Latin America: Paraguay to focus on trade at IDB

Paraguay’s minister of finance, Santiago Peña, says that he expects the recent shift to the right in the politics of Mercosur’s two largest member countries to lead the organization to refocus on its economic mission at the expense of broader political negotiations. 

Speaking to Euromoney ahead of the annual Inter-American Development Bank (IDB) Meeting in Asunción at the end of March, Peña says that he is confident the country’s model of opening to free trade will be increasingly adopted by other countries in the region.

Peña says: “Mercosur – just like the EU and Nafta – was originally an economic treaty, but over the past decade we have seen all of these become politicized and they have deviated from their original intention.

“When I took this position [in January 2015] I developed very close relationships with my peers in the region, with Danilo Astori in Uruguay and [Alfonso] Prat-Gay in Argentina, and less so [with his counterpart] in Brazil because they have their issues. I said that if we didn’t take leadership of the Mercosur agenda it would be hijacked by political debate.”

Since Horacio Cartes became Paraguay’s president in 2013 he has been pushing a free trade agenda, with low business taxes and incentives for investors to establish export-driven operations in the country. The low income and corporate tax rates and business-friendly regulatory environment have been part of an attempt to diversify the economy away from its staples of agriculture and food production. 

However, even within these traditional industries the government has sponsored the development of technology and innovation and the country has expanded within these sectors to export different categories of produce.  

Paraguay now exports to more than 80 global markets and is growing trade particularly quickly in Asia and the Middle East. Mercosur no longer accounts for the majority of Paraguay’s exports.

“In the last three years, Paraguay has decoupled its economy from its neighbours,” says Peña. Between 2003 and 2012 the country averaged annual GDP growth of about 5% – the same as the regional average. However, since 2013 the region’s economic growth rate has collapsed, largely thanks to substantial negative growth in Brazil and static rates in Argentina, while Paraguay has averaged 4.2%.

“For the first time in the history of Paraguay we haven’t been dragged along by Brazil and Argentina,” says Peña. “The growth differential with Brazil and Argentina used to be zero – now we’re plus six percentage points above Brazil and seven above Argentina.” 

The country has also been expanding its free trade network – it currently has free trade deals with Chile, Colombia and Peru and hopes to conclude a deal with the remaining Pacific Alliance member in order to apply for full membership of the trade bloc.

“Maybe Mr Trump is giving us a hand to speed up that process,” says Peña of the timetable to secure a free trade agreement with Mexico.

However, despite the diminishing importance of the Mercosur economies for Paraguay’s economic growth, Peña says Paraguay remains committed to the association, which was founded in the Paraguayan capital of Asunción in 1991.

“There is absolutely no conflict in our ambition to become a full member of the Pacific Alliance with our membership of Mercosur,” says Peña. “Paraguay is already the most open economy in the region and while we remain close to Brazil and Argentina – and will trade with these countries – there is only opportunity to continue to expand its international trade.”

Peña says that some of these opportunities can be explored through Mercosur and that he has been hearing that Brazilian companies have recently begun to exert pressure on politicians to restart free trade talks with the European Union. 

However, Neil Shearing of Capital Economics says positive noises from Brasilia should be treated with caution. “While Brazil’s government is talking a good game on trade, the reality remains that the economy is among the most closed in the world,” he says, pointing to structural problems such as poor infrastructure that make a shift to open trade policies problematic. For example, China has 10 ports that are capable of handing 100 million tonnes of cargo a year, while Brazil has none. Road networks are also of low quality. Other issues, such as a legacy of protectionism, create substantial barriers – both tariff and non-tariff based. 

“Given that the current government is likely to have to expend most of its political capital on pushing through fiscal reforms, hopes for a major progress on trade are likely to be disappointed,” says Shearing.

Peña remains upbeat. “The Brazilians have said there is a huge demand from their companies,” he says. “Ultimately it won’t be the government [that leads the push for more open trade] but the companies. I think there is a change in the mindset of the region. Brazil is a very large country – it produces close to two million cars – but how many do they sell outside of Brazil? That’s because they are not competitive. It needs to compete and to open to other markets. I think that will be very positive, and it’s the same with the Pacific Alliance.”