It might surprise Vermont senator Bernie Sanders, but that didn’t transform Colombia and South Korea offshore tax havens.
Panama, like the British Virgin Islands or a handful of well-known jurisdictions (including Delaware), was known as a top offshore destination for foreign assets well before 2012, when the U.S.-Panama Trade Promotion Agreement took effect. Today, in the aftermath of the jaw-dropping leak of the ‘Panama Papers,’ a 2011 video clip of Sanders, the insurgent candidate for the Democratic presidential nomination, is now going viral.
But it’s far from evidence that Sanders was somehow prescient, and the suggestion that the U.S.-Panama free trade agreement somehow led to Panama’s reputation as a tax haven is disingenuous.
The truth is that offshore jurisdictions have been under siege for years, and the United States has been at the forefront of that fight. It began in earnest in the 1990s, a result of efforts to stymie money laundering related to drug trafficking. But it accelerated to warp speed after the 2001 terrorist attacks in response to concerns about the intricate networks that financed terrorism. Both before and after the aftermath of the global financial crisis in 2008-2009, the Organization for Economic Co-operation and Development took steps to force many of the worst global offenders, named and shamed on its ‘blacklist’ and ‘graylist’ of violators, to weaken their bank secrecy regimes.
That included, perhaps most notably, Switzerland, once the gold standard of secret bank accounts, which agreed to relent its famous standards of bank secrecy in 2009 and 2010. For the record, neither Panama nor the United States signed a more recent effort from 2014 to introduce greater tax transparency. Yet, under the Obama administration, the Foreign Account Tax Compliance Act (FATCA) has put unprecedented burdens on foreign financial institutions in the effort to root out American tax cheats.
Despite the easy meme about Sanders, the U.S.-Panama free trade agreement was always about free trade.
In the aftermath of the bilateral agreement, Americans exporters no longer faced a 7% tariff, on average, for industrial products and a 15% tariff, on average, for agricultural products. Panama, in 2014, imported around $25.65 billion in goods, and over one-fifth of those came from the United States. That boosted American jobs, if only slightly.
Moreover, it also made Panamanian exports to the United States, from shrimp to tropical produce, marginally less expensive for American consumers. That, of course, also boosted Panamanian workers, and it helped smooth Panama’s transition to a middle-income country, something that progressives like Sanders should embrace if they are truly serious about eradicating extreme poverty worldwide. (Maybe they’re not, but then they should at least embrace the nationalist label that other anti-free trade candidates like Donald Trump wear with pride).
Perhaps most importantly, the trade agreement came at a time when Panama, due to the expansion, expected to be completed this year, of the Panama Canal, itself one of the touchstones of 20th century can-do American ingenuity (if also an example of American imperialism in Latin America, given the way that U.S. political elites and business interests virtually annexed Panama away from Colombia to negotiate the Canal’s construction on friendlier terms). The Canal’s expansion will only entrench Panama’s role as a vital link to global shipping and as an important banking center in Latin America that began with Managua’s decline that began with a horrific 1972 earthquake, and that continued with a decades-long civil war. Panama has long been open for business, including, no one will deny, a fair share of dirty business… up to a point.
It’s true that the Obama administration might have been able to strong-arm a more aggressive side agreement with Panama over tax transparency back in 2011 when it finalized the terms of the free trade agreement. Nevertheless, the 2010 Tax Information Exchange Agreement, finalized even before the free-trade deal, still gives the United States more access to banking and tax information than it might otherwise have. Nevertheless, with FATCA already enacted by the US congress in 2010, the Obama administration had little incentive to push for Panamanian reforms because FATCA allows the US Internal Revenue Service simply to impose requirements on foreign financial institutions directly.
For an administration looking to reelection in 2012 and looking, after the Republican wave in the 2010 midterm elections, to show that it could find at least some policy areas in common with a Republican majority in the House of Commons, the Panama deal (along with the Colombia and South Korea deals) were politically smart as well as economically efficient. Moreover, they came at a time when the anti-American socialist left was much more powerful in the region, and so the agreements with Panama and Colombia gave the Obama administration some vital goodwill in Latin America.
Sure, it might have been great if the Obama administration held up the Panama free trade deal to demand that Panama repent the sins of its offshore notoriety. Critics of the United States in the region would have argued that smacks of the same heavy-handed imperialist instinct that for so long mocked sovereignty throughout Latin America. And, of course, Panama isn’t the only tax haven, and it’s not even the most popular: Singapore, the British Virgin Islands, Jersey, Guernsey, the Seychelles, Mauritius, Luxembourg and many, many others are competing for market share. Most of all, the Obama administration realized, here as much as in Syria and Russia or anywhere else, it has to engage the world that exists, not the world that we might want.