The Proposed U.S.-Panama Free Trade
Agreement
J. F. Hornbeck
Specialist in International Trade and Finance
March 1, 2011
Congressional Research Service
7-5700
www.crs.gov
RL32540
CRS Report for Congress
P
repared for Members and Committees of Congress
The Proposed U.S.-Panama Free Trade Agreement
Summary
On June 28, 2007, after two and a half years of negotiation, the United States and Panama signed
a reciprocal free trade agreement (FTA). 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 future detailed congressional input. These
changes were agreed to in late June 2007, in time for the FTA to be considered under Trade
Promotion Authority (TPA) legislation before it expired on July 1, 2007. TPA allows Congress to
consider trade implementing bills under expedited procedures. Panama’s legislature approved the
FTA 58 to 4 on July 11, 2007. Neither the 110th nor the 111th Congress took up the agreement.
The proposed U.S.-Panama FTA is a comprehensive agreement. Some 88% of U.S. commercial
and industrial exports would become duty-free upon implementation, with remaining tariffs
phased out over a 10-year period. Over 60% of U.S. farm exports to Panama also would achieve
immediate duty-free status, with tariffs and tariff rate quotas (TRQs) on select farm products to be
phased out by year 17 of the agreement (year 20 for rice). Panama and the United States signed a
separate bilateral agreement on sanitary and phytosanitary (SPS) issues that would recognize U.S.
food safety inspection as equivalent to Panamanian standards, which will expedite entry of U.S.
meat and poultry exports. The FTA also consummates understandings on telecommunications,
services trade, government procurement, investment, and intellectual property rights.
The circumstances framing the proposed U.S.-Panama FTA differ considerably from those of two
other signed FTAs that have yet to be considered by Congress. The deep concerns that Congress
has expressed over Colombia’s violence have not been an issue in the Panama FTA debate, which
is framed more by the positive image of a long-standing strategic bilateral relationship based on
Panama’s canal. Nor does Panama compare well with the continuing debate over the proposed
FTA with South Korea, which as a major U.S. trading partner, can affect key industries such as
automobile and beef production. To the contrary, Panama trades little with the United States, even
by Latin American standards, and so although particular industries may be affected to some
degree, and U.S. investment is relatively important in Panama, the FTA cannot have a major
effect on the U.S. economy as a whole.
The final text of the proposed U.S.-Panama FTA incorporates amendments on key issues based on
congressional input in 2007. The most significant were 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 these cases, the proposed U.S.-
Panama FTA goes beyond provisions in existing bilateral FTAs and multilateral trade rules.
Congress is still debating two major issues: labor and tax transparency. Concerns over Panama’s
labor code have been addressed by legislation in Panama, yet to be enacted. One issue on
minimum workers needed to form a union has not been addressed for the apparent lack of support
even among labor groups in Panama. Congress also requires that Panama amend its tax laws to
incorporate changes necessary to implement the recently signed Tax Information and Exchange
Agreement (TIEA), which would provide greater transparency in support of curbing money
laundering related to drug trafficking. Legislation has been passed, but work remains to be done
on a few bills, including a final vote on approving the TIEA. It remains to be seen if these final
changes will be sufficient for the FTA to be approved by a majority in the U.S. Congress.
For more on Panama, see CRS Report RL30981, Panama: Political and Economic Conditions
and U.S. Relations, by Mark P. Sullivan.
Congressional Research Service
The Proposed U.S.-Panama Free Trade Agreement
Contents
Background and Recent Developments ....................................................................................... 1
Labor Code Amendments ...................................................................................................... 2
Tax Transparency .................................................................................................................. 2
Panama’s Canal and Economic Relations with the United States.................................................. 4
Early U.S.-Panama Economic Relations ................................................................................ 4
The Canal and U.S. Trade Policy........................................................................................... 7
Panamanian Trade Relations ....................................................................................................... 9
Structure and Direction of Panamanian Trade ........................................................................ 9
The Colón Free Zone .................................................................................................... 11
U.S.-Panama Merchandise Trade......................................................................................... 11
U.S. Foreign Direct Investment ........................................................................................... 12
Summary of Trade Negotiations and the Proposed U.S.-Panama FTA........................................ 13
Market Access..................................................................................................................... 15
Agricultural Trade......................................................................................................... 15
Sanitary and Phytosanitary Standards (SPS) .................................................................. 17
Textiles and Apparel...................................................................................................... 18
Government Procurement.................................................................................................... 19
Investment .......................................................................................................................... 19
Services .............................................................................................................................. 21
Intellectual Property Rights ................................................................................................. 21
Pharmaceutical Issues ................................................................................................... 22
Labor and Environment....................................................................................................... 24
Labor Issues.................................................................................................................. 25
Panama’s Labor Code and Conditions ........................................................................... 26
Environmental Issues .................................................................................................... 26
Trade Capacity Building...................................................................................................... 28
Outlook..................................................................................................................................... 29
Figures
Figure 1. Map of Panama ............................................................................................................ 6
Figure 2. Panama Direction of Trade, 2009................................................................................ 10
Tables
Table 1. Legislative Status of Double Taxation Agreements Entered Into by Panama ................... 4
Table 2. Panama’s Current Account Balance................................................................................ 9
Table 3. U.S.-Panama Merchandise Trade, 2009........................................................................ 12
Table 4. U.S. Foreign Direct Investment in Panama, Mexico, and Central America.................... 13
Congressional Research Service
The Proposed U.S.-Panama Free Trade Agreement
Appendixes
Appendix A. Chronology of U.S.-Panama FTA ......................................................................... 31
Appendix B. Panama: Selected Economic Indicators ................................................................. 32
Contacts
Author Contact Information ...................................................................................................... 32
Congressional Research Service
The Proposed U.S.-Panama Free Trade Agreement
n June 28, 2007, the United States and Panama signed a free trade agreement (FTA) after
two and a half years and 10 rounds of negotiations (see Appendix A for a chronology of
O events). Negotiations formally concluded on December 16, 2006, with an understanding
that changes to labor, environment, and intellectual property rights (IPR) chapters would be made
pursuant to future congressional input. These changes were agreed to in late June 2007 and the
FTA was signed in time to be considered under Trade Promotion Authority (TPA) legislation,
which expired on July 1, 2007. TPA allows Congress to consider certain trade implementing bills
under expedited procedures.1 Panama’s legislature ratified the FTA 58 to 4 on July 11, 2007.
Implementing legislation was not introduced in either the 110th or the 111th Congress.
Background and Recent Developments
Congressional action on the proposed U.S.-Panama FTA has been delayed over numerous
concerns since it was signed four years ago. The 112th Congress, however, has turned its attention
to consideration of the U.S.-Panama FTA, with the House Ways and Means Committee holding
hearings on January 25, 2011, and the Senate Finance Committee scheduled to do the same on
March 9, 2011.2 Many issues were addressed by the incorporation into the FTA of changes based
on principles outlined in the May 10, 2007, New Trade Policy for America, a bipartisan policy
crafted jointly by leadership in the 110th Congress and the Bush Administration. These require
adoption as fully enforceable commitments, the five basic labor rights defined in the International
Labor Organization’s (ILO) Fundamental Principles and Rights at Work and its Follow-up (1998)
Declaration, select multilateral environmental agreements, and new pharmaceutical intellectual
property rights provisions that may facilitate Panama’s access to generic drugs.
