The Proposed U.S.-Panama Free Trade Agreement
The Proposed U.S.-Panama Free Trade Agreement
Updated September 17, 2008
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
The Proposed U.S.-Panama Free Trade Agreement
On June 28, 2007, the United States and Panama signed a free trade agreement
(FTA) after two and half years and ten rounds of negotiations. Negotiations were
formally concluded on December 16, 2006, with an understanding that further
changes to labor, environment, and intellectual property rights (IPR) chapters would
be made pursuant to detailed congressional input. These changes were agreed to in
late June 2007, clearing the way for the proposed FTA’s signing in time to be
considered under Trade Promotion Authority (TPA), which expired on July 1, 2007.
TPA allows Congress to consider trade implementing bills under expedited
procedures. Panama’s legislature approved the FTA on 58 to 4 on July 11, 2007.th
The 110 Congress may take up implementing legislation in 2008.
Significant changes from previous bilateral FTAs include the adoption of
enforceable labor standards, compulsory adherence to select multilateral
environmental agreements (MEAs), and facilitation of developing country access to
generic drugs. In each case, the proposed U.S.-Panama FTA goes beyond provisions
in existing multilateral trade rules and even those contemplated in the Doha
Development Round negotiations.
There was one highly sensitive issue that delayed consideration of the
agreement. In September 2007, the Panamanian National Assembly elected Pedro
Miguel González Pinzón to a one-year term as President of legislative body.
Although a deputy in the National Assembly since 1999, he is known in the United
States for 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 1995, but the United
States does not recognize the verdict and maintains an outstanding warrant for his
arrest. The U.S. Congress did not wish to consider the FTA while he remained
National Assembly President. This situation changed on September 1, 2008 when
Raul Rodriguez Arauz was elected to replace him.
The proposed U.S.-Panama FTA is a comprehensive agreement. Some 88% of
U.S. commercial and industrial exports would become duty-free right away, with
remaining tariffs phased out over a ten-year period. About 50% of U.S. farms
exports to Panama would achieve duty-free status immediately. Tariffs and tariff rate
quotas (TRQs) on select farm products are to be phased out by year 17 of the
agreement. Panama and the United States agreed to a separate bilateral agreement
on SPS issues that would recognize U.S. food safety inspection as equivalent to
Panamanian standards, which would expedite entry of U.S. meat and poultry exports.
The FTA also consummates understandings on services trade, telecommunications,
government procurement, and intellectual property rights (particularly with respect
to pharmaceutical products), while supporting trade capacity building.
This report will be updated periodically. Related information may be found in
CRS Report RL30981, Panama: Political and Economic Conditions and U.S.
Relations, by Mark P. Sullivan.
Panama’s Canal and Economic Relations with the United States.............2
Early U.S.-Panama Economic Relations............................4
The Canal and U.S. Trade Policy..................................5
Panamanian Trade Relations.........................................7
Structure and Direction of Panamanian Trade........................7
The Colón Free Zone.......................................8
U.S.-Panama Merchandise Trade..................................9
U.S. Foreign Direct Investment..................................10
Summary of Trade Negotiations and the Proposed U.S.-Panama FTA........11
Sanitary and Phytosanitary Standards (SPS)....................16
Textiles and Apparel......................................16
Intellectual Property Rights.....................................20
Labor and Environment........................................22
Panama’s Labor Conditions.................................24
Trade Capacity Building.......................................27
Appendix 1. Chronology of U.S.-Panama FTA.........................30
Appendix 2. Panama: Selected Economic Indicators....................31
Appendix 3. U.S.-Panama Tariff Rates for Selected Products..............32
List of Figures
Figure 1. Map of Panama...........................................3
Figure 2. Panama Direction of Trade, 2006.............................8
List of Tables
Table 1. Panama’s Current Account Balance............................7
Table 2. U.S.-Panama Merchandise Trade, 2006........................10
Table 3. U.S. Investment in Panama, Mexico, and Central America.........11
The Proposed U.S.-Panama Free Trade
On June 28, 2007, the United States and Panama signed a free trade agreement
(FTA) after two and a half years and ten rounds of negotiations (see Appendix 1 for
a chronology of 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 congressional input, which were
agreed to in late June 2007. The FTA was signed in time to be considered under
Trade Promotion Authority (TPA), which expired on July 1, 2007. TPA allows1
Congress to consider certain trade implementing bills under expedited procedures.
Panama’s legislature ratified the FTA 58 to 4 on July 11, 2007, and the U.S.
Congress may consider implementing legislation sometime in 2008.
The FTA incorporates changes based on principles outlined in the “New Trade
Policy for America,”2 a bipartisan policy crafted jointly by congressional leadership
and the Bush Administration. It requires adoption as fully enforceable commitments,
the five basic labor rights defined in the International Labor Organization’s
Fundamental Principles and Rights at Work and its Follow-up (1998) Declaration,
select multilateral environmental agreements, and new pharmaceutical IPR
provisions that may facilitate Panama’s access to generic drugs. A congressionally
mandated report by the United States International Trade Commission (USITC)
concluded that the likely main trade effect of the FTA would be to increase U.S.
exports given that 96% of U.S. imports from Panama already enter duty free. The
small size of the Panamanian economy, however, suggests that the overall effect on
the U.S. economy would be very small.3
Although many economic policy issues were addressed in a bipartisan
compromise, albeit not to the satisfaction of all Members, the FTA also faced a
political issue between the two governments that delayed congressional action on the
FTA. On September 3, 2007, following an election of his peers, Pedro Miguel
González Pinzón assumed the office of President of the National Assembly for a one-
year term. Although a deputy in the National Assembly since 1999, he is known in
the United States for 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 1995, but
1 For details, see CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options,
and Prospects for Renewal, by J. F. Hornbeck and William C. Cooper.
2 Agreed to on May 10, 2007 and available on the websites of the House Ways and Means
Committee and the United States Trade Representative (USTR).
3 USITC. U.S.-Panama Trade Promotion Agreement: Potential Economy-wide and Selected
Sectoral Effects. September 2007. Publication 3948. pp. 1-1 and 1-5.
the United States does not recognize the verdict and maintains an outstanding warrant
for his arrest.4
Both the Bush Administration and Members of Congress indicated that his
continued presence in the National Assembly leadership position posed a problem
for congressional action on the FTA.5 Panama, for its part, faced a sensitive situation
given it did not wish to appear to be compromising its national sovereignty to
accommodate political concerns in the United States. This situation changed on
September 1, 2008 when Raúl Rodríguez Araúz was elected to replace González
Pinzón. The 110th Congress could still decide to take up the FTA before adjourning.
This report will be updated periodically.
