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Wednesday, May 18, 2011

The Proposed U.S.-Panama Free Trade Agreement

J. F. Hornbeck
Specialist in International Trade and Finance

On June 28, 2007, 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, investment, 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 10-year period. Over 50% of U.S. farm 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 are being considered by the 112
th Congress. The 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 most exports already enter the United States duty free, so although particular industries could 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 changes based on the bipartisan agreement of May 10, 2007 crafted by the Bush Administration and leadership in the 110
th Congress. These include adoption of enforceable labor standards, compulsory membership in multilateral environmental agreements, and an easing of restrictions on developing country access to generic drugs, provisions that go beyond those in existing bilateral FTAs and multilateral trade rules. Two other concerns raised in Congress were recently addressed: labor and tax transparency. All labor concerns but one were addressed with enactment of two laws in April 2011. The minimum workers needed to form a union has not been addressed for the lack of support even among Panamanian labor groups. Panama also enacted legislation implementing the U.S.-Panama Tax Information and Exchange Agreement (TIEA), which provides greater tax transparency in support of curbing illicit financial transactions associated with money laundering activities. The Obama Administration has signaled its willingness to begin technical discussions on drafting an implementing bill. It remains to be seen if these final changes will be sufficient for the FTA to be approved by a majority in the U.S. 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: May 3, 2011
Number of Pages: 36
Order Number: RL32540
Price: $29.95

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