PARAGUAY - RAPID GROWTH OF MAQUILA SECTOR

UNCLAS SECTION 01 OF 02 ASUNCION 000732

SIPDIS

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC
STATE PASS TO USTR FOR MARY SULLIVAN
USAID FOR AA/LAC ADOLFO FRANCO
TREASURY FOR OSIA AND OTA
COMMERCE ITA FOR SARAH COOK
NSC FOR SUE CRONIN
SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON ETRD EINV BEXP KMCA PA
SUBJECT: PARAGUAY - RAPID GROWTH OF MAQUILA SECTOR

REF: 05 ASUNCION 926

--------------
SUMMARY
--------------


1. Exports from Paraguayan maquilas (low-tax, export-oriented
manufacturing or service businesses) are growing rapidly. From 2006
through 2007, the Paraguayan Ministry of Industry and Commerce (MIC)
expects to receive over USD 40 million in additional foreign
investment in the sector. Paraguay still faces some obstacles
exporting to larger MERCOSUR members, but overall the GOP believes
the investment and growth in maquilas will contribute greatly to
national employment and economic growth. One of the ten components
of Paraguay's MCC Threshold Program, which is just getting under
way, involves support to the MIC for maquila sector development.
End Summary.

--------------
LAW ALLOWS FOR MAQUILA PRESENCE IN PARAGUAY
--------------


2. In 2000, the GOP passed Maquila Law 1064/97 in an effort to
attract new investment and create alternatives to employment in the
informal sector. Paraguay's maquila regime allows maquila
operations to be established anywhere in the country, provides for
very low taxation of value-added, and provides for some limited
domestic sales. The maquila regime applies both to manufacturing as
well as services such as call centers or software development.
Maquilas have been operating in Paraguay since 2001 and are
achieving rapid growth not only from exports to MERCOSUR, but also
to less traditional markets such as Thailand, China, Luxembourg,
Korea, Japan, and Taiwan.

-------------- ---
MAQUILA SECTOR EXPERIENCING UNPRECEDENTED GROWTH
-------------- ---


3. Exports of products from the Paraguayan maquila sector are
growing rapidly. As of May 2006, maquila exports reached USD 20.9
million, already 76% of total maquila exports in 2005. In May
alone, exports were greater than USD 5.4 million, the largest
monthly export level ever recorded and 70% higher than any previous
monthly record. In the five-month period from January to May 2006
Paraguay had nearly three times the export value from maquilas as
during the same period in 2005, representing a 199% increase.
Exports to MERCOSUR as of May reached more than USD 10 million.
Leather products have been some of the most successful, generating
over USD 5 million of revenue within MERCOSUR and USD 6.5 million
overall. Garments and wood molding are also major maquila exports.

-------------- --------------
FOREIGN INVESTMENT FUELING MAQUILA GROWTH AND NEW JOBS
-------------- --------------


4. According to Roberto Elias of the Consejo Nacional de las
Industrias Maquiladoras de Exportacisn (CNIME),the MIC, based on
contact with potential investors, conservatively estimates that
Paraguay's maquila sector will receive USD 41 million in foreign
investment over the next two years. France would be the largest
investor as the MIC is currently negotiating with the French
technology company Alcatel, which is considering an investment of
between USD 20 and 50 million dollars in the communications sector
(telephone assembly). While Elias stressed the tentative nature of
the estimates, he said that negotiations with France are well
underway. Companies from Brazil, Spain Chile, and Argentina are
also expected to make investments related to textiles, call centers,
metals, bottled water, and furniture. The MIC expects the increases
in foreign investment to create at least 2,600 new jobs. The
possible investments include both new projects and the expansion of
existing maquila operations.

-------------- --
U.S. MARINES USING PARAGUAYAN MAQUILA PRODUCTS
-------------- --


5. The Paraguayan company Welsheng Paraguay SRL is one of the
oldest Paraguayan maquilas and produces orthopedic products such as

ASUNCION 00000732 002 OF 002


ankle, wrist, and back braces, cervical collars, and elbow and knee
supports. Manufacturing for the Seattle based company La Pointique
International, Welsheng Paraguay has entered the U.S. market and is
now providing orthopedic supplies to the United States Marine Corps.
Welsheng Paraguay products are certified by the FDA.

--------------
MERCOSUR NTBs TOUCH MAQUILA SECTOR
--------------


6. Paraguay's private sector consistently complains that Brazil and
Argentina throw up bureaucratic non-tariff trade barriers (NTBs) to
Paraguayan exports of anything but basic raw materials. Ana Chuang,
head of the export department for Welsheng Paraguay, told the
Economic Section's commercial specialist that Welsheng frequently
encounters NTBs when exporting to Brazil and Argentina. For
example, authorities in both Brazil and Argentina often question the
authenticity of the certificate of origin and require excessive
documentation. They also reportedly claim that products are made or
processed in Paraguay, and question why neoprene used in the braces
is not imported from MERCOSUR countries. The excess scrutiny causes
delays that create disincentives for importers. Ms. Chuang stated
that doing business with countries like Chile was a delight, and it
is often easier to work with countries outside MERCOSUR.

--------------
COMMENT
--------------


7. Despite some obstacles within MERCOSUR, the recent growth of
Paraguay's maquila sector has been impressive. The MIC has made the
sector a priority, and the recent growth suggests that the MCC
Threshold Program component designed to support the maquila regime
has the opportunity to be very successful. The outcome of
Paraguay's efforts to cajole Brazil and Argentina into reducing
non-tariff barriers to internal trade within Mercosur will be
important for the sector's continued growth, although the increasing
share of non-Mercosur destinations bodes well even if those efforts
are slow to bear fruit.

CASON