FTA: How Long Can Panama Hold Out?

Free Trade Showdown:
How Long Can Panama Hold Out for an Agreement that Reflects its Own National Interests?

• In the wake of Congress’ recent approval of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), another U.S. free trade agreement with Panama, an oft-overlooked trade partner, simmers on the back burner.

• The Republic of Panama, conspicuously absent from the DR-CAFTA negotiations, has been involved in a separate set of free trade discussions with the United States since April 2003.

• The U.S.-Panama Free Trade Agreement (FTA) has undergone eight rounds of negotiations thus far without showing any potential for compromise in the near future.

• The backlash from U.S. special interest groups angered by the passage of DR-CAFTA is likely to stiffen U.S. obstinacy when it comes to protecting its agricultural subsidies, thwarting hopes that a U.S.-Panama FTA might set a precedent for a fairer template for free trade in the Americas.

While many see the passage of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) as fueling the U.S.’ momentum in achieving a Free Trade Area of the Americas (FTAA), others believe the bitter DR-CAFTA debate has exacerbated sharp divisions over free trade among special interest groups in the U.S., which could ultimately present even greater challenges to the trade dialogue with Panama. A number of contentious issues continue to dash hopes that a U.S.-Panama FTA will soon come to fruition. In particular, agricultural subsidies have marked a major road block in negotiations, as neither side has been eager to ensure that free trade will also constitute fair trade. After the difficult fight to pass DR-CAFTA, Washington’s delegation can also expect heightened activism by domestic agro-industries anxious to preserve their agricultural subsidies. This could have one of two consequences: U.S.-Panama relations will either be strained by further FTA quarreling, or Panama, unable to reject an offer that would stimulate bilateral trade with an economic giant, will be intimidated into accepting undesirable conditions in order to achieve an FTA with the U.S.

The Road to Global Domination is Paved with Free Trade Agreements
The United States has historically wielded a pseudo-custodial diplomatic relationship with Panama. For nearly a century, the U.S. administered the operation of the strategically located Panama Canal before finally passing ownership to Panamanian hands at the end of 1999. In the last decade, trade negotiations have dominated the otherwise low voltage U.S.-Panama diplomatic relations. In 2003, trade between the two nations totaled approximately $2.1 billion, with U.S. exports to Panama accounting for $1.8 billion and $0.3 billion constituting Panama’s share. Today, nearly half of Panama’s total imports come from the U.S., and trade between the hemispheric neighbors appears to be increasing at breakneck speed. Between 2002 and 2003, Panama’s market for U.S. exports grew by 30 percent. U.S. foreign investment in Panama has steadily risen as well, now totaling roughly $25 billion in the finance, maritime and energy sectors. Panama’s service sector continues to hold the utmost importance to the United States, evident in the fact that 13 percent of all U.S. shipping passes through the Panama Canal.

According to the Office of the United States Trade Representative, an FTA with Panama will seek to build on existing trade arrangements under both the DR-CAFTA and the Caribbean Basin Initiative (CBI), which has governed U.S.-Panama trade relations since its inception in 1983. In theory, a U.S.-Panama FTA would eliminate duties and “unjustified” barriers to trade in Panamanian and U.S.-made goods.

Further, a U.S.-Panama FTA may be a crucial link in a much larger U.S. economic strategy to establish a free trade zone spanning the Western Hemisphere. The so-called FTAA could eventually encompass $13 trillion worth of trade and serve 800 million people from Alaska to the tip of South America. However, many of the crucial South American players have previously issued responses ranging from ambivalence to virulent opposition to U.S. proposals for a hemispheric open market system. Panama thus holds renewed importance to Washington as a potential avenue for securing diplomatic cooperation from the steadily expanding markets in the Southern Cone for future FTAA negotiations.

The ratification of DR-CAFTA, the centerpiece of the U.S.’ current FTAA objectives, is likely to create greater challenges for Panama’s trade delegation as domestic special interests gain leverage in the U.S. legislature. DR-CAFTA’s narrow victory will undoubtedly incite U.S. domestic producers’ lobbies to exert heavier pressure on trade representatives to strive for an agreement more favorable to U.S. industry. Such attempts would further exacerbate the rift between the Panamanian and U.S. trade delegations on the subject of agricultural subsidies and other non-tariff trade barriers, which could delay indefinitely passage of a U.S.-Panama FTA. If the U.S. delegation is able to keep intact its extensive network of agricultural subsidies under the U.S.-Panama FTA, the result will likely incite a backlash from other potential Latin American trade partners and further diminish hopes for securing the FTAA in the near future.

Trade Precedent: The Caribbean Basin Initiative
The current legal framework underlying U.S.-Panama trade relations is the CBI, which was passed in 1983 to stimulate export development in Central America and the Caribbean islands through “private sector initiative.” The most recent revision of the CBI, the 2000 U.S.-Caribbean Basin Trade Partnership Act (CBTPA), purports to lift quotas and duties on CBI exports to the United States. In reality, however, duty-free trade is reserved only for those foreign textiles manufactured using U.S. yarns and fabric.