Other issues, however, cropped up that further hindered congressional action on the agreement.
Soon after the May 10 principles were agreed to, the September 3, 2007, election of Pedro Miguel
González Pinzón as president of Panama’s National Assembly resulted in another year of delay.3
Although a deputy in the National Assembly since 1999, his election to the head of the National
Assembly raised his profile and drew the attention of Congress to his alleged role in the June 10,
1992, murder of a U.S. serviceman in Panama. A Panamanian court acquitted him of the charge in
1997, but the United States does not recognize the verdict and maintains an outstanding warrant
for his arrest.4 This issue was effectively resolved on September 1, 2008, when González Pinzón
declined to run for a second term as president of the National Assembly.
Since 2008, two other issues remain unresolved, the first dealing with additional changes to the
Panamanian labor code and the second related to tax transparency issues, particularly with respect
to money laundering concerns.
1 For details, see CRS Report RL33743, Trade Promotion Authority (TPA) and the Role of Congress in Trade Policy,
by J. F. Hornbeck and William H. Cooper.
2 See also, Washington Trade Daily, "The Three FTAs and Congress," February 16, 2011, and H.Res. 86 and S.Res. 20,
both calling for passage of the Panama, South Korea, and Colombia FTAs.
3 Inside U.S. Trade. Committee Chairs Signal FTA Problem Over Panama Assembly Head. September 21, 2007.
4 U.S. Department of State. Press Statement. Election of Panamanian National Assembly President Pedro Miguel
González-Pinzón. September 1, 2007.
Congressional Research Service
1
The Proposed U.S.-Panama Free Trade Agreement
Labor Code Amendments
Despite the FTA’s adoption of new labor principles in the May 10 agreement, issues remain
outstanding with respect to Panama’s labor code, three of which have been most prominent. First,
the labor code prohibits Panamanian workers from striking against companies that have been in
business for less than two years. Second, export processing zones are covered by separate labor
provisions with more restrictive collective bargaining and right to strike language than exists as
part of the national labor code. Bill 276, submitted to the National Assembly on January 13, 2011,
would remove the language disallowing strikes on new companies, and change the labor code
covering export processing zones so that it would conform to language in the national labor code
with respect to collective bargaining and the right to strike. The bill would also create a new
department in the Ministry of Labor to oversee export processing zones. The National Assembly
has yet to hold a final vote on the bill.5
A third labor issue involves the statutory limitation on the minimum number of workers required
to start a union. Panama requires 40, the ILO recommends 20. This issue has been highlighted by
the State Department and has drawn the attention of some Members of Congress.6 The so-called
“40/20 Issue” currently remains unresolved because changing the law has not received support in
Panama from business, government, or labor constituencies. Legislative action on this particular
issue is not anticipated at this time.7
Tax Transparency
Historically, the United States has had an ongoing concern over problems with drug trafficking
and money laundering through Panama.8 Panama’s efforts in this area have improved over time,
but critics still point to the need for further control of illegal transactions. Panama remains on the
so-called “Gray List” maintained by the Organization of Economic Cooperation and
Development (OECD), which includes jurisdictions that have committed to an internationally-
agreed tax standard, but have yet to implement it.9 The GAO also listed Panama as one of 50
countries described as having “tax havens” or “financial privacy jurisdictions” according to a
number of international organizations, and until recently Panama has refused to enter into tax
information exchange agreements (TIEA) with any country.10
5 Correspondence with Embassy of Panama, January 4, 2011.
6 U.S. Department of State. Bureau of Democracy, Human Rights, and Labor. 2009 Country Reports on Human Rights:
Panama. Washington, D.C. March 11, 2010.
7 Correspondence with U.S. Department of State and Embassy of Panama, February 2011.
8 For more details, see, CRS Report RL30981, Panama: Political and Economic Conditions and U.S. Relations, by
Mark P. Sullivan.
9 This standard “requires exchange of information on request in all tax matters for the administration and enforcement
of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.” Progress
Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the International Agreed Tax
Standard, February 18, 2011. The standard has been endorsed by the G20 Finance Ministers and the United Nations
Committee of Experts on International Cooperation in Tax Matters.
10 United States Government Accountability Office (GAO). International Taxation: Large U.S. Corporations and
Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions. GAO-
09-157. December 2008.
Congressional Research Service
2
The Proposed U.S.-Panama Free Trade Agreement
Although this issue falls outside the purview of the FTA, some Members of Congress wanted to
delay consideration of the FTA until Panama signed the TIEA with the United States and took
other measures necessary to remove it from the OECD “Gray List.”11 To be removed from the
“Gray List,” Panama must implement TIEAs with a minimum of 12 countries (“partners of
relevance”). Panama has made progress in achieving both goals.
Panama and the United States came to a resolution on the tax transparency issue on November
30, 2010, when they signed a TIEA. The TIEA permits either country to request information on
most types of federal (U.S.) or national (Panama) taxes, a major policy response to the possible
use of Panama as a haven for tax evasion. Article 7 specifically allows for tax information
exchange “under the existing Treaty on Mutual Legal Assistance in Criminal Matters,” which
covers money laundering among other activities. As provided in the Joint Declaration to the
TIEA, however, the agreement does not enter into force until Panama has enacted legislation
necessary to comply fully with the agreement, which it has committed to do by the end of 2011.
Before signing the TIEA, Panama enacted legislation in June 2010 that amended the tax code and
effectively created the legal framework to provide the authority for the Minister of Foreign
Relations and the Tax Office to implement the TIEA, to establish the necessary offices,
regulations, and procedures, and to carry out obligations under the agreement. These legislative
changes allow Panama to ratify taxation agreements with other countries, including the TIEA
with the United States.
Another important step occurred on February 1, 2011, when Panama signed into law a provision
covering the “Bearer Shares” or “Know Your Client” provisions required under the TIEA. A
bearer share is a security that is wholly owned by whoever holds the physical certificate. The
issuing firm neither registers the owner, nor does it track transfers of ownership. The company
disperses dividends to bearer shares when a physical coupon is presented to the firm. Because the
share is not registered to any authority, transferring the ownership involves only delivering the
physical document. Bearer shares are typically international securities and lack the regulation and
control of common shares because ownership is never recorded. The TIEA provision requires
identification of owners of bearer shares, and that such information be provided upon request.12
Panama also must formally approve the TIEA by a vote in the National Assembly. The TIEA was
voted out of the Cabinet (Executive Branch) on January 18, 2011. It need only receive a majority
vote in the National Assembly and be published in Panama’s equivalent of the U.S. Federal
Register to enter into law; no further action is required by the Executive Branch.
Implementation of the TIEA will require that Panama set up new offices and procedures.
