US embassy cable - 05ASUNCION926

UNCLAS SECTION 01 OF 02 ASUNCION 000926 
 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OIA 
STATE PASS TO USTR FOR LYANG 
USAID FOR AA/LAC ADOLFO FRANCO 
TREASURY FOR OSIA MAUREEN WAFER 
COMMERCE ITA SARAH COOK 
NSC FOR MIKE DEMPSEY AND SUE CRONIN 
SOUTHCOM FOR POLAD 
US SOUTHERN COMMAND MIAMI, FLORIDA 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, BEXP, PGOV, KMCA, PA 
SUBJECT: Putting It Together: Paraguay's Maquilas Provide 
Open Door to MERCOSUR 
 
REF: ASUNCION 714 
 
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Summary 
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1. In operation since 2001, Paraguay's maquilas are designed 
to stimulate local manufacturing for export.  Under 
preferences unique to Paraguay, only forty percent of the 
content of the products must originate within MERCOSUR for 
the products to enter other MERCOSUR countries tariff-free. 
The sector is currently experiencing rapid growth.  With 23 
maquilas currently in operation, Paraguay hopes to expand 
the sector through marketing and promotion efforts.  The GOP 
has included support to the maquila unit in its proposed 
country plan for the Millennium Challenge Account Threshold 
Program as a way to foster greater access to jobs in the 
formal sector, particularly in the tri-border region.  End 
Summary. 
 
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Putting It Together 
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2.  Paraguay's maquilas date to a series of investment 
strategies approved in 2001.  Like other regimes in Mexico 
and Central America, the Paraguayan model is designed to 
stimulate local manufacturing, and provides for a local 
company to produce goods by adding value to foreign-produced 
inputs imported solely for the manufacturing process.  The 
final product is then exported for final sale, though 
Paraguayan regulations do allow for limited local 
distribution. 
 
3. The Paraguayan maquila regulations allow for both the 
traditional industrial production and the provision of 
services.  Regulations provide for the input of tangible and 
intangible inputs which must be returned abroad by either 
tangible or intangible means, e.g. software or database 
information. 
 
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Grading For Content 
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4.  The Ministry of Industry and Commerce's Rolando Diaz 
told Econ Chief that Paraguay's geographic location allows 
easy overland and/or river access to major South American 
markets in Argentina and Brazil, but that its true 
advantages for maquila operators lie in special product 
content preferences within the MERCOSUR trade area.  Under 
an arrangement unique to Paraguay, only 40 percent of the 
inputs in Paraguay's maquila-produced goods must originate 
in the MERCOSUR area for the final products to enter the 
common market tariff-free.  Inputs in this instance can 
include water, power, transportation, financing and labor, 
and may be sourced from any MERCOSUR member. 
 
5.  Paraguay's other advantages include competitive labor 
and energy costs, cheap land and a favorable tax structure 
for maquila goods.  Producers are only required to pay one 
percent of the value added in Paraguay.  They also enjoy a 
tax exemption on their investments, and are entitled to tax 
rebates on some costs such as electricity.  Despite generous 
incentives to locate maquilas in the country, disadvantages 
to Paraguay-based production remain.  While the day-to-day 
cost of labor in the country remains among the lowest in the 
region, there remains a lack of flexibility in labor 
regulations, meaning that employers can bear high costs if 
they must dismiss workers later.  Paraguay's MERCOSUR 
preferences, designed to jump-start local manufacturing, 
will begin to phase out in 2008, reaching full parity with 
fellow member states in 2015. 
 
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Impressive Numbers 
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6.  In spite of the generous incentives given to 
manufacturers under the 2001 maquila regulations, Paraguay's 
maquila sector has only recently seen large-scale growth. 
There are currently 23 maquilas in operation, with another 
26 approved to begin production. Numbers released by the 
Ministry of Industry and Commerce (MIC) show that as of May 
2005, maquila-produced exports totaled USD $7,154,138, an 
increase of 137% over the same period in 2004.  Among the 
leaders in maquila-produced exports are wood moldings and 
parquet flooring, tanned leather and swimwear. 
 
7.  As reported reftel, Brazilian company Mega Plasticos is 
investing USD $18 million in a synthetic rubber factory 
under the maquila regime.  Paraguay Vende, a USAID-sponsored 
initiative designed to facilitate legal commerce, provided 
Mega Plasticos with legal and other assistance that helped 
secure the company's decision to invest in Paraguay.  Diaz 
told Econ Chief that the MIC is interested in promoting 
Paraguay's maquilas abroad, including to U.S. companies 
interested in entering the South American market.  The GOP 
has included support to the maquila unit in its proposed 
country plan for the Millennium Challenge Account Threshold 
Program as a way to foster greater access to jobs in the 
formal sector, particularly in the tri-border region. 
 
KEANE