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Mercosur comes to Paraguay's aid
Journal of Commerce / December 9, 1996

By Larry Luxner

CIUDAD DEL ESTE, Paraguay -- This seedy, traffic-choked border town, situated at the point where Argentina, Brazil and Paraguay meet, has long been known as Latin America's contraband capital.

Here, just across the river from Foz do Iguaçu, Brazil, can be found the continent's busiest bazaar, with teenagers and children hustling everything from Paraguayan handi-crafts to Pringles potato chips. Inside the shops, hordes of Brazilian tourists stock up on Jack Daniels bourbon, fake Rolex watches, adulterated perfume and other items -- at a fraction of the cost back home.

Yet Ciudad del Este's days as a smuggler's paradise may be numbered.

In 1995, Paraguay became fully integrated into the Southern Common Market, a customs union that joins Argentina, Brazil, Paraguay and Uruguay into a trading bloc of 200 million people (Chile joined as an associate member on Oct. 1, 1996). Known in Spanish as Mercosur, the pact allows duty-free movement of products and services between the four countries and adoption of a common external tariff.

While that may eventually bring prosperity to Paraguay's 4.7 million inhabitants, it's not very good news for merchants in Ciudad del Este -- formerly known as Puerto Presidente Stroessner after Gen. Alfredo Stroessner, the dictator who ruled Paraguay from 1954 until his overthrow in 1989.

"This is the system that Stroessner perfected," says Gerald McCulloch, executive director of the Paraguayan-American Chamber of Commerce. "The Paraguayans would bring whisky, computers or electronics from Miami into Asunción, declare value at 10% of whatever its real value was, and sell it in Ciudad del Este to Brazilian tourists. Even at that markup, it's a lot cheaper than in the streets of São Paulo. Ciudad del Este grew up under this system -- that was its reason for being. Now the world is changing."

Daniel Elicetche, a senior partner at Coopers & Lybrand in Asunción, predicts contraband activity in the river port of 150,000 will gradually become a thing of the past as trade barriers fall and the need for smuggling disappears. Paraguayan officials are already focusing their efforts on developing lucrative exports such as textiles, yerba mate, fresh fruits, electronics and leather goods.

"We want to position Paraguay as an attractive production base for all the investors who want to take advantage of Mercosur," said Francisco R. Gutiérrez, director of Pro-Paraguay, an export promotion agency. "We have a lot of potential: cheap manpower, compared to Argentina or Brazil, very low electricity costs, abundant natural resources, and a strategic geographic position. In less than two hours, you can be in all three other Mercosur capitals."

In what rates as Paraguay's largest single foreign-investment project, Celulosa Río Paraná S.A., a joint venture between U.S., Canadian and Paraguayan investors, plans to build a $300 million pulp and paper mill on an 800-hectare site near Encarnación, along the Paraná River. The idea is to develop a eucalyptus-bleached, high-yield pulp mill producing 210,000 metric tons a year of pulp, ideal for tissue paper, and printing and writing papers.

Other planned investments include a Korean auto-parts assembly factory and a huge $130 million Taiwanese-owned industrial park on the outskirts of Ciudad del Este. This ambitious project, known as "Parque Industrial Oriente de Minga Guazú," aims to export $400 million of apparel and electrical appliances annually, a 60% increase over Paraguay's current total exports.

"This will be Paraguay's first free zone," says Miguel Angel Britos, who heads Paraguayan integration efforts at the Foreign Ministry. "The idea is to replace Ciudad del Este's dependence on contraband."

Exact details are hard to come by, but in its initial stages, the Taiwanese industrial park will bring more than 25 Chinese textile and electronics companies to the area. Thousands of jobs will be created, though Britos says "importers are opposed to this project because it means competition."

Even without the opposition, the project is beset with problems ranging from inadequate phone lines to allegations of Chinese mafia involvement. For now, the industrial park is a far-off dream, and Ciudad del Este's garbage-strewn streets remain crammed with vendors hawking "Shrap" calculators, "Chross" pens and bootlegged Madonna tapes at $2 apiece. Portuguese-speaking Brazilians and Guarani-speaking Paraguayans haggle in a third language -- Spanish -- while little boys peddle live parrots between their fathers' stalls. Customers either travel back to the Brazilian side by bus, or carry their purchases by foot over the crowded international bridge that separates the two countries.

While much of Ciudad del Este's commerce takes place at street level, other stores are more sophisticated, with marble floors and air-conditioned showrooms insulating their customers from the noise and fumes outside. One such outlet, Grupo Monalisa, specializes in perfumes and luxury gifts, and advertises its store on billboards as far away as São Paulo, 600 miles to the east.

Interestingly, about four-fifths of Ciudad del Este's commerce is controlled by Lebanese and Palestinian Arabs. It's hard not to notice the Arab presence, with huge signs advertising Jebai Center and other duty-free shops that form the lifeblood of this town's economy. Just over the river in Foz do Iguaçu -- jumping-off point for the world-famous Iguazu Falls -- tourists can change money at the Casa Jerusalém, order a shish-kebob from the Restaurante Arabe Esfiha Líbano or visit the large white mosque just off Avenida Juscelino Kubitschek.

Ibrahim Chiah, a Brazilian of Lebanese extraction, manages liquor sales at La Petisquera, one of Ciudad del Este's biggest outlets. On a shelf behind him is a bottle of Johnny Walker Black for $10. Over the river in Brazil, he said, the same bottle would cost about $28. In addition to Johnny Walker, La Petisquera sells Finlandia Vodka, Chivas Regal whisky and several dozen other brands at substantial discounts.

"Brazil has a 70% import tax, and Paraguay's tax is only 10%," says Chiah, "so it's worth buying liquor here." Noting that "Ciudad del Este is busier than ever," Chiah said he doesn't think Mercosur will have much of a long-term impact here.

Nor does the U.S. Embassy in Asunción. An official there said 50% of Paraguay's economy is based on contraband, a trend likely to continue for some time.

"Even if Mercosur functions as well as it's supposed to, there will still be profits in the contraband industry, because internal tariffs in Brazil are higher than in Paraguay," said the diplomat. "In fact, Paraguay has taken steps to lower its internal tariffs in order to keep the spread wide, so that Ciudad del Este doesn't dry up overnight."

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