Updated 2 months, 1 week ago

Brazil worries about Paraguay

Brazilians are starting to have second thoughts about the business El Dorado next door.

Low taxes, low wages and low overheads are driving the Paraguayan government’s ambition to become the "China of South America": a low-cost manufacturing hub that attracts investment from across the region.  

As Brazil struggles through its worst recession on record, dozens of businesses have set up operations across the border, creating thousands of jobs. Broadly welcomed by the Brazilian government at first, the migration of investment is now facing increasing scrutiny as unemployment rises to unprecedented levels.

"It used to be a joke," said Murillo Onesti of Sao Paulo law firm OLN Advogados, referring to Paraguay’s past reputation in Brazil as a source of cheap knock-offs. "China faced the same resistance at first. But people are seeing now that you can produce better quality goods at a lower price."

In effect since 2000, Paraguay’s "maquila law" aims to replicate the success of Mexico’s maquiladora -- or manufacturing plant -- operations. Goods can be imported tax-free for assembly, then sold locally or exported with only the value-added part taxed at a rate of just 1 percent.

Made in Paraguay

Since 2013 Brazilian companies have started to invest in earnest, encouraged initially by the vigorous salesmanship of Paraguayan President Horacio Cartes, and subsequently by the need to cut costs in Brazil’s dramatically deteriorating business environment.

"The crisis has helped," said Onesti, who offers legal and strategic advice to Brazilian businesses. "Executives are looking to reduce costs and increase productivity. Paraguay offers this solution."

Of the 126 businesses currently operating under the maquila law, 80 have opened since the start of Cartes’s mandate in August 2013, according to Paraguayan government figures. These companies have created over 11,000 jobs, with 6,700 coming in the last three years.

Around 80 percent of the foreign businesses set up under Paraguay’s maquila law are Brazilian-owned, according to Brazil’s National Industry Confederation, or CNI. Among the major firms that have recently set up operations across the border are fashion group Guararapes and toymaker Estrela.

It is not hard to see the attraction. According to the CNI, energy costs are over 60 percent lower in Paraguay while labor costs are 100 percent to 135 percent higher in Brazil. Added to that is the fact that Paraguay’s capital, Asuncion, is closer to Brazil’s industrial heartland of Sao Paulo than many of the country’s state capitals.

"Paraguay has the cost of China, with the transit time of Santa Catarina” (a state in southern Brazil), Flavio Rocha, CEO of Guararapes, told local media following his company’s decision to transfer some production from Fortaleza to Paraguay, in 2015.

Backlash

So far, the Brazilian government has embraced the trend. President Michel Temer visited Paraguay in early October in one of his first official trips abroad. On the occasion of his visit, Brazil’s ambassador in Asuncion, Jose Felicio, pointed out that Brazil’s $1.6 billion trade surplus showed that Paraguay’s economic development clearly benefits its larger neighbor.

But not everyone is so enthusiastic. Tasso Jereissati, a senator from the Social Democracy Party, known as the PSDB, has expressed concern that Paraguay’s tax breaks are luring away clothing and textile companies from under-developed parts of Brazil.

"Our companies are starting to migrate to Paraguay," he told Bloomberg in an interview on Friday. "It’s impossible for you to keep industries here when you compare the tax and labor advantages that Paraguay is offering."

In response to these concerns, Brazil’s Ministry of Industry, Trade and Services said in an e-mailed statement that it was "working on a strategy for Brazilian investments in Paraguay, but without incentivizing the migration of companies and jobs from Brazil to the neighboring country."

With the Brazilian recovery still proving elusive, concern about Paraguay eating Brazil’s lunch are likely to grow, particularly if unemployment continues to rise.

"This process is only just starting,"Jereissati said.