Paraguay WT/TPR/S/26
Page 17
II. TRADE AND INVESTMENT POLICY REGIME: FRAMEWORK AND OBJECTIVES
(1) Introduction
1. Since theendofthe35-year dictatorship in1989, wide-ranging changes havebeenintroduced
inParaguay 'slegal andconstitutional framework. These include theintroduction ofdemocratic
government, theadoption ofanewConstitution, accession totheGATT, newcommitments under
theUruguay Round andmembership oftheSouthern Common Market (MERCOSUR). Restrictions
oninvestment havebeeneliminated while guarantees andincentives havebeenstrengthened. Paraguay
hasnotbeeninvolved inanymultilateral trade dispute.
(2) General Framework
2. Paraguay isaunitary republic, withaconstitutional separation ofexecutive, legislative and
judicial powers.
3. Executive power isinthehands ofthePresident, whoiselected byuniversal suffrage fora
non-renewable five-year term.1ThePresident appoints theCouncil ofMinisters, whoneednotbe
members ofthelegislature orofthePresident 'spolitical party.
4. Legislative power isvested inabicameral Congress, composed ofa45-member Senate and
an80-member Chamber ofDeputies. Senators anddeputies (atleasttwofromeachDepartment) are
elected simultaneously (along withpresidential elections) byuniversal suffrage forafive-year term.
5. Attheheadofthejudicial system istheSupreme Court ofJustice whose Constitutional Chamber
hasthepower todeclare legislation unconstitutional. Theninemembers oftheSupreme Court are
nominated bytheCouncil ofMagistrates andappointed bytheSenate withtheapproval oftheExecutive.
Inrecent years, thelegalsystem hasundergone considerable change which ishelping tomake legal
processes more transparent. AnewSupreme Court assumed power in1995, andtheCouncil of
Magistrates wasaccepting application foralmost 700judgeships inthecountry; thisprocess wasnot
completed atthetimeofthefinalization ofthisreport.2
6. Under theConstitution of20June1992, governors ofdepartments anddepartmental councils
aredirectly elected forafive-year term, simultaneously withthepresidential andcongressional election.3
Mayors andmunicipal councils arealsoelected every fiveyears.
(3) Structure ofTrade Policy Formulation
(i) Legislative andexecutive branches ofgovernment
7. TheCongress maydebate, approve, amend, andrepeal laws. Billsmaybeintroduced by
members oftheCongress, congressional committees, ortheExecutive (thePresident astheheadof
1Article 229oftheConstitution.
2United States Department ofCommerce (1996).
3Article 161oftheConstitution.WT/TPR/S/26
Page 18Trade Policy Review
theGovernment), upon popular initiative orontherequest oftheSupreme Court.4Billsbecome law
afterpassing bothchambers andonreceiving theapproval oftheExecutive. TheExecutive mayreturn
billstoCongressonsimpleobjection;iftheseareagainpassedbyCongress,thePresidenthastoapprove
andpublish thelaw.
8. TheExecutivenegotiatesandsignsinternationaltreaties,whichareratifiedbyCongress.Positive
opinion isrequired bytheConstitutional Court before passing alaworratifying aninternational treaty.
9. TheEconomic Cabinet (established in1993, defines general policy guidelines andco-ordinates
theirobservance withspecialized government agencies.5Italsostudies andformulates recommendations
onthenational development planelaborated bytheTechnical Secretariat forPlanning.
10. TheMinistry ofIndustry andTrade (MIC) ischarged with conducting, co-ordinating,
implementing andmonitoring trade policy affecting goods andservices.6However, representation
innegotiations oninternational tradeandininternational tradeforaisassured bytheMinistry ofExternal
Relations inco-ordination withtherelevant governmental agency. Following theestablishment of
MERCOSURin1991,aMinistryofIntegrationwasestablishedtodealwithregionalintegrationmatters.7
11. AnInter-departmental Committee onWTO matters wascreated in1996tocoordinate thework
ofdifferent government agencies inareas suchasnotifications, renegotiation oftariff bindings, the
Trade Policy Review ofParaguay andagricultural matters.8Itisexpected that,asexperience grows,
co-ordination between different agencies andtheMinistry ofExternal Relations willbestrengthened,
andthiswillovercome some current weaknesses concerning transmission ofandcompliance with
notification requirements (Tables AII.1 andAII.2 andChapter III).