Currently, Panama is in the early stages of creating a new International Tax Unit and Office of
11 Inside U.S. Trade. Administration Signals Panama Issues Not Major FTA Obstacles. March 13, 2009, and Schatz,
Joseph J. Pending Panama Trade Agreement No Sure Thing as Opponents Mobilize. CQ Today. March 11, 2009. p. 6.
Panama agreed to implement the OECD tax standard in 2002 through tax information and exchange agreements,
although had not entered into any such agreements until recently.
12 As defined in the Joint Declaration of the TIEA, “The United States understands that such legislation will require
resident agents acting for Panamanian entities to obtain and maintain in their records information sufficient to identify
the owners of those entities, even in cases in which shares of those entities are issued in bearer form, including, where
the owner is a legal person, information sufficient to identify substantial owners of that legal person.”
Congressional Research Service
3
The Proposed U.S.-Panama Free Trade Agreement
International Exchange of Tax Information (formal names may vary slightly). These offices will
coordinate and respond to requests for tax information under the TIEA and various double
taxation agreements. The Panamanian Embassy reports that it is using OECD guidelines to set up
these offices and that Spain is providing technical assistance on computer software, procedures
development, and possibly other areas.
To address the “Gray List” issue, Panama has entered into 12 double taxation agreements in
addition to the TIEA with the United States (see Table 1). Unlike the TIEA, the purpose of the
double taxation agreements is to eliminate double taxation in addition to taking on obligations of
tax information and exchange as set out by the OECD international tax standard. Panama has set
an internal deadline of concluding all these agreements and having its name removed from the
“Gray List” by June 2011.13
Table 1. Legislative Status of Double Taxation Agreements Entered Into by Panama
Legislative Status
Countries
Signed and Ratified
Mexico
Signed, in Final Legislative Process
Barbados and Portugal
Signed, Presented to National Assembly January 20, 2011
Qatar, Luxemburg, Netherlands, Singapore, and South Korea
Signed, Pending Presentation to National Assembly
Italy
Finalized, Awaiting Formal Signing
France, Belgium, and Ireland
Source: Embassy of Panama, as of February 11, 2011.
The 112th Congress is still evaluating Panama’s efforts to resolve these issues, but it remains to be
seen if these final changes will be sufficient for the FTA to be approved by a majority in the U.S.
Congress.
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 stakes in the canal that traverses the Central American
isthmus, bisecting Panamanian territory. 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.
Early U.S.-Panama Economic Relations
Since first explored by the Spanish at the turn of the 16th century, interest in Panama has centered
on its unique geographic characteristic: the slender distance separating the Atlantic and Pacific
13 Correspondence with Embassy of Panama, February 7, 2011.
Congressional Research Service
4
The Proposed U.S.-Panama Free Trade Agreement
Oceans (see Figure 1). 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 the 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.14
The U.S. effort to build a canal required a concession from Colombia that would allow 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 secessionist
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 control it “in perpetuity.”15
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. 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 incursion, nonetheless, proved to be a catalyst
for the return of democracy. Panama’s decision to promote trade liberalization soon followed.16
14 Conniff, Michael L. Panama and the United States: The Forced Alliance. Athens: the University of Georgia Press,
second edition. 2001. pp. 30-35.
15 Woodward, Ralph Lee. Central America: A Nation Divided. New York: Oxford University Press, third edition. 1999,
pp. 187-191 and ibid., pp. 63-70.
16 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.
Congressional Research Service
5
Figure 1. Map of Panama
Source: CRS.
CRS-6
The Proposed U.S.-Panama Free Trade Agreement
The Canal and U.S. Trade Policy
The canal solidified Panama as a maritime economy and its return to Panamanian control 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, and 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.17 Panama held a national referendum on the proposed $5.25 billion expansion on
October 22, 2006. It passed by a wide margin and Panama has begun the expansion project.
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.18
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, fiber
optic 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.19
With the assistance of the International Finance Corporation (IFC) of the World Bank, Panama is
relying on 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.20
17 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.
18 Ibid.
19 Government of Panama. Panama-Pacifico Special Economic Area Agency.
20 Ibid., and discussion with IFC official.
Congressional Research Service
7
The Proposed U.S.-Panama Free Trade Agreement
At the start of the 21st century, the canal and close ties with the United States are still 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 had
a fully dollarized monetary system since independence 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).21 These historical circumstances have given Panama little incentive 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 preparation 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 also supported the Bush Administration’s “competitive
liberalization” trade strategy, in which negotiations were pursued simultaneously on multilateral,
regional, and bilateral levels. This multi-tiered strategy is predicated on an expectation that gains
on one level of negotiation may encourage, if not compel, breakthroughs on others. Because of
slow progress on the WTO Doha Round and the Free Trade Area of the Americas (FTAA), this
strategy played out through aggressive bilateral trade negotiations, of which the proposed Panama
FTA is one. Some, however, have questioned the bilateral approach for the asymmetrical
negotiation power the United States wields, the negative effects it may have on non-participating
countries, and the one-sided trading system that could be developing around a U.S. hub, as
opposed to a truly large regional or multilateral system.
For Panama, the proposed FTA reinforces its many trade policy goals and supports continued
U.S. foreign direct investment. The services sector is already globally competitive, but the
manufacturing sector is small and the agricultural sector 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 already have or are negotiating FTAs with the United States.
21 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.
Congressional Research Service
8
The Proposed U.S.-Panama Free Trade Agreement
Panamanian Trade Relations
Panama is a country of 3.5 million people with a stable, diversified economy that has experienced
strong growth despite the current global economic downturn. Panama’s gross domestic product
(GDP) expanded by an annual average of over 9% for the five years ending 2008, and even with
the global recession, grew by 2.4% in 2009. The economy is estimated to grow by 6.3% in 2010
(see Appendix B for selected macroeconomic data). 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 the unemployment rate has been moderately high.
Inflation rose significantly in 2007-2008, but retreated in 2009 with the diminished growth in
economic output. 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, contributing 6% to GDP.22
Structure and Direction of Panamanian Trade
Trade is an increasingly important part of this largely services-based economy, but as seen in
Table 2, Panama has a historically large merchandise trade deficit, exporting relatively little
compared to the amount of goods it imports. From 2001 to 2009, Panama’s annual merchandise
trade deficits ranged from $700 million to $4.7 billion. Panama’s declining terms of trade are one
factor affecting the trade balance (see Appendix B), but the large increases in 2007 and 2008
reflect two developments. First, a large rise in oil imports driven by price and quantity, and an
increase in construction machinery imports (derricks, dozers, cranes, etc.) related to Panama’s
strong economic growth, canal expansion, and other infrastructure investment. In most years, the
merchandise deficit has been offset by a services trade surplus, which has ranged from $900
million in 2001 to $3.3 billion in 2009. Such a large services component of the balance of
payments is unusual for a Latin American country, but reflects the unique aspects of the
Panamanian economy. Large merchandise trade deficits may continue as long as energy and food
prices remain high and as the canal expansion accelerates.
