Free Trade With Panama: Some Winners

Free Trade With Panama: Some Winners And Some Losers

-Will the pact work for the average Panamanian and what’s in it for the elite and U.S. Agro-Industry

Last Thursday the Senate Finance Committee convened in order to address a number of controversial issues that have sprung up regarding the pending U.S. free trade agreement (FTA) with Panama. Following the hearing, U.S. Trade Representative for Western Hemisphere Affairs Everett Eissenstat announced that President Obama would consult with U.S. lawmakers before sending the controversial FTA to Congress for approval. Eissenstat added that the “agreement has the potential to be a good deal for the United States.”

In early March, the Office of the U.S. Trade Representative (USTR) issued a statement of intent, indicating that it would move on the pending Panama Free Trade Agreement “relatively quickly.” However, a number of road blocks, including strong U.S. labor opposition and concerns over Panama’s classification as a tax haven, are currently holding up the FTA’s ratification in the U.S. Congress.

The Free Trade Agreement, which has been re-branded as a “Trade Promotion Agreement (TPC),” in order to distance itself from the controversy surrounding other FTAs, was signed by the Bush administration on June 28, 2007. The accord was passed by Panama’s assembly the following month, in what some have called a rushed and non-transparent process. Critics attacked the legislation on grounds that no Spanish version of the agreement had been made available, and that members of civil society who were known to be opposed to the pact were not given adequate time to review and comment on the text. The opposition within Panama has been made up of a mixed bag of labor unions, farmer groups, leftist politicians and progressive church voices, who, according to one Panamanian reporter, developed their own meaning for the acronym TPC: “Todo Panama Colonizado” (All of Panama Colonized).

Nevertheless, both the Torrijos government and now the president-elect of Panama, Ricardo Martinelli, have been pushing hard to get the agreement ratified before those who oppose the trade pact on human rights grounds are able to block its passage on the Hill. Torrijos has expressed his desire to see the accord passed before he leaves office on July 1. While some trade specialists are convinced that the U.S.-Panama FTA will pass the U.S. Congress, a number of highly regarded analysts think to the contrary. According to Eric Jackson of Panama News, “I would expect this treaty to die, but I also expect talks about a new proposal to eventually take place between the Obama and Martinelli administrations. Those would not be easy negotiations.”

The Panamanian government has insisted that none of the issues holding up the FTA in Congress are, in its eyes, legitimate concerns. Talking with Reuters, Martinelli’s top economic advisor Frank de Lima claimed that the “perception that Panama is a tax haven is totally false.” He went on to assert that Panama respects labor rights and collective bargaining. However, a growing body of evidence increasingly points to the contrary.

Panama’s Phantom Economy
For decades, Panama has adjusted its laws and regulations in order to ensure that its ‘business climate’ is one of the most competitive in the world. On the other hand, critics maintain that such regulation offers a number of opportunities for foreign companies interested in dodging fair taxes, exploiting malleable labor regulations, and taking advantage of shrouded financial transparency. Panama’s level of Foreign Direct Investment (FDI) has skyrocketed since legislation was passed in 1992 which established “Export Processing Zones (EPZs)” in a number of locations across the country. Companies from all over the world are welcome to establish factories in these zones for “light manufacturing, assembly, high technology, and specialized and general services.” Companies operating there are exempt from all taxation on imports and exports, sales tax, and imports on capital and assets. In addition, EPZs are free from all restrictive national labor and immigration standards. Instead, they are allowed to operate under provisions which are “more favorable [to foreign companies] than the current Panamanian Labor Code.”

Since Public Citizen released a report in April 2009 highlighting the country’s banking secrecy rules and lax financial regulations, there has been much circulation in the media concerning Panama’s status as a top tax haven. All foreign corporations conducting business in Panama are exempt from national taxes, making the country a “100 percent tax haven,” according to the report. It comes as no surprise that over 350,000 foreign-registered companies nominally operate from Panama, and $25 billion of U.S. investment already has been sunk into the country, according to the U.S. State Department.

In addition to tax incentives, Panamanian law also makes it easy for multinational corporations to “cook the books.” According to the Public Citizen report, “Panama has one of the world’s most restrictive information exchange regimes,” which allows the country to withhold information even within the framework of a criminal investigation. Moreover, extremely strict slander laws known as “Calumnia Y Injuria” rules can be used to arrest journalists for reporting facts and figures, if they do not reflect well on business interests. This lack of transparency, coupled with a lenient regulatory system governing the country’s banking and financial sectors, enables corporations to “conceal their financial losses and engage in off-balance sheet activities.” Evidence also links Panama’s Colón Free Zone (CFZ) with trafficking of narcotics and other illicit substances, in addition to off-shore activities carried on by foreign corporations. Panama’s CFZ, which is the second largest free trade zone in the world, provides a centrally located “transit area for drugs and related money laundering,” activities moving up through Mexico to its northern border, according to the International Monetary Fund.

The illicit matters have grown even more controversial since the G-20’s recent conference decided to crack down on tax havens and step up financial regulation as key steps toward global financial recovery. Various U.S. government bodies estimate that closing global tax havens would save U.S. taxpayers between $210 Billion and $1 Trillion over the next decade.

A free trade agreement with Panama, argues Public Citizen, would actually hinder efforts on the part of the US government to crack down on tax evasion and money laundering in Panama. The proposed FTA contains provisions that forbid cross-border regulations on financial transactions between the U.S. and Panama, and would provide subsidiaries operating in Panama enhanced “investor rights,” enabling them to challenge any attempt by the U.S. government to monitor or limit financial transactions. In the words of Lori Wallach, director of Global Trade Watch: “Members of Congress wouldn’t vote to let AIG not pay its taxes or to give Mexican drug lords a safe place to hide their proceeds from selling drugs to our kids, but that’s in essence what the Panama FTA does.”