12. Fiscal policy ishandled bytheMinistry ofFinance while theCentral Bank ofParaguay isthe
principal coordinator ofmonetary policy (Chapter IV).
(ii) Advisory bodies
13. Noformal, overall periodic review oftrade policy isconducted byanyindependent body.
However, allministries consult extensively withbusiness interests within theNational Committee on
Integration setupinDecember 1994, theNational Council onForeign Trade, andtheInter-Departmental
Committee onWTO matters .
4Articles 203to217oftheConstitution. Theintroduction ofbillsrelating totheNational Budget, codes,
international treaties, fiscal matters, theorganization ofState powers andthose deriving from popular initiative
cannot originate withcongressional committees.
5Decree 633of1993.
6TheMIC isalsocharged withoverall industrial policy coordination.
7Law93,11Decemb er1991,citedinPresidenciadelaRepública/MinisteriodeRelacionesExteriores(1996),
p.139.
8Informe delExcelentísimo Señor Presidente Constitucional delaRepública delParaguay alHonorable
Congreso Nacional ,1July1996, p.48; Decree 14956 of1996.Paraguay WT/TPR/S/26
Page 19
(4) Trade Policy Objectives
(i) General trade policy objectives
14. Since 1989 Paraguay 'strade policy objective hasbeentorationalize andreduce thelevelof
border protection. Itisseeking toexpand anddiversify itstrade, witharational andbalanced dependence
ondifferent markets.
15. Paraguay views regional integration agreements asacomplement toitsownmarket-opening
measures. Itsupported theadoption ofmore liberal sub-regional trade policies within MERCOSUR,
when theCommon External Tariff (CET) wasdesigned.
(ii) Sectoral trade policy objectives
16. Paraguay hasnever aimed atdeveloping specific sectors through import substitution policies.
Until 1994, priortotheentry inforce ofmajor MERCOSUR commitments, Paraguay 'ssectoral trade
policy objective wastoassure theabsorption ofsensitive domestic agricultural andmanufactured items
throughadhoctemporaryorseasonalimportrestrictions.Thisapproachisbeingprogressivelyovertaken
withthegradual implementation ofMERCOSUR 'stradepolicy commitments which make noprovision
forseasonal measures ordomestic absorption (section (6)(ii)(b) ofthisChapter, Chapters IIIandIV).
17. Under MERCOSUR, Paraguay 'ssectoral trade policies include substantial tariff escalation,
providing higher protection forprocessing industries. Other sectoral policy objectives are:toprovide
thebasiccomponents (e.g., credit, support services) forundisrupted production ofcashcrops; toensure
adequate supplies ofbasic public services (mainly justifying Stateinvolvement intheproductive and
tradesector); tosatisfy public finance needs (through shopping tourism encouraged bytaxconcessions;
andtomeetenvironmental protection objectives (forest exploitation, Chapter IV).
(iii) TheUruguay Round andtheWTO agenda
18. Paraguay participated intheUruguay Round fromitslaunching in1986(even priortoitsGATT
accession on6January 1994), ratified theMarrakesh Agreement on10November 1994 andbecame
afounding member oftheWTO on1January 1995.9
19. AtthefirstMinisterial meeting oftheWTO inSingapore inDecember 1996, Paraguay stressed
theneedforeffective WTO instruments which would support theefforts ofdeveloping countries to
promote export-led growth.10Iturged developed Members tobegin thepreparatory work forthe
negotiations envisaged intheWTO Agreement onAgriculture, arguing thatnegotiations inthisarea
should leadtothetotalelimination orsubstantial reduction oftariff peaks, export subsidies, domestic
support andother barriers which hampered orimpeded theimport offarm goods from developing
countries.
9Law 444, 10November 1994; MTN.TNC/MIN(94)/ST/84, 14April 1994; WT/L/113/Rev.6,
5December 1996.
10WT/MIN(96)/ST/75, 11December 1996.WT/TPR/S/26
Page 20Trade Policy Review
20. Paraguay wasanobserver attheMinisterial Meeting ofCairns Group heldinManila in
May1995; itwasexpected toobtain member status bymid-1997.11Paraguay didnotparticipate in
negotiations onbasic telecommunications andmaritime transport services (Chapter IV). Nointerest
wasexpressed inparticipating intheInformation Technology Agreement (ITA); onthecontrary, under
MERCOSUR 'stariffprotection pattern, which isapplied byParaguay, import duties onitems covered
bythisagreement aretoriseprogressively (section (6)(ii)(b) ofthisChapter andChapter III).
