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SUMMARY slight contraction, however, in 2009 following a severe drought and the impact of the world (1) INTRODUCTION economic crisis. In 2010, the economy experienced a notable recovery, sustained by 1. Paraguay has a very open trade and the increase in global prices of raw materials investment regime. Applied MFN tariffs are and by the implementation of expansionary relatively low (8.5 per cent on average) and fiscal and monetary policies. As a result of there is little recourse to non-tariff measures. economic growth, per capita GDP doubled The aim of Paraguay's medium-term trade during the review period, although reducing strategy is to boost the role of international poverty and inequality are still major trade as an engine for economic growth and to challenges for the Government. diversify its export base, which remains focused on a few agricultural products and on 5. Paraguay stabilized its public finances a small number of markets. Paraguay is also during the period under review following the seeking to enhance the business climate so as implementation of fiscal reforms, which to attract larger flows of foreign investment included improvements to the structure and and thus foster economic growth and administration of taxation. The central employment. Government posted a primary surplus throughout the period, which enabled it to 2. Since the previous Review increase public spending in order to deal with (April 2005), Paraguay has continued to apply the economic crisis in 2009. Further progress measures to facilitate trade, with the result that still has to be made in tax reform, however, customs procedures have been streamlined, and in broadening the tax base, inter alia, by mainly by setting up single windows for introducing personal income tax and imports and exports. In parallel, Paraguay has eliminating certain tax exemptions. made efforts to build its institutional capacity for foreign trade, for example, by establishing 6. There has been a gradual shift in a body responsible for ensuring compliance monetary policy towards the setting of an with commitments to notify technical inflation target, which was 5 per cent for 2010, regulations. In addition, Paraguay has adopted with a variation of +/-2.5 per cent. Paraguay measures to improve enforcement of has a floating exchange rate regime, even intellectual property rights, including reform though the Central Bank does sometimes of the Penal Code; this area nevertheless intervene in order to mitigate sharp remains one of concern for Paraguay's fluctuations in the exchange rate. During the authorities and its trading partners. review period, the real effective exchange rate rose by around 20 per cent; this has helped 3. Paraguay's trade policy is strongly reduce imported inflation, without any influenced by its membership of apparent adverse impact on exports. Bank MERCOSUR, under which it has signed interest rates have fallen and private sector preferential agreements with the majority of credit has shown a notable increase. Latin American countries, as well as with some countries outside the region. 7. Paraguay's foreign trade grew rapidly over the period 2004-2010, reaching 98 per (2) ECONOMIC ENVIRONMENT cent of GDP, which reflects the high degree of openness of the country's economy. 4. Paraguay's economy enjoyed sustained Agricultural products remain the largest growth during most of the period under review export, while imports consist essentially of (2004-2010), chiefly driven by dynamic manufactures. A high percentage of goods performance in agricultural production. GDP imports are re-exported. The traditional deficit increased at an annual average rate of close to in the trade balance is offset by the large 5 per cent between 2004 and 2008, with a amounts earned from royalties and other WT/TPR/S/245 Trade Policy Review Page viii

business services related to the sale of promotion of investment and exports, was electricity. Paraguay's leading trading partners established in 2005 and involves closer are MERCOSUR, the European Union and coordination with the private sector. China. In recent years, MERCOSUR's role has decreased, while China has become the 11. Paraguay has been an active main source of imports. participant in the Doha Development Agenda trade negotiations and since 2005 has (3) TRADE AND INVESTMENT REGIME co-sponsored proposals in the areas of trade facilitation, intellectual property rights, 8. Paraguay's trade regime is to a large non-agricultural market access, and extent framed by its participation in agriculture. Paraguay has maintained a solid MERCOSUR. The development objectives of record of notifications to the WTO over the the present Government, in which trade policy review period, with only a few outstanding. It plays a leading role, especially as regards the has not been a party, either as a complainant or promotion and diversification of exports and as a defendant, in any WTO dispute settlement export markets, can be found in the Economic procedure, although it has participated as a and Social Strategic Plan (2008-2013). These third party. objectives are complemented by the proposals contained in the Social Development Policies (4) TRADE POLICIES BY MEASURE (PSD 2020), whose strategic objective is to promote and develop the conditions to permit 12. Since the previous Review in 2005, inclusive, sustained growth. Paraguay has continued to adopt measures to streamline and modernize its trade regime. 9. As a member of MERCOSUR, These efforts have led to the simplification of Paraguay has signed framework agreements to customs procedures and trade facilitation. formally initiate preferential trade negotiations After setting up a Single Window for with various countries outside the region, Exports (VUE), in July 2010 Paraguay also although in some cases these still have to be introduced a Single Window for Imports ratified. Since 2005, a partial scope agreement (VUI), enabling electronic clearance of all between MERCOSUR and India and a free overseas buying and selling operations. trade agreement with Israel have come into Imports are cleared through three channels: force. Agreements between MERCOSUR and green, orange or red. Goods sent to the red Egypt, on the one hand, and the Southern channel undergo documentary checks, Africa Customs Union (SACU), on the other, physical inspection and verification of customs have been signed but have not yet come into value. effect. Paraguay has not ratified the MERCOSUR Protocol of Montevideo on 13. During the period under review, Trade in Services. Paraguay applied reference values to certain products, mainly textiles and made-up articles, 10. Paraguay is open to foreign for a limited period. According to the investment and its legislation guarantees equal authorities, the purpose of this measure is to treatment for foreign and Paraguayan prevent unfair trade practices such as false investors. It also belongs to several declarations of value and tax evasion. international arbitration mechanisms for the Paraguay makes use of prior authorizations settlement of investment-related disputes. and import prohibitions for health, Attracting investment plays a key role in environmental, security, economic Paraguay's development strategy; the development, balance-of-payments or Economic and Social Strategic Plan safeguards reasons, and to protect domestic 2008-2013 mentions the need to improve the industry from imports. Since the previous business environment in order to attract Review, new requirements on registration and investment. "REDIEX", a new agency for the prior licensing for imports of clothing, meat Paraguay WT/TPR/S/245 Page ix

