Panama has long been recognized as an avenue for trade since the 16th century when Inca gold and silver filled the Spanish treasury by way of the galleons that sailed from Portobelo harbor on the Caribbean side of the isthmus on their way to Cadiz. The English privateers who sailed the coasts of the Caribbean coasts, such as Drake and Morgan, have obtained mythic status and rumors of Spanish wrecks off the coast abound. Portobelo was also the site of a twice annual fair that attracted visitors from throughout the region to trade in goods newly arrived from Spain, as well as goods produced in each of the countries. But the decline of the Spanish empire in the 17th century and the subsequent revolutionary wars in the early part of the 18th century meant that Panama was a sleepy backwater of Gran Colombia, as the new nation was known.

However, the discovery of gold in 1849 in California attracted the development of the Panama Railroad that shortened the trek from the east coast of the U.S. to San Francisco. The first successful land bridge between the oceans was an enormously profitable project in the New York exchanges. Later, Ferdinand De Lesseps, fresh from his successful construction of the Suez Canal, came to repeat his exploits in the jungles of Panama in 1880, but fate deemed his efforts should meet with colossal failure that broke the French treasury, along with Monsieur De Lesseps’ sanity. Yellow fever and malaria decimated the work force and ultimately forced the bankruptcy of the effort. It would not be until the end of the century that, as a result of investigations carried out in Cuba by Dr. Walter Reed and Dr. Carlos Finlay, the mosquito was identified as the vector between the virus and the infection.

The delays in the arrival of the Pacific fleet during the Spanish American War spurred Theodore Roosevelt’s efforts to build a canal but his overtures were spurned by the politicians in Bogota who were leery of Uncle Sam’s designs on the area. The frustrations by the isthmian business interests in the face of the capital’s resistance to the plans created the nascent revolutionary movement that culminated in a declaration of independence from Colombia in 1903.

One of the first acts by the young nation were dollarization and a signing of a treaty by the new government with the U.S. bequeathing in perpetuity a narrow strip of land on either side of the canal that became the Panama Canal Zone. A massive public health effort was carried out as the first stage of the construction program to safeguard the lives of the canal construction workers.

The successful construction of the canal meant the colossal project was inaugurated on August 1914, just as the First World War broke out in Europe. The canal was operated by the U.S. government as a federal dependency up until the implementation of the Torrijos-Carter treaties on 1977. Radical student movements during the early sixties caused serious riots in both Panama City and Colón and marked the end of the perpetuity aspect of the treaty and the beginning of Panamanian politicians’ search for alternatives to having a U.S. colony in the middle of the country. Omar Torrijos, the military strongman, capitalized on the post-colonial tide sweeping the world to obtain the gradual return of Canal Zone territories with a final handover slated for December 31, 1999. The Canal Zone was a federal institution that also harbored more than 10 bases manned by all of the U.S. military services.

The post-Second World War era in Colon, on the Atlantic terminus of the Panama Canal, was one of a severe downturn in economic activity as a result of the cessation of hostilities. The booming nightlife that hosted scores of soldiers moving across theaters of conflict seeking a respite from the horrors of war had shut down and the city fathers were desperately seeking an alternative model to boost growth in the Caribbean hamlet. The hiring of an American consultant was propitious as his insight with regard to the U.S. Free Trade Zone law of 1936 seemed to fit the bill with developing an additional element to the passing of goods through the canal. The law was signed and took effect in 1948 but really took a few years to gather the traction necessary to attract customers to this innovative project.

The Colón Free Zone (CFZ) was the genesis of the Puerto Rican pharmaceutical industry as politicians there saw the success by pharma companies and their production efforts in the zone. Early Panamanian investors also saw the opportunity to offload cargo from the transiting vessels to build a buffer stock of inventory in the Free Zone, allowing for a shortening of the supply chain with relative speed to the traditional model of waiting for the production and dispatch of goods from the point of origin. Due to its central location in the Western Hemisphere, the Colón Free Trade Zone began to attract more and more traders who bridged the supply from China with the demand from small and medium merchants in the Central American, Caribbean and South American markets.

Few of the members of the board of directors of the Colón Chamber of Commerce in the late 40s would have believed how the object of their efforts has grown to become an important sector of the national economy after almost 70 years since its founding.

Today, the CFZ administers an operation that employs more than 25,000 direct jobs associated with the more than 2,400 business located there representing over 6 percent of the countries’ GDP. The CFZ has grown to encompass an area of more than 800 hectares of land around the city of Colon. Three of Panama’s five ocean ports are based on the Caribbean side, a scant few kilometers away from the zone. The Panama Railroad, now under the skilled administration of Kansas City Southern Railroad, has its Atlantic terminal a few meters away from a recently renovated airport which should soon begin to handle air cargo to and from neighboring cities.