(5) Trade Laws andRegulations
21. Theprovisions ofinternational agreements ratified andpublished intheOfficial Gazette are
implemented directly, superseding existing domestic legislation, andcannot beaffected bysubsequent
domestic laws. MERCOSUR decisions, directives andresolutions havesimilar status butdonotrequire
legislative approval; these legaltexts, which arepublished intheOfficial Bulletin ofMERCOSUR,
areadopted bydecree andimplemented afterpublication inthedomestic Official Gazette.
22. TheprovisionsofWTOAgreementsareconstitutionallysuperiortothoseofdomesticlegislation
andMERCOSUR provisions affecting trade withthird countries.12More specifically, theWTO
Agreements, nowincorporated intonational legislation, supersede previous legislation notinconformity
with their provisions andcan,therefore, bedirectly invoked before thecourts, including the
Constitutional Court. They havenotbeendirectly invoked todate.
23. There areanumber ofareas where Paraguay hasyettomeetWTO notification requirements
(Tables AII.1 andAII.2 andChapter III);theauthorities indicated thatthissituation ispartly dueto
thetransitional period ofadoption andimplementation ofMERCOSUR provisions which alsorequire
modifications toParaguay 'slegalframework. Tofacilitate thenotification process, inJanuary 1997,
theWTOCentralRegistryofNotificationsindicatedtotheauthoritiesoutstandingnotificationsinvarious
areas. Theauthorities alsoindicated thattherecent issue ofamanual inSpanish would facilitate
completion ofnotification requirements.
24. Under theConstitution, agrarian reform isviewed asameans ofraising welfare inruralareas.
Theprogramme istobecarried outbyvarious means, including fiscal andother measures toboost
production, discourage large landholding andguarantee thedevelopment ofsmall andmedium-sized
rural landholding; theexpropriation ofunproductive large landholding isalsoenvisaged.13Natural
resources (e.g., hydrocarbons, minerals inanyform) aredefined astheproperty oftheState tobe
exploited through concessions, withalegislated fiscal régime. Theelectromagnetic communication
waves arealsoState-owned, andtheirexploitation mustberegulated bylaw.Privatization plans must
provide forpreferential purchase conditions infavour ofthestafforfirms directly involved inthe
operations oftheentity concerned. TheConstitution alsorecognizes theroleofcooperatives forthe
production ofgoods andservices asaneconomic development tool. Theprotection ofintellectual
property rights isguaranteed.
25. Nosingle basic tradelawassuchexists inParaguay. Trade policy guidelines areincreasingly
based onMERCOSUR provisions (Chapter III(2)(i)). Since 1995several lawsontrade matters have
beenpromulgated, e.g.,onfree-trade zones, hydrocarbons, mining, reafforestation, banking, insurance,
11WTO document G/C/COM/1, 23June 1995.
12Article 137oftheConstitution.
13Articles 30,87,110, 111, 112, 113, 114, 115and116oftheConstitution.Paraguay WT/TPR/S/26
Page 21
telecommunications andmoney-laundering. Atthetimeofcompletion ofthisreport draftlawswere
being debated intheCongress ontrademarks, patents, competition, consumer protection andassembly
operations.
(6) Trade Agreements andArrangements
(i) Multilateral agreements
26. Paraguay 'saccession totheGATT in1994 wasseenbytheauthorities asakeyachievement
intheareaofforeign trade policy. Itwasalsoseenasastrengthening ofthecountry 'snegotiating
position within MERCOSUR.
27. Under theAgreement Establishing theWTO, Paraguay assumed, aspartoftheSingle
Undertaking, allcommitments under theMultilateral Trade Agreements. Italsosigned onePlurilateral
TradeAgreement,theInternationalBovineMeatAgreement.Despitethelackofspecificplans,Paraguay
doesnotexclude thepossibility ofaccession toother plurilateral trade agreements.14
28. Since 1971, Paraguay hasbeen abeneficiary under various GSP(Generalized System of
Preferences) schemes but,asindicated bytheauthorities, thedegree ofutilization hasbeenparticularly
low.
29. Paraguay hasnotbeenaparticipant intheGeneralized System ofTrade Preferences among
Developing Countries (GSTP); atpresent, asaconsequence ofitsmembership ofMERCOSUR, which
hasacommon external trade policy, itisrenegotiating concessions withother GSTP participants.