Besides promoting economic development, the 2000 CBTPA outlines the initiative as another “incentive” for hemispheric neighbors to cooperate in FTAA proceedings. The language of the CBTPA specifically etches a primary goal as:
“ To seek the participation of Caribbean Basin beneficiary countries in the FTAA or another free trade agreement at the earliest possible date, with the goal of achieving full participation in such agreement not later than 2005.”

It is unsurprising, then, that as a corollary to this objective, the CBTPA delineates as policy the stipulation that preferential tariff treatment be offered only to those Caribbean Basin beneficiary countries willing to become party to the FTAA. Evidently, even in the early stages of these free trade agreements, the U.S.’ vision for commanding a regional free trade behemoth took precedent over concerns of economic development and poverty alleviation.

Isthmus of Opportunity
While it may seem that Panama would not have much bargaining leverage with an economic giant like the United States, the isthmian country is not a novice to free trade negotiations. Within a short time span, Panama has opened up the second largest duty-free zone in the world, the Colón Free Zone (CFZ), formed free trade alliances with two Asian powerhouses, Singapore and Taiwan, and accepted an offer to become an associate member of MERCOSUR, South America’s regional trading partnership.

Panama’s CFZ, the largest duty-free trade area in the Americas and the second largest in the world, after Hong Kong, has drawn the interest of many international market players to Panama as a potentially explosive trading partner. More than 2,000 companies and 25 banks operate within Panama’s trade zone; its market is larger than the country’s entire internal market, with transactions totaling $12.2 billion in 2003. The majority of the trade flowing through the CFZ is between Asia and Latin America, suggesting yet another reason why the U.S. may be interested in an FTA with Panama—to regain the markets it has slowly ceded to its most vigorous economic competitors. The United States currently accounts for about 4.3 percent of exports transactions and 9.3 percent of imports to the CFZ.

The CFZ has proved extremely lucrative for Panama, generating $22 million a year in direct revenue for the Panamanian government. In addition, the zone employs 19,000 workers in a country with a perpetually high unemployment rate. Multi-national corporations are seeking to establish roots in the manufacturing and service district there in large part because they only have to pay a maximum rental rate on average of 50 cents per square meter, which is significantly lower than at the Miami Free Zone, with rates starting at $760/month.

The CFZ became pivotal in U.S.-Panama FTA negotiations when a wave of destabilizing violence broke out along the Panama-Colombia border and soon made financing security control a key matter of importance for the Panamanian trade delegation. Panama hoped the U.S. would provide funds for addressing security concerns in the persistently treacherous zone spanning Panama’s short-waisted border with Colombia in an effort to protect its potential participation in the CFZ. If Washington fails to come through with satisfactory security provisions in the FTA negotiations, CFZ General Manager Nilda Quijano has indicated that other foreign-based companies, including South Korea’s Samsung, have issued attractive offers for security support. It is unlikely the United States would be pleased to have a South Korean security presence replace its own in the strategic and historically U.S.-dominated Panama Canal region.

The MERCOSUR Connection
Panama may hold increasing value for the United States as a link to MERCOSUR, South America’s premier regional free trade bloc. Panamanian President Martin Torrijos was officially invited to participate in the June MERCOSUR summit, elevating Panama to the rank of “associate member.” Associate member status grants Panama access to preferential trade with the MERCOSUR bloc, but not to the tariff benefits of the four full members, Argentina, Brazil, Paraguay and Uruguay. Torrijos has sought official MERCOSUR membership since his inauguration last fall, hoping to expand Panama’s service exports in the region to counterbalance the country’s negative trade balance with MERCOSUR member countries. In 2003, for instance, Panama’s imports from Argentina totaled more than 150 times the value of its exports.
Full membership in MERCOSUR would greatly increase Panama’s bargaining leverage in U.S.-Panama FTA talks, considering Washington’s long-term interest in integrating the Southern Cone under its hemispheric trade umbrella. A U.S.-Panama FTA could serve as a diplomatic staging ground for the United States to advance FTAA proceedings with the major South American countries that, up to now, have greeted such connections somewhat coldly.

