Its position at the heart of the Americas, combined with one of world trade’s most vital pieces of infrastructure, will continue to ensure the flow of goods through Panama. In fact, the country’s status as a major trading centre will only develop further following the completion of the $5.25bn expansion of the Panama Canal and the arrival of post-Panamax ships. This could be further compounded by a growing collection of free trade agreements (FTAs). However, as the country continues to watch its trade balances grow, the government and the private sector are endeavouring to make full use of its status in regional and global trade by transforming it into a full-service nearsourcing destination replete with all manner of logistics services, end-of-the-line manufacturing and back office support centres.

Trade Deficit

A quick glance at trade statistics reveal a sizeable trade deficit, which has grown in recent years due to the importation of oil and machinery to fuel the government’s overhaul of national infrastructure networks. In 2008 the cost, insurance and freight value of imports totalled $9bn while the freight-on-board value of exports was just $1.1bn, following data from the National Institute of Statistics and Census. Fast forward to September 2013 and the trade deficit has ballooned even further, with imports of goods expanding to $9.59bn and exports registering $637.88m. However, these figures do not tell the whole story, as they do not include duty-free trade conducted within the Colón Free Zone (CFZ). As of September 2013 the CFZ imported $9.95bn in goods, while its re-exports amounted to $11.16bn. Indeed, increasing the value of re-exports is where most of the opportunity lies.


Numerous FTAs have been signed in recent years with accords being struck with regional neighbours Costa Rica, Guatemala, Nicaragua, El Salvador and Honduras, as well as major international trading partners such as the US and the EU. A member of the Central American Integration System, Panama is also contemplating joining the recently created trade bloc dubbed the Pacific Alliance, having already struck limited commercial accords with Colombia, Peru, and Mexico and a fully fledged FTA with its fourth and final member, Chile. The growing number of FTAs and the existence of large free trade zones should strengthen the case for Panama as a nearsourcing destination, though there are concerns over human resources, a lack of economies of scale and the impact of FTAs on domestic industries located outside free zones (such as agriculture which employs roughly one-fifth of the national population).

Advantages & Challenges

The most obvious reason for nearsourcing – placing some or all of business operations closer to vendors and product markets – in Panama stems from its status as a trade hub located in the heart of growing Latin American markets and close to the world’s largest economy, the US.

Many goods will pass through Panama anyway. In addition, Panama provides legal and tax incentives for companies establishing multinational headquarters through Law 41 of 2007, a free trade zone framework (see analysis), one of Latin America’s strongest financial centres and a growing infrastructure network. It also boasts a stable, peaceful and generally pro-business, laissez faire approach to governance. Many companies have already set up end-of-the-line manufacturing on small scales in industries such as pharmaceuticals and retail, although these pale in comparison to what could be accomplished in the medium to long term.

The largest challenge the country faces in terms of capitalising on its constant flow of goods is a severe shortage of qualified human resources; this is exacerbated by its relatively small population of 3.72m. Moreover, despite possessing one of the highest GDPs per capita in Latin America, Panama’s education system ranks 75th in overall education, 96th in primary education and 114th in the quality of maths and science education in the World Economic Forum’s “Global Competitiveness Report 2013-14”.


While the largest portion of canal traffic by weight is accounted for in bulk shipments of agricultural, energy and metal commodities, the largest portion of canal revenues is derived from its container shipments. Container shipments also represent the greatest opportunity for re-export, given the limitations and economies of scale required in value-added manufacturing as it pertains to commodities. Industries with low labour requirements needed to finish and package goods, such as technology, retail or pharmaceutical goods, provide the best opportunities.

Daniel Isaza, general manager of international shipping and logistics company Interoceanic Cargo and president of the Logistics Business Council, said, “There is tremendous opportunity to capitalise on value-added manufacturing in Panama, and it is already happening in small doses inside the free zones. Companies are seeing that nearsourcing end-of-the-line manufacturing in Panama does have its advantages, though we still lack a broad vision for the sector.”

Main Markets

Opportunities for expanding reexports can initially be gleaned by analysing the primary trade routes and users of the canal. In 2012 332.6m tonnes of cargo passed through the canal, 38.9% of which was part of the trade route from Asia to the eastern seaboard of the US, according to data published by the Panama Canal Authority.

Another 8.8% flows from the eastern US to western South America, while 6.5% moves from Europe to South America, 4.7% is intercoastal within South America, 4.5% moves from the eastern US to western Central America, 3.6% moves from Europe to eastern North America and 3.6% is intercoastal US traffic.


Panama is also positioning itself as a logistics and trans-shipment hub as thousands of square metres of new warehousing space are expected to come on-line to keep up with demand and prepare for the completion of the canal’s expansion. Already a natural logistics centre, there is still plenty of room for growth, although it faces competition from destinations such as Cartagena and Puerto Rico.

New free zones designed for particular industries seem to be the way forward, exemplified by the recently created Panama Pacifico Special Economic Area which is trying to lure high-end logistic and technological firms. Isaza lauded such developments as well as recent cooperation between the public and private sector, while at the same time lamenting the absence of a Secretary of Logistics or Secretary of Transportation. Indeed, the existence of numerous relatively autonomous authorities in charge of the national port, road, rail and airport infrastructure makes coordination on a macro level difficult. To address this, the central government created a national logistics council staffed by the independent transportation authorities, the Ministry of Public Works, the National Customs Authority, the Ministry of Economy and Finance, and chaired by the Ministry of Commerce and Industry. However, barriers remain, such as Law 41 passed in July 2013 that restricts foreign ownership and personnel in companies operating in auxiliary maritime services, including fuel distribution and the transportation of supplies, to 25%. It has been criticised by the private sector and may contravene Panama’s numerous free trade agreements.