30. Paraguay isasignatory totheAgreement Establishing theCustoms Co-operation Council (now
theWorld Customs Organization). Itisamember oftheUnited Nations, theWorld Bank andthe
International Monetary Fund, aswellasanumber ofregional bodies including theInter-American
Development Bank (IDB) andtheOrganization ofAmerican States (OAS).
(ii) Regional agreements
31. Since theearly1990s, Paraguay 'ssub-regional commitments havebeenextended anddeepened.
Their expansion totherestofthecontinent isunder way. Inrecent years merchandise trade(especially
imports) withMERCOSUR partners hasgrown rapidly (Chapter I).
(a) LAIA
32. Paraguay isamember oftheLatin American Integration Association (LAIA), established on
12August 1980 bytheMontevideo Treaty, replacing theLatin American FreeTrade Association
(LAFTA). Thelong-term objective oftheMontevideo Treaty isthegradual andprogressive
establishment ofaLatin American Common Market. Theinstruments usedtoattain LAIA objectives
14TheAgreemen tonTradeinCivilAircraft,theAgreemen tonGovernmentProcurementandtheInternational
Dairy Agreement. Theplurilateral trade agreements arebinding onlyonthose WTO Members thathaveaccepted
them.WT/TPR/S/26
Page 22Trade Policy Review
comprise twomaincategories ofagreements: Regional-Scope Agreements, where allmember countries
participate according totheirlevelofdevelopment15,andPartial-Scope Agreements thatbindonlytheir
signatories.
33. Paraguay hasmaintained Partial-Scope Agreements withallLAIA members.16Outside
MERCOSUR,thesecompriseEconomicComplementarityAgreementswithBolivia,Colombia,Ecuador,
Mexico, PeruandVenezuela. Paraguay anditsMERCOSUR partners areintheprocess ofrenegotiating
theirbilateral agreements withother Latin American countries sothatthese become asingle setof
agreements ofthesub-regional group.
34. Apart fromgranting tariff preferences, some oftheLAIA agreements areaimed atfostering
economic complementarity anddeveloping economic co-operation among signatories. Additionally,
aReciprocal Payments andCredit Agreement isintended tofacilitate intra-regional transactions
(Chapter I).
35. Thefirstreport onLAIA activities totheWTO wassubmitted in1996andcovers developments
until1994; similar reports hadbeenpresented totheGATT.17
(b) MERCOSUR
36. Paraguay isamember oftheMERCOSUR, established inMarch 1991 under theTreaty of
Asunción; whose objective wasthecreation ofacommon market andthefreecirculation ofgoods,
services, capital andlabour among member countries asfrom1January 1995.18MERCOSUR, initially
onlyanagreement within theLAIA framework, hassince 1995 acquired anindependent legalstatus
and,since January 1997, membership hasbeenopentoother LAIA countries.19
37. MERCOSUR 'sinstitutional structure, established under the1994Protocol ofOuro Preto (in
force since December 1995), comprises, inhierarchical order: theCouncil oftheCommon Market,
which meets atleast every sixmonths; theCommon Market Group, anexecutive body; the
MERCOSURTradeCommission,whichmonitorstheapplicationofthecommontradepolicyinstruments,
reviewsissuesrelatingtocommontradepolicies,intra-MERCOSURtradeandtradewiththirdcountries,
andmeets atleast once amonth; theJoint Parliamentary Commission, anadvisory body; the
15ALADI/AR.PAR/4, 1August 1990; Regional Scope Agreement No.4; andAmending Protocol of
12March 1987. Countries areclassified inthree categories: (i)most-developed, (ii)those atanintermediate
stage ofdevelopment, and(iii)leastdeveloped. Paraguay benefits from aleast-developed-country status within
LAIA. Countries higher upintheclassification areexpected togrant more benefits thanthose standing lower
andmake aneffort togrant deeper preferences toleast-developed countries aswellasonproducts ofspecial
export interest tothem.
16WT/COMTD/7, 30September 1996, andinformation supplied bytheGovernment.
17LAIA reports totheGATT andWTO arefound in:(i)GATT documents L/6946, 20December 1991;
L/6985,5March1992;andL/6985/Add.1,9April1992;(ii)WTOdocumentWT/COMTD/7,30September1996.
