The case for the Canada- Panama Free Trade Agreement

The case for the Canada- Panama Free Trade Agreement policy brief Abstract In May 2010, Canada signed the Canada-Panama Free Trade Agreement (FTA), its fifth with a Latin American country. The agreement marks an important step in the incremental growth of Canadian trade beyond the U.S. market, and serves as a building block for stronger relations with the region. Currently, although Panama subscribes to World Trade Organization tariff mandates many key Canadian exports face higher rates as some products remain protected. Implementing the FTA would immediately eliminate nearly all tariffs, with the remainder lowered gradually. This competitive advantage will prove important given that Canada s biggest competitor in the Panamanian market is the U.S., whose own bilateral FTA with Panama is stalled. A swift ratification of the trade deal by Parliament would enable Canadian businesses to maintain or increase their competitiveness in this national market and should create opportunities for more exports. Essentials Expanding and diversifying Canada s international trade portfolio is essential for the growth of the Canadian economy as it will reduce heavy dependence on the U.S. market. International trade currently accounts for 60 per cent of Canadian GDP and will become increasingly important as other key contributors labour, productivity and capital face serious constraints. Panama is a stable and flourishing economy with major opportunities for Canadian investment, such as the 5.3 billion Panama Canal expansion project. Rapid ratification of the Canada-Panama FTA would give Canadian companies a competitive edge over their American counterparts, whose government is unlikely to ratify their trade deal with Panama. Contrary to popular belief, Panama is moving toward international co-operation on tax issues, signing a series of Double Taxation Conventions, including with OECD countries. Canadian Foundation for the Americas

!"# ' (%" )* " In May 2010, Canada signed the Canada-Panama Free Trade Agreement (FTA), its fifth with a Latin American country and ninth globally. The agreement marks an important step in the incremental growth of Canadian trade beyond the U.S. market, and serves as a building block for stronger relations with Latin America. The region is a key market for Canada s international trade portfolio: in 2009, 3.05 per cent (10.9 billion) of total Canadian exports were bound for this destination and 8.10 per cent (29.5 billion) of Canada s total imports came from LAC. Currently, although Panama applies an average Most Favoured Nation (MFN) industrial tariff of 6.4 per cent and an average applied agricultural tariff of 13.6 per cent, many key Canadian exports face higher rates because some products remain protected. For example, tariffs on pork products average 47 per cent, while those on frozen potato products stand at 20 per cent, those on motor vehicles are at 15 per cent, and those on aircraft are at 14 per cent. Canada and Panama will eliminate tariffs on 99 per cent of bilateral trade products immediately upon implementation of the FTA. Panama has already ratified the agreement but it has yet to go through Parliament in Canada. The tariffs on the remaining products will be eliminated over a period of 5 to 15 years, with the exception of certain sensitive products such as dairy, poultry and eggs, and certain items containing sugar. Tariff reduction proves important given that Canada s biggest competitor in the Panamanian market is the United States, whose own bilateral FTA with Panama has stalled. A swift ratification of the Canada-Panama FTA would enable Canadian businesses to maintain or increase their competitiveness in this national market and should create opportunities for more exports of machinery, soybeans and aircraft parts, as lower tariffs will give Canadian companies a competitive advantage over American firms. A healthy trading partner for Canada Panama is a politically stable and democratic country with!" #"!" %& relatively low levels of violence and insecurity. It stands committed to protecting the environment and human rights, and has strong institutions and tremendous commercial potential given its strategic geographical location. In 2008, Panama s GDP growth was at a stunning 10.7 per cent, vastly outpacing major economies such as the United States and Mexico. The Panama Canal alone handles five per cent of the global trade and 12 per cent of U.S. international trade. These numbers are set to increase thanks to the US5.3 billion canal expansion project that will double the canal s capacity by 2014. Canada is the 11th top user of the Panama Canal both by origin and by destination of cargo, with a total of 8 million long tons of cargo transit in 2009 alone. According to Peter G. Hall, Senior Vice-President and Chief Economist at Export Development Canada, the growth of Asian Canadian Foundation for the Americas 2

