the
United States
The United States and Panama have entered into many agreements over the past
150 years, the most prominent ones defining their relative stake in the famous canal
that traverses the Central American isthmus, bisecting Panamanian territory (see
Figure 1). The canal has been a critical factor influencing Panamanian domestic and
foreign affairs, and like earlier U.S.-Panama agreements, the FTA’s significance is
tied to a Panamanian economy that has formed largely around the canal.
1 For details, see CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options,
and Prospects for Renewal, by J. F. Hornbeck and William C. Cooper.
2 Released March 27, 2007 and available on the websites of the House Ways and Means
Committee and the United States Trade Representative (USTR).
3 Washington Trade Daily. Democrats Say No to TPA. July 2, 2007.

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CRS-2
Figure 1. Map of Panama
Panama
C a r i b b e a n S e a
G r
Canal
e a t e r Antilles
S
Madden
AN B
C a r i b b e a n
Lake
Lago
LA
Gatun
S
Bayano
S e a
Lake
Golfo de los
COLON
Mosquitos
PANAMA
P a c i f i c
BOCAS DEL TORO
O c e a n
Bay of Panama
COLUMBIA
COCLE
CHIRIQUI
ARCHIPIELAGO
VERAGUAS
DE LAS PERLAS
Golfo de Chiriqui
G u l f o f P a n a m a
DARIEN
HERRERA
LOS SANTOS
Panama
Isla de
Coiba
International Boundary
Province Boundary
National Capital
Province Capital
San Blas is a territory (comarca).
0
25
50
75 Kilometers
N O R T H P A C I F I C O C E A N
0
25
50
75 Miles
Source: Map Resources. Adapted by CRS. (K.Yancey 7/27/04)

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CRS-3
Early U.S.-Panama Economic Relations
Since first explored by the Spanish at the turn of the sixteenth century, interest
in Panama has centered on its unique geographic characteristic: the slender distance
separating the Atlantic and Pacific Oceans. Because of the transit possibilities this
presented (first for Peruvian gold and other colonial trade), Panama was a natural
crossroads for the movement of commerce, a strategic position that grew as the world
became ever more traveled and integrated. In fact, Panama’s destiny became fused
to its geography and, over time, to the vagaries of foreign interests that sought to take
advantage of it, particularly the United States.
Panama was swept to independence from Spain on November 28, 1821,
becoming part of the Gran Colombia regional group. By this point, both the United
States and Britain had openly coveted the prospect of an inter-oceanic connector.
Well before construction of a canal could begin, the United States displaced Britain
as the dominant foreign influence and completed a cross-isthmian railroad in 1855.
This project was driven by the westward expansion of the United States, which
included an anticipated southern water route to the west coast. To secure this transit
system, as well as the safety of goods and people using it, the United States resorted
to armed intervention in Panama some 14 times in the 19th century. By the time the
United States sought permission to construct a canal, a precedent had already been
set to use military force for defense of U.S. interests in Panama.4
The initial U.S. effort to build a canal required a concession from Colombia
allowing the United States to complete the bankrupt French project abandoned in
1889. In early 1903, the details were set down in a treaty ratified by the U.S. Senate,
but unanimously rejected by the Colombian legislature. The United States responded
by reaching out to the growing Panamanian successionist movement. On November
3, 1903, in a quick and bloodless move encouraged by the offshore presence of U.S.
warships, Panama separated from Colombia. The United States immediately
recognized Panama as an independent state, and in return, Panama signed the Hay-
Buneau-Varilla Treaty, ceding to the United States the rights to construct a canal and
to control it “in perpetuity.”5
The Panama Canal opened in 1914, leading to U.S. dominance in the economic
and, at times, political life of Panama. Although both countries benefitted from its
operations, the relationship was far from equal, which along with the perpetual U.S.
presence, generated a nagging resentment, frequent protests, and periodic violence
over the tangible loss of national sovereignty. This tension remained a dominant
feature of U.S.-Panamanian relations until the canal was ceded back to Panama in
1977 under terms defined in the Panama Canal Treaties signed by Presidents Jimmy
Carter and Omar Torrijos. Although tensions flared again in 1989 when the U.S.
military invaded Panama to arrest then-chief of state General Manual Noriega on
narcotics trafficking charges and for threatening U.S. personnel and property, the
4 Conniff, Michael L. Panama and the United States: The Forced Alliance. Athens: the
University of Georgia Press, second edition. 2001. pp. 30-35.
5 Woodward, Ralph Lee. Central America: A Nation Divided. New York: Oxford
University Press, third edition. 1999, pp. 187-191 and ibid., pp. 63-70.

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CRS-4
incursion proved to be a catalyst for the return of democracy. Perhaps not
coincidently, Panama’s decision to promote trade liberalization followed soon
thereafter.6
The Canal and U.S. Trade Policy
The canal solidified Panama as a maritime economy and its return to control by
Panama raised expectations of greater economic benefits from its ownership. The
canal operations by themselves account for approximately 6% of Panama’s GDP,
with the largest and fastest growing traffic volume generated along the U.S. East
Coast-to-Asia trade route (especially U.S.-China). About one-third of all cargo
passing through the canal has its origin or destination in the United States. The
canal’s total economic impact, however, is far greater, supporting income and jobs
in various services industries including warehousing, ship registry and repair, salvage
operations, insurance, banking, and tourism. The two major ports at either end of the
canal have been privatized and modernized, a portion of the canal was widened in
2001, but Panama faces a difficult and expensive challenge to enhance the capacity
of the entire canal to accommodate much larger post-Panamax ships.7 Panama held
a national referendum on the proposed $5.25 billion expansion on October 22, 2006,
which passed by a wide margin.
With transfer of the canal and its operations to Panama, the country also
inherited a substantial amount of land and physical assets. The conversion of these
assets to private use has been a boon to the Panamanian economy, but not without
considerable costs and investment, as well. Privatization efforts eased the
transformation of former U.S. government facilities to productive Panamanian use,
which has included refurbishing the Panamanian railroad by Kansas City Southern
Railways, transforming the former Albrook base into residential housing, and
developing a small foreign processing zone in the former Ft. Davis.8
The Panama-Pacific Special Economic Area (PPSEA) is perhaps the most
ambitious of these projects. This public-private partnership, established in law,
aspires to convert the former Howard Air Force Base into a “world class business
center,” with an emphasis on the export sector. Existing assets include housing and
office buildings, a hospital, transportation infrastructure, fiberoptic cable network,
an 8,500-foot runway, and four hangar facilities. The government offers businesses
various fiscal incentives and a streamlined regulatory process. Firms are required to
commit to state-of-the-art practices that include adopting internationally accepted
environmental and labor standards.9
6 Conniff, Panama and the United States, pp. 134-39 and CRS Report RL30981, Panama:
Political and Economic Conditions and U.S. Relations, by Mark P. Sullivan.
7 The Economist Intelligence Unit. Panama: Country Profile 2003. London, 2003. pp. 16-
17 and U.S. Department of Energy. Energy Information Administration. Panama: Country
Analysis Briefs. October 2003; and [http://www.pancanal.com].
8 Ibid.
9 Government of Panama. Panama-Pacifico Special Economic Area Agency.