18Theprovisions oftheTreaty ofAsunción were incorporated inLAIA 'slegal framework through Economic
Complementarity Agreement No.18;other participating countries (also LAIA members) areArgentina, Brazil
andUruguay. More information onMERCOSUR iscontained intheTPRreports ofBrazil, Colombia, Venezuela
andUruguay (WTO (1996a, bandc);andGATT (1992)).
19Article 34,Chapter IIofLaw596, 15June 1995, adopting the1994 Protocol ofOuro Preto.Paraguay WT/TPR/S/26
Page 23
Economic-Social Consultative Forum, anadvisory body; andtheMERCOSUR Administrative
Secretariat. AttheFortaleza meeting oftheCommon Market Council inDecember 1996, plans to
setupaMERCOSUR development bank tofinance infrastructure projects inthesub-region were
announced.20
38. UndertheTradeLiberalizationProgramme,betweenJune1991and31December1994virtually
allbarriers totradeamong MERCOSUR partners, covering closeto95percentofintra-regional trade
wereeliminated.21Arégime ofadjustment, agreed inAugust 1994, istoleadtoaprogressive phase-out
ofremaining tariffs onintra-regional trade. Thesensitive items which arecontained inindividual
exception/adjustment lists,aresubject tothephased change, between 1January 1995and31December
1998forArgentinaandBrazil,between1January1996to31December1999forParaguayandUruguay.
Atthesame time, thisrégime wasextended bywaiver topermit theprogressive adjustment ofsugar
andautomotive sectors toMERCOSUR rules; acommon automotive régime istobeestablished by
theyear2000, while amechanism forthephase-out ofduties onsugar wastobesubmitted tothe
Common Market Group byMay1997.22Paraguay 'sexception/adjustment listcontains 431eight-digit
HSitems forwhich duty-free treatment istoapply asof1January 2000(Chapters IIIandIV).Paraguay
(andUruguay) benefit from preferential rules oforigin within MERCOSUR (Chapter III).
39. TheCommon External Tariff (CET) ofMERCOSUR hasbeeninforce since January 1995,
covering about 85percentofimports from outside theregion. Asdiscussed inChapter III,itsfull
implementation istotakeplaceby2001forArgentina andBrazil andby2006forParaguay andUruguay.
Thisconsists ofagradual increase orreduction inrates, depending onthecountry, onitems contained
inthecommon list,i.e.,capital goods, informatics, telecommunications items andthenational exception
lists. Tariff reductions forproducts contained innational exception listsmayonlybeaccelerated, not
delayed. ForParaguay, almost allrates willneed tobeincreased toconverge onCET levels.
MERCOSUR CET ratesmayonlybemodified withtheconsent ofallMERCOSUR partners.
40. Negotiations areunder wayfortheharmonization andco-ordination ofagricultural policies.
Production-sharing arrangements, which, interalia,areaimed atfostering therationalization of
investments andraising thecompetitiveness ofcompanies, maybenegotiated bytheprivate sector;
theapproval ofMERCOSUR 'sCommon Market Group isrequired. Thearrangements fortrade in
theautomotive sector aredescribed inBoxVI.3oftheTrade Policy Review ofBrazil, butthisdid
notinvolve Paraguay.23Paraguay didnotparticipate inanarrangement involving thesteelindustry,
inforce between 1992 and1994. Noother arrangements havebeennegotiated sofar.
41. MERCOSUR ministers meetperiodically toco-ordinate theirposition onareassuchasinflation,
foreign investment andtrade, andtheadoption ofcommon positions ininternational fora. Co-ordination
isalsobeing strengthened innon-economic areas, asMERCOSUR encompasses adiversified agenda
including environment, justice, education andlabour issues.
20Financial Times, 18December 1996.
21Thetrade coverage limitation refers onlytoitems under therégime offinaladjustment, nottotheexceptions
such asforautomobiles, sugar andnational concessionary régimes.
22Presidencia delaRepública/Ministerio deRelaciones Exteriores (1996), pp.68and69;MERCOSUR
Decisions 29/94 and16/96.
23WTO (1996a).WT/TPR/S/26
Page 24Trade Policy Review
42. MERCOSURmembershaveadoptedcommonpositionsinrenegotiationsofexistingpreferential
agreements within theLAIA framework andtheestablishment offree-trade areas. Theso-called "four
plusone"method (i.e., MERCOSUR members negotiating asagroup withindividual countries) has
beenusedand,inthiscontext, agreements havebeenconcluded withChile andBolivia which thereby
gained associate member status; theconclusion ofthese agreements wascommunicated totheWTO
inApril 1997 anddiscussed attheMay1997 meeting oftheCommittee onRegional Agreements.24
TheAndean countries haveexpressed theirpreference forgroup-to-group negotiations. Theprocess
ofextending sub-regional agreements isconsidered aspartofthe"building block" approach forthe
establishment ofaSouth American Free-Trade Area (ALCSA).
