April 12, 2016 1:32PM

Trade and the Panama Papers

When there is a trade negotiation going on, people often try to bring various other policies into the mix. One way they do this is to argue that if another country wants to trade with the U.S., they should have to change some of the policies we don't like. One recent example comes from the so-called Panama Papers. This is from the Washington Post: 

The Panama Papers’ detailed revelations of a massive international tax-haven scheme have snowballed this week into a fierce debate among Democrats over President Obama’s trade policies with the tiny Central American nation and again laid bare sharp divisions within the party over such agreements.

Trade critics lambasted the administration as failing to heed their prior warnings and win sufficient financial reforms from Panama before signing a landmark free-trade deal in 2011, missing a chance to disrupt the elaborate financial arrangements disclosed in a massive leak of private data last weekend.


“The Panama Papers just show once again how entirely cynical and meaningless are American presidents’ and corporate boosters’ lavish promises of economic benefits and policy reforms from trade agreements,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. The Panama free-trade deal’s “investor protections and official U.S. stamp of approval made it safer to send dirty money to Panama,” she said.


... Wallach, the consumer advocate, said the Obama administration did not push hard enough. The financial-transparency treaty, she said, “requires someone in the U.S. to know what to ask for. It’s not like in Canada, where a financial transaction is automatically reported.”

She said that the trade talks were “a potential opportunity, and if Panama really wanted that opportunity, the administration should have said, ‘These are the things you must do if you really want it and your government is interested enough to change some of this.’ But they didn’t even ask those things.”

There's a general problem with this kind of criticism. There are many ways U.S. domestic policies might differ from those of other countries, and going down the road of using our leverage to change other countries' policies is dangerous. We already use trade agreements to influence other countries' intellectual property, labor and environmental policies. If we keep going in this direction, you could imagine governments taking aim at a wide range of additional domestic policies. (As an extreme example, trade could be used as leverage to encourage pro-choice abortion policies; or it could be used to encourage pro-life policies).  And you could also imagine other governments with large economies doing something similar. The EU already does this to some extent. If it sees others doing so, China might decide to join in.

All in all, this approach to trade policy creates a mess for trade negotiations and trade liberalization, distracting everyone from their main purpose, and causing conflict rather than promoting economic integration.

As it happens, in the context of the Panama Papers, there is also a more specific criticism: It turns out that the critics may be wrong on the facts. The Washington Post editorial board explains:

Data culled from the documents by the International Consortium of Investigative Journalists, and presented in several charts on the group’s website, show that the Panama-based law firm Mossack Fonseca, which specialized in setting up offshore accounts and shell companies for wealthy people, has been steadily reducing its activity in Panama for about a decade. As it happens, the decline began about the time the Bush administration and Panama began discussing a free-trade pact — and accelerated after the deal took effect during Mr. Obama’s first term.

Specifically, the number of offshore incorporations fell from 4,741 in 2005 to 835 in 2015. Most important, as of last year Mossack Fonseca appeared to have nearly completely ceased incorporating the least transparent form of company — known as “bearer shares” — which often don’t need to register an owner’s name.

This should provide an effective rebuke to the critics here. On the other hand, it is problematic if it suggests this type of trade leverage can accomplish domestic policy change abroad, as it might encourage more such efforts. Much better to let trade agreements focus on free trade, and leave discussions of other issues to a separate forum.