Free Trade Agreement Review Series: Panama-U.S.

The White House looks to be officially submitting to Congress the three pending free trade agreements (FTA) sometime next week. This is something that we and a chorus of others have argued should be a priority for the White House and we hope that Congress acts on addressing the FTAs immediately. But the trade deals are not perfect, as we noted yesterday in looking at the Colombia-U.S trade promotion agreement that included unnecessary exporting of bad American labor regulation. And earlier this week we looked at some of the benefits of pending South Korea-U.S FTA while noting Congress should avoid expanding the Trade Adjustment Assistance program as a part of ratification.

Today we finish our three part trade agreement review series and praise the value of the Panama—U.S. Trade Promotion Agreement, but also note a key flaw in the deal that will limit its value to America that all should be aware of in ensuring we have proper expectations on what economic changes we will see if Congress ratifies this pact:

The Panama-U.S. trade pact is the third that awaits approval in Congress, and it is structured very similar to the agreements struck with South Korea and Colombia. Once ratified by Congress this FTA would immediately eliminate tariffs and quotas on 87 percent of American consumer and industrial exports to Panama, with the remaining duties to be removed over a 10-year period. Industrial and agricultural products carry a 7 percent and 15 percent average tariff respectively, and a 0 percent rate will provide a boost to American manufacturing. Given the heavy business currently being done by American firms like Caterpillar, who is heavily invested in providing equipment for the $5.25 billion expansion of the Panama Canal. In fact, construction equipment accounted for $280 million in U.S. exports to Panama last year, and American businesses in this sector stand to benefit significantly from the reduced tariffs. The FTA will also open Panama’s $20.6 billion service industry to American businesses, and this will benefit numerous of industries including telecommunications, finance, and distribution.

What makes this trade deal distinguishable from the other two at hand is that it calls for “tax transparency” on the part of Panama, and its status as a major offshore banking center turns this innocent trade deal into a backdoor for crackdowns on tax evasion. When it comes to hunting down tax evaders, the Organization for Economic Cooperation and Development (OECD) leads the way, and the trade agreement pushes Panama to conform to tax compliance rules created by the OECD.

Tax evasion is merely the practice of American firms avoiding over-burdensome tax rates in the United States—rates which are the second highest corporate tax rates in the world, and will soon be the highest when Japan goes through with its approved corporate tax rate reduction. The easiest way to get Americans to pay taxes is to simplify the code, remove double taxation provisions—like the idea of a corporate tax in the first place—and use the resources spent trying to get those using tax havens like Panama instead on ensuring that Americans at home are not straight up lying on their tax returns.

President Obama demonizes wealthy Americans on a daily basis for not paying their “fair share” of taxes and in order for his John Hancock to appear on this trade deal, it’ll probably have to provide good news for the IRS. The Associated Press did a fact check recently on the president’s definition of fair share and came up with a damning report. There is no reason for this provision in the Panama-U.S trade agreement.

At the turn of the 20th century, the U.S. was the fastest growing economy in the world partly because it was a safe haven from taxes. There were no federal or state income taxes, no payroll taxes, no capital gains taxes, and no corporate taxes. Looking at how to go back to this era of tax policy should be the focus of the government, not provisions like this concession in the Panama-U.S. trade agreement to go after those who use Panama as a tax haven. Though all those people have probably used their money by now anyway so it might not matter.

See our previous post on the South Korea-U.S. free trade agreement from earlier this week for more on free trade theory. Also see yesterday’s post looking at the good and bad in the Colombia-U.S. free trade agreement.