Panama’s Canal and Economic Relations with the
The United States and Panama have entered into many agreements over the past
150 years, the most prominent ones defining their relative stake in the famous canal
that traverses the Central American isthmus, bisecting Panamanian territory (see
Figure 1). The canal has been a critical factor influencing Panamanian domestic and
foreign affairs, and like earlier U.S.-Panama agreements, the FTA’s significance is
tied to a Panamanian economy that has formed largely around the canal.
4 U.S. Department of State. Press Statement. Election of Panamanian National Assembly
President Pedro Miguel González-Pinzón. September 1, 2007.
5 Inside U.S. Trade. Committee Chairs Signal FTA Problem Over Panama Assembly Head.
September 21, 2007 and Yerkey, Gary G. Gutierrez Says Panama Must ‘Resolve’ Fugitive
Issue or Put Free Trade Pact at Risk. International Trade Reporter. September 20, 2007.
Figure 1. Map of Panama
ce: Map Resources. Adapted by CRS.
Early U.S.-Panama Economic Relations
Since first explored by the Spanish at the turn of the sixteenth century, interest
in Panama has centered on its unique geographic characteristic: the slender distance
separating the Atlantic and Pacific Oceans. Because of the transit possibilities this
presented (first for Peruvian gold and other colonial trade), Panama was a natural
crossroads for the movement of commerce, a strategic position that grew as the world
became ever more traveled and integrated. In fact, Panama’s destiny became fused
to its geography and, over time, to the vagaries of foreign interests that sought to take
advantage of it, particularly the United States.
Panama was swept to independence from Spain on November 28, 1821,
becoming part of the Gran Colombia regional group. By this point, both the United
States and Britain had openly coveted the prospect of an inter-oceanic connector.
Well before construction of a canal could begin, the United States displaced Britain
as the dominant foreign influence and completed a cross-isthmian railroad in 1855.
This project was driven by the westward expansion of the United States, which
included an anticipated southern water route to the west coast. To secure this transit
system, as well as the safety of goods and people using it, the United States resorted
to armed intervention in Panama some 14 times in the 19th century. By the time the
United States sought permission to construct a canal, a precedent had already been
set to use military force for defense of U.S. interests in Panama.6
The initial U.S. effort to build a canal required a concession from Colombia
allowing the United States to complete the bankrupt French project abandoned in
but unanimously rejected by the Colombian legislature. The United States responded
by reaching out to the growing Panamanian successionist movement. On November
warships, Panama separated from Colombia. The United States immediately
recognized Panama as an independent state, and in return, Panama signed the Hay-
Buneau-Varilla Treaty, ceding to the United States the rights to construct a canal and
to control it “in perpetuity.”7
The Panama Canal opened in 1914, leading to U.S. dominance in the economic
and, at times, political life of Panama. Although both countries benefitted from its
operations, the relationship was far from equal, which along with the perpetual U.S.
presence, generated a nagging resentment, frequent protests, and periodic violence
over the tangible loss of national sovereignty. This tension remained a dominant
feature of U.S.-Panamanian relations until the canal was ceded back to Panama in
1977 under terms defined in the Panama Canal Treaties signed by Presidents Jimmy
Carter and Omar Torrijos. Although tensions flared again in 1989 when the U.S.
military invaded Panama to arrest then-chief of state General Manual Noriega on
narcotics trafficking charges and for threatening U.S. personnel and property, the
6 Conniff, Michael L. Panama and the United States: The Forced Alliance. Athens: the
University of Georgia Press, second edition. 2001. pp. 30-35.
7 Woodward, Ralph Lee. Central America: A Nation Divided. New York: Oxford
University Press, third edition. 1999, pp. 187-191 and ibid., pp. 63-70.
incursion proved to be a catalyst for the return of democracy. Perhaps not
coincidently, Panama’s decision to promote trade liberalization followed soon
t h ereaft er. 8
The Canal and U.S. Trade Policy
The canal solidified Panama as a maritime economy and its return to control by
Panama raised expectations of greater economic benefits from its ownership. The
canal operations by themselves account for approximately 6% of Panama’s GDP,
with the largest and fastest growing traffic volume generated along the U.S. East
Coast-to-Asia trade route (especially U.S.-China). About one-third of all cargo
passing through the canal has its origin or destination in the United States. The
canal’s total economic impact, however, is far greater, supporting income and jobs
in various services industries including warehousing, ship registry and repair, salvage
operations, insurance, banking, and tourism. The two major ports at either end of the
canal have been privatized and modernized, a portion of the canal was widened in
2001, but Panama faces a difficult and expensive challenge to enhance the capacity
of the entire canal to accommodate much larger post-Panamax ships.9 Panama held
a national referendum on the proposed $5.25 billion expansion on October 22, 2006,
which passed by a wide margin.
With transfer of the canal and its operations to Panama, the country also
inherited a substantial amount of land and physical assets. The conversion of these
assets to private use has been a boon to the Panamanian economy, but not without
considerable costs and investment, as well. Privatization efforts eased the
transformation of former U.S. government facilities to productive Panamanian use,
which has included refurbishing the Panamanian railroad by Kansas City Southern
Railways, transforming the former Albrook base into residential housing, and
developing a small foreign processing zone in the former Ft. Davis.10
The Panama-Pacific Special Economic Area (PPSEA) is perhaps the most
ambitious of these projects. This public-private partnership, established in law,
aspires to convert the former Howard Air Force Base into a “world class business
center,” with an emphasis on the export sector. Existing assets include housing and
office buildings, a hospital, transportation infrastructure, fiberoptic cable network,
an 8,500-foot runway, and four hangar facilities. The government offers businesses
various fiscal incentives and a streamlined regulatory process. Firms are required to
commit to state-of-the-art practices that include adopting internationally accepted
environmental and labor standards.11
8 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.
9 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].
11 Government of Panama. Panama-Pacifico Special Economic Area Agency.
With the assistance of the International Finance Corporation (IFC) of the World
Bank, Panama is seeking a large global financing package to cover the initial
investment needs. The project aims at developing various businesses including
computer technology, cell phone manufacturing, international call centers (Dell
already operates one on site), aeronautical industry support, and others that require
a well-trained work force. The IFC supports this project not only for its prospects as
a business venture, but because it is forward looking rather than relying on the
“maquiladora” business model common in much of the region.12
At the start of the 21st century, the canal and close ties with the United States are
still the defining features of Panama’s economy, but in the past these traits have
hindered Panama’s participation in regional integration. Although part of the Central
American Integration System, a broadly focused political arrangement, Panama has
declined to join the Central American Common Market, relying instead on the canal
and the large U.S. economy as its economic anchors. Panama has always had a fully
dollarized monetary system and is a beneficiary of U.S. unilateral trade preferences
defined in the Caribbean Basin Economic Recovery Act (CBERA), the Caribbean
Basin Trade Partnership Act (CBTPA), and the Generalized System of Preferences
(GSP).13 Under these circumstances, there has been little external incentive for
Panama to become a more open economy. Only since joining the World Trade
Organization (WTO) in 1997 did Panama begin to reduce tariff rates, an important
step in preparing Panama for an FTA with the United States.