Table 2. Panama’s Current Account Balance
(U.S. $ millions)
2001
2002
2003
2004
2005
2006
2007
2008
2009
Merchandise
Trade
Balance -696 -1,035 -1,202 -1,537 -1,558 -1,712 -3,190 -4,546 -2,026
Services Trade Balance
890
968
1,240
1,337
1,420
2,273
2,836
3,205
3,272
Source: United Nations Economic Commission on Latin America and the Caribbean. Estudio económico de
América Latina y el Caribe, 2009-2010, July 2010. p. 222.
22 United Nations. Economic Commission on Latin America and the Caribbean. Statistical Yearbook for Latin America
and the Caribbean 2009, February 2010 and press release December 13, 2010.
Congressional Research Service
9
The Proposed U.S.-Panama Free Trade Agreement
Panama’s trade policy emphasizes increased 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. Panama is a global trader and since 2002 has ratified FTAs with Chile, Costa
Rica, Cuba, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Singapore,
and Taiwan. It has signed agreements with Canada (ratified by Panama) and has an Association
(limited) agreement with Central America and the European Union. Negotiations are in process
with Colombia, Peru, and the European Free Trade Association (EFTA) countries. Panama has
also expressed interest in negotiating agreements with South Korea, the Caribbean Community
(CARICOM) countries, and Gulf Cooperation Council.23
Figure 2. Panama Direction of Trade, 2009
Source: CRS from Global Trade Atlas data.
In 2009, the United States accounted for 42.6% of Panamanian exports and 29.1% of its imports
(see Figure 2). The EU is the second largest export market with a 20.7% export share, but
accounts for only 6.4% of Panamanian imports. The Latin American countries collectively are
Panama’s third-largest export market with 20.1% share of the total, and have a 23.1% import
share. Panamanian trade has two distinct elements of importance on the import side. Nearly 12%
of imports entered Panama through the Colon Free Zone (CFZ), discussed in detail below. In
addition, another 14.0% of oil imports entered through the Oil Import Zone (OIZ). Most of these
imports originated in the United States, Latin America, and the Caribbean.
Panama is closely tied to the United States as its dominant trading partner, and is one of the few
Latin American countries with which the United States has a merchandise trade surplus. 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 Costa Rica, Mexico, and Colombia.
Panama also imports significant quantities of oil from Trinidad and Tobago. Asia accounts for
7.4% of Panama’s exports, but 12.7% of its imports, dominated by China, Japan, and South
Korea.
23 Correspondence with Embassy of Panama, December 2010.
Congressional Research Service
10
The Proposed U.S.-Panama Free Trade Agreement
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, if not ideal, place for a duty
free zone. It serves as a “one stop shop” for both Latin American buyers and sellers from the rest
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 luxury goods.
Buyers benefit from the ability to purchase in small lots, reduced travel costs, consolidated
shipping, 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 2008, CFZ trade added
a net $807 million to the Panamanian trade balance.24
The CFZ is frequently associated with a number of illicit activities including money laundering,
illegal transshipment, and 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 illicit 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.25
U.S.-Panama Merchandise Trade
U.S.-Panamanian merchandise trade is small, as seen in Table 3.26 In 2009, the United States
exported $4,293 million worth of goods and imported $302 million, producing a U.S. trade
24 Data from Global Trade Atlas. Discussion based on U.S. Department of Commerce. U.S. Commercial Service.
Doing Business In Panama: 2008 Country Commercial Guide for U.S. Companies. February 21, 2008 and author’s
interviews with CFZ representatives, September 21, 2005.
25 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.
26 Services trade data are not available for smaller U.S. trading partners, including Panama.
Congressional Research Service
11
The Proposed U.S.-Panama Free Trade Agreement
surplus of $3,991 million, the largest in the Western Hemisphere. Still, Panama ranked as only the
40th-largest export market for U.S. goods and 97th for imports. Major U.S. exports include oil and
mostly capital- and technology-intensive manufactured goods such as aircraft, pharmaceuticals,
machinery, medical equipment, and motor vehicles.
Table 3. U.S.-Panama Merchandise Trade, 2009
(top 10 U.S. exports and imports by $ value and as % of total)
U.S. Exports
$ Value
% of
% of
million
Total
U.S. Imports
$ Value
million
Total
1. Oil (not crude)
1,496.2
34.8
1. Repaired Goods
88.9
29.4
2. Machinery
436.6
10.2
2. Fish/Seafood
74.3
24.5
3. Electrical mach.
338.4
7.9
3. Gold
55.7
18.4
4. Aircraft
235.7
5.5
4. Sugar
17.1
5.7
5. Repaired Goods
191.3
4.5
5. Edible Fruit
9.8
3.2
6. Vehicles
184.5
4.3
6. Coffee
7.9
2.6
7. Cereals
118.5
2.8
7. Crude Oil
4.9
1.6
8. Optical/Med. Equip
100.7
2.3
8. Beverages
4.1
1.4
9. Plastics
90.5
2.1
9. Optical/Med.
4.0
1.3
10. Perfume
89.7
2.1
10. Perfume
4.0
1.3
Other 1,010.8
23.5
Other
31.6
10.6
Total 4,292.9
100.0
Total
302.3
100.0
Source: U.S. Department of Commerce data presented by Global Trade Atlas.
The United States imports relatively little from Panama, accounting for the growing U.S.
merchandise trade surplus. Most imports are primary products; 25% is seafood, mostly fresh fish
and shrimp. Repaired goods account for 29% of total imports from Panama.27 Commodity trade
includes crude oil, precious metal (mostly gold), fruit, sugar, and coffee, which together account
for one-third 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 issue.
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, however, that the legal environment can be
cumbersome and that Panama’s relatively high labor costs (for the hemisphere) and inflexible
27 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.”
Congressional Research Service
12
The Proposed U.S.-Panama Free Trade Agreement
labor laws can be a frustration if not an impediment to U.S. foreign direct investment (FDI).28
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.
U.S. FDI represents over a third of total FDI in Panama. Table 4 compares U.S. FDI in Panama to
other regional destinations. The dollar value of U.S. investment in Panama is often nearly equal to
or higher than that in the five Central American countries combined, and amounts to over 25% of
Panama’s GDP, compared to only 6% for Central America. Plans to widen and improve the canal
will likely provide an opportunity for some $5 billion of investment in the canal itself, and
perhaps related large amounts of FDI for other sectors of the economy with a significant U.S.
presence.
Table 4. U.S. Foreign Direct Investment in Panama, Mexico, and Central America
($ millions)
2001 2002 2003 2004 2005 2006 2007 2008 2009
Panama
5,141 5,842 5,409 4,919 4,826 4,636 6,509 6,236 7,845
Mexico
52,544 56,303 59,851 63,384 73,687 82,965 91,259 89,610 97,897
Central
America
2,994 3,199 2,333 4,884 3,902 3,595 5,315 8,282 8,051
Source: U.S. Department of Commerce. Bureau of Economic Analysis. BEA website. Data are stock of foreign
direct investment (FDI) presented on a historical-cost basis.