The neighboring markets of Colombia and Venezuela have each in their own way, affected negatively in the exports from the free zone. In 2016, turnover exceeded US$10 billion in exports to the neighboring markets supplying a broad range of goods, such as pharmaceuticals, clothes, footwear, electronics, wine and spirits, perfumes and cosmetics, as well as a plethora of goods that supply the region’s demands.

The Venezuelan economic meltdown, coupled with the Colombian restrictions on trade that compete with domestic producers, have made the Panamanian economy a primary destination for the goods handled there as CFZ users have sought vertical integration to capture additional margins at the point of sale. Panama has become a shopping destination, with millions of passengers taking advantage of the excellent price advantages on a myriad of goods found in the country thanks to the Colón Free Trade Zone.

Venezuela has gone from being the main client of the zone to a fourth-place position as the Maduro government mismanaged the world’s largest oil reserve economy to the point that imported gasoline shortages have begun occurring in the formerly wealthy nation. Recent events would indicate that changes should soon arrive to that neighboring country but doubts about the speed of the recovery amongst the CFZ users should temper any optimism about a short-term economic rebound.

The value proposition of the CFZ is that of a midway point between the factory and the final point of consumption. Goods arrive primarily from Asia, the factory of the world and are shipped from multiple origins to the Free Zone to build a buffer stock of inventory to service the neighboring countries on a just needed basis, thereby reducing the new for higher inventory lessons under a longer lead-time scenario.

Multinational corporations have increasingly seen the benefits of bringing products produced around the world under one roof to service the more than 70 countries that can be accessed from the zone on a weekly basis by ocean and daily by air from the Hub of the Americas in the Tocumen Airport on the Pacific side. The Tocumen airport received more than 14 million passengers in 2016 and is increasingly an attractive alternative to connect with Europe and Asia with daily flights by the major airlines, including Lufthansa, Turkish, Air France, KLM, Iberia and Avianca, among others. Copa, the Panama flag carrier listed on the NYSE, boasts a fleet of more than 100 aircraft to service over 70 destinations on a daily basis, making Panama an interesting alternative for multinational corporations seeking regional headquarters conveniently located in the region.

More than 80 of the world’s largest multinationals have considered the CFZ an ideal location for storing goods and performing value-added services such as labeling, pricing, promotions and assembly of goods customized at the moment of sale for the destination location. This value-added operation provides the thousands of jobs that are sorely needed in a traditionally disadvantaged area of the country, with double the unemployment in the rest of the country. A large Chinese telecom operation in the CFZ builds custom-made telephone equipment for contracts in the region. Employing more than 100 technicians in two shifts, this operation highlights the changing nature of the zone with regards to speeding up the supply chain and offering customization at the last moment. A major U.S. footwear retailer receives all of its China product in the CFZ, allowing for a cross-dock operation to build outbound containers with product in the freshest mix possible as determined by point of sale information in the more than 500 stores throughout the region. A large U.S. computer company is bundling its various products into a combo pack designed for the requirements of each of the countries it services.

With last year’s news of the Panama Papers debacle, the offshore industry in Panama has attracted the attention of the multilateral agencies seeking greater worldwide controls on the tax haven status of the country. The OECD is reviewing the CFZ regime in light of the favorable treatment by Panama fiscal policy of profits on foreign trade. Panama’s territorial fiscal policy regarding offshore profits is seen as possible harm to the traditional confiscatory tax policies in the G20 nations. Will the review committees recognize that the CFZ has been a good thing for the country?

The CFZ is also facing a challenge by Chinese SEZs, such as Yiwu and Guangzhou, that have attracted the former free zone clients to buy direct from the producers in China, bypassing the free zone merchants. Can the CFZ maintain its relevancy in light of the above challenges? The current Panamanian government has contracted the services of various consultancies to survey the best minds globally to try and forecast the possible scenarios for not only the Colón Free Zone but the other special regimes that have emerged due to the Free Zone’s success. The example of the Panama Pacifico SEZ, a former U.S. Air Force base was the subject of a recent Forbes article1 highlighting the swords to plowshares aspect of that area.

Panama has recognized the benefits of the CFZ regime and proof of this are the rising number of SEZs that have popped up around the country. The Panama Canal administration has also recognized the potential of creating more space along the banks of the canal, permitting the construction of more logistics parks to house the increasing numbers of companies that are becoming aware of the potential Panama offers for the supply chain. The World Bank in 2016 recognized Panama’s efforts in maximizing its logistics potential by awarding the country the #1 position in its logistics index for Latin America (globally #40), ahead of Chile (#46), the perennial leader in economic development in the area.

Conservative estimates place logistics as a sector providing over 30 percent of GDP in the country. With the recent inauguration of the Panama Canal expansion project that allows for over 90 percent of the container fleet of the world to pass, the country is well positioned to continue building on its infrastructure investments and aspires to become a global hub along with other zones like Dubai, Singapore and Rotterdam.

ENDNOTES

1 https://www.forbes.com/sites/danalexander/2016/03/23/inside-the-most-audacious-real-estate-project-in-the-world/#16f97e4d196f