(") * % &' #. trade is set to overwhelm Pacific ports in the near future and thus the importance of Panama, especially its canal, will only increase. Canada is also the second largest investor in the Panamanian economy, with cumulative investment reaching 130 million in 2009. Panama is an attractive investment destination due to the use of the U.S. dollar as legal tender, low inflation, and a stable and sophisticated banking sector. In the wake of stalled global and regional trade negotiations, such as the Doha Round and the Free Trade Area of the Americas, the negotiation of bilateral free trade agreements has increased substantially between countries seeking to gain a competitive advantage in global markets. Canada has acquired more trading - " (") * +, " / - 0, +, *" 1" 2+,! partners through FTAs than have some major economies in Latin America, such as Brazil and Argentina, but it is far behind some other countries, notably Mexico and Chile. In order to guarantee Canadian competitiveness in the global economy, the government would need to continue its assertive bilateral free trade agenda. International trade remains as crucial as ever for the well-being of the Canadian economy since it contributes to 60 per cent of the total GDP and still has enormous growth potential. In fact, it becomes even more important when considering that other key contributors to the Canadian GDP, namely labour, productivity and capital, are facing serious constraints due to low consumer spending and low levels of investment. One factor holding back growth in trade is linked to Canada s heavy dependence on trade with the United States. As of 2009, 75 per cent of total Canadian exports were destined for the U.S. while half of imports came from our southern neighbour. As demonstrated by the current global recession, Canada s economic dependence on the U.S. presents many drawbacks. Although the situation has improved in the last 10 years, it is important for Canada to continue to diversify its trade portfolio to limit the impact of future shocks caused by instabilities in the U.S. market. The ratification of the Canada- Panama FTA would solidify Canadian presence in a growing and strategic market and indicate concrete progress on the Americas Strategy. The agreement is far more comprehensive than traditional trade policy. It includes chapters on investment, intellectual property rights, government procurement and temporary entry for business people. It also includes side agreements on labour and the environment. As a result, the Canada-Panama FTA bridges traditional trade policy and other objectives to foster growth and welfare. Thus, this FTA should facilitate dialogue and co-operation on a variety of issues including security, democratic governance and economic prosperity, all of which are priorities of the Americas Strategy. An interesting exercise to Canadian Foundation for the Americas 3

attempt to capture the commercial potential of a country such as Panama is to compare its economy with that of a Canadian trading partner that has a similar-sized economy: the U.S. state of Vermont. The GDP of Panama stood at 24.7 billion in 2009, while Vermont s GDP stood at 25 billion. According to Industry Canada, the bilateral trade flow between Canada and Panama in 2009 totalled 132 million. For that same year, Canada-Vermont trade amounted to 4.9 billion. As a thought exercise, a large proportion of the trade between Canada and Vermont could be attributed to geographic proximity, a shared history, and the North American Free Trade Agreement (NAFTA) framework. Yet, the difference in trade flows with Panama and Vermont is so monumental that the potential for trade with the Panamanian economy remains significant, regardless of distance. The Panamanian economy has promising economic potential that could greatly benefit Canadian companies. Most of Canada s existing investment in this country is concentrated in the mining sector, in which Canadian companies such as Inmet Mining and Teck Comico operate. Panama currently witnesses a construction boom that offers tremendous opportunities for Canadian construction and manufacturing companies in the form of investment and supply * & of goods and services in government procurement contracts. In addition to the canal expansion project, the Panamanian government plans to build a metro system in Panama City, restore the extensive road infrastructure along the Colón Free Zone (CFZ), and construct a total of three new hydroelectric facilities, as well as new buildings and convention centres for the financial district. Main Issues Taxation Issues of financial and regulatory systems concerning taxes are complex. Panama is only one of several countries with which Canada maintains ongoing discussions on tax issues, and these are not the most serious cause for concern. It is interesting to note that the Canada Revenue Agency is actively investigating more than 1,000 Canadians in Switzerland and Liechtenstein who are suspected of using the banking! " #" %% & ' ()**% system to illegally evade their tax obligations; yet this long-known matter did not prevent Canada from signing an FTA with the European Free Trade Association, of which Switzerland and Liechtenstein are members. This raises questions as to why the taxation issue has not come up before in discussions about FTAs and suggests that it is merely an excuse to slow ratification of the Canada-Panama agreement. This is certainly the case in the United States, where the same issue is being used by anti-free trade and protectionist forces to delay the ratification of its own trade deal with Panama. In fact, the Panamanian government has recently strengthened its tax policies. In March of 2010, Panama signed a Double Taxation Convention (DTC) with Mexico and since then it has successfully concluded DTC negotiations with five other countries, four of which are Organisation for Economic Co-operation and Canadian Foundation for the Americas 4