Bad News for Labor
According to U.S. Trade Representative Ron Kirk, who has been straining to get safe passage for the Panama trade measure during his short time in this position, Panama has made “very good progress” on labor issues hindering U.S. approval of a free trade agreement. Kirk and others point to the fact that the agreement incorporates the policies of the “New Trade Policy for the Americas (TPA).” This provision contains the same labor and environmental protections which were added to the recently enacted US-Peru FTA. However, in Peru such punative protections failed to guard labor or the environment from being scaled back and hassled as result of its FTA being enacted. Additionally, the U.S. Labor Advisory Committee stated in its report that the labor stipulations in the Panama FTA “will not protect the fundamental human rights of workers in either country.” Although the FTA makes reference to the UN International Labor Organization’s Fundamental Principles and Rights at Work Declaration, it contains no provisions that would force the signatories to strictly implement the UN’s labor standards. Further, the agreement does not prevent Panama from “weakening or reducing the protections afforded in domestic labor laws” in any future effort it may make to “encourage trade or investment.”

The U.S.-Panama FTA contains only one enforceable labor provision: a requirement for the government to adhere to its own labor laws. Unfortunately, there is a significant canard involved in this language. Panama’s labor track record is not entirely clean; in August 2007 two construction union members were assassinated while demonstrating for worker rights. Furthermore, if existing labor laws are broken, the FTA’s “dispute settlement system,” set in place to uphold these standards, serves as little more than window-dressing. The maximum government fine is capped at $15 million, which amounts to about one-tenth of one percent of total US-Panama trade in 2006. Additionally, these funds, in the unlikely circumstance that they ever will be collected, are paid a “joint commission to improve labor rights enforcement,” which in turn could be easily funneled back into Panamanian government’s coffers.

Given that the Panamanian labor code does not even apply in Export Processing Zones, and in conjunction with the fact that approximately two-thirds of Panamanian workers operate in the informal economy, the remedial power of any labor provisions that might be included in the agreement would be severely limited. This FTA will ultimately exonerate the signatories from meeting an acceptable human rights standard.

Agriculture Markets and Rural Poverty
In addition to labor and tax issues, the FTA will inevitably have the effect of slowly eroding the protections that Panama has worked to maintain in its most vulnerable economic sectors. Due to a number of existing regional trade agreements, Panamanian products already enter the United States duty free. The pending FTA, according to the State Department’s Charles S. Shapiro, would simply “reduce [Panama’s] tariffs on products imported from the United States.” Aware of the dangers associated with the FTA’s role in opening the country up to the behemoth U.S. economy, Panama’s negotiators were able to reserve some protections for the country’s developing sectors, specifically agriculture. This relatively young sector not only employs 17% of the country’s labor force, but also supports 40% of the country’s rural population, according to the US Congressional Research Service. Thus, the Panamanian government has argued that opening the country’s markets to U.S. agricultural goods, which are subsidized by the government and produced on a much greater scale than its more protective partner, would be “highly detrimental to the social structure of the rural economy, leading to increased unemployment, poverty, and urban migration.”

Despite the fact that “agriculture was one of the most sensitive issues for Panama,” its officials failed to reach lasting and effective compromises in order to protect their markets from U.S. incursion. The FTA immediately eliminates tariffs on over 60 percent of U.S. agricultural exports to Panama, with most remaining tariffs to be gradually eliminated over a period of 15 years or less. Two key products: locally-grown rice (which currently supplies over 90% of Panama’s domestic demand) and sugar (which presently accounts for a third of Panama’s agricultural exports, as well as 41percent of its agricultural exports to the United States), will retain limited protections in the short-term. However, as tariffs are slowly lifted over a fixed period of years, Panama could lose the “relatively high wage rates” that it currently enjoys in these sectors.

According to the congressional report, this phase-out period would “buy time for Panama to develop its nontraditional export crops, such as melons, palm oil, and pineapples, which some view as the future of this sector.” Unfortunately, these are precisely the crops that the rest of Central America already exports to the U.S. at bottom-barrel prices. Thus, Panama, under this new regime, would be forced to join the regional ‘race to the bottom’ in order to ensure competitive prices for its products on the global market. The impact on Panama’s rural poor could be debilitating. In addition, Panama’s already spotty social safety net stands to suffer as the global economic partnership involving Panama develops. In a bid to attract foreign investment, President-elect Martinelli has committed his government to “massive infrastructure spending in partnership with foreign investors,” according to Reuters. This spending is not likely to benefit the approximately one third of Panama’s population currently living below the poverty line in the country’s rural areas. Already, very little public spending is allocated to this demographic. The World Bank has identified sharp geographical inequities in health care and education spending, which disproportionately benefits the urban upper and middle classes far more than the rural poor and indigenous populations. This trend will likely worsen with a free trade agreement that opens Panama’s agriculture markets to fierce competition and commits further government revenue to the country’s urban commercial centers.

In short, the U.S.-Panama free trade agreement inevitably will be a bonanza for big business. It would contribute to the elimination of many inconvenient hurdles that cut down on corporate profits, such as labor regulations, taxes, and fair-minded market signposts. A far larger portion of the population could lose out under the FTA including those who benefit from these protections, such as workers in both countries, poverty-stricken Panamanian farmers, and the American taxpayer. As a battle between corporate interests and civil society ensues in the U.S. Congress, a parallel struggle to sway public opinion is taking place in the media. However, whichever way the decision falls, a lasting solution to global economic ills is unlikely without a fundamental shift in the way the United States conducts its business in developing countries.

This analysis was prepared by Research Fellow Mary Tharin

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