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CRS-5
With the assistance of the International Finance Corporation (IFC) of the World
Bank, Panama is seeking a large global financing package to cover the initial
investment needs. The project aims at developing various businesses including
computer technology, cell phone manufacturing, international call centers (Dell
already operates one on site), aeronautical industry support, and others that require
a well-trained work force. The IFC supports this project not only for its prospects as
a business venture, but because it is forward looking rather than relying on the
“maquiladora” business model common in much of the region.10
At the start of the 21st century, the canal and close ties with the United States are
still the defining features of Panama’s economy, but in the past these traits have
hindered Panama’s participation in regional integration. Although part of the Central
American Integration System, a broadly focused political arrangement, Panama has
declined to join the Central American Common Market, relying instead on the canal
and the large U.S. economy as its economic anchors. Panama has always had a fully
dollarized monetary system and is a beneficiary of U.S. unilateral trade preferences
defined in the Caribbean Basin Economic Recovery Act (CBERA), the Caribbean
Basin Trade Partnership Act (CBTPA), and the Generalized System of Preferences
(GSP).11 Under these circumstances, there has been little external incentive for
Panama to become a more open economy. Only since joining the World Trade
Organization (WTO) in 1997 did Panama begin to reduce tariff rates, an important
step in preparing Panama for an FTA with the United States.
Panama’s subregional independence and reliance on U.S. economic ties has
suited the United States as well, given its continuing interest in the Canal. An FTA
with Panama may be seen as one way for the United States to support long-
established commercial interests and deepen bilateral relations, particularly if
accepted as a mutually beneficial pact with reasonably balanced political and
economic outcomes. Although many ships have outgrown the canal, its locale and
prospects for enlarging the passageway continue to reinforce Panama’s historic, albeit
currently diminished, importance for the United States as a strategic trade passage.
A bilateral FTA with Panama is also part of the Bush Administration’s
“competitive liberalization” trade strategy, in which negotiations are taking place on
multilateral, regional, and bilateral levels. This multi-tiered negotiation strategy
is predicated on an expectation that gains on one level of negotiation may encourage,
if not compel, similar breakthroughs on others. Because of slow progress in
negotiations at the WTO Doha Round and the Free Trade Area of the Americas
(FTAA), the United States has moved ahead aggressively with bilateral talks, of
which the Panama FTA is one. Some, however, have questioned the bilateral
10 Ibid., and discussion with IFC official.
11 Panama’s dollarized economy has been a cornerstone of its long-term economic stability.
It has safeguarded Panama against exchange rate risk, currency mismatches, and speculative
attacks experienced in other developing economies, and eliminated the monetizing of
deficits, thereby reinforcing fiscal constraint and price stability. See Moreno-Villalaz, Juan
Luis. Financial Integration and Dollarization: The Case of Panama. Cato Journal, Winter
2005. For more on trade preferences, see CRS Report RL33951, U.S. Trade Policy and the
Caribbean: From Trade Preferences to Free Trade Agreements, by J. F. Hornbeck.

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CRS-6
approach for the asymmetrical negotiation power the United States wields, the effects
it may have on non-participating countries, and the one-sided trading system that is
developing around a U.S. hub, as opposed to a truly regional or multilateral system.
For Panama, the proposed FTA may be seen as a way to reinforce its varied
trade liberalization goals. The services sector is already globally competitive, but the
manufacturing sector is small and agricultural remains protected and uncompetitive
(see below). For Panama, the chief concern was crafting an FTA that would balance
the need to pursue openness for services, export growth and promotion for
manufacturing, and adjustment time for agriculture to become more competitive,
while minimizing social displacement. The incentive to negotiate was perhaps also
enhanced by the desire to keep pace with other Latin American countries that have
or are negotiating FTAs with the United States.
Panamanian Trade Relations
Panama is a country of 3.2 million people with a stable, diversified economy
that has rebounded briskly from the 2001-2002 global economic downturn.
Panama’s gross domestic product (GDP) expanded by 4.2% in 2003, 7.6% in 2004,
6.9% in 2005, and 7.1% in 2006 (see Appendix 2 for selected macroeconomic data).
With the exception of Costa Rica, Panama has the highest per capita income in the
Central American region, but income distribution is highly skewed, poverty remains
a nagging problem, especially in rural areas, and unemployment is high, but
declining. Unlike any other Latin American country, 77% of Panama’s GDP is in
services, developed around the transportation and commerce generated by canal
traffic and the Colón Free Zone (CFZ). Industry is the second most important sector,
contributing 17% to GDP followed by agriculture at 6%.12
Structure and Direction of Panamanian Trade
Trade is an increasingly important part of this services-based economy. As seen
in Table 1, Panama’s balance of payments points to a sizeable trade deficit in goods
compared to a large services trade surplus. Panama’s merchandise trade deficits
ranged from $700 million to $1.6 billion from 2001 to 2006. In each year, the
merchandise deficit was offset by a services trade surplus of between $900 million
to $1.7 billion, unusual for a Latin American economy.
Table 1. Panama’s Current Account Balance
2001
2002
2003
2004
2005
2006
Balance on Merchandise Trade
($ million)
-696
-1,037
-1,113
-1,538
-1,316
-1,576
Balance on Services Trade
($ million)
899
979
1,254
1,278
1,415
1,715
Data Source: United Nations Economic Commission on Latin America and the Caribbean (ECLAC).
Preliminary Overview of the Economies of Latin America and the Caribbean, years 2003-2006.
12 Republic of Panamá. Controller General’s Office. 2005.

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CRS-7
Overall, the current account deficit has remained relatively high in recent years
due in part to the sharp rise in oil prices, which has also negatively affected Panama’s
inflation rate and terms of trade (Appendix 2). Panama places a strong emphasis on
increasing exports as a driver of economic growth, pointing to the Panama Pacific
Special Economic Area, Colón Free Zone (see below), and, to a lesser extent, the
small export processing zones and nontraditional agricultural products as
opportunities to execute this vision. As a global trader, it has completed FTAs with
El Salvador (2002), Taiwan (2004), and Singapore (2005). In addition to the United
States, it is negotiating FTAs with Guatemala, Nicaragua, Costa Rica, and Honduras.
Panama nonetheless remains closely tied to the United States as its dominant trading
partner, which as a single country is a larger trading partner than any of the world’s
major regions.
Figure 2. Panama Direction of Trade, 2006
In 2006, the United States accounted for some 38.5% of Panamanian exports
and 26.8% of its imports (see Figure 2). The European Union is the second largest
export market with a 33.2% export share, but accounts for only 6.7% of Panamanian
imports. The Latin American countries collectively are Panama’s third largest export
market with 20.4%, but has the largest import share at 44.8%.
Panama is one of the few Latin American countries with which the United
States has a merchandise trade surplus, and although relatively small, it is by far the
largest in the region. Panama runs a sizeable trade deficit with Latin America; its
largest Latin American trade partners are Mexico, Costa Rica, and Brazil. Panama
also imports significant quantities of oil from Peru, Venezuela, and Ecuador. Asia
accounts for 5.6% of Panama’s exports, but 13.7% of its imports, dominated by
Japan, South Korea, and more recently, China.
The Colón Free Zone. A distinct feature of Panama’s trade regime is the
Colón Free Zone (CFZ), which with the exception of Hong Kong, is the largest duty
free zone in the world. The vast trade volume that traverses the Panama Canal,
multimodal transportation infrastructure, modern financial sector, and Panama’s
central location in the Americas make Colón a logical place for a duty free zone. It
serves as a “one stop shop” for both Latin American buyers, and sellers from the rest

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CRS-8
of the world, including Asia and the United States. Sellers operate showrooms
targeted at small- and medium-sized buyers, who make wholesale purchases of goods
for retail sale in their respective countries. Goods are typically repackaged in smaller
lots, priced in the local market currency, and transferred to the purchasing country
without incurring income, value added, or transfer taxes. Most CFZ trade is in
electronics, clothing, jewelry, and other consumer goods.
Buyers benefit from the ability to purchase small lots, reduced travel to distant
foreign countries, economies of scale that arise from consolidating lots for shipping,
minimal transaction costs, vastly improved shipping times, and credit offered by
sellers. The sellers benefit from reaching smaller Latin American markets in one
location and reduced tax and transaction costs. Panama benefits from the 20,000
direct jobs the CFZ creates and the public revenue they generate. CFZ trade is
reported as a separate component of Panama’s trade statistics and only those goods
entering the Panamanian economy are recorded as imports. In 2005, nearly $5 billion
worth of goods passed through the CFZ, with $500 million added to the Panamanian
trade balance.13
The CFZ is frequently associated with a number of illicit activities including
money laundering, illegal transshipment, trademark and other intellectual property
violations. In part, this is a reputation that Panama as a whole has been fighting since
the military dictatorship, which was widely known for its flagrant disrespect of the
law, if not outright corruption. Panama’s proximity to Colombia and headquarters
as a transshipment point helped fuel this perception.
The CFZ has attempted to counter this reputation. The zone itself is an enclosed
commercial area, encircled by, and under the supervision of, customs and other law
enforcement agencies of the Republic of Panama. In addition, both the Colón Free
Zone User’s Association and the CFZ Administration have a strict code of conduct
and argue that illegal activity is also policed by individual companies because a bad
reputation hurts those dedicated to making the CFZ a world class trading center.
Even the accusation of an infraction can lead to a suspension of the license needed
to operate in the zone. Cash accounts for only 10% of transactions and there is
careful monitoring of all goods that move in and out of the zone through electronic
tracking systems.14
U.S.-Panama Merchandise Trade
U.S.-Panamanian merchandise trade is small.15 In 2006, the United States
exported $2,706 million worth of goods and imported $323 million, producing a U.S.
13 U.S. Department of Commerce. U.S. Commercial Services. Doing Business In Panama:
A Country Commercial Guide for U.S. Companies 2005. April 7, 2005. p. 3 and author’s
interviews with CFZ representatives, September 21, 2005.
14 Colón Free Zone User’s Association. Rules of Conduct for the Members of the Colón
Free Zone Users’ Association, 1995; and author’s interviews with representatives from
agencies mentioned.
15 Services trade data are not available for smaller U.S. trading partners, including Panama.

