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Paraguayan Contraband Business Threatened by Mercosur
Impact International / July 1, 1995

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 handicrafts to Pringles potato chips. Inside the shops, 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.

On Dec. 31, 1995, Paraguay will be fully integrated into the Southern Cone Common Market, a customs union that joins Argentina, Brazil, Paraguay and Uruguay into a trading bloc of 200 million people. Known in Spanish as Mercosur, the pact -- which for all intents and purposes took effect in January -- allows duty-free movement of products and services between the four countries and adoption of a common external tariff.

In numerical terms, Mercosur's potential strength is formidable. Its member countries cover 12 million square kilometers, or 59% of the land area of Latin America, and encompass 190 million people, or 44% of Latin America's population. More importantly, the four nations have a combined gross domestic product of $437 billion, with annual exports of $47 billion and imports of $25 billion.

While all that may be good for Paraguay's 5 million inhabitants, it could have a negative impact on the merchants of Ciudad del Este.

"Little by little, Paraguay is changing, and entering the world," says Daniel Elicetche, senior partner at Coopers & Lybrand in Asunción. He 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. Gutierrez, 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."

He adds: "Lots of things are coming from Brazil because it's a protected market. Once this opens up, there won't be any reason to come through Paraguay."

On a typical day, Ciudad del Este's garbage-strewn streets are 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.

But the liquor trade is still king here, and local businessmen estimate Paraguay imports around 600,000 12-liter crates of Scotch and whisky, including 30,000 cases of Johnnie Walker. More than half of that is sold to Brazilian tourists in Ciudad del Este (formerly known as Puerto Presidente Stroessner after the country's long-time dictator). Rumors persist of liquor brands being falsified, though no one has ever been able to prove those charges.

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, who asked not to be named. "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."

Just in case the contraband business does collapse, the government of President Juan Carlos Wasmosy has a backup plan. It intends to convert Ciudad del Este into a manufacturing and export center, with the help of Taiwanese investors who have announced plans for a $260 million industrial park.

"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."

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