Summary of Trade Negotiations and the Proposed
U.S.-Panama FTA29
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). 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 for separate negotiations.30 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,
28 U.S. Department of Commerce, Doing Business In Panama: 2008 Country Commercial Guide for U.S. Companies.
29 This summary reflects information in the final text of the proposed FTA, released on July 2, 2007.
30 Inside U.S. Trade. Panama FTA Unlikely To Be Docked Into CAFTA as Talks Set to Begin. April 23, 2004.
Congressional Research Service
13
The Proposed U.S.-Panama Free Trade Agreement
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 10 rounds of negotiation, concluding on December 16,
2006, and in general follows the text framework of earlier FTAs. It was signed on June 28, 2007,
following some significant last minute changes to the labor, environment, intellectual property
rights, and government procurement chapters to accommodate new commitments agreed to by the
USTR and bipartisan congressional leadership. Market access schedules, drawn from previous
FTA templates, reflect both U.S. and Panamanian interests, as do other market access provisions.
Congress requires that the United States International Trade Commission (USITC) make an
economic assessment of the potential impact of an FTA on the U.S. economy. The analysis
usually is done with both a general equilibrium model to estimate economy-wide changes and a
partial equilibrium model to estimate sector or industry-level changes. In Panama’s case, there
was insufficient data to make a meaningful estimate from a general equilibrium model, and so
detailed estimates of how the FTA might affect U.S. economic growth, employment, trade, and
income were not offered. In general, however, through other quantitative and qualitative
indicators, the USITC concluded that because Panama’s economy is very small relative to that of
the United States, the likely overall effect on the U.S. economy will be similarly very small.31
At the sector level, the USITC finds that the “main effect” of the FTA would likely be to increase
U.S. exports, while causing little growth in U.S. imports from Panama. In general, the estimates
are in line with general expectations based on (1) the small amount of goods imported from
Panama; (2) the small production capacity of Panama; and (3) the fact that most imports from
Panama (96% by value) already enter the United States duty free through either normal trade
relations (NTR) or preferences provided by the Caribbean Basin Initiative (CBI) programs or the
Generalized System of Preferences (GSP).32
Detailed estimates suggest that when fully implemented, the largest growth potentially will
accrue to U.S. exports of rice (145%), pork (96%), beef (94%), and passenger vehicles (43%).
Again, these would amount to a very small dollar value increase given that, with the exception of
rice, the U.S. exports of these goods to Panama represent less than two-tenths of one percent
(0.2%) of U.S. exports to the world and even a smaller portion of U.S. production. With respect to
the services provisions in the FTA, they exceed WTO commitments, but the gains for U.S.
providers are also expected to be small, with the potential for further gains once the Panama
Canal expansion project is fully underway.33
Below is a more detailed discussion of the major negotiation areas and an analysis of the issues
that have been of particular interest to Panama and the United States, including the U.S.
Congress. Where relevant, changes made pursuant to the May 10, 2007, bipartisan New Trade
Policy for America are highlighted.
31 USITC, U.S.-Panama Trade Promotion Agreement: Potential Economy-wide and Selected Sectoral Effects, pp. 1-1
and 1-5.
32 Ibid., pp. 1-5, 2-1, and 2-7.
33 Ibid., pp. 2-1 and 2-7.
Congressional Research Service
14
The Proposed U.S.-Panama Free Trade Agreement
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 duty-free treatment extended selectively by 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). Most Panamanian goods enter the U.S. duty free, but Panamanian agricultural products
face some of the highest barriers, particularly sugar, which is subject to a tariff rate quota (TRQ).
Panama levies an average tariff of 7% on U.S. industrial and consumer goods, with tariff peaks of
81% for some goods. The average tariff on U.S. agricultural goods is 15%, with peaks as high as
260% on one product.34 Imports also face an 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 nine staging categories that classify each country’s goods based on the time to
tariff elimination, with the most sensitive products given 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 10-year period. Similarly, up to two-thirds of U.S.
farm exports would receive immediate duty free treatment.35 Tariffs on some agricultural goods
would remain in place longer, with some taking up to 17 years to be completely eliminated (20
years for rice). 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.
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, of which there is very little exported from Panama
Agricultural Trade
The United States has a small, but positive agricultural trade balance with Panama. Agriculture
accounts for 9% of total U.S. merchandise exports to Panama, and the United States captures
some 51% of the Panamanian agricultural import market. While the average tariff on U.S.
agricultural products is 15%, tariffs can peak as high as 260% for chicken leg quarters.36 Because
both countries have products they wished to protect, agriculture market access was one of the
most difficult issues to resolve.
34 Office of the United States Trade Representative, 2010 National Trade Estimates Report on Foreign Trade Barriers,
Washington, D.C., 2010.
35 Office of the United States Trade Representative. Free Trade with Panama: Summary of the Agreement. January
2007.
36 CRS Report R40622, Agriculture in Pending U.S. Free Trade Agreements with Colombia, Panama, and South
Korea, by Remy Jurenas.
Congressional Research Service
15
The Proposed U.S.-Panama Free Trade Agreement
U.S. domestic agricultural support programs are not addressed in the proposed FTA, which
focused on tariff reduction, quota definitions, and sanitary and phytosanitary (SPS) rules and
enforcement measures. 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 Panama’s markets further. It was “defensive” on sugar,
attempting to limit increases in the sugar quota that might disrupt operations of the U.S. 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 sugar export quota.
The U.S. 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 permitted under WTO rules. In fiscal year
2008, the above-quota tariff rate was estimated to be 86% on raw cane sugar and 76% on refined
sugar.37 For comparative purposes, 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 Panamanian agricultural sector. Sugar constitutes a third of Panama’s total
agricultural exports, compared to less than 10% for the Central American countries, and 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 Panamanian sugar producers on the U.S. market, in part driven by the
industry’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.
For 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, dark meat is preferred. The concern revolved 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, also argued that
opening the market to U.S. subsidized rice would decimate their industry, which, because of its
37 CRS derived this effective ad valorem equivalent by applying the current U.S. over-quota tariffs against the FY2008
import unit value for such imports. 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.
See: CRS Report R40995, Sugar Market Developments and Policy Issues, by Remy Jurenas.
Congressional Research Service
16
The Proposed U.S.-Panama Free Trade Agreement
protection, sells rice considerably above the world price. In fact, the USITC report estimates that
when fully implemented, the FTA will have the greatest impact on U.S. rice exports. Although the
rice provisions will not be fully implemented until year 20 of the agreement, for milled rice, the
TRQ for the first year will be 20 times the current level of U.S. exports to Panama, which may be
expected to affect rice growers shortly after implementation, perhaps causing them to shift
production to other crops, or leave farming for alternative employment.38
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 years 7
and 17 of the FTA. Rice tariffs, which protect one of Panama’s most sensitive products, would
remain in place until year 20 of the FTA. U.S. exports of rice and other 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.39
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 option might be employed if the U.S. sugar program were
threatened with disruption.
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 or exceed WTO standards. The USTR, however, has long raised concerns over
procedural transparency with respect to phytosanitary permits and also Panama’s requirement that
38 USITC, U.S.-Panama Trade Promotion Agreement: Potential Economy-wide and Selected Sectoral Effects, pp. 2-7,
2-10, and 2-18 through 2-19.