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CRS-9
trade surplus of $2,383 million, the largest in the Western Hemisphere. Still, Panama
ranked as only the 45th largest export market for U.S. goods and 98th for imports.
Major U.S. exports, as seen in Table 2, include oil and mostly capital- and
technology-intensive manufactured goods such as aircraft, pharmaceuticals,
machinery, medical equipment, and motor vehicles.
Table 2. U.S.-Panama Merchandise Trade, 2006
(top ten U.S. exports and imports by $ value)
$ Value
% of
$ Value
% of
U.S. Exports
U.S. Imports
million
Total
million
Total
1. Oil (not crude)
855.6
31.6%
1. Fish/Seafood:
101.9
26.9%
2. Machinery
291.8
10.8%
2. Repaired Goods
79.6
21.0%
- Computers
(65.1)
- Office mach.
(41.8)
3. Electrical mach.
183.6
6.8%
3. Gold
35.0
9.3%
4. Aircraft
166.1
6.2%
4. Crude Oil
32.3
8.6%
5. Pharmaceuticals
132.4
4.9%
5. Sugar (cane)
23.5
6.2%
6. Vehicles
93.4
3.5%
6. Edible Fruit
12.2
3.3%
7. Optical/Medical
93.4
3.5%
7. Coffee
11.8
3.1%
Equipment
8. Perfume
77.3
2.9%
8. Electrical mach.
9.0
2.4%
9. Paper
67.2
2.5%
9. Aluminum
8.8
2.3%
10. Cereals
69.0
2.6%
10.Glass
5.2
1.4%
Other
676.9
24.7%
Other 59.0
15.4%
Total
2,706.7
100.0% Total
378.3

100.0%
Data Source: U.S. Department of Commerce.
The United States imports relatively little from Panama, accounting for the
growing U.S. merchandise trade surplus. Most imports are primary products; over
one-quarter is seafood, mostly fresh fish and shrimp. Repaired goods are number two
accounting for 22% of total imports from Panama.16 Commodity trade includes crude
oil, precious metal (mostly gold), fruit, sugar, and coffee, which together account for
30.5% of total imports. Unlike the Central American countries, where U.S.
sensitivities to textile and apparel trade run high, Panama trades little in this sector.
Panama’s agricultural exports, particularly sugar, presented the more difficult
negotiation issues.
U.S. Foreign Direct Investment
Panama has no formal restrictions on capital flows, does not discriminate
between foreign and domestic investment, and maintains bilateral investment treaties
with the United States and many European countries. Critics have pointed out,
16 Technically classified in the Harmonized Tariff System (HTS) as “products of the United
States when returned after having been exported, without having been advanced in value or
improved in condition by any process.”

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CRS-10
however, that the legal environment can be cumbersome and that Panama’s relatively
high labor costs (for the hemisphere) and inflexible labor laws can be a frustration
if not an impediment to U.S. foreign direct investment (FDI).17 Still, U.S. companies
are well represented in Panama, including the largest container port facility in the
region, multiple financial institutions, transportation firms, and manufacturing
facilities from various sectors. Like other countries pursuing an FTA with the United
States, Panama seeks closer ties for the continued FDI that may be generated from
having a permanent rules-based trade relationship with a large trading partner.
Table 3. U.S. Investment in Panama, Mexico, and Central
America
($ millions)
Sector
2001
2002
2003
2004
2005
Panama
5,141
5,842
5,409
5,631
5,162
Mexico
52,544
56,303
59,851
63,502
71,423
Central America
2,994
3,199
2,333
2,857
3,230
Data Source: U.S. Department of Commerce. Bureau of Economic Analysis. International Economic
Accounts. BEA website. Data are stock of foreign direct investment (FDI) presented on a historical-
cost basis.
U.S. FDI represents over a third of total FDI in Panama. Table 3 compares U.S.
FDI in Panama to other regional destinations. The amount of U.S. investment in
Panama well exceeds that in the five Central American countries combined, although
it is a small fraction of U.S. investment in Mexico. Plans to widen and improve the
canal will likely provide an opportunity for some $5 billion of investment in the canal
itself, and perhaps related large amounts of FDI for other sectors of the economy with
a significant U.S. presence.
Summary of Trade Negotiations and the Proposed
U.S.-Panama FTA18
Panama approached the United States for a stand-alone FTA, preferring to avoid
a direct link to the U.S.-Dominican Republic-Central America Free Trade Agreement
(CAFTA-DR).19 Panama wanted to maximize an FTA’s potential to win U.S.
congressional approval by emphasizing the historical and strategic nature of the U.S.-
Panamanian relationship, while separating the negotiations from the divisive
CAFTA-DR accord. Panama’s service economy, small textile and apparel industry,
and limited integration with the Central American economies also bolstered the case
17 U.S. Department of Commerce, Doing Business in Panama, pp. 3-4.
18 This summary reflects information in the final text of the proposed FTA, released on July
2, 2007.
19 For a discussion of the CAFTA-DR and a deeper understanding of the regional economic
implications of freer trade, see CRS Report RL31870, The Dominican Republic-Central
America-United States Free Trade Agreement (CAFTA-DR), by J. F. Hornbeck.

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CRS-11
for separate negotiations.20 Another unique feature of the FTA negotiations was the
treatment of business issues with respect to the Panama Canal Area. Its status as an
autonomous legal entity under the Panamanian Constitution required separate
negotiations for government procurement, labor, investment, and other areas. The
United States is the only country with which Panama has been willing to negotiate
issues related to the canal area in an FTA.
The proposed agreement was completed in ten rounds of negotiation, concluding
on December 16, 2006 and follows the text framework of earlier FTAs. It was signed
on June 28, 2007 following some significant last minute changes to the labor,
environment, and intellectual property rights chapters to accommodate new
commitments agreed to by the USTR and bipartisan congressional leadership.
Market access schedules, drawn from previous FTA templates, reflect U.S. and
Panamanian interests, as do other market access provisions. Below is a more detailed
discussion of the major negotiation areas and a description of the issues that have
been of particular interest to Panama and the United States, including the U.S.
Congress.
Market Access
Market access (chapter 3 of the FTA) covers provisions that govern barriers to
trade such as tariffs, quotas, safeguards, other nontariff barriers, and rules of origin
(chapter 4). The proposed U.S.-Panama FTA would replace unilateral trade
preferences provided to Panama under the Caribbean Basin Economic Recovery Act
(CBERA), the Caribbean Basin Trade Partnership Act (CBTPA), and the Generalized
System of Preferences (GSP), under which many imports from Panama enter the
United States duty free along with those entering under the normal trade relations
schedule (see Appendix 3 for selected tariff rates). Panamanian agricultural products
face some of the highest barriers, particularly sugar, which is subject to a tariff rate
quota. U.S. exports face tariffs, with most falling in the range of 3-10%, plus the
additional 5% transfer tax, which applies to domestic goods as well.
Market access provides for national treatment for traded goods of both parties,
with a detailed schedule defining the progressive elimination of customs duties for
manufactured and agricultural goods. There are eight staging categories that allowed
each country to identify its most sensitive products for lengthier phase out of tariffs.
The USTR reports that tariffs on 88% of industrial and commercial goods would go
to zero immediately, with the remaining tariffs phased out over a ten-year period.
Similarly, over half of U.S. farm exports would receive immediate duty free
treatment.21 Tariffs on some agricultural goods would remain in place longer, with
some taking up to 16 years to be completely eliminated. Safeguards have been
retained for many products only for the period of duty phase out, but antidumping
and countervailing duties were not addressed, leaving these trade remedy laws fully
operational, as required under TPA.
20 Inside U.S. Trade. Panama FTA Unlikely To Be Docked Into CAFTA as Talks Set to
Begin. April 23, 2004.
21 Office of the United States Trade Representative. Free Trade with Panama: Summary of
the Agreement. January 2007.

