US embassy cable - 04PANAMA3009

UNCLAS SECTION 01 OF 04 PANAMA 003009 
 
SIPDIS 
 
 
FOR EB/MTA/MST AND USTR/G. BLUE 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, ECONOMIC AFFAIRS 
SUBJECT:  PANAMA - 2005 NATIONAL TRADE ESTIMATE REPORT 
 
 
1.  TRADE SUMMARY 
 
 
The U.S. trade surplus with Panama was $1.5 billion in 2003, 
an increase of $443 million from $1.1 billion in 2002.  U.S. 
goods exports in 2003 were $1.8 billion, an increase of 31 
percent from the previous year.  Corresponding U.S. imports 
from Panama were $301 million, roughly unchanged from 2002. 
Panama is currently the United States' 42nd largest export 
market for U.S. goods. 
 
 
The stock of U.S. foreign direct investment (FDI) in Panama 
in 2002 amounted to $20.0 billion, down from 20.5 percent 
from 2001. 
 
 
Updated trade data to be filled in by Washington agencies 
for consistency purposes. 
 
 
2.  IMPORT POLICIES 
 
 
a.  Tariffs 
 
 
Following its accession to the World Trade Organization 
(WTO) in 1997, Panama's import policies opened considerably 
and its tariffs ranked among the lowest in Latin America. 
Panama's average tariff remains low, averaging just 8 
percent.  However, in September 1999, Panama did raise 
selected agricultural tariffs, some of which reached the 
maximum amount allowed under Panama's WTO commitments. 
 
 
b.  Non-Tariff Measures 
 
 
In addition to tariffs, all imports into Panama are subject 
to a 5% transfer (or ITBM) tax levied on the CIF value, and 
other handling charges.  Pharmaceuticals, foods, and school 
supplies enjoy an exemption from the transfer tax. 
Currently, no import licenses are required in the country, 
provided the intending importing entity holds a commercial 
or industrial license to operate in Panama. 
 
 
c.  Free Trade Negotiations 
 
 
In April 2004, the United States and Panama began free trade 
negotiations.  A free trade agreement (FTA) with Panama 
would extend the list of countries in the Americas with 
which the United States has completed free trade agreements 
to include all of North and Central America except Belize, 
which is a member of the Carribbean Community (CARICOM).  In 
conjunction with these and a planned free trade agreement 
with the Andean countries Colombia, Peru, Ecuador, and 
Bolivia, the negotiation with Panama will complement the 
goal of completing a Free Trade Area of the Americas (FTAA). 
Negotiations with Panama will increase momentum toward 
lowering trade barriers and set a positive example for other 
small economies in the Western Hemisphere. 
 
 
3.  STANDARDS, TESTING, LABELING, AND CERTIFICATION 
 
 
With certain exceptions, Panama's application of standards 
and certification requirements generally conforms to WTO 
standards. However, restrictions have been applied from time 
to time in response to pressure to protect local producers. 
Particularly of concern has been the lack of procedural 
transparency by relevant Panamanian authorities when 
deciding whether to issue or deny phytosanitary permits. 
 
 
Panama requires certification by Panamanian health and 
agriculture officials of individual U.S. processing plants 
as a condition for the import of poultry, pork, dairy, and 
beef products. U.S. exporters have assisted Panamanian 
officials in making inspection visits to U.S. plants. There 
have been no instances of a U.S. plant failing to be 
certified, but inspections have been delayed many times for 
various reasons, including lack of personnel and budgetary 
constraints in the responsible Panamanian ministries.   The 
United States considers it a high priority to obtain 
Panama's system-wide recognition of the U.S. meat inspection 
system, in place of the current plant-by-plant approach. 
This effort is a primary focus during the ongoing FTA 
negotiations. 
 
 
While importers of non-agricultural products must register 
them with the Ministry of Commerce and Industry before 
distribution or sale in Panama, procedures for registration 
are straightforward and evenly applied. There are no 
comprehensive labeling or testing requirements for imports, 
except for food and pharmaceutical products. 
 
 
When the United States launched FTA negotiations in 2004, it 
simultaneously initiated an active working group dialogue on 
SPS barriers to agricultural trade that meets alongside the 
negotiations and will also continue to meet and work on 
resolution of SPS issues after the negotiations conclude. 
 