Panama’s subregional independence and reliance on U.S. economic ties has
suited the United States as well, given its continuing interest in the Canal. An FTA
with Panama may be seen as one way for the United States to support long-
established commercial interests and deepen bilateral relations, particularly if
accepted as a mutually beneficial pact with reasonably balanced political and
economic outcomes. Although many ships have outgrown the canal, its locale and
prospects for enlarging the passageway continue to reinforce Panama’s historic, albeit
currently diminished, importance for the United States as a strategic trade passage.
A bilateral FTA with Panama is also part of the Bush Administration’s
“competitive liberalization” trade strategy, in which negotiations are taking place on
multilateral, regional, and bilateral levels. This multi-tiered negotiation strategy
is predicated on an expectation that gains on one level of negotiation may encourage,
if not compel, similar breakthroughs on others. Because of slow progress in
negotiations at the WTO Doha Round and the Free Trade Area of the Americas
(FTAA), the United States has moved ahead aggressively with bilateral talks, of
which the Panama FTA is one. Some, however, have questioned the bilateral
12 Ibid., and discussion with IFC official.
13 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.
approach for the asymmetrical negotiation power the United States wields, the effects
it may have on non-participating countries, and the one-sided trading system that is
developing around a U.S. hub, as opposed to a truly regional or multilateral system.
For Panama, the proposed FTA reinforces its varied trade liberalization goals
and supports continued U.S. foreign direct investment. The services sector is already
globally competitive, but the manufacturing sector is small and agricultural remains
protected and uncompetitive (see below). For Panama, the chief concern was crafting
an FTA that would balance the need to pursue openness for services, export growth
and promotion for manufacturing, and adjustment time for agriculture to become
more competitive, while minimizing social displacement. The incentive to negotiate
was perhaps also enhanced by the desire to keep pace with other Latin American
countries that have or are negotiating FTAs with the United States.
Panamanian Trade Relations
Panama is a country of 3.2 million people with a stable, diversified economy
that has rebounded briskly from the 2001-2002 global economic downturn.
Panama’s gross domestic product (GDP) expanded by 4.2% in 2003, 7.6% in 2004,
With the exception of Costa Rica, Panama has the highest per capita income in the
Central American region, but income distribution is highly skewed, poverty remains
a nagging problem, especially in rural areas, and unemployment is high, but
declining. Unlike any other Latin American country, 77% of Panama’s GDP is in
services, developed around the transportation and commerce generated by canal
traffic and the Colón Free Zone (CFZ). Industry is the second most important sector,
contributing 17% to GDP followed by agriculture at 6%.14
Structure and Direction of Panamanian Trade
Trade is an increasingly important part of this services-based economy. As seen
in Table 1, Panama’s balance of payments points to a sizeable trade deficit in goods
compared to a large services trade surplus. Panama’s merchandise trade deficits
ranged from $700 million to $1.6 billion from 2001 to 2006. In each year, the
merchandise deficit was offset by a services trade surplus of between $900 million
to $1.7 billion, unusual for a Latin American economy.
Table 1. Panama’s Current Account Balance
2001 2002 2003 2004 2005 2006
Balance on Merchandise Trade
Balance on Services Trade
($ million) 899 9791,2541,2781,4151,715
Data Source: United Nations Economic Commission on Latin America and the Caribbean (ECLAC).
Preliminary Overview of the Economies of Latin America and the Caribbean, years 2003-2006.
14 Republic of Panamá. Controller General’s Office. 2005.
Overall, the current account deficit has remained relatively high in recent years
due in part to the sharp rise in oil prices, which has also negatively affected Panama’s
inflation rate and terms of trade (Appendix 2). Panama places a strong emphasis on
increasing exports as a driver of economic growth, pointing to the Panama Pacific
Special Economic Area, Colón Free Zone (see below), and, to a lesser extent, the
small export processing zones and nontraditional agricultural products as
opportunities to execute this vision. As a global trader, it has completed FTAs with
El Salvador (2002), Taiwan (2004), and Singapore (2005). In addition to the United
States, it is negotiating FTAs with Guatemala, Nicaragua, Costa Rica, and Honduras.
Panama nonetheless remains closely tied to the United States as its dominant trading
partner, which as a single country is a larger trading partner than any of the world’s
Figure 2. Panama Direction of Trade, 2006
Source: CRS from World Trade Atlas.
In 2006, the United States accounted for some 38.5% of Panamanian exports
and 26.8% of its imports (see Figure 2). The European Union is the second largest
export market with a 33.2% export share, but accounts for only 6.7% of Panamanian
imports. The Latin American countries collectively are Panama’s third largest export
market with 20.4%, but has the largest import share at 44.8%.
Panama is one of the few Latin American countries with which the United
States has a merchandise trade surplus, and although relatively small, it is by far the
largest in the region. Panama runs a sizeable trade deficit with Latin America; its
largest Latin American trade partners are Mexico, Costa Rica, and Brazil. Panama
also imports significant quantities of oil from Peru, Venezuela, and Ecuador. Asia
accounts for 5.6% of Panama’s exports, but 13.7% of its imports, dominated by
Japan, South Korea, and more recently, China.
The Colón Free Zone. A distinct feature of Panama’s trade regime is the
Colón Free Zone (CFZ), which with the exception of Hong Kong, is the largest duty
free zone in the world. The vast trade volume that traverses the Panama Canal,
multimodal transportation infrastructure, modern financial sector, and Panama’s
central location in the Americas make Colón a logical place for a duty free zone. It
serves as a “one stop shop” for both Latin American buyers, and sellers from the rest
of the world, including Asia and the United States. Sellers operate showrooms
targeted at small- and medium-sized buyers, who make wholesale purchases of goods
for retail sale in their respective countries. Goods are typically repackaged in smaller
lots, priced in the local market currency, and transferred to the purchasing country
without incurring income, value added, or transfer taxes. Most CFZ trade is in
electronics, clothing, jewelry, and other consumer goods.
Buyers benefit from the ability to purchase small lots, reduced travel costs,
consolidated shipping and improved shipping times, and credit offered by sellers.