43. Under theAgreement signed withChile, which entered inforce on1October 1996, duty-free
treatment willcover about 90percentoftraded goods within eightyears; fortheremaining 10percent
ofitems (sensitive andverysensitive items) thetariff elimination period issetat10,15and16years,
except forwheat which willrequire 18years. Areas suchasrules oforigin, intellectual property,
transportation, communications, services, investment anddispute settlement arealsocovered bythis
Agreement (Chapter III).
44. TheAgreement withBolivia, which encompasses therenegotiation oftheexisting preferential
agreements, wasconcluded inDecember 1996 andwasduetocome intoforce on1March 1997.
Itistoleadtoafree-trade areawithin aperiod oftenyears.
45. Further negotiations ofthistypeareplanned withotherintegration groups orindividual partners
intheregion. In1996, theAndean Community (ex-Andean Group, formed byBolivia, Colombia,
Ecuador andVenezuela) expressed interest ininitiating negotiations foraframework accord leading
toaFree-Trade Area withMERCOSUR.25Negotiations fortheestablishment ofafree-trade area
between MERCOSUR andMexico, initiated inOctober 1996, areexpected toconclude in1997.26
Following Panama 'sexpression ofinterest inconcluding anagreement withMERCOSUR, negotiations
wererecentlyinitiated.Theintentiontonegotiateanassociationagreement,concentratingonagriculture,
energy, telecommunications andtourism, withtheCaribbean Common Market (CARICOM) was
announced inFebruary 1997.27
46. MERCOSUR countries havesigned anagreement withtheUnited States (June 1991) forthe
promotion oftradeandinvestment (Agreement relating toaCouncil onTrade andInvestment). There
isalsoaFramework Agreement forInter-regional Cooperation) signed withtheEuropean Union in
December 1995. TheEUagreement isintended toextend existing economic andtrade cooperation
toother fields, suchasscience andtechnology, environmental protection, communication, investment
24WTO document WT/COMTD/1/Add.4/Rev.1, 11April 1997.
25Andean Group Report, 10October 1996. Peru initiated itswithdrawal from theAndean Community in
April 1997.
26Financial Times, 25October 1996.
27CARICOM's14memb ersareAntiguaandBarbuda,Bahamas,Barbados,Belize,Dominica,Grenada,Guyana,
Jamaica, Montserrat, St.Kitts andNevis, St.Lucia, St.Vincent andGrenadines, Suriname, andTrinidad and
Tobago.Paraguay WT/TPR/S/26
Page 25
promotion, andthefightagainst illegal drugs trade. Thismayalsoleadtofuture negotiations ona
possible inter-regional association, including thereciprocal elimination oftrade barriers bythefirst
decade ofthenextcentury.28
47. MERCOSUR members havedeveloped acommon action programme ontheproposals fora
FreeTrade AreafortheAmericas (FTAA). Theprogramme, which seeks, interalia,coherence with
WTO provisions, hasbeendeveloped towork outrecommendations forthe1997Ministerial meeting
inthefollowing areas: market access; customs procedures andrulesoforigin; investment; technical
barriers totrade; sanitary andphytosanitary measures; subsidies, anti-dumping andcountervailing
duties; small-size economies; government procurement; intellectual property rights; services; and,
competition policy. ThelastMinisterial meeting tookplaceinBrazil (BeloHorizonte )on16May1997.
48. Paraguay 'sparticipation inMERCOSUR isseenasameans toovercome structural deficiencies
suchasthesmall sizeofthedomestic market, hightransport costsrelating toitsgeographical position,
technology restraints andscarce human resources.29Paraguay considered thatalowCETlevelwas
necessary toassist thestructural adjustment ofdomestic industries toraisetheircompetitiveness both
attheMERCOSUR andworld market levels. Theelimination ofintra-regional trade barriers ina
relatively short transition period isexpected toimprove thecompetitiveness ofParaguayan cotton,
soybeans andmeatwithin neighbouring markets. Paraguay alsohasavested interest intheestablishment
within MERCOSUR ofanopentraderégime, without adversely affecting orimmediately eliminating
itslow-taxrégimefavouringshoppingtourism(ChapterIII(4)(ii)),whichisofmajoreconomicimportance
tothecountry.30
49. Trade developments within MERCOSUR may compel structural changes inParaguay
(Chapter IV),andthese could, interalia,affect thecountry 'straditional entrepôt roleintheregion.31
Inorder tomaintain itsadvantage intriangular trade, consideration isbeing given toopposing orseeking
exemptions from anyattempt fortheharmonization ofindirect taxratesinMERCOSUR countries.