 
4.  GOVERNMENT PROCUREMENT 
 
 
Panama's government procurement regime is governed by Law 56 
and managed by the Ministry of Economy and Finance (MEF). 
The law provides for a transparent bidding process for 
government contracts, but allows for exceptions, such as 
procurements for national defense.  The Panamanian 
Government has generally handled bids in a transparent 
manner, although occasionally U.S. companies have complained 
of mishandling of certain procedures. However, formal 
complaints have not been pursued, usually because of 
interest in other business, fear of reprisals, and lack of 
confidence in the appeals process.  While Panama make a 
commitment at the time of its WTO accession, to become a 
party to the WTO Government Procurement Agreement (GPA), its 
efforts to accede to the GPA have stalled.  Although the 
Panama Canal Authority (PCA) has generally followed 
transparent and fair bidding processes, the United States 
has been particularly disappointed by the Government of 
Panama's failure to include the PCA in its accession offer. 
The U.S. government is addressing the issue of the PCA 
within the context of bilateral free trade agreement 
negotiations. 
 
 
5.  EXPORT SUBSIDIES 
 
 
Panamanian law allows any company to import raw materials or 
semi-processed goods at a duty of three percent for domestic 
consumption or processing, or duty free for export 
production, except for sensitive agricultural products, such 
as rice, dairy, pork, and tomato products.  Companies not 
already receiving benefits under the Special Incentives Law 
of 1986 are allowed a tax deduction of up to 10 percent of 
their profits from export operations through 2005. 
 
 
Because of its WTO obligations, Panama revised its export 
subsidy policies in 1997-98. The government originally had 
stated its intention to phase out its Tax Credit Certificate 
(CAT), given to firms producing certain non-traditional 
exports, by the end of 2001. But during the WTO Ministerial 
Conference in November 2001, the Government of Panama asked 
for and received an extension for the use of CATs.  The WTO 
further extended the period of this waiver to December 2006 
for multiple developing countries, including Panama.  The 
policy allows exporters to receive CATs equal to 15 percent 
of the export's national value added. The certificates are 
transferable and may be used to pay tax obligations to the 
government, or they can be sold in secondary markets at a 
discount. The government has become stricter in defining 
national value added, attempting to reduce the amount of 
credit claimed by exporters. 
 
 
A number of industries that produce exclusively for export, 
such as shrimp farming and tourism, are exempted from paying 
certain types of taxes and import duties. The Government of 
Panama established this policy to attract foreign 
investment, especially in economically depressed regions, 
such as the city of Colon. Companies that profit from these 
exemptions are not eligible to receive CATs for their 
exports. 
 
 
A new domestic subsidy called the Certificate to Foment 
Industry (CFI), which would replace the CATs when that 
program ends, was signed into law by former President Mireya 
Moscoso on February 4, 2004.  Panamanian authorities have 
stated that the CFI will be consistent with Panama's WTO 
obligations. 
 
 
The Tourism Law of 1994 (Law 8) allows deduction from 
taxable income of 50 percent of any amount invested by 
Panamanian citizens in tourism development. 
 
 
Law 25 of 1996 provides for the development of "export 
processing zones" (EPZ's) as part of an effort to broaden 
the Panamanian manufacturing sector while promoting 
investment, particularly in former U.S. military bases. 
Companies operating in these zones may import inputs duty- 
free if products assembled in the zones are to be exported. 
The government also provides other tax incentives to EPZ 
companies. 
 
 
6.  INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
 
 
Protection of intellectual property rights (IPR) in Panama 
has improved significantly in recent years.  Specialized 
prosecutors have been created for intellectual property- 
related cases.  Intellectual property policy and practice in 
Panama is the responsibility of an Inter-institutional 
Committee. This committee consists of representatives from 
six government agencies and operates under the leadership of 
the Vice-Minister of Foreign Trade. It coordinates 
enforcement actions and develops strategies to improve 
compliance with the law. In 2000, the Government of Panama 
issued a decree mandating that all computer systems used by 
government entities be legal and licensed. 
 
 
a.  Copyrights 
 
 
Panama's 1994 copyright law modernized copyright protection 
in Panama, providing for payment of royalties, facilitating 
the prosecution of copyright violators, protecting computer 
software, and making copyright infringement a felony. 
Although the lead prosecutor for IPR cases in the Attorney 
General's Office has taken a vigorous enforcement stance 
against piracy and counterfeiting, the Copyright Office 
remains small and ineffective, and Panama's judicial system 
has not provided speedy and effective remedies in civil and 
criminal piracy cases brought under the law.  Given Panama's 
role as a transshipment point, Panama is susceptible to 
trading in pirated and counterfeit goods. 
 