The sellers benefit from reaching smaller Latin American markets in one location and
reduced tax and similar reductions in transaction costs. Panama benefits from the
20,000 direct jobs the CFZ creates and the public revenue they generate. CFZ trade
is reported as a separate component of Panama’s trade statistics and only those goods
entering the Panamanian economy are recorded as imports. In 2005, nearly $5 billion
worth of goods passed through the CFZ, with $500 million added to the Panamanian
The CFZ is frequently associated with a number of illicit activities including
money laundering, illegal transshipment, trademark and other intellectual property
violations. In part, this is a reputation that Panama as a whole has been fighting since
the military dictatorship, which was widely known for its flagrant disrespect of the
law, if not outright corruption. Panama’s proximity to Colombia and headquarters
as a transshipment point helped fuel this perception.
The CFZ has attempted to counter this reputation. The zone itself is an enclosed
commercial area, encircled by, and under the supervision of, customs and other law
enforcement agencies of the Republic of Panama. In addition, both the Colón Free
Zone User’s Association and the CFZ Administration have a strict code of conduct
and argue that illegal activity is also policed by individual companies because a bad
reputation hurts those dedicated to making the CFZ a world class trading center.
Even the accusation of an infraction can lead to a suspension of the license needed
to operate in the zone. Cash accounts for only 10% of transactions and there is
careful monitoring of all goods that move in and out of the zone through electronic
U.S.-Panama Merchandise Trade
U.S.-Panamanian merchandise trade is small.17 In 2006, the United States
exported $2,706 million worth of goods and imported $323 million, producing a U.S.
trade surplus of $2,383 million, the largest in the Western Hemisphere. Still, Panama
15 U.S. Department of Commerce. U.S. Commercial Services. Doing Business In Panama:
A Country Commercial Guide for U.S. Companies 2005. April 7, 2005. p. 3 and author’s
interviews with CFZ representatives, September 21, 2005.
16 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
17 Services trade data are not available for smaller U.S. trading partners, including Panama.
ranked as only the 45th largest export market for U.S. goods and 98th for imports.
Major U.S. exports, as seen in Table 2, include oil and mostly capital- and
technology-intensive manufactured goods such as aircraft, pharmaceuticals,
machinery, medical equipment, and motor vehicles.
Table 2. U.S.-Panama Merchandise Trade, 2006
(top ten U.S. exports and imports by $ value)
U.S. Exports$ Valuemillion% ofTotalU.S. Imports$ Valuemillion% ofTotal
- Office mach.(41.8)
Total2,706.7100.0% Total378.3 100.0%
Data Source: U.S. Department of Commerce.
The United States imports relatively little from Panama, accounting for the
growing U.S. merchandise trade surplus. Most imports are primary products; over
one-quarter is seafood, mostly fresh fish and shrimp. Repaired goods are number two
accounting for 22% of total imports from Panama.18 Commodity trade includes crude
oil, precious metal (mostly gold), fruit, sugar, and coffee, which together account for
sensitivities to textile and apparel trade run high, Panama trades little in this sector.
Panama’s agricultural exports, particularly sugar, presented the more difficult
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 labor laws can be a frustration
18 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.”
if not an impediment to U.S. foreign direct investment (FDI).19 Still, U.S. companies
are well represented in Panama, including the largest container port facility in the
region, multiple financial institutions, transportation firms, and manufacturing
facilities from various sectors. Like other countries pursuing an FTA with the United
States, Panama seeks closer ties for the continued FDI that may be generated from
having a permanent rules-based trade relationship with a large trading partner.
Table 3. U.S. Investment in Panama, Mexico, and Central
Sector 2001 2002 2003 2004 2005 2006
Panama 5,141 5,842 5,409 5,631 5,777 5,728
Mexico 52,544 56,303 59,851 63,502 75,106 84,699
Data Source: U.S. Department of Commerce. Bureau of Economic Analysis. BEA website. Data
are stock of foreign direct investment (FDI) presented on an historical-cost basis.
U.S. FDI represents over a third of total FDI in Panama. Table 3 compares U.S.
FDI in Panama to other regional destinations, and although the dollar value of U.S.
investment in Panama exceeds that in the five Central American countries combined,
it actually amounts to 40% of Panama’s GDP compared to only 4% 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.
Summary of Trade Negotiations and the Proposed
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 Agreement21
(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.22 Another unique feature of the FTA negotiations was the
19 U.S. Department of Commerce, Doing Business in Panama, pp. 3-4.
20 This summary reflects information in the final text of the proposed FTA, released on July
21 For a discussion of the CAFTA-DR and a deeper understanding of the regional economic
implications of freer trade, see CRS Report RL31870, The Dominican Republic-Central
America-United States Free Trade Agreement (CAFTA-DR), by J. F. Hornbeck.
22 Inside U.S. Trade. Panama FTA Unlikely To Be Docked Into CAFTA as Talks Set to
treatment of business issues with respect to the Panama Canal Area. Its status as an
autonomous legal entity under the Panamanian Constitution required separate
negotiations for government procurement, labor, investment, and other areas. The
United States is the only country with which Panama has been willing to negotiate
issues related to the canal area in an FTA.
The proposed agreement was completed in ten rounds of negotiation, concluding
on December 16, 2006 and 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
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
sectoral 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 also will be similarly very small.23
At the sectoral 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).24
Specific 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
Begin. April 23, 2004.
23 USITC, U.S.-Panama Trade Promotion Agreement: Potential Economy-wide and Selected
Sectoral Effects, pp. 1-1 and 1-5.
24 Ibid., pp. 1-5, 2-1, and 2-7.
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 underway.25
Below is a more detailed discussion of the major negotiation areas and a
description of the issues that have been of particular interest to Panama and the
United States, including the U.S. Congress. Where relevant, changes made pursuant
to the May 10, 2007 bipartisan “New Trade Policy for America” are discussed.
Market access (chapter 3 of the FTA) covers provisions that govern barriers to
trade such as tariffs, quotas, safeguards, other nontariff barriers, and rules of origin
(chapter 4). The proposed U.S.-Panama FTA would replace unilateral trade
preferences provided to Panama under the Caribbean Basin Economic Recovery Act
(CBERA), the Caribbean Basin Trade Partnership Act (CBTPA), and the Generalized
System of Preferences (GSP), under which most imports from Panama enter the
United States duty free along with those entering under the normal trade relations
schedule (see Appendix 3 for selected tariff rates). Panamanian agricultural products
face some of the highest barriers, particularly sugar, which is subject to a tariff rate
quota (TRQ). U.S. exports face tariffs, with most falling in the range of 3-10%, plus
the additional 5% transfer tax, which applies to domestic goods as well.
Market access provides for national treatment for traded goods of both parties,
with a detailed schedule defining the progressive elimination of customs duties for
manufactured and agricultural goods. There are 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 ten-year period. Similarly, over half of U.S. farm
exports would receive immediate duty free treatment.26 Tariffs on some agricultural
goods would remain in place longer, with some taking up to 17 years to be
completely eliminated. Safeguards have been retained for many products only for the
period of duty phase out, but antidumping and countervailing duties were not
addressed, leaving these trade remedy laws fully operational, as required under TPA.