50. Concerns havebeenexpressed about thepossible trade diverting effects oftheMERCOSUR
scheme, inparticular theboosting ofintra-regional tradeininefficient sectors (seealsoChapter III).32
However, between 1990 and1995 totalimports rosefaster thantotalexports, andtrade withthird
countries alsogrewsubstantially inthesameperiod.33Changes inthetradepattern forcertain product
categories (e.g., those relating toagriculture andagro-industry) toward intra-MERCOSUR countries
28Presidencia delaRepública/Ministerio deRelaciones Exteriores (1996), p.120; Europe ,issue 6745,
10&11June 1996; Agra Presse ,issue 2570, 24June 1996.
29Breuer L.E. (1996).
30Presidencia delaRepública/Ministerio deRelaciones Exteriores (1996), p.74.
31EIU(1996b), pp.19,26and30.Paraguay 'straditional rôleasanentrepôt fortheregion dates back to
colonialtimes.Tradedistortionscreatedbyimportsubstitutionpoliciesinneighbouringcountries,roadconstruction
inBrazil andtheconstruction oftheItaipú damhave contributed totheexpansion ofunregistered trade inthe
1970s andthe1980s. Prices ofcertain luxury goods soldintheCiudad delEsteareadonotseem todiffer from
those inMiami (United States). Itseems thatthelinks between theCiudad delEstemarket andinformal labour
markets inBrazil 'slargest towns have been strengthened (Breuer, 1996).
32Yeats (1997).
33UNSTAT, Comtrade database.WT/TPR/S/26
Page 26Trade Policy Review
mayreflect changing comparative advantage andincreased competition within theregion, buttariff
escalation andahigher thanaverage incidence ofnon-tariff barriers oninputs fromtherestoftheworld
mayalsobeacontributing factor.34
51. Since February 1996, MERCOSUR hasbeenexamined inthelightoftherelevant provisions
ofGATT 1994, including Article XXIV (oncustoms unions andfree-trade areas), bythenewWTO
Committee onRegional Trade Agreements.35Until then, theWorking Party onMERCOSUR, set
upinMay1993, hadbeenexamining theoperation oftheTreaty ofAsunción which wasfirstnotified
totheGATT under theEnabling Clause inJuly1992.36MERCOSUR countries havesupplied tothe
GATT andtheWTO detailed information on:theelimination oftariff andnon-tariff restrictions; the
establishment oftheCETandtheadoption ofacommon tradepolicy inrelation tothirdStates orgroups
ofStates; thecoordination ofmacroeconomic policies; rules oforigin; measures affecting imports
fromthirdcountries; theapplication ofnational treatment; issues relating tocommitments under LAIA;
accession; dispute settlement; services; trade dataandstudies ontrade creation/diversion; andthe
institutional structure.37
(iii) Bilateral andother arrangements
52. Paraguay maintains economic and/or tradecooperation orassistance agreements withanumber
ofcountries, including Chinese Taipei (11May1962), Germany (21September 1978), Israel (2January
1987), theRussian Federation (15April 1993), Spain (31March 1971 and7September 1994) and
theUnited States (26September 1961). Agreements which guaranteed m.f.n. treatment forbilateral
tradewithEgypt, Italy, theRepublic ofKorea andsome other countries weresuperseded byParaguay 's
multilateral commitments when itacceded totheGATT in1994.
53. Paraguay receives unilateral official aidandloans fromabroad through economic co-operation
arrangementswiththemultilaterallendingagenciesandindividualcountries.Someoftheseprogrammes
areconcerned withthereform oftheStateorsectoral reforms, andassuchcould bebeneficial totrade
andproduction. However, therehavebeensome delays indisbursements linked topolitical difficulties
inobtaining congressional approval fortheGovernment 'sreform proposals.