39 Inside U.S. Trade. Panama FTA Offers Limited Sugar Access; Labor Changes Possible. December 22, 2006.
Congressional Research Service
17
The Proposed U.S.-Panama Free Trade Agreement
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.40
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.41
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 and
entered into force 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.42
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 (requiring use of fabric and yarn
produced in Panama or the United States).43 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 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.44
40 United States Trade Representative. 2007 National Trade Estimate Report on Foreign Trade Barriers. Washington,
D.C. March 2007. p. 452.
41 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.
42 United States-Panama Agreement Regarding Certain Sanitary and Phytosanitary Measures and Technical Standards
Affecting Trade in Agricultural Products. December 20, 2006.
43 USTR, 2010 Foreign Trade Barriers.
44 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.
Congressional Research Service
18
The Proposed U.S.-Panama Free Trade Agreement
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.45 Some of the concerns
expressed were addressed in the 2006 amendments to the procurement law, which codified
advancements such as allowing use of Internet procurement. These changes modernized and
made more transparent procurement regulations, government purchasing information, and
transactions. 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.46
The government procurement chapter differs from earlier FTAs by stating that a firm’s adherence
to “acceptable” environmental and labor standards may be included as a standard in the bidding
and procurement process. The technical specifications article states that it is not intended to
preclude a procuring entity from using technical specifications to promote conservation of natural
resources, or to require a supplier to comply with generally applicable laws regarding
fundamental principles and rights to work; and acceptable conditions of work with respect to
minimum wages, hours of work and occupation safety and health in the territory in which the
good is produced or the service is performed.
Government procurement takes on a greater importance when considered in light of the Panama
Canal expansion 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, 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 a well-developed financial services industry to support the flow of capital and is an
important regional financial center. U.S. firms invest heavily in Panama relative to other Latin
American countries, and a permanent rules-based trade agreement may be seen as enhancing this
relationship. 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.
45 Panamcham. Issues of Importance in the U.S.-Panama FTA Negotiations, March 12, 2004.
http://www.panamcham.com/business_center/FTA.asp.
46 USTR, 2010 Foreign Trade Barriers.
Congressional Research Service
19
The Proposed U.S.-Panama Free Trade Agreement
foreign investment interests, concerns have arisen in particular cases involving investment in
highly regulated industries. Resolution of these concerns facilitated the FTA negotiations and the
potential exists for further significant foreign investment in Panama, including the canal
expansion and reverted areas of the former canal zone.47
The FTA 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 is the investor-state provision, which was controversial
during the CAFTA-DR debate, but is commonly used in U.S. bilateral investment treaties (BITs)
and in earlier FTAs. 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 lack the institutional capacity to 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. Circumstances 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.48
Although none of the claims filed against the United States has prevailed, Congress instructed in
Trade Promotion Authority (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 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
47 Ibid.
48 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.
Congressional Research Service
20
The Proposed U.S.-Panama Free Trade Agreement
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 includes 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.” In general, the FTA provides for market access commitments in services that exceeds
the WTO General Agreement on Trade in Services (GATS). With the possible exception of future
canal expansion projects, the USITC estimates that the new commitments, although important
changes, will have only a small economic impact on U.S. provides.49
Panama does require local licensing for many professionals to practice in the country, which the
United States wanted to change, but was only partially successful in some cases (e.g., lawyers).
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.50
Equal ability to compete in retail trade, express delivery, and financial services, including
insurance and portfolio management, was achieved 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.
To the extent that restrictions in these areas are reduced, U.S. firms are 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
Strengthening intellectual property rights (IPR) was a major U.S. priority, in particular by
harmonizing standards at U.S. levels, and by securing Panama’s commitment to join an array of
international agreements related to IPR protection. The most contentious IPR issues revolved
around patent and data exclusivity issues related to pharmaceutical products, but recently, Internet
piracy has become a serious problem.
49 USITC, U.S.-Panama Trade Promotion Agreement: Potential Economy-wide and Selected Sectoral Effects, p. 3-1.
50 USTR, 2007 Foreign Trade Barriers, pp. 455-456.
Congressional Research Service
21
The Proposed U.S.-Panama Free Trade Agreement
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. 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.51
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.52
Pharmaceutical Issues
The proposed U.S.-Panama FTA adopts new IPR pharmaceutical standards that reflect a
bipartisan understanding as developed by congressional leadership and the USTR in the May 10,
2007, New Trade Policy for America. They affect three important issues. The first and perhaps
most complicated issue is data exclusivity. 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 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. Under this protection, regulatory agencies cannot use these data
or rely on references to such data in the certification of a generic version of the medicine or drug
until the data exclusivity period ends. This issue was raised by members of Congress during the
CAFTA-DR debate, but was only partially addressed in a side agreement (“understanding”)
assuring that relevant WTO rules would be in force. Critics, however, wanted the side agreement
to include an explicit exception to the data protection requirement for cases where compulsory
licensing under the WTO rules might be invoked, and to include the language in the body of the
FTA.53
51 USTR, 2009 Foreign Trade Barriers, p. 388.
52 U.S.-Panama FTA, Chapter 15.
53 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
(continued...)
Congressional Research Service
22
The Proposed U.S.-Panama Free Trade Agreement
Congressional input led to significant changes to the Panama text. The IPR chapter provides that
if a company files to bring to market a new drug in a foreign country (e.g., Panama), and the
foreign regulatory agency relies on marketing approval of the initial filing in the home country
(e.g., the United States) for approval in Panama, and the Panamanian regulatory agency approves
the drug within six months of that filing, the data exclusivity term begins at the time the drug was
approved in the United States, not Panama. This provision is intended to speed the entry of
generic drugs into Panama’s market by encouraging both drug companies and foreign
governments to engage in the approval process as efficiently as possible. Because the six-month
rule effectively 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
receiving 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.54
In addition, there is language in the IPR chapter stating that in cases such as epidemics, extreme
urgency or national emergency, and other cases of public non-commercial use, a waiver from the
data exclusivity laws would be allowed. The WTO public health provisions allow for compulsory
licensing, circumventing patents in public health emergencies or other circumstances of public
use deemed necessary. In the case of the U.S.-Panama FTA, which requires a period of data
exclusivity not mandated by the WTO, the waiver is extended to the data exclusivity term as well.
A second issue is patent term restoration, which allows for the retroactive application of patents
in cases where the approval process for a patent extends beyond some legal- or regulatory-
determined standard period of time. Although there are provisions that require term restoration for
patents in general, in the case of pharmaceutical products, term extension is only optional.
The third issue is patent linkage. This term refers to linking the sanitary registration process
(done, for example, by the Food and Drug Administration in the United States) with the patent
registration process. U.S. firms effectively wanted mandatory linkage that would automatically
check for patent infringement when an application for bringing a drug to market is made in a
foreign country sanitary registration office. The Panama agreement was amended to make patent
linkage voluntary, and allows for administrative or judicial remedies to expedite patent
challenges.