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CRS-12
Rules of origin define which goods would be eligible for duty-free treatment
based on the country of origin of their content. Rules of origin are intended to
prevent transshipment of goods made from materials originating in countries outside
the agreement. They are particularly pertinent to apparel and textile trade. Apparel
products made in Panama would be given duty-free treatment if they are made from
U.S. or Panamanian fabric and yarns (the yarn forward rule).
Agricultural Trade. U.S. domestic agricultural support programs are not
addressed in the proposed FTA, which focused on reducing tariffs, increasing quota
levels, and cooperating more closely on sanitary and phytosanitary (SPS) rules and
enforcement. Market access was particularly difficult for four highly protected
products: pork; poultry; rice; and sugar. The United States was basically “offensive”
on pork, poultry, and rice, expecting to open further Panama’s markets as soon as
possible. It was “defensive” on sugar, attempting to limit increases in the sugar quota
that might disrupt operations of the sugar program as defined in legislation.
Panama’s position was the reverse, pressing to minimize increases in U.S. exports
of pork, poultry, and rice, and to increase its U.S. sugar export quota.
In the United States, the sugar program reflects a historical commitment to
protect the income of sugar beet, sugar cane, and sugar processing firms with below-
prime-rate loans, limitations on sales in the domestic market, and tariff rate quotas
(TRQs). TRQs restrict imports with prohibitively high tariffs on imports above a
defined quota amount, as defined in WTO rules agreed to by the United States. In
2003, the above-quota tariff on sugar was 78%.22 On average, Panama harvests only
a quarter of the sugar produced by each of the five Central American countries, but
it still plays a disproportionally important role in the agricultural sector. Sugar
constitutes: 1) a third of Panama’s total agricultural exports, compared to less than
10% for the Central American countries, and; 2) 41% of agricultural exports to the
United States. The U.S. market consumes 76% of Panamanian sugar exports,
compared to less than 10% of sugar exports from Central America.
Given the dependence of sugar producers on the U.S. market, in part driven by
Panama’s relatively high wage rates that make it cost prohibitive to produce for the
world market, the Panamanians argued that even a relatively small quantitative
increase in their portion of the U.S. sugar quota would have a large benefit for their
industry. The U.S. sugar industry, however, continued to resist the inclusion of sugar
in bilateral FTAs, arguing that the WTO is the forum for addressing domestic support
programs and TRQs in the agricultural sector.
In Panama, pork, rice, and poultry were the most sensitive products. These are
also protected by TRQs, with in-quota tariffs of 15% and out-of-quota tariffs rising
to 74%, 103%, and 273%, respectively. Pork and poultry have a special issue related
to the consumption of white versus dark meat. The United States consumes
considerably more white meat than dark, leaving a disproportional amount of dark
cuts for export, which face the highest tariffs. In Panama, as with much of the world,
22 The economic effect is to raise the price of sugar in the United States above the world
price, increasing income to sugar-producing industries, but raising costs to sugar-using firms
and consumers. CRS Report RL33541, Sugar Policy Issues, by Remy Jurenas.

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CRS-13
dark meat is preferred. The concern revolves around U.S. producers willingness to
sell dark meat cuts at a low price in foreign markets, putting downward pressure on
prices and hurting domestic producers in those countries. The Panamanians argued
that because of the relatively high profit margins on white meat in the United States,
on a cost allocation basis, U.S. producers can actually afford to sell the dark meat at
below cost. The cost accounting can be debated, but concerns over the price effect
in the Panamanian market remained unchanged. Panama’s rice industry, which
supplies over 90% of the domestic demand, was also convinced that opening their
market to U.S. subsidized rice would decimate their industry, which, because of its
protection, sells rice considerably above the world price.
Panamanian agriculture represents only 6% of GDP, but 17% of employment.
These numbers point to both an inherent inefficiency, due in part to protection, but
also the strong role agriculture plays in supporting rural employment and social
stability. Agriculture’s 17% of national employment actually supports 40% of the
country’s population living in rural areas, most of whom exist at or below the poverty
line. Given the potential to dislocate much of the poor in the country, the
Panamanians argued that opening the agricultural sector too quickly to the large
production capacity of the United States would have been highly detrimental to the
social structure of the rural economy, leading to increased unemployment, poverty,
and rural-urban migration. For these reasons, Panama wanted a slow transition to
open markets in the agriculture sector, as well as, an increase in the sugar quota to
boost employment. This would also buy time for Panama to develop its non-
traditional export crops, such as melons, palm oil, and pineapples, which some view
as the future of this sector.
The compromise struck in the proposed FTA would provide duty-free treatment
for over half of U.S. farm exports to Panama including high quality beef, poultry
products, soybeans, most fresh fruits, and a number of processed goods. Remaining
tariffs would be phased out between 7 and 16 years after the FTA takes effect. Rice
tariffs, which protect one of Panama’s most sensitive products, would remain in place
for the full 16 years, as would tariffs on pork, chicken leg quarters, dairy products,
and corn, among others. These products would receive expanded quotas under the
Panamanian tariff rate quota system. The United States agreed to give Panama an
additional 7,000 metric tons of sugar imports in the first year under a three-tiered
TRQ system, which would grow by 1% per year, capped eventually for some types
of sugar. The American Sugar Alliance apparently has agreed not to come out
against the agreement.23
Other protective measures for agriculture were negotiated. Whereas export
subsidies, voluntary restrain agreements (VREs), and import licensing are generally
prohibited, TRQs, safeguards, and a sugar compensation mechanism would be
allowed. The sugar mechanism gives the United States the option to compensate
Panamanian sugar producers in lieu of giving Panamanian their exports duty-free
treatment. This provision might be used if the U.S. sugar program were threatened
with disruption.
23 Inside U.S. Trade. Panama FTA Offers Limited Sugar Access; Labor Changes Possible.
December 22, 2006.

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CRS-14
Sanitary and Phytosanitary Standards (SPS). SPS was one of the most
difficult issues to resolve. Although understood as necessary to ensure the safety of
agricultural imports, SPS standards can be a burden, and are often denounced as a
veiled form of protectionism. Panama’s SPS standards, on the whole, are considered
to be very high and meet WTO standards. The USTR, however, has long raised
concerns over procedural transparency with respect to phytosanitary permits and also
Panama’s requirement that imports of poultry, beef, and pork, its most protected
products, come from processing plants that have been individually inspected by
Panamanian officials. The United States contends that this process has often been
cumbersome, drawn out, and ultimately very costly to U.S. producers.24
The United States wanted Panama to recognize the USDA certification process
as equivalent to Panamanian standards for the purpose of securing unimpeded entry
of U.S. meat exports. This issue became highly controversial during the ninth round
of negotiations, when U.S. negotiators proposed this agreement be put into a formal
side letter. Panama responded by noting that the SPS chapter had already been
closed, that its meat inspection standards are among the highest in the world, and that
a last minute effort to change SPS provisions raised sovereignty issues in Panama by
potentially requiring Panama to lower its standards in some cases.25
As part of the resolution, Panamanian officials visited the United States to
review the food safety inspection system for meat and poultry and found that
accepting the U.S. system would pose no sanitary threat to Panama. This
understanding was formalized in a separate bilateral agreement between the two
countries, along with a streamlined import documentation system. Signed on
December 20, 2006, the agreement states that for meat, poultry, dairy, and other
processed products, Panama agrees to accept U.S. sanitary, phytosanitary, and
regulatory systems as equivalent to those of Panama and will no longer require
individual plant inspections. Panama has since amended its laws accordingly.26
Textiles and Apparel. In general, textiles and apparel make for difficult
market access negotiations, but Panama produces very little of these goods. The
proposed FTA would provide immediate duty-free access for all textile and apparel
goods, subject to rules of origin. The permanence of the provisions and more
accommodating measures provide a benefit to the small Panamanian industry.
Safeguard measures would allow duties to increase on imports in which a sudden
increase in volume either threatens or actually harms U.S. producers. The text also
provides for short supply lists of fabrics, yarns, and fibers that otherwise would face
duties. The market access provisions were not the major apparel issue. Because
24 United States Trade Representative. 2007 National Trade Estimate Report on Foreign
Trade Barriers. Washington, D.C. March 2007. p. 452.
25 Berrocal, Rafael E. Panamá Reconoce Sistema Sanitario de Estados Unidos. Presna.com.
February 22, 2006 and Inside U.S. Trade. Dispute Over Agriculture Inspections Holding
up U.S.-Panama FTA Talks. January 23, 2006. Also see USTR Press Release, February 13,
2006.
26 United States-Panama Agreement Regarding Certain Sanitary and Phytosanitary
Measures and Technical Standards Affecting Trade in Agricultural Products. December
20, 2006.