Rules of origin define which goods would be eligible for duty-free treatment
based on the country of origin of their content. Rules of origin are intended to
prevent transshipment of goods made from materials originating in countries outside
the agreement. They are particularly pertinent to apparel and textile trade. Apparel
products made in Panama would be given duty-free treatment if they are made from
U.S. or Panamanian fabric and yarns (the yarn forward rule).
Agricultural Trade. U.S. domestic agricultural support programs are not
addressed in the proposed FTA, which focused on reducing tariffs, adjusting quota
25 Ibid., pp. 2-1 and 2-7.
26 Office of the United States Trade Representative. Free Trade with Panama: Summary of
the Agreement. January 2007.
levels, and cooperating more closely on sanitary and phytosanitary (SPS) rules and
enforcement. Market access was particularly difficult for four highly protected
products: pork; poultry; rice; and sugar. The United States was basically “offensive”
on pork, poultry, and rice, expecting to open further Panama’s markets as soon as
possible. It was “defensive” on sugar, attempting to limit increases in the sugar quota
that might disrupt operations of the sugar program as defined in legislation.
Panama’s position was the reverse, pressing to minimize increases in U.S. exports
of pork, poultry, and rice, and to increase its U.S. sugar export quota.
In the United States, the sugar program reflects an historical commitment to
protect the income of sugar beet, sugar cane, and sugar processing firms with below-
prime-rate loans, limitations on sales in the domestic market, and tariff rate quotas
(TRQs). TRQs restrict imports with prohibitively high tariffs on imports above a
defined quota amount, as defined in WTO rules agreed to by the United States. In
2003, the above-quota tariff on sugar was 78%.27 On average, Panama harvests only
a quarter of the sugar produced by each of the five Central American countries, but
it still plays a disproportionally important role in the agricultural sector. Sugar
constitutes: 1) a third of Panama’s total agricultural exports, compared to less than
10% for the Central American countries, and; 2) 41% of agricultural exports to the
United States. The U.S. market consumes 76% of Panamanian sugar exports,
compared to less than 10% of sugar exports from Central America.
Given the dependence of sugar producers on the U.S. market, in part driven by
Panama’s relatively high wage rates that make it cost prohibitive to produce for the
world market, the Panamanians argued that even a relatively small quantitative
increase in their portion of the U.S. sugar quota would have a large benefit for their
industry. The U.S. sugar industry, however, continued to resist the inclusion of sugar
in bilateral FTAs, arguing that the WTO is the forum for addressing domestic support
programs and TRQs in the agricultural sector.
In Panama, pork, rice, and poultry were the most sensitive products. These are
also protected by TRQs, with in-quota tariffs of 15% and out-of-quota tariffs rising
to 74%, 103%, and 273%, respectively. Pork and poultry have a special issue related
to the consumption of white versus dark meat. The United States consumes
considerably more white meat than dark, leaving a disproportional amount of dark
cuts for export, which face the highest tariffs. In Panama, as with much of the world,
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.
27 The economic effect is to raise the price of sugar in the United States above the world
price, increasing income to sugar-producing industries, but raising costs to sugar-using firms
and consumers. CRS Report RL33541, Background on Sugar Policy Issues, by Remy
Panama’s rice industry, which supplies over 90% of the domestic demand, also
argued that opening their market to U.S. subsidized rice would decimate their
industry, which, because of its protection, sells rice considerably above the world
price. In fact, the USITC report estimates that when fully implemented, the FTA will
have the greatest impact on U.S. rice exports. The rice provisions, however, will not
be fully implemented until year 17 of the agreement.28
Panamanian agriculture represents only 6% of GDP, but 17% of employment.
These numbers point to both an inherent inefficiency, due in part to protection, but
also the strong role agriculture plays in supporting rural employment and social
stability. Agriculture’s 17% of national employment actually supports 40% of the
country’s population living in rural areas, most of whom exist at or below the poverty
line. Given the potential to dislocate much of the poor in the country, the
Panamanians argued that opening the agricultural sector too quickly to the large
production capacity of the United States would have been highly detrimental to the
social structure of the rural economy, leading to increased unemployment, poverty,
and rural-urban migration. For these reasons, Panama wanted a slow transition to
open markets in the agriculture sector, as well as, an increase in the sugar quota to
boost employment. This would also buy time for Panama to develop its non-
traditional export crops, such as melons, palm oil, and pineapples, which some view
as the future of this sector.
The compromise struck in the proposed FTA would provide duty-free treatment
for over half of U.S. farm exports to Panama including high quality beef, poultry
products, soybeans, most fresh fruits, and a number of processed goods. Remaining
tariffs would be phased out between 7 and 17 years after the FTA takes effect. Rice
tariffs, which protect one of Panama’s most sensitive products, would remain in place
for the full 17 years, as would tariffs on pork, chicken leg quarters, dairy products,
and corn, among others. These products would receive expanded quotas under the
Panamanian tariff rate quota system. The United States agreed to give Panama an
additional 7,000 metric tons of sugar imports in the first year under a three-tiered
TRQ system, which would grow by 1% per year, capped eventually for some types
of sugar. The American Sugar Alliance apparently has agreed not to come out
against the agreement.29
Other protective measures for agriculture were negotiated. Whereas export
subsidies, voluntary restrain agreements (VREs), and import licensing are generally
prohibited, TRQs, safeguards, and a sugar compensation mechanism would be
allowed. The sugar mechanism gives the United States the option to compensate
Panamanian sugar producers in lieu of giving Panamanian their exports duty-free
treatment. This provision might be used if the U.S. sugar program were threatened
28 USITC, U.S.-Panama Trade Promotion Agreement: Potential Economy-wide and Selected
Sectoral Effects, pp. 2-7 and 2-10.
29 Inside U.S. Trade. Panama FTA Offers Limited Sugar Access; Labor Changes Possible.
December 22, 2006.
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 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.30
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 by31
potentially requiring Panama to lower its standards in some cases.
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
accordi n gl y. 32
Textiles and Apparel. In general, textiles and apparel make for difficult
market access negotiations, but Panama produces very little of these goods. The
proposed FTA would provide immediate duty-free access for all textile and apparel
goods, subject to rules of origin. The permanence of the provisions and more
accommodating measures provide a benefit to the small Panamanian industry.
Safeguard measures would allow duties to increase on imports in which a sudden
increase in volume either threatens or actually harms U.S. producers. The text also
provides for short supply lists of fabrics, yarns, and fibers that otherwise would face
30 United States Trade Representative. 2007 National Trade Estimate Report on Foreign
Trade Barriers. Washington, D.C. March 2007. p. 452.
