Caribbean & Central America - May 2011 (ISSN 1741-4458)

Panama’s pro-business President Ricardo Martinelli looks set to achieve what he previously described as his “foreign policy priority”. On 19 April, nearly four years after Panama and the US first inked a bilateral Free Trade Agreement (FTA), US Trade Representative Ron Kirk confirmed that Panama had overcome the last “hurdle” and the deal would be sent to the US Congress for its ratification. The announcement provided the backdrop to Martinelli’s first ever official meeting with US President Barack Obama. It comes at a critical point for Martinelli given growing US concern, expressed in US embassy cables released by WikiLeaks, regarding his perceived autocratic tendencies and the suspicion of corruption in his government [RC-11-04].

Security was also discussed during the brief (35 minute) Martinelli-Obama meeting in Washington on 28 April, largely within the context of the US’s interest in assisting Central America on a regional basis to combat crime. However, the main topic was trade. Accompanied by praise for Martinelli’s “leadership” and an allusion to the importance of “showcase[ing]… commitments to democracy”, Obama’s pledge of support for the FTA echoed Kirk’s announcement which had followed the entry into effect (on 18 April) of a bilateral Tax Exchange Information Agreement (TIEA). The TIEA, which allows both countries to request information on all types of national taxes in civil criminal matters, was part of more general efforts by Martinelli to address tax transparency, which had hitherto proved a major stumbling block. Other examples of these efforts include the negotiation of 10 double taxation accords with other countries in order to get Panama off the Organization for Economic Co-operation and Development’s ‘grey list’ (for which 12 such deals are necessary).

In addition to US concerns about labour rights (which Martinelli addressed with recent legislation), the FTA had stalled under the previous Partido Revolucionario Democrático (PRD) government (2004-2009) over US objections to the PRD congress leader, Pedro Miguel González, who the US want prosecuted for the murder of a US sergeant (although this was resolved in 2008 when González declined to stand for a further term). Having also encountered a set-back with the expansion of the Democrat presence in the US House of Representatives following the 2008 election, the trade deal received fresh impetus in January 2011 after the Republicans assumed control of the lower house, following the 2010 mid-term elections.

Beneficiaries
The promise of the FTA is a boost for Martinelli’s efforts to dismantle Panama’s traditional tax haven image. With US foreign direct investment (FDI) in Panama totalling US$7.8bn in 2009, up 26% on 2008 and almost equivalent to the entire US$8bn for the other five Central American countries put together, the prospect of further investment is also particularly welcomed by the President given his huge US$13.5bn five-year infrastructure plan for 2010-2015. The plan, following the completion of the US$5.2bn Canal expansion project, seeks to turn Panama into the “Hub of the Americas”. Local organizations such as the influential trade union group, Frenadeso, complain that in trade terms the US is the main beneficiary, as many of Panama's exports have long entered the US duty-free under trade preference programs. Examples include the Caribbean Basin Initiative, under which more than 99% of Panama’s agricultural exports enter the US market duty-free. US industrial goods, however, face an average tariff of 7% with some as high as 81%, while US agricultural goods face an average tariff of 15%, with some as high as 260%. The FTA allows over 87% of US exports of consumer and industrial products to immediately enter Panama duty-free, with the remaining tariffs to be phased out over 10 years. Nearly 56% of agricultural exports will receive immediate duty-free treatment, with most of the remaining tariffs to be scrapped within 15 years. In 2010, the US ran a US$5.7bn trade surplus with Panama, exporting almost US$6.1bn in goods and importing US$379m.

• Deteriorating business climate

As well as challenging Obama’s praise of Martinelli’s commitment to ‘democracy’, US embassy cables released by WikiLeaks reveal US reservations about the business climate in Panama. One, dated 10 February 2010, said that the “Investment Climate for American firms has deteriorated since the Martinelli Administration took office”. “Events” cited include “GOP” procurement of “approximately $100 million through sole-source contracts between July 1 and September 25, 2009 under emergency licitation procedures” and the passage of a “law that eliminates contract concession changes by reverting contracts back to the original non-amended concession if the company harmed the people of Panama; thereby eliminating years of business predictability to contract holders”.