products and poultry offal have been Information and Notification System (SNIN), introduced. which covers technical regulations, standards and conformity assessment procedures. Since 14. Paraguay applies MERCOSUR's November 2006, when Paraguay first notified Common External Tariff (CET) with a draft technical regulation, the Paraguayan exceptions concerning 23 per cent of all tariff authorities have notified the WTO of all the lines, resulting in an average tariff lower than proposed technical regulations deemed to MERCOSUR's average CET. During the affect trade, even where these are identical to period under review, tariff protection lessened regional or international standards. By slightly, with the arithmetic average of applied November 2010, Paraguay had submitted MFN rates in 2010 falling to 8.5 per cent 32 notifications of draft technical regulations compared to 8.9 per cent in 2004. This to the WTO. The conformity of imports with reduction was mainly due to the lowering of these technical regulations is verified at the tariffs on capital goods. The average applied border. MFN tariff is 10.0 per cent for agricultural products (WTO definition) and 8.3 per cent for 17. During the period under review, non-agricultural products. All rates are Paraguay greatly increased the number of its ad valorem. Paraguay did not make use of notifications of sanitary and phytosanitary temporary or variable levies on imports during measures, although in most cases the the review period. All tariffs are bound at notifications concerned measures already rates ranging from 10 to 35 per cent, giving adopted and not draft regulations or Paraguay an average bound tariff of 32.4 per legislation. In late 2010, the authorities were cent. There is still a large difference between in the process of establishing an agency to applied tariffs and bound tariffs and bridging centralize notifications on sanitary and this gap in the context of the current trade phytosanitary measures and enable the negotiations would yield benefits in terms of notification of draft measures and the transparency and predictability. Market access processing of comments and remarks. commitments on agricultural products are not subject to tariff quota-based limitations. 18. Paraguay has no special legislation on competition, even though certain laws contain 15. In addition to tariffs, imports are relevant provisions, and, as at December 2010, subject to a valuation fee of 0.5 per cent of the the National Congress was reviewing a transaction value, a consular fee for endorsing preliminary draft law on the subject. At the the documents, and duty equivalent to 7 per regional level, Paraguay has signed cent of the consular fee to finance the National MERCOSUR's Competition Protocol (PDC) Indigenous Institute. Value added tax (VAT) and its implementing regulations, which have is imposed on imported goods and services been incorporated into Paraguay's domestic alike and applies at a general flat rate of 10 per legislation. Paraguay does not in general cent, with a few exceptions. Agricultural apply price controls on goods or services, with products in their natural state are exempt from the exception of electricity rates for VAT. The selective consumption tax applies low-income households and a maximum to a group of products, whether imported or selling price for certain types of diesel fuel. domestically produced, essentially tobacco, alcoholic beverages, perfumes, petroleum 19. Paraguay provides a series of fuels, etc., at rates which vary between 1 and incentives, for the most part fiscal, for 38 per cent. investment and production, for which both Paraguayans and foreigners are in general 16. One important step forward since the eligible. Some benefits are contingent on the previous Review has been in relation to use of domestic capital goods or the notification of technical regulations. This has involvement of Paraguayan consultants. been made possible by creating the National Official credit programmes are also in place, WT/TPR/S/245 Trade Policy Review Page x