Public health advocates have long pushed for re-balancing international rules in ways that would
facilitate the introduction of lower cost generic equivalents into developing countries. The revised
IPR chapter in the Panama FTA supports congressional interest in pursuing this goal, although not
to the full satisfaction of some public health advocates. Pharmaceutical companies, by contrast,
lobbied against these changes, arguing that they bear their full cost through cumbersome
administration and lost revenue by the earlier introduction of generic competition. They further
(...continued)
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.
54 There are further complicated implications. This process is useful for countries with weak drug certification
mechanisms, but for those that have developed such capability, it may encourage hasty responses or circumventing the
process all together to qualify for the six-month time constraint.
Congressional Research Service
23
The Proposed U.S.-Panama Free Trade Agreement
argued that they count on this revenue to offset the high costs of research and development that
allows new drugs to be properly tested and approved in the first place.
Labor and Environment
Labor and environmental 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 2007 bipartisan understanding as developed by congressional leadership and the USTR
in the New Trade Policy for America. Despite the bipartisan nature of the agreement, many
members continue to express reservations about the effectiveness of labor provisions, as well as
the overall benefits of bilateral FTAs.
The debate over labor and environmental standards reflects differences in both economic and
political perspectives. From an economic perspective, it has been 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 may compete with
those produced in developed countries.55 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 production standards that lead to unacceptable
working conditions or 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.56 Further,
many economists view trade liberalization as part of the overall development process that, in and
of itself, can promote improved social and economic conditions over the long run.57 Developing
countries are also concerned with the possible 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.
55 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.
56 See Perkins, Dwight H., Steven Radelet, and David L. Lindauer. Economics of Development, Sixth Edition. New
York: W. W. Norton Company. 2006. pp. 745-746. 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. See also Rodrik, Dani. Sense and Nonsense in the Globalization Debate. Foreign Policy. Summer 1997. pp.
30-33.
57 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.
Congressional Research Service
24
The Proposed U.S.-Panama Free Trade Agreement
Labor Issues
Preliminary drafts of the U.S.-Panama FTA adopted the CAFTA-DR labor chapter language
verbatim. Many members of Congress and others objected to four key aspects of this language.
First, it emphasized that a country must effectively “enforce its own labor laws,” rather than
define specific labor standards to be codified and enforced.58 Second, this was the only provision
in the labor chapter subject to the FTA’s labor dispute resolution process (other commitments
were unenforceable). Third, labor (and environment) provisions had their own dispute settlement
mechanism separate from the process used for commercial and other disputes. Critics charged
that the labor dispute mechanism was inferior for many reasons. Fourth, language that required
Parties to the agreement only to “strive to ensure” that they do not waive or derogate from their
labor law commitments was considered both inadequate 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.59
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 May 10,
2007, New Trade Policy for America, were incorporated into the labor chapters for proposed U.S.
bilateral FTAs with Panama, Peru, and Colombia. The major changes from the CAFTA-DR
model state that each country:
• shall adopt and maintain in its statutes, regulations and practices as rights, the five
core ILO labor principles: freedom of association; the effective recognition of the right to
collective bargaining; the elimination of all forms of compulsory or forced labor; the
effective abolition of child labor and, for purposes of this Agreement, a prohibition on the
worst forms of child labor; and, the elimination of discrimination in respect of
employment and occupation;
• shall 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;
• shall not fail to effectively enforce its labor laws in accordance with the above
commitment and that each party retains the right to the reasonable exercise of discretion
in using resources to achieve this goal, provided the exercise of such discretion is not
inconsistent with the obligations of the chapter, and;
58 As defined by the United Nations International Labor Organization (ILO) in the Fundamental Principles and Rights
at Work and its Follow-up (1998) Declaration.
59 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.
Congressional Research Service
25
The Proposed U.S.-Panama Free Trade Agreement
• 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 binding and
enforceable to the same extent as all other commitments in the proposed FTA, including having
recourse to trade sanctions. The rest of the labor chapter conforms largely to commitments in
previous bilateral FTAs. These 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. A new Labor Cooperation and Capacity Building Mechanism is also
to be established.
Panama’s Labor Code and Conditions
Panama has higher wage rates, stronger labor laws, and fewer impediments to union formation
than 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 workers’ rights are being observed in
Panama.
The U.S. State Department notes that Panama’s labor laws guarantee all the ILO basic principles.
All private-sector and most public-sector employees have the right to organize, bargain
collectively, and strike (limited for the public sector). In general, major violations of labor laws
have not been found, but the ILO has raised concerns about a number of ongoing practices. These
include the widespread use of temporary workers to circumvent the labor code, the minimum
requirement of 40 workers to form a union, and the use of child labor, particularly in agricultural
areas during harvest times and for domestic employment. Lax enforcement of health and safety
standards was also cited as a continuing problem.60 Some of these issues were cited by some
Members of Congress as needing to be addressed before the FTA could be considered (see
Background and Recent Developments, p. 1).61
Environmental Issues
Environmental specialists have stressed the need to achieve multiple goals in U.S. reciprocal
FTAs. These 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
60 U.S. Department of State. Bureau of Democracy, Human Rights, and Labor. 2009 Country Reports on Human
Rights: Panama. Washington, D.C. March 11, 2010 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.
61 David J Lynch, "U.S.-Panama Trade Deal May Test Obama Goals: Congress Wants to See Bank, Tax Reforms There
First," USA Today, July 31, 2009, p. B1.
Congressional Research Service
26
The Proposed U.S.-Panama Free Trade Agreement
provisions in FTAs are subject to the same dispute resolution and enforcement mechanisms as are
other aspects of the agreements.62
At issue is identifying and attempting to ameliorate the environmental effects of trade,
particularly in developing countries that may have weak laws and lax enforcement mechanisms.
Even among environmental experts, opinions vary. Some have suggested 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, 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.63
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:
• adopt, maintain, and implement laws, regulations, and other measures to fulfill their
obligations under selected multilateral environmental agreements (MEAs) listed in Annex
18.2;
• shall not fail to effectively enforce environmental laws and regulations, including
those adopted as signatories to the MEAs;
• shall not waive or otherwise derogate from, or offer thereto, from such laws
(replacing the “strive to ensure” language with “shall not”);
• adopt a commitment to policies that will promote conservation and sustainable use of
biological diversity;
• subject disputes to the FTA’s overall dispute settlement mechanism rather that a
mechanism developed solely to deal with labor and environmental disagreements that
was used in previous FTAs, and;
• 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.64
62 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, Foreign Investor Protection Under
NAFTA Chapter 11, by Robert Meltz.
63 See Audley, John. Environment and Trade: The Linchpin to Successful CAFTA Negotiations? Carnegie Endowment
for International Peace. Washington, D.C. July 2003.
64 U.S.-Panama FTA, Chapter 17, The Environment.
Congressional Research Service
27
The Proposed U.S.-Panama Free Trade Agreement
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.65 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 production and trade little. Still, the FTA 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.66
Panama’s environmental regulatory agency 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 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 also 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
65 Office of the United States Trade Representative. Interim Environmental Review: U.S.-Panama Free Trade
Agreement. June 2004. pp. 7-9.
