US embassy cable - 05PANAMA2258

UNCLAS SECTION 01 OF 05 PANAMA 002258 
 
SIPDIS 
 
FOR EB/MTA/MST AND FOR WHA/CEN - SCHIFFER 
STATE PASS USTR/G. BLUE 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EFIN, ECONOMIC AFFAIRS 
SUBJECT:  PANAMA - 2006 NATIONAL TRADE ESTIMATE REPORT 
 
1.  TRADE SUMMARY 
 
The U.S. trade surplus with Panama was $1.50 billion in 
2004, a decrease of $43 million from $1.55 billion in 2003. 
U.S. goods exports in 2004 were $1.8 billion, up 1.6 percent 
from the previous year.  Corresponding U.S. imports from 
Panama were $316 million, up 4.8 percent. Panama is 
currently the 48th largest export market for U.S. goods. 
The stock of U.S. foreign direct investment (FDI) in Panama 
in 2003 was $6.5 billion, up from $5.8 billion in 2002. 
U.S. FDI in Panama is concentrated largely in the financial, 
energy, and maritime sectors. 
 
2.  IMPORT POLICIES 
 
a.  Tariffs 
 
Following its accession to the World Trade Organization 
(WTO) in 1997, Panama opened its markets considerably and 
its tariffs ranked among the lowest in Latin America, 
averaging just 8 percent.  However, in September 1999, 
Panama raised selected agricultural tariffs, some of which 
reached the maximum amount allowed under Panama's WTO 
commitments.  For example, Panama retains tariffs of 273% 
for chicken, 63-159% for dairy products, 83% for tomatoes 
and over-quota potatoes, 74% for pork, 55% for rice, 20% on 
sparkling wine and other fermented beverages, and 40% on 
still wines.  In addition, Panama charges a 10 percent tax 
on wine products.   Panama also increased the tariff on 
frozen french fries from 15 percent to 20 percent. 
 
b.  Non-Tariff Measures 
 
In addition to tariffs, all imports into Panama are subject 
to a 5 percent transfer (or ITBM) tax levied on the CIF 
value, and other handling charges.  Pharmaceuticals, foods, 
and school supplies are exempt from the transfer tax. 
Currently, Panama does not require import licenses on 
manufactured goods in the country, provided the 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 
negotiating a free trade agreement (FTA).  Negotiations 
proceeded through eight rounds, the most recent of which 
concluded in February 2005.  As of late 2005, U.S. and 
Panamanian negotiators continued to discuss possible ways 
forward to successfully conclude an FTA.  A bilateral FTA 
with Panama would be a natural extension of an already 
largely open trade and investment relationship.  Panama is 
unique in Latin America, but like the United States, in that 
it is predominantly a services-based economy, as services 
represent about 80% of Panama's GDP.  Following passage of 
the U.S. FTA with Central America  and the Dominican 
Republic (CAFTA-DR), and bilateral FTA with Panama could 
further boost momentum for lowering trade and investment 
barriers throughout the region. 
 
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 at times 
in order to protect local producers.  Of particular concern 
has been the lack of procedural transparency by relevant 
Panamanian authorities in deciding whether to issue 
phytosanitary permits. 
 
Panama requires that Panamanian health and agriculture 
officials certify individual U.S. processing plants as a 
precondition for the import of poultry, pork, dairy, and 
beef products. U.S. exporters have assisted Panamanian 
officials in inspecting U.S. plants, and there have been no 
instances of a failed inspection by a U.S. plant. However, 
inspections are often delayed due to budgetary constraints 
and the lack of personnel in the responsible Panamanian 
ministries.  As such, it is the United States' priority to 
obtain Panamanian recognition of the U.S. meat inspection 
system in place of the current plant-by-plant approach. 
This effort is a primary focus of the ongoing FTA 
negotiations. 
 
In December 2003, following detection of the first case of 
bovine spongiform encephalopathy (BSE), or "Mad Cow" disease 
in the U.S., the Panamanian Agriculture Ministry banned 
importation of U.S. beef.  The ban remained in place for 
until March 2005, despite U.S. assurances that BSE-infected 
beef never entered the human food supply.  Shortly after the 
U.S. discovered a second BSE case, the Agriculture Ministry 
reinstated the ban in May 2005.  Following questionable 
reporting requirements imposed on the U.S. Department of 
Agriculture and problematic delays, the Agriculture Ministry 
lifted the ban in October 2005.  The Agriculture Ministry 
acted slowly to resume issuance of import permits for U.S. 
beef.   Before the ban, Panama imported an estimated 12,000 
pounds (5,400 kilograms) of U.S. beef yearly. 
 
Panama's import licensing process is often arbitrary and non- 
transparent, constituting a major impediment for U.S. 
exporters.  For example, Panamanian importers of U.S. 
processed potatoes have had difficulties obtaining import 
permits in 2003 and 2004.  In one instance, arguing that 
U.S. processed potatoes compete directly with domestic fresh 
potatoes, the Panamanian government refused to issue import 
permits for frozen french fries, disrupting the extensive 
quick service restaurant industry within the country. 
 
