Panama wrong choice for Obama's first trade deal

PANAMA is a country primarily known for three things: a canal, cool hats and money laundering. In fact, you can float right through the middle of the country, sporting a stylish straw hat, and nobody ever has to know who paid for the trip, or the hat.

Panama's "comparative advantage" is tax evasion. The more money multinational companies shift to hokey Panamanian subsidiaries, the fewer taxes they owe in the U.S. And secrecy in the Panamanian banking sector secures foreign investment of another sort. The U.S. State Department and the Drug Enforcement Agency have identified Panama's financial sector as a primary repository and conduit for Colombian and Mexican narco-trafficking cartels.

In 2004, President Bush began trade negotiations with this top tax haven, but was unable to get the Panama deal passed through Congress. Now the failed ending point of the past administration threatens to be the default starting point for the new one. Panama is a ghastly choice for Obama's first trade deal.

More than 350,000 corporations registered in Panama conduct virtually no business there. Panama is second only to Hong Kong as a haven for multinational firms to fabricate offshore subsidiaries, precisely to avoid taxes. This trade deal — largely based on the North American Free Trade Agreement model — was written by and for multinational companies. It enables companies to increase their profits while skipping town on taxes. This proposed trade agreement just provides more financial incentive for American companies to ship out.

President Obama has been vocal on opposing tax loopholes, offshoring and outsourcing. As a candidate, he ran more than a dozen ads promising to change tax laws that move American companies and jobs overseas. As he said during the campaign, "It's time to close corporate loopholes, shut offshore tax havens, and restore balance and fairness to the tax code." He co-sponsored the 2007 Stop Tax Haven Abuse Act, which listed Panama as one of 34 tax-haven jurisdictions.

Panama has put up stiff resistance to combating tax evasion and money laundering. It is one of very few countries to reject all tax-information-exchange treaties. A Government Accountability Office study identified Panama as one of eight countries — the only current or prospective trading partner with the U.S. — listed on all major tax-haven watchdog lists.

There's nothing "free" about this type of trade except the license to cheat. As the Senate Homeland Security Committee estimates, tax evasion in offshore havens costs U.S. taxpayers $100 billion a year. This revenue is desperately needed to fund domestic infrastructure projects and get our own fiscal house in order. In the wake of the G-20 Washington summit and G-7 finance ministers' focus on banking secrecy's contribution to global economic instability, our first trade deal should not be with the top money-laundering country in the hemisphere.

Any future deal with Panama must be conditioned on eliminating excessive banking secrecy, ceasing to accept illicit drug-cartel cash, re-regulating its financial sector, forcing banks and multinational subsidiaries to pay taxes, and signing international tax-transparency treaties. Panama should sign the U.S. Tax Information Exchange Agreement and the standard U.S. double taxation/fiscal evasion treaty before any consideration for an agreement.

Most believe international trade can be a force for good, and that reform does not equal protectionism. It's time for trade deals that work to achieve larger societal goals of fairness, transparency, poverty alleviation and sustainability. Unfortunately, the Panama FTA does not meet any of these basic goals.

With 195 countries in the world, we should perhaps be working with New Zealand or Bolivia to craft a trade model that is mutually beneficial. The hats aren't nearly as nice in those places, but at least you know who's paying for them.

David Batker is executive director of Earth Economics in Tacoma. Stephanie Celt is director of the Washington Fair Trade Coalition.