What’s behind Paraguay’s recent progress with trade agreements?
Minister Cramer: We are fully aware that we need to diversify the Paraguayan economy and strengthen exports – either through access to new markets or diversification of our exports. So, while 2019 was a tough year for the Paraguayan economy it was very productive in terms of international agreements. The main one was clearly the provision free trade agreement with the EU. It’s important to note that we don’t need to wait for other countries in Mercosur to ratify this. There are several parts of the agreement that can be implemented on the basis of the agreement between Paraguay and the EU.
The Mercosur-EU trade agreement isn’t just significant for Paraguay – it’s the largest trade deal in the world. It will lead to tariff-free access for up to 93% of Mercosur production, as duties are gradually cut over the years. Our imports will also become cheaper as 90% of EU production will eventually be able to enter Mercosur without paying tariffs. We believe that Paraguay in particular can benefit as a point of distribution or assembly for European firms that want to enter Mercosur. We are also negotiating with South Korea, Canada and Singapore. The talks with the EU may have taken a long time but they will help with other negotiations as it gives us a template for dealing with other trading partners.
Where are the opportunities in Paraguay for British firms?
MC: Britain, in its new economic reality outside of the EU, will no doubt be looking for different markets. Mercosur is a huge market of more than 260 million people and Paraguay is the perfect way to access it. We can offer a competitive base to manufacture for Mercosur because we have low energy costs, an affordable, productive and competitive workforce and an attractive tax regime. We’ve already seen the rapid growth of an auto-parts industry as international firms have taken advantage of these factors. Indeed, it’s worth noting that while the agricultural sector struggled in 2019 – and impacted the whole economy – services continued to grow. We are keen to expand in new areas, such as fintech and telecoms, and they are sectors where the UK has plenty of expertise. As Paraguay starts to grow in more sophisticated industries there is increasing demand for the type of investment and know-how that Britain can bring to the table.
“Mercosur is a huge market of more than 260 million people and Paraguay is the perfect way to access it…”
We recently relaunched our export promotion and investment attraction agency – Rediex. We want it to attract the type of foreign investment that can kickstart new export industries and clusters in Paraguay. A good example of this is the $800 million Omega Green project led by ECB Group, a Brazilian firm. This advanced biofuel plant has the potential to consume 20% of our soy output and turn it into a more sophisticated value-added product which has several markets eager to implement greener and sustainable fuel practices. It’s not just biofuels, eventually it will become a cluster for green industry, with products such as renewable plastic among others.
This is exactly the type of investment that we need to attract. It will create an industry that put Paraguay at the forefront of where the world is going in the 21st century. It also has a large positive impact on our country because its local supply chains will support 20,000 Paraguayan families. Crucially your readers need to understand that we don’t just want to sell our young workforce and cheap, green energy to anyone. We have abundant supplies of both but they are finite. Therefore, we want to offer them to industries that will really have a positive multiplying impact in Paraguay. Omega Green will position Paraguay as one of the world leaders in green energy.
How will Paraguay’s economy be impacted by coronavirus?
MC: We foresee that Paraguay, like many other economies in the world, will suffer from short- and medium-term effects of the necessary quarantine to fight against Covid-19, but Paraguay’s unique blend of sectors also makes it a resilient country that produces what the world demands right now and after: commodities, food products, pharmaceuticals and light manufacturing related to medical and chemical industries. We hope that our short-term sacrifices in implementing a strict and early quarantine, since March 11th, have ensured that our population is safe, healthy and productive in the long-term.
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What about Paraguayan challenges such as labour skills and electricity distribution?
MC: We only consume 20% of the energy that we generate, with the rest sold to our neighbours, so there is no problem with supply. However, a historical lack of investment in distribution has led to some areas suffering from temporary power cuts. This government is accelerating an initiative, begun by its predecessor, to invest heavily in our electrical distribution network. We are rolling out 500kv high-tension lines to reduce congestion in certain parts of the grid. And we are laying the smaller 200kv lines and micro distribution needed to connect the end users with the substations. The state-owned electricity company. Ande, had a $520million investment budget in 2019. We are also very responsive to the private sector. If a company highlights a problem to the government, then Ande, can send a team to reinforce the substation in that area. So, we are troubleshooting in the short-term while investing in the longer-term.
But let’s be frank with your readers. Paraguay is an emerging market that is in construction. Not everything is perfect now, which is why early movers – investors who come now – will have an advantage and pay lower prices than those who come in five years when everything is fixed. I will share with you another insight: Paraguay is one notch below investment grade, and we remain so even in these turbulent times, so assets now are still relatively attractive and affordable than they will be in five years.
“Paraguay is an emerging market that is in construction. Not everything is perfect now, which is why early movers – investors who come now – will have an advantage and pay lower prices than those who come in five years when everything is fixed…”
As for the local workforce, it is actually one of our strengths. We have a demographic bonus, with a young and growing workforce that means there is availability of labour and demand for jobs. That helps to keep wage costs competitive. Moreover, many of the international companies here say that Paraguayans are among the most productive workers of their global operations. Historically, education was a problem which is why Paraguay launched an ambitious scholarship programme. Currently there are 1,500 Paraguayans studying abroad in the world’s best universities. The government pays for them to study MBAs or PhDs in any global top-ranked university on the understanding that they will return to the country once they graduate. The first scholars are beginning to return so we will start to benefit from the programme. It is true that there can be a lack of middle management in very niche industries. That’s obviously the case for the emerging sectors that we are trying to promote in the country. But the government is aware of that and will work with companies in those industries to help them build up training programmes and bring in the expats they require.
Paraguay is a small nation surrounded by giants; does that make Mercosur inherently unworkable?
MC: Mercosur is an imperfect customs union. If we so wished, we could complain about it every day but that will not help us develop Paraguay’s trade or industry. Brazil has more than 200 million inhabitants while Argentina has almost 50 million compared to our almost 7 million. Clearly there are lots of industries where we compete with them. However, we do not want to compete with Brazil. We want to integrate ourselves into its supply chains. In fact, Paraguay can help make Brazilian products more competitive by offering low-cost, specialized and complementary parts. Fortunately, the Brazilian government sees and understands this, which is why we concluded the auto parts, a subsector not covered by Mercosur, bilateral trade deal last year. We also reached last year an auto parts trade deal with Argentina. Your readers probably understand that the world now competes as regional blocks. In North America you have new Nafta agreement, while in China the ASEAN countries have integrated themselves in Chinese supply chains. Soon Mercosur auto manufacturers will have to compete on a tariff-free basis with European cars so it’s vital that we work together to become as competitive as possible.