PANAMA - 2006 NATIONAL TRADE ESTIMATE REPORT

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