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CRS-15
Panama is a huge transshipment point for international trade and has its own duty
free zone, the main concern was to assure U.S. apparel producers that there would be
effective customs cooperation to deter illegal transshipment of goods that do not meet
rules of origin. There is an extensive provision on consultation, monitoring, and
onsite visit procedures in support of adhering to the rules of origin.27
Government Procurement
Transparency in the bidding process for government contracts was listed as one
of the most important issues by the U.S. Chamber of Commerce in Panama.28 Some
of the concerns expressed were addressed in the 2006 amendments to the
procurement law, which modernized (e.g., through the use of Internet procurement
system) and made more transparent procurement regulations and government
purchasing information. A separate administrative court for public contracting
disputes was also created. These changes enhanced Panamanian laws that already
require transparency in the bidding process. Panama has not acceded to the WTO
Government Procurement Agreement, which the United States has encouraged.29
Government procurement takes on a greater importance when considered in
light of the proposed expansion of the Panama canal and related prospects for large
long-term investments. The Panama Canal Authority (PCA) operates independently
of the national government and Panama required separate negotiation apart from the
regular government procurement chapter. Panama negotiated to maintain the canal
authority dispute settlement system within the proposed FTA, as well as to keep
small business set aside provisions for Panamanian firms. In addition, for 12 years
after the agreement takes effect, Panama may set aside contracts let by the PCA to
Panamanian firms subject to clear notice of intent to do so and limitations on the size
of contracts. The text otherwise addresses U.S. concerns over nondiscriminatory,
fair, nondiscriminatory, and open government procurement procedures for all
national government authorities. Like the PCA, subnational governments (e.g. states
and municipalities) are not required to uphold the government procurement
provisions, but those willing to do so appear in an appendix of the proposed FTA.
Investment
Panama has actively encouraged foreign direct investment, has a well-developed
financial services industry to support the flow of capital, and is a regional financial
center in its own right. U.S. firms are heavily invested in Panama relative to other
Latin American countries. Panama signed a bilateral investment treaty with the
United States in 1991, the first in the region, which includes investor-state provisions
and further guarantees of the free flow of transfers under a 1998 law. Although the
Panamanian government has been responsive to U.S. foreign investment interests,
27 Inside U.S. Trade. U.S. Panama FTA Includes Restrictive Textile Rules of Origin.
January 5, 2007 and USTR, Free Trade with Panama, p. 2.
28 Panamcham. Issues of Importance in the U.S.-Panama FTA Negotiations, March 12,
2004. [http://www.panamcham.com/business_center/FTA.asp].
29 USTR, 2007 Foreign Trade Barriers, p. 503.

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CRS-16
concerns have arisen in particular cases involving investment in highly regulated
industries. Resolution of these concerns facilitated proceeding with the proposed
FTA and there is potential for further significant foreign investment in Panama,
including the canal expansion and reverted areas of the former canal zone.30
The text provides for clear and enforceable rules for foreign investments, which
is largely accomplished by “standard” language (identical to the CAFTA-DR)
requiring national and most-favored-nation (nondiscriminatory) treatment. It further
clarifies rules on expropriation and compensation, investor-state dispute settlement,
and the expeditious free flow of payments and transfers related to investments, with
certain exceptions in cases subject to legal proceedings (e.g., bankruptcy, insolvency,
criminal activity). Transparent and impartial dispute settlement procedures provide
recourse to investors.
Two investment issues stand out. First, an investor-state provision,
controversial during the CAFTA-DR debate, but commonly used in U.S. bilateral
investment treaties (BITs) and in earlier FTAs, has been included. It allows investors
alleging a breach in investment obligations to seek binding arbitration against the
state through the dispute settlement mechanism defined in the Investment Chapter.
U.S. investors have long supported the inclusion of investor-state rules to ensure that
they have recourse in countries that may not adequately protect the rights of foreign
investors. Since bilateral investment treaties are usually made with developing
countries that have little foreign investment in the United States, it was not
anticipated that these provisions would be applied in the United States. This changed
under NAFTA, when investor-state provisions gave rise to numerous “indirect
expropriation” claims against subnational (state) governments in the United States,
Mexico, and Canada over environmental and other regulations.31
Although none of the claims filed against the United States has prevailed,
Congress instructed in TPA legislation that future trade agreements ensure “that
foreign investors in the United States are not accorded greater substantive rights with
respect to investment protections than United States investors.” In response, Annex
10-B of the proposed U.S.-Panama FTA states that “except in rare circumstances,
nondiscriminatory regulatory actions by a Party that are designed and applied to
protect legitimate welfare objectives, such as public health, safety, and the
environment, do not constitute indirect expropriations.” This provision, along with
one that allows for early elimination of “frivolous” suits, is intended to address
congressional concerns.
Second, Annex 10-F of the proposed FTA seeks to reserve certain rights with
respect to disputes filed under Section - B of the investment chapter that may affect
the Panama Canal Authority (PCA). First, it clarifies that Panama has sole authority
over the canal and its operations, and should a claim be made against the PCA, the
30 Ibid., p. 475.
31 Indirect expropriation refers to regulatory and other actions that can adversely affect a
business or property owner in a way that is “tantamount to expropriation.” This issue and
many cases are discussed in CRS Report RL31638, Foreign Investor Protection Under
NAFTA Chapter 11, by Robert Meltz.

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CRS-17
dispute tribunal “may not order attachment or enjoin the application of a measure that
has been adopted or maintained by the Panama Canal Authority in pursuance of...”
its responsibility for the canal. Second, a claim arising from acts of the PCA that
alleges a breach of the investment agreement must first be made to the PCA, where
it will have three months to respond before the claim may be made to the dispute
settlement panel under the proposed FTA.
Services
Services trade was negotiated in multiple chapters and include financial
services, shipping, telecommunications, professional services, and e-commerce.
Panama is a service-based economy, has many competitive services industries, and
is known for its “open regulatory environment for services.” Panama does require
local licensing for many professionals to practice in the country, which the United
States wanted to change. Panama was the first country in Latin America to pass e-
commerce legislation. It recognizes the legal standing of electronic transactions and
provides for the creation of an oversight agency. The United States pressed for even
greater transparency in regulatory procedures and U.S. business groups identified
services as a critical negotiating area given U.S. competitive advantages and the large
services sector in Panama.32
Equal ability to compete in retail trade, express delivery, and financial services,
including insurance and portfolio management, was negotiated in the proposed FTA,
an issue of primary importance to the United States. In particular, restrictions on
investment in retail trade and access to contracts let by the Panama Canal Authority
were either eliminated or reduced. Greater access to other professional services and
transparency in licensing and other accreditation were clarified. In reducing
restrictions in these areas, U.S. firms would be better able to compete in the largest
sector of the Panamanian economy, the one most likely to grow with canal expansion
and increased merchandise trade through the canal. Panama wanted greater
transparency in the U.S. state-level financial services regulatory system to help ease
the possible opening of Panamanian banks in select U.S. states. The United States
government argued, however, that it was unable to make commitments on state-level
financial services regulatory matters.
Intellectual Property Rights
Clarifying intellectual property rights (IPR) was a major U.S. priority, in
particular by having Panama’s standards approximate more closely those of the
United States and by securing Panama’s commitment to join an array of international
agreements related to IPR protection. The most contentious IPR issues revolved
around loosening restrictions on data exclusivity with respect to the approval process
of new pharmaceutical products (see below).
The USTR reports that Panama’s IPR laws and institutional support have
improved with the creation of courts dedicated specifically to IPR cases. Panama
updated its patent law in 1996 and has a law governing trademark protection.
32 USTR, 2007 Foreign Trade Barriers, pp. 455-456.