Lots of Talk, but Little Action
Those serving as Panama’s trade representatives see an FTA as a potentially “tremendous opportunity” for their underdeveloped country, which already uses the U.S. dollar as its currency but struggles with high poverty and unemployment rates. In addition, appearing to take concerted action to stimulate the Panamanian economy could win public favor for an administration already deeply mired in corruption allegations and a scandal over no-show diplomas at the University of Panama. Specifically, Panama has hoped an FTA would fuel the production of nontraditional exports, such as pineapples and melons, in addition to more traditional markets like bananas and sugar. However, while Panamanians want greater access to U.S. agricultural and industrial markets, they fear that opening Panama’s markets entirely to U.S. products will have disastrous consequences for Panamanian farmers and producers, who are likely to be overwhelmed when forced to compete with U.S.-subsidized agro-industries. Panama’s former President Mireya Moscoso was an avid FTA supporter, given her proclivity to yield to the highest bidder, but current president Martin Torrijos has been less convinced that an FTA with the United States is best for Panama. According to Torrijos, "much prudence and caution [are] required" on the issue because of the United States’ immense economic outreach.

The biggest roadblocks to reaching a consensus in negotiations between the U.S. and Panamanian trade delegations have involved agricultural issues. At the end of the fifth round of talks in 2004, Panamanian negotiator Estif Aparicio described the U.S.’ farm proposals as “rough and aggressive,” and lamented that there was still “a lot to do” in upcoming negotiation rounds. Meanwhile, Panamanian farmers have continued their protest throughout the country, demanding protection for domestically produced milk, meat and poultry products.

In the United States, the sugar industry has strongly opposed the inclusion of this commodity in any FTA, wary of the losses that would inevitably be suffered if Panama were given the opportunity to openly export its lower-priced produce to U.S. markets. For Panama, concerns over U.S. demands are multi-sided. The U.S.’ bid for increased access to beef, dairy, pork, onion, potato, rice and other agricultural markets in Panama is disconcerting to local producers who fear that they will be entirely unable to compete against U.S.-government subsidies in an open market. Francisco Aleman, Deputy for the right-wing Arnulfist Party, has complained that the negotiations thus far have not revealed any benefits for Panama: "I do not understand what the rush is to close negotiations in this round, if there is not yet a balance in Panama's favor, particularly in the agricultural part."

Do as I Say, Not as I Do
While the United States’ trade delegation has sought free trade guarantees from Panama, it has, as it did in the CAFTA negotiations, shirked its own responsibility for ensuring truly free and fair trade by eliminating trade barriers at home. The Bush administration outlined to Congress specific objectives for FTA negotiations with Panama. Such objectives focus U.S. priorities on eliminating tariffs and duties, as well as non-tariff barriers on U.S. exports to Panama. However, Washington explicitly has expressed an unwillingness to offer Panama comparable trade conditions by canceling its own agricultural subsidies. Not only were any U.S. subsidies or waivers specifically omitted from the proposed free trade agreement’s draft of trade objectives, but the language actually underlines that the U.S. delegation will seek to “improve U.S. import relief mechanisms as appropriate.” In effect, this would allow the U.S. government to reinforce existing subsidies and aid for U.S. industries adversely affected by the proposed Free Trade Agreement.

Even free trade proponents are troubled by Washington’s laxity toward improving environmental and labor standards with its trading partners. Many saw DR-CAFTA and a U.S.-Panama FTA as opportunities to persuade these countries to enact reforms that would bring their domestic laws into compliance with International Labor Organization and environmental standards. While Washington has claimed it will ensure that Panama enforces its current environmental and labor laws, it has not made any effort to use the FTA’s potential to improve upon such existing laws. Considering that Panama has proved to be more difficult than other negotiating partners in accepting conditions favorable to U.S. agricultural interests, the U.S. delegation has proven wary of wasting precious bargaining leverage on promoting what all along have been low priority issues for the administration: sustainable environmental standards and labor rights.

Will Panama Stand its Ground?
As U.S.-Panama FTA talks wear on, Panamanian taxpayers are becoming increasingly alarmed over the daily cost of the negotiations. In the first 18 months, Panama committed $1.5 million to consultants and lobbyists operating on its behalf, even though this is a small portion of the $7 million total spent thus far to negotiate the agreement with Washington. Many Panamanians have been unimpressed by the inability of their negotiators to generate favorable conditions for their side of the agreement. According to the authoritative Panama City daily, La Prensa, national agricultural producers are overwhelmingly dissatisfied with the consultants’ treatment of agricultural issues. The Panamanian government has issued public pledges to steadfastly defend the country’s interests to the bitter end, vowing that the government will not ratify an FTA without favorable conditions on the most important agricultural clauses.

Many Latin American planners have faulted the U.S.’ execution of free trade stipulations under NAFTA, and fear that DR-CAFTA will bring on more of the same. The decline of a number of agricultural sectors, the proliferation of violence and human trafficking in industrialized border towns and environmental degradation are some of the pitfalls associated with free trade that Washington once again has failed to satisfactorily address, in DR-CAFTA and in the proposed FTA with Panama. The question remains whether the U.S. will use its colossal economic clout to allow Panama to fully benefit from the virtues of reciprocal free trade that is not only free, but fair.

This analysis was prepared by COHA Research Associate Jessie Gaskell.

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