some targeting specific sectors. The (5) SECTORAL POLICIES automotive industry benefits from a special regime that requires an increasing use of 22. Agriculture remains a key sector of national components. Paraguay also has Paraguay's economy, accounting for 19.3 per special regimes for exports, such as temporary cent of GDP and 29.5 per cent of jobs in 2009. admission, free zones, in-bond processing Exports of agricultural products represent (maquila), and the raw materials regime. some 90 per cent of goods exports and consist Enterprises under the maquila regime pay a mainly of soya beans, their by-products, and flat rate tax of 1 per cent of the national value livestock products. Government domestic added or the invoicing, whichever is higher. support in the agricultural sector is relatively Enterprises exclusively engaged in export and low. Domestic support is targeted at family operating under the free zone regime pay a flat farms and small-scale producers and rate tax of 0.5 per cent on gross income from essentially consists of technical assistance, exports; in addition, enterprises in free zones research projects and distribution of inputs. In may sell finished goods and services in March 2005, Paraguay abolished export taxes Paraguayan customs territory in an amount on agricultural products. equivalent to a maximum of 10 per cent of the enterprise's gross income from sales, only 23. The manufacturing sector's role in the paying the flat rate free-zone tax. economy is fairly limited, with a 13 per cent share of GDP and 11 per cent of jobs in 2009. 20. Paraguay is not a signatory to the There is a low level of value added and little WTO Plurilateral Agreement on Government diversification in this sector, although the Procurement. During the period under review, export of some products has been relatively Paraguay continued to reform its regulatory dynamic in recent years. The major industries and institutional framework for government are involved in processing agricultural procurement, commenced in 2003, in order to products or producing consumer goods. enhance the quality and efficiency of Paraguay has a number of official programmes government procurement procedures. in support of the sector, including tax Nonetheless, it also used the government exemptions and investment credits, together procurement system as an economic policy with a programme for the automotive industry. tool to promote domestic production and There is a draft law on industrial policy whose employment, mainly by giving price objective is to attract investment to the preferences for local goods and services. manufacturing sector.

21. During the period under review, a 24. Paraguay has abundant hydroelectric number of changes to the legal regime resources and is a large exporter of electricity. governing intellectual property were On an annual basis, the Itaipú binational introduced, for example, an amendment to the hydroelectric power station, operated jointly Patent Law revising the granting of with Brazil, is the largest energy producer in compulsory licences, publication of patent the world. The State-owned company ANDE applications and their substantive examination. controls all segments of the domestic Paraguay has continued to make efforts to electricity market. Substantial investment in improve the enforcement of intellectual the power transmission and distribution property rights, inter alia, by reforming the infrastructure is needed to meet growing Penal Code in order to increase the penalties demand and eliminate bottlenecks. and by creating an intelligence unit to identify, prevent and prosecute piracy, counterfeiting 25. Paraguay depends on imports to meet and tax evasion. Despite these endeavours, its hydrocarbon needs. The State-owned enforcement of rights remains a matter of company PETROPAR is the main importer of concern for both Paraguay and its trading petroleum based fuels; private firms may also partners. import such products, provided that they have Paraguay WT/TPR/S/245 Page xi

the necessary legal authorization. The price at 28. The State-owned company COPACO which PETROPAR sells certain types of diesel has a de facto monopoly on basic telephony. fuel to distributors is fixed by the Government, The mobile telephony market is open to and this has had a negative impact on the private investment and has gradually absorbed company's financial situation because of the the unsatisfied demand for fixed telephony. In rise in international hydrocarbons prices in March 2009, international access to the recent years. There are fiscal incentives for Internet using fibre optics - hitherto a producing biofuels, provided that domestic COPACO monopoly - was liberalized. raw materials are used; furthermore, diesel Telecommunications services are provided by fuel must be mixed with biodiesel in the means of concessions, licences or proportions determined by the authorities. authorizations. Foreign companies must be domiciled in Paraguay or appoint a legal 26. Services are the largest sector in representative. In late 2010, a new law on Paraguay's economy, accounting for 51.2 per information and communications technology cent of GDP and 53.1 per cent of jobs (2009). was being prepared, together with regulations Paraguay's commitments under the General on number portability and separate accounting. Agreement on Trade in Services are limited to certain financial services and tourism. 29. Being a landlocked country, Paraguay Paraguay did not take part in the negotiations faces some of the highest transport costs in on financial and telecommunications services Latin America. Over 70 per cent of the that followed the Uruguay Round. country's external trade goes by river, notably along the Paraguay-Paraná Waterway. The 27. The banking system was reinforced law reserves river and maritime transport of during the period under review and maintains imports and exports for Paraguayan-registered adequate solvency and capitalization ratios, vessels; this restriction does not, however, while financial regulation and supervision apply to vessels of countries that are parties to have been improved. Banking legislation the River Transport Agreement for the makes no distinction between domestic and Waterway. The private sector may build and foreign capital, and the latter plays an operate river ports that compete with public important role in the sector. The financial ports, while airports providing commercial spread has lessened, even though it remains services are operated by a State body, although relatively wide. Companies established in it is planned to grant airport management Paraguay or subsidiaries of foreign companies concessions to the private sector in the near with separate capital may engage in insurance; future. Basically, land transport relies on the subsidiaries of foreign companies may operate road network; developing the railway network under the same conditions as domestically as part of an inter-oceanic linkage project is a owned companies. Cross-border insurance Government priority. operations are allowed.