31 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,
32 United States-Panama Agreement Regarding Certain Sanitary and Phytosanitary
Measures and Technical Standards Affecting Trade in Agricultural Products. December
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.33
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.34 Some
of the concerns expressed were addressed in the 2006 amendments to the
procurement law, which modernized (e.g., through the use of Internet procurement
system) and made more transparent procurement regulations and government
purchasing information. A separate administrative court for public contracting
disputes was also created. These changes enhanced Panamanian laws that already
require transparency in the bidding process. Panama has not acceded to the WTO
Government Procurement Agreement, which the United States has encouraged.35
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 proposed expansion of the Panama canal and related prospects for large
long-term investments. The Panama Canal Authority (PCA) operates independently
of the national government and Panama required separate negotiation apart from the
regular government procurement chapter. Panama negotiated to maintain the canal
authority dispute settlement system within the proposed FTA, as well as to keep
small business set aside provisions for Panamanian firms. In addition, for 12 years
after the agreement takes effect, Panama may set aside contracts let by the PCA to
Panamanian firms subject to clear notice of intent to do so and limitations on the size
of contracts. The text otherwise addresses U.S. concerns over nondiscriminatory,
fair, and open government procurement procedures for all national government
authorities. Like the PCA, subnational governments (e.g. states and municipalities)
33 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.
34 Panamcham. Issues of Importance in the U.S.-Panama FTA Negotiations, March 12,
35 USTR, 2007 Foreign Trade Barriers, p. 503.
are not required to uphold the government procurement provisions, but those willing
to do so appear in an appendix of the proposed FTA.
Panama has a well-developed financial services industry to support the flow of
capital and is a 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. 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.36
The text provides for clear and enforceable rules for foreign investments, which
is largely accomplished by “standard” language (identical to the CAFTA-DR)
requiring national and most-favored-nation (nondiscriminatory) treatment. It further
clarifies rules on expropriation and compensation, investor-state dispute settlement,
and the expeditious free flow of payments and transfers related to investments, with
certain exceptions in cases subject to legal proceedings (e.g., bankruptcy, insolvency,
criminal activity). Transparent and impartial dispute settlement procedures provide
recourse to investors.
Two investment issues stand out. First 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
Although none of the claims filed against the United States has prevailed,
Congress instructed in TPA legislation that future trade agreements ensure “that
36 Ibid., p. 475.
37 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.
foreign investors in the United States are not accorded greater substantive rights with
respect to investment protections than United States investors.” In response, Annex
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
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
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 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.38
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.39
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
38 USITC, U.S.-Panama Trade Promotion Agreement: Potential Economy-wide and Selected
Sectoral Effects, p. 3-1.
39 USTR, 2007 Foreign Trade Barriers, pp. 455-456.
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
Clarifying intellectual property rights (IPR) was a major U.S. priority, in
particular by having Panama’s standards approximate more closely those of the
United States and by securing Panama’s commitment to join an array of international
agreements related to IPR protection. The most contentious IPR issues revolved
around patent and data exclusivity issues related to pharmaceutical products.
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.40
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.41
40 USTR, 2007 Foreign Trade Barriers, p. 454.
41 U.S.-Panama FTA, Chapter 15.
Pharmaceutical Issues. Three patent-related issues generated the major IPR
debate. The first, and perhaps most sensitive and complicated, issue was 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
from use by generic manufacturers to certify their own products for a period of five
years from the time the patented drug is approved for use in a country’s market, the
so-called data exclusivity term. This issue was raised by Members of Congress
during the CAFTA-DR debate, but was only partially addressed in a side agreement
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 licencing under the WTO rules might be invoked.42
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 second
country (e.g., Panama) after making an initial filing in the first country (e.g., the
United States), and Panama approves the drug within six months of that filing, the
data exclusivity term begins at the time the drug was approved in the United States,
not Panama. This provision is intended to encourage both drug companies and
foreign governments to engage in the approval process as efficiently as possible,
thereby speeding the entry of generic drugs into developing countries (Panama).
Because the six-month rule 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 getting market approval. Because countries
must approve within the sixth-month rule to benefit from it, they are encouraged to
put in place an efficient drug certification process.
In addition, there is language in the IPR chapter stating that in the case of
epidemics, a waiver from the data exclusivity laws would be allowed. In the past, the
WTO public health provisions have allowed for compulsory licensing, circumventing
patents in public health emergencies, but in the case of the U.S.-Panama FTA, the
waiver is extended to the data exclusivity term, as well.
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 would like to see a
42 U.S. Congress. House of Representatives. Committee on Ways and Means. Dominican
Republic-Central America-United States Free Trade Agreement Implementation Act.
H.Rept. 109-182. pp. 50-51. The side agreement is available at [http://www.ustr.gov] and
for a summary of the debate, see Brevetti, Rosella. CAFTA Opponents Blast U.S. Stance
on Guatemalan Data Protection Law. International Trade Reporter. BNA, Inc. March 10,
2005. See also: CRS Report RS21609, The WTO, Intellectual Property Rights, and the
Access to Medicines Controversy, by Ian F. Fergusson.
transparent, preferably administrative process 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 allows for both
administrative and judicial procedures, which could increase the chances of a country
employing a cumbersome and costly process.
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. Pharmaceutical companies, however,
argued against these changes because they bear the full cost through cumbersome
administration and lost revenue by the earlier introduction of generic competition.
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. Also, in
developing countries with less than robust patent laws, data exclusivity, for example,
is often the only recourse drug companies have to provide some protection of their
investment, and so changing the terms of the data exclusivity term has a direct
financial cost for drug companies.
Labor and Environment
Labor and environment provisions have been highly contentious issues in trade
agreements, with considerable disagreement in Congress and elsewhere over how
aggressive language in trade agreements should be in accommodating these concerns.
An important aspect of the proposed U.S.-Panama FTA is that it adopts new
standards for both the labor and environment chapters that reflect a bipartisan
understanding as developed by congressional leadership and the USTR in the “New
Trade Policy for America.” Despite the bipartisan nature of the agreement, many
Members continue to express reservations about the benefits of bilateral FTAs.
The debate over labor and environmental standards reflect differences in both
economic and political perspectives. From an economic perspective, labor and
environment advocates in the United States have argued that developing country
firms may have an “unfair” competitive advantage because their lower standards are
a basis for their lower costs, which in turn are reflected in lower prices for goods that
compete with those produced in developed countries.43 It follows from this argument
that the difference in costs may be an inducement to move U.S. investment and jobs
abroad. In addition, critics have also argued that trade agreements should not support
a status quo in production standards that leads to unacceptable working conditions
and severe environmental degradation.
43 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.