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 usually straightforward and evenly applied.  There is no 
comprehensive labeling or testing requirement for imports, 
except for food and pharmaceutical products.  U.S. industry 
is seeking a commitment from the Panamanian government to 
provide explicit recognition of Bourbon and Tennessee 
Whiskey as a trademark. 
 
When the United States launched FTA negotiations in 2004, it 
simultaneously initiated a working group on SPS barriers to 
agricultural trade to meet in parallel with the negotiations 
and to work on resolution of SPS issues even 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. 
 
While Panama committed to become a party to the WTO 
Government Procurement Agreement (GPA) at the time of its 
WTO accession, 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 was disappointed by the Government of 
Panama's exclusion of the PCA from its accession offer.  The 
U.S. government is currently addressing the issue of the PCA 
within the context of bilateral FTA negotiations to help 
ensure a strong government procurement package that would 
give U.S. businesses fair opportunities to bid on Panama 
Canal expansion work, should Panamanian voters ultimately 
approve a future referendum on Canal expansion and 
modernization. 
 
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. 
 
Due to 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), which was given to firms producing certain non- 
traditional exports, by the end of 2001. However, 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 extended this waiver until December 2005, 
allowing 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, however, become stricter in 
defining national value added, in an attempt to reduce the 
amount of credit claimed by exporters. 
 
In addition, a number of export industries, such as shrimp 
farming and tourism, are exempt 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), designed to replace the CATs when they end, 
was enacted by the former Moscoso administration in February 
2004.  Panamanian authorities maintain that the CFI will be 
consistent with Panama's WTO obligations. 
 
The Tourism Law of 1994 (Law 8) allows a 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 
 
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.  The creation of specialized prosecutors for 
intellectual property-related cases has strengthened the 
protection and enforcement of intellectual property rights 
(IPR) in Panama.  However, given Panama's role as a 
transshipment point, industry is concerned Panama will 
become susceptible to trading in pirated and counterfeit 
goods. 
 
a.  Copyrights 
 
Though Panama's 1994 copyright law modernized copyright 
protection and its 2004 update incorporated a special 
Copyright Office with anti-piracy enforcement powers, piracy 
remains a significant problem. 
 
The government of Panama is a 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 enhance border measures and establish new 
punishable offenses, such as for Internet-based copyright 
violations. 
 
Though industry welcomes both the effective police and legal 
action, which have significantly reduced the rate of VHS 
piracy, internet piracy is quickly emerging in Panama.  Both 
hard goods sales and films in theatrical release are often 
downloaded, reproduced on optical discs, and then 
distributed by street vendors.  Despite ongoing 
investigations to detect laboratory facilities, the legal 
framework guiding internet use in the country remains 
incomplete.  The United States is working with Panama 
through the current FTA negotiations to establish a legal 
regime to combat piracy of audiovisual products over the 
Internet, including notice and take down provisions and 
clearly defined ISP liabilities as well as temporary copy 
protection, protection of technological protection measures, 
and protection against Electronic Rights Management 
Information removal/alteration. 
 
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. 
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 
bolstered its reputation as an international trading, 
banking, maritime, and services center. 
 
However, under the constitution, retail activity is reserved 
to Panamanians-an issue that the U.S. government seeks to 
address within the context of FTA negotiations.  On a 
variety of investment issues, the Panamanian government was, 
until recently, often unresponsive to concerns raised by 
U.S. investors.  For example, a few firms that are closely 
regulated by, or hold concessions from the Government of 
Panama, in the past 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.  This advanced the resolution of a number of 
investment disputes and helped open the way for the start of 
bilateral FTA negotiations. 
 
The U.S.-Panama Bilateral Investment Treaty (BIT) entered 
into force in 1991 (with additional amendments in 2001). 
With some exceptions, the BIT ensures that U.S. investors 
receive fair, equitable and non-discriminatory treatment and 
that both Parties abide by international law standards such 
as for expropriation and compensation and free transfers. 
Conclusion of a bilateral FTA would suspend the availability 
of both investor-state and state-state dispute settlement 
under the BIT and replace it with investor-state and state- 
state dispute settlement under the FTA, except with regard 
to a dispute arising from an investment agreement and for 
existing investors for a ten-year period. 
 
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.  For a period of ten 
years, investors will not suffer any deterioration of the 
conditions prevailing at the time the investment was made. 
 
 
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 between 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.  In addition, in August 2004 
partial regulations to the 2001 law were issued to 
facilitate the registration of certification organizations. 
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.  Amid persistent 
allegations of corruption in the government, particularly in 
the judiciary, the Torrijos administration committed itself 
to combating corruption as part of its overall agenda of 
institutional reform. 
 
EATON