Development (OECD) members. Panama has also signed several Mutual Legal Assistance Treaties aimed at combating money laundering originating from drug trafficking and other serious crimes. There have also been important legislative and operational changes to improve the exchange of tax information. In March and June of 2010, the government passed Laws 8 and 33, which notably empower the General Revenue Directorate (DGI in its Spanish acronym) to enforce taxation laws. With the help of the United Nations Development Program, Panama will allocate resources to the creation of an International Tax Office within the DGI. In brief, Panama is moving toward international co-operation on tax information. FTAs are meant to deal with to key economic issues, such as trade and investment. The Canada-Panama Free Trade Agreement does not cover taxation, but both countries are working toward another agreement which would address many of the concerns associated with this issue. Mining A major challenge in Latin America has been the extension of the benefits of trade liberalization to indigenous and Afrodescendent populations due to their systematic marginalization. Of particular concern is the impact of an increase in mining activity. In Panama, the 2000 National Census surveyed 285,231 people roughly 10 per cent of the country s population that identified as indigenous. The country is comprised of five indigenous regions, representing 20 per cent of the national territory. In Panama, Clarke Educational Services (CES), a Canadian First Nations owned and operated professional services firm, has been working on this issue. CES provides education and capacity-building for indigenous communities, governments, and resource-based firms in order to advance large-scale natural resource development projects in a responsible and culturally appropriate manner. CES has been working in Panama for two years with the Ngobe-Bugle Indigenous People to make them aware of their right to be consulted on and participate in the project of Cerro Colorado, the country s largest deposit of copper and one of the largest worldwide. Using a grassroots methodology, CES has worked directly with the indigenous communities on sustainable and responsible mining practices and the Cerro Colorado copper project. CES and its investment partners are currently working toward the development of an agreement between the Government of Panama, the Ngobe and Canadian mining companies to manage the project in a socially and politically responsible manner. Labour The labour rights situation in Panama is deemed generally satisfactory. Private sector workers have the right to form and join unions and the Ministry of Labour is legally bound to promote the creation of trade unions where none exist. For workers in the special export zones and the autonomous Panama Canal Authority, all labour disputes are subject to compulsory arbitration and a strike is allowed only after 36 working days of failed conciliation attempts. According to the 1994 Civil Service Act, civil servants may form associations, limited to one association per government institution, and engage in collective bargaining if the association has a minimum of 40 members. While these provisions have drawn criticism from the International Labour Organization (ILO) Committee of Experts, this criticism has more to do with the gap between Panamanian law and the ILO s highest standards than with basic rights. The 2009 U.S. State Department Human Rights Report on Panama was largely favourable on the situation of labour rights in the country. According to the National Council of Organized Workers, eight to 10 per cent of workers in the private sector are unionized. The ILO states that labour clauses whether they are in the main text or in a side agreement list minimum commitments for Canadian Foundation for the Americas 5

the protection of human rights at work and refer to specific international labour standards adopted by the ILO [ ] they also provide for conflict resolution systems as well as funds and parallel labour co-operation/ consultation. The ILO points to Canada in particular as a country whose agreements establish a number of principles, objectives, institutions and initiatives aimed at avoiding social dumping and advancing fundamental labour principles and workers rights. In addition to recognizing the fundamental labour rights, some of Canada s FTAs [ ] include a number of protection provisions regarding employment conditions and rules on employment promotion as well as the protection of migrant workers. Environment The environment is another area that trade liberalization can impact negatively. Indeed, the mining, construction, transportation and manufacturing sectors tend to grow with trade liberalization and they are all taxing on the environment. To meet this challenge, Canada and Panama have signed a side agreement on the environment, guaranteeing that both parties will enforce their environmental laws, engage in sustainable development, and undertake environment co-operative activities. Conclusion Ratification of the Canada- Panama FTA would be a modest but useful step toward making Canada more competitive in global trade and would advance the trade diversification agenda. Foremost, Canadian companies and entrepreneurs will maintain or increase their competitive advantage in a rapidly growing economy of strategic importance. Given that Canada and Panama already enjoy a stable trade relationship and that Canada has already invested heavily in the region, deepening this relationship through an FTA would greatly benefit both countries. Canada is fortunate that the opportunity for an FTA with Panama coincided with the massive infrastructure projects taking place there. Many Canadian companies with expertise in fields such as shipping, logistics, design, manufacturing and construction will benefit from the government procurement contracts available across multiple levels of government during the Panama Canal expansion project and construction boom. The Canada-Panama FTA is a complement to other LAC region initiatives that seek to diversify and improve the competitiveness of Canada s trade portfolio. The FTA will promote stability of Canada s economy, and will improve Canada s influence and integration throughout the region. Rapid negotiation and adoption of the agreement will send an important political signal that Canada is open for global business; it will also set the country apart from the United States, where domestic debates on trade are damaging its reputation abroad. The side agreements on labour and the environment, and the Panamanian government s willingness to sign DTCs and commit to better enforcement of taxation measures, indicate that Panama is a responsible partner worthy of an FTA with Canada. This agreement could help Canada achieve progress on important non-economic priorities in the areas of environmental protection and the promotion of workers rights abroad. Carlo Dade is the Executive Director of FOCAL. Marina Connors and Mark Richards are interns at FOCAL. Canadian Foundation for the Americas FOCAL Tel: 613-562-0005 Fax: 613-562-2525 1 Nicholas Street, Suite 720, Ottawa, Ontario.Canada.K1N 7B7 Email: focal@focal.ca www.focal.ca Canadian Foundation for the Americas 6