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Panama signed on to the World Intellectual Property Organization (WIPO) Copyright
Treaty and Performances and Phonographs Treaty. The 1994 copyright law
improved protection and increased the options to prosecute violators. The United
States continues to encourage Panama to accede to additional IPR treaties, as now
required in the proposed FTA, and to remain vigilant in its antipiracy commitment,
a primary concern given the large amount of goods that are shipped through the
Canal Free Zone.33
IPR provisions in the proposed FTA exceed those in the WTO. They provide
that all businesses receive equal treatment and that Panama ratify or accede to various
international IP agreements. Trademark registration is better enforced through a
transparent online process and special system to resolve disputes over internet
domain issues, among other requirements. Copyright provisions clarify use of digital
materials (exceeding TRIPS standards) including rights over temporary copies of
works on computers (music, videos, software, text), sole author rights for making
their work available online, extended terms of protection for copyrighted materials,
strong anti-circumvention provisions to prohibit tampering with technologies, the
requirement that governments use only legitimate computer software, the prohibition
of unauthorized receipt or distribution of encrypted satellite signals, and rules for
liability of internet service providers for copyright infringement. Patents and trade
secrets rules conform more closely with U.S. norms. End-user piracy is criminalized
and all parties are required to authorize the seizure, forfeiture, and destruction of
counterfeit and pirated goods. The text also mandates statutory damages for abuse
of copyrighted material.34
Pharmaceutical Data Exclusivity. A debate emerged during the CAFTA-
DR negotiations over IPR provisions because they were construed to be a potential
barrier to the more timely entry of generic drugs into developing country markets.
The primary issue involved the data exclusivity term. To bring a patented drug to
market, a drug company must demonstrate through clinical trials that the drug is both
safe and effective, a time consuming and costly process. Under U.S. law, the data
used to establish these claims are protected from use by generic manufacturers to
certify their own products for a period of five years from the time the patented drug
is approved for use in a country’s market, the so-called data exclusivity term. In the
CAFTA-DR debate, this provision became controversial when the Guatemala
legislature changed its laws, adopting WTO language that would have limited data
protection to five years from the time a drug is brought to market in the first country
(e.g., the United States), rather than from the later time that it might be introduced
in a second country (e.g., Guatemala).
This issue was partially resolved in the CAFTA-DR with a side agreement
stating that “obligations” under the IPR chapter do not affect a country’s ability “to
take necessary measures [e.g., compulsory licensing for generic drugs] to protect
public health by promoting access to medicines for all,” in particular those needed
to combat epidemics such as HIV/AIDS, tuberculosis, and malaria, among others.
Critics, however, wanted the side agreement to include an explicit exception to the
33 USTR, 2007 Foreign Trade Barriers, p. 454.
34 U.S.-Panama FTA, Chapter 15.

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CRS-19
data protection requirement for cases where compulsory licencing under the WTO
rules might be invoked.35
For the proposed U.S.-Panama FTA, congressional input changed the language
to reflect this latter concern. The new text provides that if a company files to bring
to market a new drug in a second country (e.g., Panama) after making an initial filing
in the first country (e.g., the United States), and Panama approves the drug within six
months of that filing, the data exclusivity term begins at the time the drug is approved
in the United States, not Panama. This provision is intended to encourage both drug
companies and governments to engage in the approval process as efficiently as
possible, thereby speeding the entry of generic drugs into developing countries
(Panama). Because the six-month rule potentially reduces the data exclusivity term
in Panama, drug companies are encouraged to file as soon as feasible to maximize
the time their data may be protected in Panama after getting market approval.
Because countries must approve within the sixth-month rule to benefit from it, they
are encouraged to put in place an efficient drug certification process.
In addition, there is language in the IPR chapter stating that in the case of
epidemics, a waiver from the data exclusivity laws would be allowed. In the past, the
WTO public health provisions have allowed for compulsory licensing, circumventing
patents in public health emergencies, but in the case of the U.S.-Panama FTA, the
waiver is extended to the data exclusivity term, as well. Among other issues, the
FTA also eliminates patent restoration, or allowing for the retroactive application of
patents in cases where the approval of a patent extends beyond some legal- or
regulatory-determined standard period of time.
Public health advocates have long pushed for changing international rules that
would potentially hasten the introduction of lower cost generic equivalents into
developing countries, particularly to address public health emergencies. The revised
IPR chapter supports this goal. Pharmaceutical companies, however, argued against
these changes because they bear the full cost of this option through lost revenue to
the earlier introduction of generic competition, revenue expected to offset the high
costs of research and development that allows new drugs to be properly tested and
approved in the first place. Also, in developing countries with less than robust patent
laws, data exclusivity is often the only recourse drug companies have to provide
some protection of their investment, and so changing the terms of the data exclusivity
term has a direct financial cost.
35 U.S. Congress. House of Representatives. Committee on Ways and Means. Dominican
Republic-Central America-United States Free Trade Agreement Implementation Act.
H.Rept. 109-182. pp. 50-51. The side agreement is available at [http://www.ustr.gov] and
for a summary of the debate, see Brevetti, Rosella. CAFTA Opponents Blast U.S. Stance
on Guatemalan Data Protection Law. International Trade Reporter. BNA, Inc. March 10,
2005. See also: CRS Report RS21609, The WTO, Intellectual Property Rights, and the
Access to Medicines Controversy, by Ian F. Fergusson.

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Labor and Environment
Labor and environment provisions have been highly contentious issues in trade
agreements, with considerable disagreement in Congress and elsewhere over how
aggressive language in trade agreements should be in accommodating these concerns.
An important aspect of the proposed U.S.-Panama FTA is that it adopts new
standards for both the labor and environment chapters that reflect a bipartisan
understanding as developed by congressional leadership and the USTR in the “New
Trade Policy for America.”
The debate over labor and environment standards reflect differences in both
economic and political perspectives. From an economic perspective, labor and
environment advocates in the United States have argued that developing country
firms may have an “unfair” competitive advantage because their lower standards are
a basis for their lower costs, which in turn are reflected in lower prices for goods that
compete with those produced in developed countries.36 It follows from this argument
that the difference in costs may be an inducement to move U.S. investment and jobs
abroad. In addition, critics have also argued that trade agreements should not support
a status quo in production standards that leads to unacceptable working conditions
and severe environmental degradation.
On the other hand, some studies have suggested that cost differentials are
usually not high enough to determine business location alone, and that productivity
is the more important factor.37 Further, many economists view trade liberalization
as part of the overall development process that, in and off itself, can promote
improved social and economic conditions in the long run.38 Developing countries are
concerned with the loss of sovereignty should specific standards be defined in trade
agreements, as well as with the possibility that such provisions can be misused as a
disguised form of protectionism.
Labor Issues. Preliminary drafts of the U.S.-Panama FTA adopted the
CAFTA-DR labor chapter language verbatim. Many Members of Congress and
36 The difference is that in most developing countries, the social costs associated with
environmental degradation, pollution, and poor working conditions may not be captured in
the market price of goods (so-called external costs). Through legal and regulatory measures,
developed countries require that businesses correct for many of these social costs, thereby
internalizing them to the business, where they are then reflected in the final (relatively
higher) price of the good in the market place.
37 See CRS Report 98-742, Trade with Developing Countries: Effects on U.S. Workers, by
J.F. Hornbeck. September 2, 1998. Productivity and wage levels are highly correlated,
suggesting that lower productivity jobs gravitate toward countries with a relative abundance
of low-skilled (and hence low-wage) workers. Rodrik, Dani. Sense and Nonsense in the
Globalization Debate. Foreign Policy. Summer 1997. pp. 30-33.
38 Some broader evidence suggests that FTAs have not “forced a race to the bottom of
regulatory standards,” but rather to the contrary, that policy convergence is affected more
by countries agreeing to “norms of governance” via cooperation through international
agreements. See Drezner, Daniel W. Globalization and Policy Convergence. International
Studies Review. Vol. 3, Issue 1, Spring 2001. pp. 75 and 78.

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CRS-21
others objected to four key aspects of this language. First, it emphasized that a
country must effectively “enforce its own labor laws,” rather that define specific
labor standards to be codified and enforced. Second, this was the only provision in
the agreement subject to the FTA’s labor dispute resolution process. Third, labor
(and environment) provisions had their own dispute settlement process separate from
the process used for commercial and other disputes that might arise with respect to
the FTA. Critics argued the labor dispute mechanism was inferior for many reasons.
Fourth, for other commitments in the labor chapter, language requiring that the
Parties to the agreement “strive to ensure” that basic labor principles as defined in the
International Labor Organization (ILO) Fundamental Principles and Rights at Work
and its Follow-up (1998) Declaration was an inadequate commitment and
unenforceable.
In short, there existed a basic criticism that the labor provisions in the bilateral
FTAs did not reflect the intent of Congress in defining labor negotiating objectives
in Trade Promotion Authority (TPA) legislation, were a step backward in U.S. policy
on this issue that conditions trade benefits on meeting basic ILO labor commitments
as defined in the Caribbean Basin Initiative (CBI) and the Generalized System of
Preferences (GSP), and were effectively meaningless without a credible enforcement
mechanism.39
Although supporters of the CAFTA-DR model prevailed in earlier agreements,
a new bipartisan consensus emerged with the 110th Congressional leadership that led
to a significantly changed model for bilateral FTA labor chapters. The principles of
this change, as defined in the “New Trade Policy for America,” were incorporated
into the labor chapters for proposed U.S. bilateral FTAs with Panama (and Peru).
The major changes from the CAFTA-DR model state that each country:
1. shall adopt and maintain in its statutes, regulations and practices as rights, the five
core ILO labor principles: a) freedom of association; b) the effective recognition
of the right to collective bargaining; c) the elimination of all forms of
compulsory or forced labor; d) the effective abolition of child labor and, for
purposes of this Agreement, a prohibition on the worst forms of child labor;
and, e) the elimination of discrimination in respect of employment and
occupation;
2. not waive or otherwise derogate from, or offer to do so, in a manner affecting
trade or investment between the countries in implementing the above
commitment;
3. shall not fail to effectively enforce its labor in accordance with the above
commitment and that each party retains the right to the reasonable exercise of
39 U.S.-Panama Free Trade Agreement. Report of the Labor Advisory Committee for Trade
Negotiations and Trade Policy (LAC). April 25, 2007. pp. 3-7, and U.S. Congress. House
of Representatives. Committee on Ways and Means. Dominican Republic-Central
America-United States Free Trade Agreement Implementation Act. H.Rept. 109-182. pp.
47-50.

