I. EXECUTIVE SUMMARY COMMERCIAL OVERVIEW Panama has always been a country of traders. The Atlantic city of Portobelo in the 1600s was the major port and marketplace for gold and silver, and other goods from the Americas to imperial Spain. The Transisthmian Railroad, built in the 1850s, established Panama as the principal location to transport goods between the Atlantic and the Pacific Oceans. Then, the inauguration of the Panama Canal in 1914 ensured Panama's position as a major trading nation for the twentieth century. Since the 1950's, when the first free zone of the Americas was opened in the Atlantic city of Colon, Panamanian businesses have continued supplying larger markets north and south with just about everything from toys and fragrances to advanced electronics and major appliances. Given Panama's central geographic location, the government and business community actively promote this country's long-standing reputation as an international trading, banking, and services center, and as a site for foreign direct investment (FDI). Panamanian businesspeople and officials can point to Panama's dollar-based economy as offering low inflation and zero foreign exchange risk. The Panamanian Trade Development Institute (IPCE) provides investors with information, expedites specific projects, leads investment- seeking missions abroad, and supports foreign investment missions to Panama. Due to the evolution and composition of Panama's economy, the extent and nature of local competition is very limited in most of the non-service sectors. Although the United States is Panama's most important trade partner and U.S. products have a high degree of receptivity in Panama, competition from third countries is particularly strong in certain sectors. Competition from Western Europe is very heavy in the areas of telecommunications equipment, alcoholic beverages, cosmetics and toiletries. Japanese products compete very well in automobile, heavy construction equipment, and consumer electronics markets. Korea, Taiwan, Singapore and Hong Kong are very competitive in the consumer goods, computers, apparel, gifts and novelty product areas. Panama's merchandise imports grew in 1993 by 70 percent over 1992 to a total of US$ 2,173 million, down significantly from the yearly growth rate of 19 percent registered in 1992. The value of Panama's total merchandise exports in 1993 climbed 7 percent over 1992 to a total of US$ 507.6 million. Increased export earnings from meat, fishmeal, shrimp and sugar accounted for 58 percent of the increased exports. Banana exports fell by US$ 6.3 million (4.5 percent) to US$ 199.5 million. Bananas accounted for 35 percent of total merchandise exports. Panama's economy is primarily based on a well-developed services sector that accounts for 72 percent of GDP. Services include the Panama Canal, banking, insurance, government, the transisthmian oil pipeline, and the Colon Free Zone. Manufacturing, mining, utilities, and construction together account for 19 percent of GDP. Manufacturing is principally geared to production of items such as processed foods, clothing, chemical products, and construction materials for the domestic market. Agriculture, forestry and fisheries account for about 11 percent of GDP. BUSINESS TRENDS AND OPPORTUNITIES Business practices and attitudes in Panama are very similar to those in the U.S. U.S. television, radio, and magazines are all available and popular in Panama. Panamanians frequently travel to the U.S. to vacation, study and do business, and their buying patterns and tastes are similar. U.S. products and services are well accepted and remain competitive in the local market. Panama has the highest per capita GDP in Central America. The majority of income is skewed to a small, consumer goods-oriented economic class. Upper middle and upper class families have high levels of disposable income. They are interested in purchasing high quality, trend-setting goods; price plays less of a factor in purchasing an item for this class than for the middle to lower income classes. The availability of the U.S. dollar as legal currency and lower import duties have helped U.S. products remain price competitive. However, other foreign imports are slicing a greater market share of the pie, because of their increasingly higher quality goods at competitive prices. Growth prospects for U.S. goods and services for the next three years correlate directly with continued growth of the Panamanian economy. The Panamanian economy offers renewed potential for substantial growth in the areas of mining, tourism and maritime services. Several U.S., Canadian and Panamanian mining exploration companies are working in-country to quantify and qualify the mining potential of several large mining projects. In 1988, new mining legislation amended the existing regulations in order to attract foreign investors to explore and exploit the mining potential of Panama. In 1994, the Government of Panama signed a new Tourism law which offers a number of fiscal incentives and other benefits for local and foreign companies investing in tourism projects. Maritime services have always been important for Panama. The country' strategic geographic location and its long tradition as a maritime center, places Panama as a potential location for maritime-related projects, such as port operation, fishing, ship registry, cargo insurance, etc. Panama has no restrictions on the outflow of capital or outward direct investment. TRADE AND INVESTMENT CLIMATE The Government of Panama (GOP), has declared its policy commitment to trade liberalization, but liberalization proceeded slowly under the outgoing government of President Guillermo Endara. Incoming President Ernesto Perez Balladares has publicly acknowledged the need for Panama to continue trade liberalization, especially in the context of Panama's accession to the General Agreements on Tariffs and Trade (GATT). The economic reform program, begun in 1990 after agreement with the International Financial Institutions, has faced legal obstacles. The Legislative Assembly and private sector interest groups have initiated legal challenges to several of the trade liberalization measures and other government actions removing nontariff barriers on agricultural products. Despite these challenges, certain steps have been taken, such as the elimination of specific tariffs and their replacement with ad valorem tariff rates ranging from as much as 40 percent for industrial products and 50 percent on agroindustrial products. Even with these lower tariff averages, Panama has the highest tariff rates of Central America. A decade of Government inattention to basic public infrastructure and public services, combined with slow progress on economic reforms that would establish clearer "rules of the game," undermine somewhat the generally welcoming stance toward foreign investment. Cumbersome legal procedures sometimes delay resolution of contract and other business disputes. Setting up shell corporations, however, is not cumbersome. Government regulation and occasional intervention in the Panamanian economy have tended to reduce transparency, hinder competition and the efficient allocation of investment. The government's economic liberalization program has been designed to reduce these distortions and increase competition and competitiveness, but has fallen short in some areas. The National Labor Code ranks with the most pro-labor in the world. The combination of relatively high costs for both utilities and labor makes unit costs higher than average for the region. Investors have complained of burdensome and excessive registration and licensing requirements, although the Government of Panama is trying, via the "one-stop shop", to make its regulations more investment-friendly for those producing for export.