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.44 Further, many economists view trade liberalization
as part of the overall development process that, in and off itself, can promote
improved social and economic conditions over the long run.45 Developing countries
are concerned with the loss of sovereignty should specific standards be defined in
trade agreements, as well as with the possibility that such provisions can be misused
as a disguised form of protectionism.
Labor Issues. Preliminary drafts of the U.S.-Panama FTA adopted the
CAFTA-DR labor chapter language verbatim. Many Members of Congress and
others objected to four key aspects of this language. First, it emphasized that a
country must effectively “enforce its own labor laws,” rather that define specific
labor standards to be codified and enforced. Second, this was the only provision in
the labor chapter subject to the FTA’s labor dispute resolution process (other
commitments are unenforceable). Third, labor (and environment) provisions had
their own dispute settlement process separate from the process used for commercial
and other disputes. Critics argued that the labor dispute mechanism was inferior for
many reasons. Fourth, for other commitments in the labor chapter, language
requiring that the Parties to the agreement “strive to ensure” that basic labor
principles as defined in the International Labor Organization (ILO) Fundamental
Principles and Rights at Work and its Follow-up (1998) Declaration was an
inadequate commitment and unenforceable.
In short, there existed a basic criticism that the labor provisions in the bilateral
FTAs did not reflect the intent of Congress in defining labor negotiating objectives
in Trade Promotion Authority (TPA) legislation, were a step backward in U.S. policy
on this issue that conditions trade benefits on meeting basic ILO labor commitments
as defined in the Caribbean Basin Initiative (CBI) and the Generalized System of
Preferences (GSP), and were effectively meaningless without a credible enforcement46
44 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.
45 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.
46 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.
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
!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;
!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 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;
!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 that include
procedural guarantees of transparency and fairness in the use of tribunals to enforce
a Party’s labor laws and institutional arrangements that include creation of a joint
Labor Affairs Council to oversee implementation and review of commitments made
in the Labor Chapter. These commitments include establishing a Labor Cooperation
and Capacity Building Mechanism.
Panama’s Labor Conditions. Panama has higher wage rates, stronger labor
laws, and fewer impediments to union formation compared to many countries in the
region. The business community, including U.S. firms operating in Panama, argue
that the labor laws are too generous with respect to firing or downsizing the labor
force, which can actually encourage unintended responses by business, such as
extended use of temporary workers. In 1970, Panama created the Tripartite Council
on Union Freedom and Participation in Economic and Social Development with
representatives from the government, labor, and business. Its primary function is to
oversee that worker rights are being observed in Panama.
The U.S. Department of State has pointed out that Panama’s labor laws
guarantee all five of the ILO basic principles. In general, major violations have not
been found. Nonetheless, concerns still exist over the widespread use of temporary
workers in the general and child labor in the informal sector and rural areas,
particularly during harvest times. Lax enforcement of health and safety standards
was also cited as a problem.47
The Colón Free Zone and the small export processing zones are all subject to
national labor laws. The Panama Canal Area presents a unique issue. Although the
Canal Zone has separate statutes governing labor, they tend to be more generous with
respect to workers’ rights and compensation, and jobs in the Canal Zone are highly
coveted. Workers may organize and exercise their rights to collective bargaining, but
the prohibition on striking goes to Panama’s commitments under the Panama Canal
Treaties, which stipulate that the canal must be operated without interruption.48
Environmental Issues. Major environmental goals in FTAs include
protecting and assuring strong enforcement of existing domestic environmental
standards, ensuring that multilateral environmental agreements are not undermined
by trade rules, promoting strong environmental initiatives to evaluate and raise
performance, developing a systematic program of capacity-building assistance, and
assuring that environmental provisions in FTAs are subject to the same dispute
resolution and enforcement mechanisms as are other aspects of the agreements.49
Advocates raise the issue of the environmental effects of trade, particularly in
developing countries that may have weak laws and lax enforcement mechanisms.
Some of these same advocates, however, have indicated that thus far trade
agreements have not led to catastrophic pollution nor encouraged a “regulatory race
to the bottom.” There has also been a certain acknowledged degree of success in
having environmental issues addressed in the body of FTAs, in side agreements on
environmental cooperation, and through technical assistance programs, the latter of
which developing countries can use to respond to specific problems. Advocates and
many Members of Congress still note that much can be improved, such as clarifying
obligations, tightening enforcement language, and ensuring that the United States
allocates financial resources to back up promises of technical assistance.50
47 U.S. Department of State. Panama: Country Report on Human Rights Practices - 2006.
Washington, D.C. March 6, 2007, the Economist Intelligence Unit. Country Report -
Panama. London, June 2004. p. 14, and American Federation of Labor and Congress of
Industrial Organizations (AFL-CIO). Panama: Labor Rights and Child Labor Reports.
Washington, D.C. August 9, 2004. p. 3.
48 Panama Legislative Assembly. Law No. 19 — “Whereby the Panama Canal Authority is
Organized.” Chapter V — Personnel Administration and Labor Relations. June 11, 1997.
49 See [http://www.sierraclub.org/trade/fasttrack/letter.asp], Principles for Environmentally
Responsible Trade. Another important issue for the United States is ensuring that its higher
environmental standards defined in law and regulation not be compromised by challenges
of protectionism. See CRS Report RL31638, International Investor Protection: “Indirect
Expropriation” Claims Under NAFTA Chapter 11, by Robert Meltz.
50 See Audley, John. Environment and Trade: The Linchpin to Successful CAFTA
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” 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 an 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
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.52 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
Negotiations? Carnegie Endowment for International Peace. Washington, D.C. July 2003.
51 U.S.-Panama FTA, Chapter 17, The Environment.
52 Office of the United States Trade Representative. Interim Environmental Review: U.S.-
Panama Free Trade Agreement. June 2004. pp. 7-9.
of the proposed FTA on environmental standards would be small, whether in terms
of projected impacts on the United States or on Panama.
The environmental review further notes that Panama’s service-oriented economy
and the small trade volume with the United States are unlikely to be greatly affected
by the proposed FTA and so will change marginal production and trade little. The
FTA, however, may have both positive and negative effects. The negative effects of
pollution, environmental degradation, and endangering wildlife would come mostly
from increased agricultural trade and production, which might be addressed with
increased environmental oversight and policies. The positive effect of the FTA could
include improvements in environmental standards that may be encouraged by the
provisions of the agreement and the consultative and cooperation agreements
attached to the proposed FTA.53 Panama’s environmental regulatory agency
(Autoridad Nacional de Ambiente — ANAM) points out that Panama is increasingly
using environmental impact studies, but realizes it has enforcement capacity issues
that may require time to remedy, which could be accommodated in the FTA.
