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Monday, January 24, 2011

The Proposed U.S.-Panama Free Trade Agreement

J. F. Hornbeck
Specialist in International Trade and Finance

On June 28, 2007, after two and a half years of negotiation, the United States and Panama signed a reciprocal free trade agreement (FTA). Negotiations were formally concluded on December 16, 2006, with an understanding that further changes to labor, environment, and intellectual property rights (IPR) chapters would be made pursuant to future detailed congressional input. These changes were agreed to in late June 2007, in time for the FTA to be considered under Trade Promotion Authority (TPA) legislation before it expired on July 1, 2007. TPA allows Congress to consider trade implementing bills under expedited procedures. Panama’s legislature approved the FTA 58 to 4 on July 11, 2007. Neither the 110th nor the 111th Congress took up the agreement.

The proposed U.S.-Panama FTA is a comprehensive agreement. Some 88% of U.S. commercial and industrial exports would become duty-free upon implementation, with remaining tariffs phased out over a ten-year period. Over 60% of U.S. farms exports to Panama also would achieve immediate duty-free status, with tariffs and tariff rate quotas (TRQs) on select farm products to be phased out by year 17 of the agreement (year 20 for rice). Panama and the United States signed a separate bilateral agreement on sanitary and phytosanitary (SPS) issues that would recognize U.S. food safety inspection as equivalent to Panamanian standards, which will expedite entry of U.S. meat and poultry exports. The FTA also consummates understandings on telecommunications, services trade, government procurement, investment, and intellectual property rights.

The circumstances framing the proposed U.S.-Panama FTA differ considerably from those of two other signed FTAs that have yet to be considered by Congress. The deep concerns that Congress has expressed over Colombia’s violence have not been an issue in the Panama FTA debate, which is framed more by the positive image of a long-standing strategic bilateral relationship based on Panama’s canal. Nor does Panama compare well with the continuing debate over the proposed FTA with South Korea, which as a major U.S. trading partner, can affect key industries such as automobile and beef production. To the contrary, Panama trades little with the United States, even by Latin American standards, and so although particular industries may be affected to some degree, and U.S. investment is relatively important in Panama, the FTA cannot have a major effect on the U.S. economy as a whole.

The final text of the proposed U.S.-Panama FTA incorporates specific amendments on key issues based on congressional input. The most significant were adoption of enforceable labor standards, compulsory adherence to select multilateral environmental agreements (MEAs), and an easing of restrictions on developing country access to generic drugs. In these cases, the proposed U.S.- Panama FTA goes beyond provisions in existing bilateral FTAs and multilateral trade rules. Two other concerns still linger. The first deals with Panamanian labor statutes, which some members of Congress would like to see amended so that the minimum number of workers required to start a union would be reduced from 40 to 20. Reportedly there is little interest in making this change in Panama, even among labor groups, but Panama is updating the labor code to standardize language nationally, particularly clarifying collective bargaining and right to strike language covering export processing zones. The second issue relates to questions raised over tax transparency issues, which may have been defused by the November 30, 2010 signing of a Tax Information and Exchange Agreement (TIEA) by Panama and the United States. It is unclear, however, if these changes will be sufficient for the FTA to be approved by a majority in Congress.

For more on Panama, see CRS Report RL30981, Panama: Political and Economic Conditions and U.S. Relations, by Mark P. Sullivan. 

Date of Report: January 14, 2011
Number of Pages: 33
Order Number: RL32540
Price: $29.95

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