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CRS-22
discretion in using resources to achieve this goal, provided the exercise of such
discretion is not inconsistent with the obligations of the chapter; and,
4. will be required to use the dispute settlement process defined for the entire
agreement (rather than a separate process for labor disputes as defined in the
CAFTA-DR).
The change in language is intended to make commitments to ILO basic
principles under the proposed FTA binding and enforceable to the same extent as all
other disputes, including the recourse to trade sanctions. The rest of the labor chapter
conforms largely to commitments in previous bilateral FTAs that include procedural
guarantees of transparency and fairness in the use of tribunals to enforce a Party’s
labor laws and institutional arrangements that include creation of a joint Labor
Affairs Council to oversee implementation and review of commitments made in the
Labor Chapter. These commitments include establishing a Labor Cooperation and
Capacity Building Mechanism.
Panama’s Labor Conditions. Panama has higher wage rates, stronger labor
laws, and fewer impediments to union formation compared to many countries in the
region. The business community, including U.S. firms operating in Panama, argue
that the labor laws are too generous with respect to firing or downsizing the labor
force, which can actually encourage unintended responses by business, such as
extended use of temporary workers. In 1970, Panama created the Tripartite Council
on Union Freedom and Participation in Economic and Social Development with
representatives from the government, labor, and business. Its primary function is to
oversee that worker rights are being observed in Panama.
The U.S. Department of State has pointed out that Panama’s labor laws
guarantee all five of the ILO basic principles. In general, major violations have not
been found. Nonetheless, concerns still exist over the widespread use of temporary
workers in the general and child labor in the informal sector and rural areas,
particularly during harvest times. Lax enforcement of health and safety standards
was also cited as a problem.40
The Colón Free Zone and the small export processing zones are all subject to
national labor laws. The Panama Canal Area presents a unique issue. Although the
Canal Zone has separate statutes governing labor, they tend to be more generous with
respect to workers’ rights and compensation, and jobs in the Canal Zone are highly
coveted. Workers may organize and exercise their rights to collective bargaining, but
the prohibition on striking goes to Panama’s commitments under the Panama Canal
Treaties, which stipulate that the canal must be operated without interruption.41
40 U.S. Department of State. Panama: Country Report on Human Rights Practices - 2006.
Washington, D.C. March 6, 2007, the Economist Intelligence Unit. Country Report -
Panama. London, June 2004. p. 14, and American Federation of Labor and Congress of
Industrial Organizations (AFL-CIO). Panama: Labor Rights and Child Labor Reports.
Washington, D.C. August 9, 2004. p. 3.
41 Panama Legislative Assembly. Law No. 19 — “Whereby the Panama Canal Authority is
(continued...)

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CRS-23
Environmental Issues. Major environmental goals in FTAs include
protecting and assuring strong enforcement of existing domestic environmental
standards, ensuring that multilateral environmental agreements are not undermined
by trade rules, promoting strong environmental initiatives to evaluate and raise
performance, developing a systematic program of capacity-building assistance, and
assuring that environmental provisions in FTAs are subject to the same dispute
resolution and enforcement mechanisms as are other aspects of the agreements.42
Advocates raise the issue of the environmental effects of trade, particularly in
developing countries that may have weak laws and lax enforcement mechanisms.
Some of these same advocates, however, have indicated that thus far trade
agreements have not led to catastrophic pollution nor encouraged a “regulatory race
to the bottom.” There has also been a certain acknowledged degree of success in
having environmental issues addressed in the body of FTAs, in side agreements on
environmental cooperation, and through technical assistance programs, the latter of
which developing countries can use to respond to specific problems. Advocates and
many Members of Congress still note that much can be improved, such as clarifying
obligations, tightening enforcement language, and ensuring that the United States
allocates financial resources to back up promises of technical assistance.43
As with the proposed FTA labor chapter, revisions made pursuant to ideas
outlined in the “New Trade Policy for America,” reflect a bipartisan sense of that
although the text recognizes sovereign rights and responsibilities with respect to the
management of natural resources, that trade and environmental policies should be
mutually supportive and dedicated to the objective of sustainable development. The
new language, therefore, strengthens the commitments to environmental obligations
and their enforcement, requiring that each country:
1. adopt, maintain, and implement laws, regulations, and other measures to fulfill
their obligations under selected multilateral environmental agreements (MEAs)
listed in Annex 18.2;
2. shall not fail to effectively enforce environmental laws and regulations, including
those adopted as signatories to the MEAs;
3. shall not waive or otherwise derogate from, or offer thereto, from such laws
(replacing the “strive to ensure” with “shall not”);
41 (...continued)
Organized.” Chapter V — Personnel Administration and Labor Relations. June 11, 1997.
42 See [http://www.sierraclub.org/trade/fasttrack/letter.asp], Principles for Environmentally
Responsible Trade. Another important issue for the United States is ensuring that its higher
environmental standards defined in law and regulation not be compromised by challenges
of protectionism. See CRS Report RL31638, International Investor Protection: “Indirect
Expropriation” Claims Under NAFTA Chapter 11, by Robert Meltz.
43 See Audley, John. Environment and Trade: The Linchpin to Successful CAFTA
Negotiations? Carnegie Endowment for International Peace. Washington, D.C. July 2003.

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CRS-24
4. adopt a commitment to policies that will promote conservation and sustainable
use of biological diversity;
5. subject disputes to the FTA’s overall dispute settlement mechanism rather that an
mechanism developed solely to deal with labor and environmental
disagreements that was used in previous FTAs; and,
6. meet obligations for formal cooperation among governments on environmental
issues and use of the consultation and dispute resolution mechanism in a way
that is transparent and involves public input.44
As required under TPA, the USTR conducted an environmental review of the
potential environmental effects possibly attributable to the proposed FTA. It noted
that Panama “faces a number of challenges in protecting its environment as it
supports its economic and population growth.” Deforestation, land degradation, loss
of wildlife, and threats to water quality and wetlands, among other problems are
serious issues for Panama. The Panama Canal also places severe water use
requirements on the country. Panama has responded through the public policy
process, establishing environmental standards in law and entering into international
and U.S. bilateral environmental cooperation agreements.45 These issues were
already factors in Panama’s development process prior to the negotiation of the
proposed FTA. Thus, the environmental review maintains that the marginal effects
of the proposed FTA on environmental standards would be small, whether in terms
of projected impacts on the United States or on Panama.
The environmental review further notes that Panama’s service-oriented economy
and the small trade volume with the United States are unlikely to be greatly affected
by the proposed FTA and so will change marginal production and trade little. The
FTA, however, may have both positive and negative effects. The negative effects of
pollution, environmental degradation, and endangering wildlife would come mostly
from increased agricultural trade and production, which might be addressed with
increased environmental oversight and policies. The positive effect of the FTA could
include improvements in environmental standards that may be encouraged by the
provisions of the agreement and the consultative and cooperation agreements
attached to the proposed FTA.46 Panama’s environmental regulatory agency
(Autoridad Nacional de Ambiente — ANAM) points out that Panama is increasingly
using environmental impact studies, but realizes it has enforcement capacity issues
that may require time to remedy, which could be accommodated in the FTA.
Trade Capacity Building
The proposed FTA would create a Committee on Trade Capacity Building
(TCB), designed to assist Panama with the transition to freer trade with the United
44 U.S.-Panama FTA, Chapter 17, The Environment.
45 Office of the United States Trade Representative. Interim Environmental Review: U.S.-
Panama Free Trade Agreement. June 2004. pp. 7-9.
46 Ibid., pp. 15-20.