Trade Capacity Building
The proposed FTA would create a Committee on Trade Capacity Building
(TCB), designed to assist Panama with the transition to freer trade with the United
States. In general, the committee’s mission includes providing technical assistance
and coordinating financing to accelerate the transition period in expectation of
increasing the gains of trade while minimizing the adjustment costs. The TCB
Committee would help coordinate technical assistance provided by U.S., regional,
and multilateral agencies in helping Panama meet its obligations under the FTA.
Panama prioritized TCB needs in its national trade capacity building strategy.
The overriding goal is to formulate a strategy that would allow Panama to assume all
the commitments under the proposed FTA, in the context of meeting the country’s
development needs. The National TCB Strategy places strong emphasis on sectoral
adjustment strategies, recognizing that some industries are already competitive by
international standards (e.g., financial services), whereas others will need
considerable assistance when faced with increased competition from the United
States (e.g., agriculture). Emphasis is also placed on supporting existing and
potentially new micro, small, and medium-sized businesses, which may need the
most assistance and constitute a significant portion of the Panamanian economy, as
well as government capacity to administer trade-related activities.54
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
53 Ibid., pp. 15-20.
54 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.
rules of origin, to labor, environment, transparency, and trade agreement
administration. In each case, the status of Panama’s commitments under the
proposed FTA is identified along with action items that may need to be pursued to
improve capacity in the respective area.
Successfully implementing the strategy, however, 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. Sectoral 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
Panama’s legislature ratified the revised FTA 58-4 on July 11, 2007, but it
cannot take effect until the U.S. Congress passes implementing legislation. The 110th
Congress may consider such a bill in 2008. The debate over FTAs is frequently
contentious for other reasons as well, given their increased complexity and Members’
broadly held concerns over the negative effects of globalization that have increased
substantially in a post-CAFTA-DR environment. To address some of these concerns,
the proposed U.S.-Panama FTA, in addition to supporting U.S. commercial and
economic interests, incorporates significant changes initiated by the Democrats and
ultimately agreed to by congressional leadership as part of a bipartisan congressional
understanding arrived at with the Bush Administration.
The most significant changes include the adoption of enforceable labor
standards, compulsory adherence to select multilateral environmental agreements
(MEAs), and an easing of restrictions to developing country access to generic drugs.
In each of these cases, the proposed U.S.-Panama FTA goes beyond provisions in
existing multilateral trade rules and even those contemplated in the Doha Round. In
this case, along with the broader arguments both for and against FTAs, Congress
perhaps now faces an even more difficult choice given that the recent changes to this
proposed FTA may set a precedent in U.S. trade policy. As significant as these
55 Miller, Eric. USAID/Panama-Supported TCB Programs. Summary chapter. Nathan and
Associates. May 9, 2007.
changes may be, perhaps portending a shift in U.S. trade policy, it is still not clear
that they are sufficient to ease the concerns many Members have over bilateral free
Appendix 1. Chronology of U.S.-Panama FTA
November 18, 2003The 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, 2004First round of negotiations occurs in Panama City.
June 11-15, 2004Second round of negotiations takes place in Los Angeles.
July 12-16, 2004Third round of negotiations held in Panama City.
August 9-12, 2004Fourth round of negotiations held in Tampa.
October 18-22, 2004Fifth round of negotiations takes place in Panama City.
December 6-10, 2004Sixth round of negotiations held in Washington, DC.
January 10-15, 2005Seventh round of negotiations held in Washington, DC.
Jan. 31-Feb. 6, 2005Eighth round of negotiations occurs in Washington, DC.
Jan. 17-20, 2006Ninth round of negotiations held in Washington, DC.
Dec. 16, 2006Tenth and final round of negotiations concludes in
Washington, D.C. Chapters on labor and environment left
March 27, 2007Bipartisan “New Trade Policy for America” released.
March 30, 2007President Bush formally notifies Congress of his intention
to sign the proposed U.S.-Panama FTA.
April 27, 2007USTR transmits to the White House and Congress 27 trade
advisory reports on the U.S.-Panama FTA.
May 10, 2007Congressional leadership and Bush Administration agree to
change labor, environment, and intellectual property rights
chapters in this and other FTAs based on principles outlined
in the bipartisan “New Trade Policy for America.”
June 29, 2007The United States and Panama sign a free trade agreement
at the Organization of American States in Washington, D.C.
July 2, 2007USTR releases final text of proposed U.S.-Panama FTA.
July 11, 2007Panamanian legislature approves U.S.-Panama FTA 58-4.
Appendix 2. Panama: Selected Economic
2000 2001 2002 2003 2004 2005 2006
GDP Growth (%)188.8.131.52.184.108.40.206
Per Capita GDP Growth (%)0.8-220.127.116.11.65.15.7
Urban Unemploy. Rate (%)15.217.016.515.918.104.22.168
Current Acct. Bal. (% GDP)-5.8-1.4-0.8-3.9-7.5-5.0-4.2
Terms of Trade (2000=100)100.0102.7101.697.295.393.590.8
Foreign Direct Invest. ($ mil)*624467997711,0041,0272,500
Source: United Nations Economic Commission on Latin America and the Caribbean. Preliminary
Overview of the Economies of Latin American and the Caribbean, 2006. December 2006.
*Net investment = direct foreign investment in Panama minus Panamanian direct investment abroad.
Appendix 3. U.S.-Panama Tariff Rates for Selected
(% of total dollar value)
Major U.S.a% ofTariffMajor U.S.a% ofTarifunder
Expor t s Tot a l Rat e Imports Tot a l f CB I c
Rat e b
Machinery 10.8 3-5% Precious 9.3 Free
(3004) - under quota0
- over quota 78%
Optical/Medical 3.5 10% Coffee 3.1 Free
Cereals 2.8 Fruit 3.3 Free
- corn (1005)(1.8) - bananasunder
- under quota3% - papayaCBI and
- over quota58% - watermelonGSP
- mesline (1001)Free
- rice (1006)(1.0)
- under quota15%
- over quota(0.2)103%
T otal 100% T otal 100%
Data Source: U.S. Department of Commerce.
Note: all Panamanian imports are subject to a 5% transfer tax, which is also collected on domestic
products. This tax is considered similar to a nondiscriminatory sales or value added tax (VAT).
a. By HTS number = Harmonized Tariff Schedule of the United States.
b. NTR is the general or normal tariff rates (also known as most favored nation rates) applied to
products not given preferential tariff treatment.
c. CBI = Caribbean Basin Initiative provides unilateral preferential tariff treatment to select Caribbean
and Central American country products. Petroleum enters duty free under the Caribbean Basin
Trade Partnership Act (CBTPA — P.L. 106-200), a related program.
d. Tariffs on oil vary depending on end use. Discussions with U.S. Department of Commerce officials
suggest most U.S. oil exports to Panama (for automotive use) face a 5% tariff. Some oil for
maritime use has tariffs as high as 30%.