Highlights

• Paraguay is taking advantage of its low production costs and geographical proximity to Argentina and Brazil to attract struggling low-end manufacturing companies from the regional giants.
• Brazilian producers of textiles, auto parts and plastic goods will continue to flock to Paraguay to escape Brazil’s high corporate tax rate.
• Problems of scale and a possible South American trade deal with China could challenge Asuncion’s viability as an industrial hub.

In terms of wars, few conflagrations have had a proportionally more devastating impact on a country as the War of the Triple Alliance in the 19th century, which killed off upward of 90 percent of Paraguay’s male population and set the tone for relations between the landlocked nation and its two main foes in the conflict, Brazil and Argentina. The bloodshed is long in the past, but Paraguay remains caught between its larger neighbors. Its position as a buffer state between them means that it remains largely at the mercy of the governments in Brasilia and Buenos Aires on matters of trade. Now, however, it appears as if the government in Asuncion has found a way to make itself an industrial hub of Latin America’s southern cone by encouraging companies from north and south to ditch the comforts of home and set up shop in Paraguay.

Despite the resentment some Paraguayans still harbor toward their larger neighbors, over the past four years, the country has become a major destination for Argentinian and particularly Brazilian manufacturers intent on reducing their production costs. Paraguay’s corporate tax rate and energy and labor costs are much lower than in either Argentina or Brazil. Additionally, some Paraguayan cities that have welcomed Brazilian- and Argentinian-owned factories are a mere 960 kilometers (600 miles) from Sao Paulo, South America’s largest industrial and financial center, relatively close by South American standards.

After he came to power in 2013, Paraguayan President Horacio Cartes touted his country’s lower production costs and its proximity to Brazil and Argentina in an effort to attract manufacturing companies from the two regional heavyweights. Although a full member of the Common Market of the South (Mercosur), Paraguay has not always enjoyed good relations with its regional trade partners. After the Paraguayan Congress rushed through an impeachment process to oust President Fernando Lugo from office in 2012, Mercosur suspended Paraguay from the bloc on the grounds that legislators did not grant the head of state sufficient time to present a legal defense. Essentially, Mercosur ruled that the impeachment process was legal according to the Paraguayan Constitution but that its Congress had violated the principle of due process. With Paraguayan exports to full Mercosur members Argentina, Brazil and Uruguay subject to uncertainty as a result of Asuncion’s suspension from the bloc, the country’s economy contracted by 1.2 percent in 2012, abruptly reversing years of high growth.

Paraguay Comes in from the Cold

Accordingly, Cartes’ first order of business after taking power was to mend ties with Brasilia and Buenos Aires. Fortunately for Asuncion, Brazil and Argentina rapidly accepted Cartes’ victory in the 2013 election, declaring the vote to be free and fair. The two countries also called for Paraguay’s reinstatement to Mercosur, and Asuncion duly rejoined the bloc within months of the election. Having secured normalization, Cartes turned his attention to establishing Paraguay as an industrial hub by enticing the Brazilian and Argentinian manufacturers of textiles, toys, plastic products, auto parts and other goods to relocate to the country. The president especially targeted firms that were struggling to compete domestically against Chinese imports. Many of Brazil’s textile companies had already ceased operations in the face of overseas competition a decade ago, forcing them to resort to importing Chinese textiles, but the Paraguayan offer appeared attractive to other Brazilian and Argentinian companies that were still fighting to survive.

Paraguay, for example, offered corporate tax rates that made it far more competitive than its northern and southern neighbors: While companies pay 34 and 35 percent in corporate taxes in Brazil and Argentina, respectively, firms operating in Paraguay are charged 10 percent if they sell their products domestically and just 1 percent if they export them. In addition, electricity rates in Paraguay, a net power exporter, are three times cheaper than in Brazil. Another factor that has lured Brazilian and Argentinian companies – most of whom seek to produce for their home markets – is the tariff exemptions that Brasilia and Buenos Aires extend to imports from Paraguay if the regional content in the goods totals at least 40 percent.

Bringing in the Brazilians

In the past five years, 67 percent of the new factories in Paraguay have been opened by Brazilian companies, while Argentinian firms have opened a further 8 percent. In all, the amount of low-end exports from these companies in the past five years has totaled approximately $380 million, representing a jump of more than 260 percent. While the number remains comparatively small, Asuncion hopes that its attractiveness will persuade the two neighbors to choose Paraguay as a source for some of the $34 billion in goods the countries import from China every year.

Brazil’s economic decline over the past three years has led many companies in the country to search for ways to keep their businesses buoyant. According to a report published earlier this month by Brazilian newspaper Estadao, almost 80 Brazilian companies have opened factories in Paraguay in the last three years. And in just the past year alone, over 440 Brazilian companies – a 67 percent increase year on year – have expressed an interest in opening factories in Paraguay, according to the Brazilian Embassy in Asuncion.

Some of these companies are seeking to supplant textile imports from China. The Guararapes group, one of Brazil’s largest textile companies, began operations in Paraguay in 2016. This year the company has announced plans to increase its workforce from 400 to 1,500 over the next 18 months. In total, Brazilian manufacturing transplants to Paraguay now employ over 11,000 people.