 
The government of Panama is signatory to the WIPO Copyright 
Treaty and the WIPO Performances and Phonographs Treaty, but 
the Copyright Office has been slow to draft and implement 
further improvements to the Copyright Law.  Nevertheless, 
the office has proposed to establish new offenses, such as 
for Internet-based copyright violations, and to enhance 
border measures.  It has already raised the penalties for 
infractions.  Legislation drafted with technical assistance 
from SIECA (the Central American Economic Integration 
System) has not yet become law. 
 
 
b.  Patents 
 
 
Panama's 1996 Industrial Property Law provides a term of 20 
years of patent protection from the date of filing. 
However, pharmaceutical patents are granted for only 15 
years and can be renewed for an additional ten years, if the 
patent owner licenses a national company (minimum of 30 
percent Panamanian ownership) to exploit the patent.  The 
Industrial Property Law provides specific protection for 
trade secrets. 
 
 
c.  Trademarks 
 
 
Law 35 provides trademark protection, simplifies the process 
of registering trademarks and allows for renewal of a 
trademark for ten-year periods. The law's most important 
feature is the granting of ex-officio authority to 
government agencies to conduct investigations and to seize 
materials suspected of being counterfeited. Decrees 123 of 
November 1996 and 79 of August 1997 specify the procedures 
to be followed by Customs and Colon Free Zone (CFZ) 
officials in conducting investigations and confiscating 
merchandise. In 1997, the Customs Directorate created a 
special office for IPR enforcement, followed by a similar 
office created by the CFZ in 1998. The Trademark 
Registration Office has undertaken significant modernization 
with a searchable computerized database of registered 
trademarks that is open to the public. 
 
 
7.  SERVICES BARRIERS 
 
 
In general, Panama maintains an open regulatory environment 
for services. For some professions, such as insurance 
brokers, customs brokerage, freight forwarding, architects, 
engineers, medical doctors, lawyers, and psychologists, 
Panama requires that individuals hold a Panamanian technical 
license. 
 
 
8.  INVESTMENT BARRIERS 
 
 
Panama maintains an open investment regime and is receptive 
to foreign investment. Over the years the country has 
focused its efforts on bolstering its reputation as an 
international trading, banking, maritime, and services 
center.  However, retail activity is reserved to 
Panamanians.  The U.S. government is addressing the issue of 
the retail sector within the context of bilateral free trade 
agreement negotiations.  Until recently, the Panamanian 
government was unresponsive to several foreign investors. 
For example, a few firms that are closely regulated by, or 
hold concessions from the Government of Panama, encountered 
a lack of cooperation from certain officials and abrupt 
changes related to terms of various concessions or 
contracts.  In 2003, the Government of Panama addressed 
these problems constructively by re-opening discussions with 
the U.S. Government under the rubric of the Ad Hoc 
Investment Commission, which had been used successfully in 
the past to resolve concerns of U.S. investors.  The 
resolution of a number of these disputes during the past two 
years helped make possible the November 2003 announcement 
that both countries plan to move forward with bilateral 
negotiations for a free trade agreement in 2004. 
 
 
In accordance with the terms of the U.S.-Panama Bilateral 
Investment Treaty, Panama places no restrictions on the 
nationality of senior management. Panama does restrict 
foreign nationals to 10 percent of the blue-collar work 
force, however, and specialized or technical foreign workers 
may number no more than 15 percent of all employees in a 
business. 
 
 
A 1998 investment law aimed to enhance new investment in 
Panama by guaranteeing that investors will have no 
restrictions on capital and dividend repatriation, foreign 
exchange use and disposal of production inside a limited 
number of sectors in the economy. The spirit of the law is 
that for ten years, investors will not suffer any 
deterioration of the conditions prevailing at the time the 
investment was made. The guarantees are related to new laws 
that may be enacted in the future affecting fiscal, customs, 
and labor regimes. 
 
 
 
 
9.  ELECTRONIC COMMERCE 
 
 
In mid-2001, Panama became the first country in Central 
America to adopt a law specific to electronic commerce. The 
law was a collaborative effort of the public and private 
sectors, resulting from several months of detailed 
discussions and broad consultations. Panama's electronic 
commerce law has several important features:  it gives legal 
force to any transaction or contract completed 
electronically; it creates the National Directorate of 
Electronic Commerce to oversee the enforcement of the law; 
and it defines certification organizations and establishes a 
voluntary registration regime.  A regulatory framework was 
established in August 2004.  The law is expected to have a 
favorable impact on many sectors of Panama's services 
dominated economy, particularly the maritime sector. 
 
 
10.  OTHER BARRIERS 
 
 
Corruption 
 
 
The judicial system can pose a problem for investors due to 
poorly trained personnel, huge case backlogs and a lack of 
independence from political influence.  In addition, 
allegations of corruption persist, not only in the judicial 
system, but also possibly in government procurement and at 
the municipal level.