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CRS-25
States. In general, the committee’s mission includes providing technical assistance
and coordinating financing to accelerate the transition period in expectation of
increasing the gains of trade while minimizing the adjustment costs. The TCB
Committee would help coordinate technical assistance provided by U.S., regional,
and multilateral agencies in helping Panama meet its obligations under the FTA.
Panama prioritized TCB needs in its national trade capacity building strategy.
The overriding goal is to formulate a strategy that would allow Panama to assume all
the commitments under the proposed FTA, in the context of meeting the country’s
development needs. The National TCB Strategy places strong emphasis on sectoral
adjustment strategies, recognizing that some industries are already competitive by
international standards (e.g., financial services), whereas others will need
considerable assistance when faced with increased competition from the United
States (e.g., agriculture). Emphasis is also placed on supporting existing and
potentially new micro, small, and medium-sized businesses, which may need the
most assistance and constitute a significant portion of the Panamanian economy, as
well as government capacity to administer trade-related activities.47
The major goals identified include inter-sectoral coordination, increasing
exports to the United States, enhancing the investment climate, better integrating
education and innovation into the business community, and improving government
trade facilitation (processing imports and exports.) The strategy identifies 18 action
plans covering major trade and trade-related issues, ranging from market access and
rules of origin, to labor, environment, transparency, and trade agreement
administration. In each case, the status of Panama’s commitments under the
proposed FTA is identified along with action items that may need to be pursued to
improve capacity in the respective area. Successfully implementing the strategy,
however, would require resources and coordinated assistance among international
and U.S. agencies.
47 Government of Panama. Ministry of Trade and Industry. Panama’s National Strategy
for Trade Capacity Building (TCB) in Light of the Free Trade Agreement with the United
States. Panama, March 4, 2005. pp. 20-23.

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CRS-26
Outlook
The proposed U.S.-Panama FTA cannot take effect without congressional
passage of an implementing bill. The U.S. Congress appears poised to consider such
a bill this fall, a considerable challenge given the increased complexity of FTAs.
Unlike earlier (pre-1960s) FTAs that focused mainly on tariff reduction, Congress
faces weighing the implications that newly proposed FTAs have on foreign economic
and domestic policy considerations, including trade-related issues with broad social
implications in such areas as worker standards, environmental regulation, and public
health.
The debate over proposed FTAs is frequently contentious because of this
increased complexity (not to mention the political ramifications) and concerns over
the negative effects of globalization that have increased substantially in a post-
CAFTA environment. To address some of these concerns, the proposed U.S.-
Panama FTA, in addition to supporting U.S. commercial and economic interests,
incorporates significant changes initiated by the Democrats and ultimately agreed to
by congressional leadership as part of a bipartisan congressional understanding
arrived at with the Bush Administration.
The most visible of these changes include the adoption of enforceable labor
standards, compulsory adherence to select multilateral environmental agreements
(MEAs), and an easing of restrictions to developing country access to generic drugs.
In each of these cases, the proposed U.S.-Panama FTA goes beyond provisions in
existing multilateral trade rules and even those contemplated in the Doha Round. In
this case, along with the broader arguments both for and against FTAs, Congress
perhaps now faces an even more difficult choice given that the recent changes to this
proposed FTA may set a precedent in U.S. trade policy. As significant as these
changes are, perhaps portending a shift in U.S. trade policy, it is still not clear that
they are sufficient to ease the concerns many Members have over free trade
agreements.

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CRS-27
Appendix 1. Chronology of U.S.-Panama FTA
Negotiations
Date
Milestone
November 18, 2003
The USTR notifies Congress of President George W.
Bush’s intent to enter into negotiations on a free trade
agreement (FTA) with the Republic of Panama.
April 26-29, 2004
First round of negotiations occurs in Panama City.
June 11-15, 2004
Second round of negotiations takes place in Los Angeles.
July 12-16, 2004
Third round of negotiations held in Panama City.
August 9-12, 2004
Fourth round of negotiations held in Tampa.
October 18-22, 2004
Fifth round of negotiations takes place in Panama City.
December 6-10, 2004
Sixth round of negotiations held in Washington, DC.
January 10-15, 2005
Seventh round of negotiations held in Washington, DC.
Jan. 31-Feb. 6, 2005
Eighth round of negotiations occurs in Washington, DC.
Jan. 17-20, 2006
Ninth round of negotiations held in Washington, DC.
Dec.
16,
2006
Tenth and final round of negotiations concludes in
Washington, D.C. Chapters on labor and environment left
open.
March 27, 2007
Bipartisan “New Trade Policy for America” released.
March 30, 2007
President Bush formally notifies Congress of his intention
to sign the proposed U.S.-Panama FTA.
April 27, 2007
USTR transmits to the White House and Congress 27 trade
advisory reports on the U.S.-Panama FTA.
June 29, 2007
The United States and Panama sign a free trade agreement
at the Organization of American States in Washington, D.C.
July 2, 2007
USTR releases final text of proposed U.S.-Panama FTA.

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CRS-28
Appendix 2. Panama: Selected Economic
Indicators
2000
2001
2002
2003
2004
2005
2006
GDP Growth (%)
2.7
0.6
2.2
4.2
7.5
6.9
7.5
Per Capita GDP Growth (%)
0.8
-1.3
0.4
2.3
5.6
5.1
5.7
Urban Unemploy. Rate (%)
15.2
17.0
16.5
15.9
14.1
12.1
10.4
Inflation (%)
0.7
0.0
1.9
1.5
1.5
3.4
2.0
Current Acct. Bal. (% GDP)
-5.8
-1.4
-0.8
-3.9
-7.5
-5.0
-4.2
Terms of Trade (2000=100)
100.0
102.7
101.6
97.2
95.3
93.5
90.8
Foreign Direct Invest. ($ mil)*
624
467
99
771
1,004
1,027
2,500
Source: United Nations Economic Commission on Latin America and the Caribbean. Preliminary
Overview of the Economies of Latin American and the Caribbean, 2006. December 2006.
*Net investment = direct foreign investment in Panama minus Panamanian direct investment abroad.

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CRS-29
Appendix 3. U.S.-Panama Tariff Rates for Selected
Products
(% of total dollar value)
NTR
Free
Major U.S.
% of
Tariff
Major U.S.
% of
Tarif
under
Exportsa
Total
Rate
Importsa
Total
f
CBIc
Rateb
Oil (2710)
31.6
5%d
Fish/Seafood
26.9
Free
(0302)
Aircraft (8802)
6.2
10%
Repaired
21.0
Free
Goods (9801)
Machinery
10.8
3-5%
Precious
9.3
Free
Metals (7112)
- gold/scrap
Electrical
6.8
5%
Crude oil
8.6
Free
Machinery (8517)
(2710)
under
CBTPA
Pharmaceuticals
4.9
Free
Sugar (1701)
6.2
(3004)
- under quota
0
- over quota
78%
(avg. 2003)
Optical/Medical
3.5
10%
Coffee
3.1
Free
Instruments
Cereals
2.8
Fruit
3.3
Free
- corn (1005)
(1.8)
- bananas
under
- under quota
3%
- papaya
CBI and
- over quota
58%
- watermelon
GSP
- mesline (1001)
Free
- rice (1006)
(1.0)
- under quota
15%
- over quota
(0.2)
103%
Other
33.4
Other 21.6
Total
100%
Total
100%
Data Source: U.S. Department of Commerce.
Note: all Panamanian imports are subject to a 5% transfer tax, which is also collected on domestic
products. This tax is considered similar to a nondiscriminatory sales or value added tax (VAT).
a. By HTS number = Harmonized Tariff Schedule of the United States.
b. NTR is the general or normal tariff rates (also known as most favored nation rates) applied to
products not given preferential tariff treatment.
c. CBI = Caribbean Basin Initiative provides unilateral preferential tariff treatment to select Caribbean
and Central American country products. Petroleum enters duty free under the Caribbean Basin
Trade Partnership Act (CBTPA – P.L. 106-200), a related program.
d. Tariffs on oil vary depending on end use. Discussions with U.S. Department of Commerce officials
suggest most U.S. oil exports to Panama (for automotive use) face a 5% tariff. Some oil for
maritime use has tariffs as high as 30%.

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