66 Ibid., pp. 15-20.
Congressional Research Service
28
The Proposed U.S.-Panama Free Trade Agreement
significant portion of the Panamanian economy, as well as government capacity to administer
trade-related activities.67
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.
Successful implementation of the strategy, however, requires financial and technical resources
coordinated among international and U.S. aid agencies. Already in place is a U.S. Agency for
International Development (USAID) project to support Panama’s transition to more open trade. It
has two major initiatives: supporting implementation of the proposed FTA and assisting Panama
with sectoral adjustment to the increased competitiveness arising from international trade. In the
first case, the USAID project has helped prepare and disseminate a product that explains the
benefits of the proposed FTA and how Panama might better access the U.S. market with its
specific products.
The second initiative focuses on helping three major sectors of the economy, each with a differing
level of product complexity, to increase their exposure and market share in the United States.
Specifically, agro-industry, information and communications technology, and artisan products
were identified as sectors with potential to benefit from the proposed FTA. Sector strategies range
from targeted product design, to “hands on” assistance in participating in trade fairs, and building
contacts and linkages with venture capitalists and other key business facilitation professionals.68
Outlook
On June 28, 2007, representatives of Panama and the United States signed a reciprocal bilateral
free trade agreement, establishing a commitment, subject to congressional approval, to more
liberalized rules on trade and investment between the two countries. Panama’s National Assembly
ratified the FTA by a vote of 58 to 4 on July 11, 2007. The U.S. Congress has yet to take up the
FTA, but the House Ways and Means Committee held hearings on January 25, 2011, and the
Senate Finance Committee has scheduled hearings for March 9, 2011.
Trade policy and agreements affect more than commercial ties between countries. For Latin
America, and in particular for countries in the Caribbean Basin region, U.S. trade arrangements
historically have been an important part of U.S. foreign economic policy. The proposed U.S.-
Panama FTA is no exception and presents the U.S. Congress with a complex and diverse policy
challenge. The significance of the proposed U.S.-Panama FTA has not been lost on Congress, as
67 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.
68 Miller, Eric. USAID/Panama-Supported TCB Programs. Summary chapter. Nathan and Associates. May 9, 2007.
Congressional Research Service
29
The Proposed U.S.-Panama Free Trade Agreement
exemplified by a vigorous ongoing debate. Votes on FTAs, as on many trade policy matters,
present difficult choices because they have become increasingly complex and can pit interest
groups within a state or district against one another. This challenge is made even more difficult at
a time when doubts over “globalization” and the lingering effects of the 2008 financial crisis have
created widespread anxiety over the nation’s economic well being. To the extent that a bilateral
FTA may be viewed as compromising or directly hurting certain industries, firms, or jobs, the
arguments favoring specific economic interests face off against those emphasizing broader
foreign and economic policy goals.
Often, the significance of such a trade off depends on the specifics of a particular trade
agreement. The circumstances framing the Panama FTA differ considerably from those of two
other signed FTAs that have yet to be considered by Congress. For example, the deep concerns
that Congress has expressed over Colombia’s violence have not been an issue in the Panama FTA
debate, which is framed more by the positive image of a long-standing strategic bilateral
relationship based on Panama’s canal. Nor is Panama easily compared with the proposed FTA
with South Korea, which as a major U.S. trading partner, can affect key industries such as
automobile and beef production. To the contrary, Panama trades little with the United States, even
by Latin American standards, and so the FTA cannot have a major economic effect on the U.S.
economy.
Congress is still debating two major issues: labor and tax transparency. The final text of the
proposed FTA incorporated specific language on labor required by Congress in 2007, resulting in
obligations that exceed those in existing multilateral trade rules or even contemplated in the Doha
Round. As time passed, however, new concerns over Panama’s labor code emerged, which
Panama has addressed with legislation pending before the National Assembly. One issue on
minimum workers needed to form a union was not addressed for lack of support even among
labor groups in Panama.
Congress has also required that Panama amend its tax laws to incorporate changes necessary to
implement the recently signed Tax Information and Exchange Agreement (TIEA), which would
provide greater transparency in support of curbing money laundering activities related to drug
trafficking. Much of the legislation has been completed, but the National Assembly has not
completed work on all bills, including a final vote on ratifying the TIEA. It remains to be seen if
these final changes will be sufficient for the FTA to be approved by a majority in the U.S.
Congress.
Congressional Research Service
30
The Proposed U.S.-Panama Free Trade Agreement
Appendix A. Chronology of U.S.-Panama FTA
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, DC. Chapters on labor
and environment left open.
March 27, 2007
Bipartisan New Trade Policy for America released.
March 30, 2007
President Bush formal y 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.
May 10, 2007
Congressional leadership and Bush Administration agree to change labor, environment,
and intel ectual property rights chapters in this and other FTAs based on principles
outlined in the bipartisan New Trade Policy for America.
June 28, 2007
The United States and Panama sign a free trade agreement at the Organization of
American States in Washington, DC.
July 2, 2007
USTR releases final text of proposed U.S.-Panama FTA.
July 11, 2007
Panama’s National Assembly approves U.S.-Panama FTA 58-4.
November 30, 2010
United States and Panama sign a Tax Information and Exchange Agreement (TIEA).
January 25, 2011
House Ways and Means Committee holds hearing on proposed U.S. free trade
agreements with Colombia, Panama, and South Korea
March 9, 2011
Senate Finance Committee scheduled hearing on proposed U.S. free trade agreements
with Colombia, Panama, and South Korea
Congressional Research Service
31
The Proposed U.S.-Panama Free Trade Agreement
Appendix B. Panama: Selected Economic Indicators
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
GDP Growth (%)
2.7
0.6
2.2
4.2
7.5
7.2
8.5
12.1
10.7
2.4
Per Capita GDP Growth (%)
0.8
-1.3
0.4
2.3
5.6
5.3
6.7
10.2
8.9
0.8
Unemployment Rate (urban %)
13.5
14.0
13.5
13.1
11.8
9.8
8.7
6.4
5.6
6.6
Inflation – CPI (%)
0.7
0.0
1.9
1.4
-0.2
3.4
2.2
6.4
6.8
1.9
Current Acct. Bal. (% GDP)
-5.8
-1.4
-0.8
-4.5
-7.1
-4.9
-3.1
-7.3 -11.5
0.0
Terms of Trade (2000=100)
100.0
102.7
101.6
97.2
95.3
93.5
90.8
90.0
85.9
94.0
Source: United Nations Economic Commission on Latin America and the Caribbean. Estudio económico de
América Latina y el Caribe, 2008-2009. July 2009, supplemented by ECLAC online statistics.
a. FDI = net investment or direct foreign investment in Panama minus Panamanian direct investment abroad.
Author Contact Information
J. F. Hornbeck
Specialist in International Trade and Finance
jhornbeck@crs.loc.gov, 7-7782
Congressional Research Service
32