I. Commercial Overview (Executive Summary) Overview of Import Market The relatively low import tariffs traditionally maintained by Paraguay have encouraged the development of a huge commercial sector based on the importation of goods from the far east and the U.S. for re-export to neighboring countries. Market conditions in Paraguay are subject to rapid change, often depending on economic conditions and exchange rate movements in Brazil and Argentina. Paraguay has a relatively open market economy, and the government allows the free importation of most goods and services. Government policy is to encourage free trade and capital flow, particularly with traditional trade partners like the United States. As a member of the Latin American Integration Association (ALADI), Paraguay favors low import tariffs. Moreover, as a member of Mercosur (southern cone common market), Paraguay favors a low Common External Tariff (CET) regime with a maximum rate of ten percent. Paraguay's import market is larger than appears in the official records. The formal trade sector, with registered transactions of 1.7 billion dollars in 1993, represents around twenty five percent of GDP. The informal commercial sector includes underground operations, whose activities are not registered in the national income account and are difficult to quantify. According to most observers, the informal sector generates transactions somewhere between three to seven billion dollars per year. Brief Synopsis of Commercial Environment Paraguay has a free market economic system. Since 1989, the government has liberalized and deregulated the economy, tightly controlled previously by President Stroessner's authoritarian regime. The government eliminated foreign exchange controls and implemented a free-floating exchange rate system, established tax incentives to encourage and attract investment, reduced tariff levels, launched a stock exchange market, reformed the tax structure, and started a process of financial reform. Paraguayans are friendly to foreigners and welcome foreign businessmen and foreign investment. In general, Paraguayans prefer imported goods, and local industry relies on imported capital goods. The government provides national treatment to foreign investors and businesspeople. Host Country Business Attitude Toward The U.S.. Paraguayan imports of U.S. made products have increased steadily since 1989. According to the U.S. Department of Commerce, U.S. exports to Paraguay totaled USD 520 million in 1993. United States products and services enjoy wide acceptability among the Paraguayan public. New U.S. products appear every day in Paraguayan shops. On occasion, however, U.S. companies have been kept out of the lucrative government procurement business in Paraguay through questionable government procurement practices. Major sectors for U.S. exports include computers and peripherals, machinery, automobiles, auto parts, and consumer goods. The U.S. maintains a healthy trade surplus with Paraguay. Major Business Opportunities Several large government investment projects could offer interesting opportunities for U.S. firms in the future. Paraguay and Argentina are considering a hydroelectric project at Corpus. The two governments plan to establish a concession to let private sector companies construct and manage the project. Another ambitious project will be the Hidrovia, a long-term river transportation project that aims to improve the navigation system of the river plate region, including the Paraguay and Parana Rivers. The project will be financed with funds provided by the IDB. The hidrovia project will fund improvements in roads and ports, and may include some river dredging. A U.S. consulting firm is preparing a feasibility study for the recuperation of the Ypacarai lake basin and the Bay of Asuncion funded by a TDA grant. The final report would include recommendations for the installation of wastewater treatment plants and the construction of dikes to prevent flooding of land bordering the Bay of Asuncion. The scheduled privatization of five state companies including the Paraguayan airline, the national steel company, the state merchant fleet, the Paraguayan railroad, and an alcoholic beverage plant could also offer attractive investment opportunities to prospective U.S. Investors. Other areas for business are: computer hardware, software and network products, home entertainment equipment, communications equipment, and office machines and equipment. Major Roadblocks To Doing Business There are no significant administrative or tariff barriers to U.S. exports. Paraguay has a relatively open market economy, and the government allows the free importation of most goods and services. U.S. exports to Paraguay rose to USD 520 million in 1993 from a modest USD 95 million in 1985--in part because of increased re-export opportunities. Difficulties in obtaining financing from U.S. Sources has prevented the gop from moving ahead with development and other large-scale projects that could have favored U.S. companies. For example, the government wants to buy a new air traffic control radar system from U.S. manufacturers, but it needs favorable financing. There are no restrictions on foreign investment, except for activities reserved for state monopolies (cement, electricity, water, and telephone), which remain closed to both national and foreign private investment. Paraguay welcomes and offers an open climate for foreign investors, who enjoy the same legal rights as do national investors. The government established a number of fiscal incentives to promote investment, both domestic and foreign. The government also signed a new agreement with the overseas private investment corporation on September 24, 1992. The legal framework governing investment incentives is contained in Law 60/90. The fiscal incentive package includes total exemption from certain taxes on the establishment of operations and reduction of customs duties on imports of capital goods. There is a 95 percent corporate income tax exemption for five years. Foreign corporations doing business in Paraguay are subject to the same tax rules as those applied to domestic business entities. Nature of Local and Third Country Competition Paraguay has not developed industrial and technological capacity. Locally manufactured products do not compete with U.S. products. Nonetheless, U.S. manufactured goods face strong competition from Far East producers. Recently, the declining dollar has increased the competitiveness of U.S. products, particularly processed foods dominated by Brazil.