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Panama FTA Queuing Patiently for U.S. Signature – At What Cost?

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Written by Oscar Montealegre, Contributor

In his 2010 State of the Union address, President Obama made a bold commitment of doubling U.S. exports by 2015. Flash forward 18 months, and politicians from both parties have failed in achieving a consensus towards ratifying the already negotiated Free Trade Agreements (FTA) with Colombia, South Korea and Panama, lessening the realization of President Obama’s’ pledge. Perhaps the problem is not in the details of the agreements, but failure of presentation, or if you may, selling the FTA’s better to Congress and the American public.

The FTA’s challenge is trumping the following legitimate argument: Jobs and manufacturing in the U.S. have withered due to job outsourcing and importing low priced goods, undoubtedly, a possible consequence of free trade (depending on the country the FTA is negotiated with). In addition, labor groups and a cache of politicians have focused on improving the counter party’s human and labor rights record. The latter point is valid, but it masks the real benefit of free trade, a needed jolt in improving the U.S. economy in the local, state, and federal sphere, by way of capturing new markets. Bundled together, implementation of the Free Trade Agreements of all three countries can bring in an estimated $13 billion to the U.S. economy.

Why the hold up? The concerns Congress has manifested over Colombia revolves around human rights and union safety issues. Regarding South Korea, apprehensions exist over auto and beef imports. In Panama’s case, the FTA has fewer hurdles to overcome compared to Colombia and South Korea. The issues that hinder(ed) the U.S.-Panama FTA are Panama’s lack of tax transparency and unregulated illicit financial transactions. Panama has addressed the issues by agreeing to the Tax Information and Exchange Agreement (TIEA), essentially providing greater tax transparency and curbing illegal financial transaction. So the question can be slightly altered, why the hold up with Panama?

By Latin American standards, Panama trades very little with the United States. As mentioned in prior articles, Latin America – including Panama – is experiencing unprecedented economic growth; subsequently, it would be in the United States’ best interest to re-solidify its relationship with Latin American countries: economically first, then politically. An easy start to a “reset” of relationships with Latin American countries would be to finalize the FTA with Panama first, which would benefit the U.S. economically, and Panama would gain from it by being furnished more political clout in international affairs.

From 2005 to 2010, Panama’s economy has expanded by more than 8 percent per year, owning the fastest rate in the Americas. The IMF has projected that Panama in the next five years is expected to grow more than 6% per year. By purchasing power standards – the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy – the small Central American country can boast being one of the five richest countries in mainland Latin America. Accelerating Panama’s growth and economic projections is the $5.3 billion expansion of the Panama Canal, set to be completed by 2014. The expansion allows access to bigger ships, and increases the amount of ships it can service per day, meaning more revenues. Also, it will be a generator of new jobs and continuous infrastructure projects, which the government claims will reduce poverty by 30 percent. A hopeful promise indeed, especially because of Panama’s main domestic concern is income inequality, dreadfully among the worst in the Western Hemisphere.

Most imports from Panama enter the U.S duty free (the same scenario applies to Colombia as well); therefore, a general statement can be assessed that an FTA with Panama (as well as Colombia) will not dramatically affect the U.S. economy. On paper, it seems that the FTA with Panama can boost U.S. exports in certain industries, especially in agriculture. The main farm exports to Panama are corn, wheat, rice, soybean meal, and horticultural products. Currently, roughly 40 percent of agricultural exports enter the Panamanian market duty free. If the FTA would be implemented, over 50 percent of farm exports would gain duty free status, increasing market share and business for U.S. companies. On the flip side, almost 99 percent of Panamanian agricultural exports enter the U.S. market duty free. Clearly, when it pertains to agricultural exports, the tide is in favor of Panama. The FTA would remedy this discrepancy of tariff restrictions, making U.S. agricultural products more competitive, boosting profits, productivity, and ideally, providing more jobs.

Also, some states are already directly trading with Panama. California traded in 2009 $230 million worth of goods. Mississippi trades a surprising $419 million; New Jersey trades $103 million; and Alabama trades $28 million. With an FTA enacted, it would give these states and many other certain competitive advantages that translate to higher dollar amounts of goods and services traded, ultimately assisting certain states, like California, in remedying their unemployment malaise.

Free Trade should not be lead by politics, or politicians; it should be debated whether it makes sense for business. When NAFTA was debated, many voted against it, yet many states have experienced a huge gain exporting to Canada and Mexico. Californian leaders were against the FTA with Chile, yet since its inception, California has boosted trade over 275 percent in the last nine years with Chile. In Latin America, amongst all the various U.S. exports, U.S. manufactured goods are the leading exports to the region, rebutting the argument that imports will affect domestic manufacturing. At the risk of sounding biased, free trade is based on new markets opening, thus new unforeseen opportunities, benefitting U.S. workers and manufacturers.

President Obama has persisted that all three FTA include money for the Trade Adjustment Assistance Program (TAA). What this program does is that it allocates funds for Americans that lose their jobs to foreign competition to be retrained and their health insurance to be subsidized while in transition. Senate Minority Leader John Boehner has dismissed this program, arguing that free trades creates enough new jobs, and that the health insurance component is one more vague request that ultimately stalls ratification of the Free Trade Agreements. Somehow, the negative or the uncertain is drowning out the positives. Panama is in need of new transportation infrastructure, real estate, financial services such as banking and insurance, etc., industries attracting many U.S. exporters, but difficult to accomplish success with tariffs put in place, which will not be alleviated unless the FTA is approved. The selling pitch should distance itself from the halls of DC and be constructed in a simpler and direct manner, arguing that free trade is based on new markets opening, thus new unforeseen opportunities, benefitting U.S. workers and manufacturers.

Other countries are taking note of the Panama’s ascension, and positioning themselves in capturing market share while the U.S. lags behind amidst the gears of politics. In 2010, the EU signed an FTA with the Central American region, facilitating increased economic activity and removing tax barriers, with Panama being a major target. Recently Panama penned a Free Trade Agreements with Chile, and just concluded negotiations with our neighbor up north, Canada. Colombia is doing the same, no longer content in waiting or relying on the U.S.’s leadership in ratifying their respective FTA. Panama, Colombia, Brazil, et al, are not straddled with insurmountable sovereign debt and low productivity, rendering more confidence, and as a result the Latin American region is looking elsewhere (i.e. Europe and Asia) to find new markets to trade with. It would be wise for the U.S. Congress or Administration to act soon, or it may find itself instead a step or two behind in the year 2015.