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Free Trade With Panama: Some Winners And
Some Losers
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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