(7) Trade Disputes andConsultations
(i) Dispute settlement under theWTO
54. Paraguay hasnever acomplainant oraplaintiff under theWTO dispute settlement mechanism.
55. Paraguay isasignatory oftheMarch 1996 declaration ontheHelms-Burton Act. According
tothesignatories ofthisdeclaration, thisActisnotinkeeping witheither thespirit ortheprinciples
34Yeats (1997).
35WTO document WT/L/127, 7February 1996.
36GATT documents: L/7044, 9July1992; L/7370, 18January 1994; andL/7370/Add.1, 18January 1994.
37ThisinformationiscontainedinWTOdocuments,mainlyWT/COMTD/1andaddendaandrevisions,1995-97.Paraguay WT/TPR/S/26
Page 27
ofinternational law,theUNCharter, theCharter oftheOrganization ofAmerican States, and,in
particular, theWTO andfree-trade agreements which hadbeensigned withtheUnited States.38
(ii) Disputes outside WTO
56. TheCommittee ofRepresentatives oftheLAIA provides aframework fortrade consultation
mechanisms. Thisbody makes proposals fortheresolution ofdifferences between members when
norms orprinciples oftheMontevideo Treaty arenotobserved. Bilateral commissions dealwith
problems, mostly intheareaofnon-tariff measures, arising from theimplementation ofbilateral
LAIA agreements.
57. MERCOSUR 'sdispute settlement procedures, initially established under theBrasilia Protocol
fortheSettlement ofDisputes of1991 (inforce asfrom April 1993), were amended andexpanded
bythe1994 Ouro Preto Protocol. Themechanism provides forthree successive stages forresolving
disputes: (i)direct negotiation, (ii)intermediation bytheMERCOSUR Trade Commission and,in
theabsence ofconsensus, recourse totheCommon Market Group (section II(6)(ii)(b)), and(iii)recourse
toanarbitration tribunal (panel ofexperts), whose decisions cannot beappealed. In1994itwasdecided
toestablish MERCOSUR 'sArbitration Tribunal inAsunción, butuptomid-1996, allcases hadbeen
solved withdirect negotiation (thefirststage). Thefirstformal dispute settlement case, involving a
complaint byaUruguayan paper firmontheapplication ofimport duties byArgentina, wasresolved
between theparties inApril 1997.
58. Paraguay hasstrongly supported theestablishment ofaMERCOSUR Court ofJustice39,which
itconsiders important tostrengthen therights ofthesmaller members.
59. TheMERCOSUR-Chile andMERCOSUR-Bolivia agreements provide foradispute settlement
mechanism based onapanel ofexperts.
(8) Investment Policy Framework
60. Inrecent years, Paraguay 'sinvestment promotion objectives havechanged fromthose aimed
atenhancing theproduction ofitems needed tomeetdomestic demand tothose intended tofoster the
adoption ofnewtechnologies, increase theofferofexportables andcreate newjobs. Restrictions on
foreign investment havebeeneliminated andthenewlegal framework hasstrengthened guarantees
andintroduced various incentives.
61. Paraguay 'slegal framework governing foreign investment isoneofthemost liberal in
Latin America. Nospecific restrictions affect theaccess oflegitimate foreign investment contributing
tothecountry'seconomicandsocialdevelopment.Nationalandforeigninvestorsenjoyequalguarantees,
rights andobligations.40There arenodiscriminatory credit policies andforeign investors areallowed
toraisefinancial resources locally.41Therightofprivate ownership, regardless oftheindividual 's
38WTO document G/C/M/9, 10April 1996.
39MERCOSURDecision28/94citedinPresidenciadelaRepública/MinisteriodeRelacionesExteriores(1996),
pp.18, 56and68.
40Law 117/91, 7January 1992.
41Inpractice, thisisrarebecause ofthelimited sizeandlending conditions ofthelocal capital market.WT/TPR/S/26
Page 28Trade Policy Review
countryoforigin,isguaranteedundertheConstitution.Expropriationcantakeplaceonlyafterindemnity
issettled, andspecial provisions, established under the1992Agrarian reform law(Chapter IV),apply
totheexpropriation oflarge landholding.42
62. While private sector participation isstillrestricted insome areas where statemonopolies exist,
suchastelecommunications, water/sewage andelectricity generation/distribution, recent government
action isdirected toward theopening upofpossibilities forprivate investment intheform ofjoint
ventures orfullprivatization (Chapters I,IIIandIV).
63. Allfirms havetoberegistered withtheMinistry ofFinance fortaxpurposes andwiththe
municipality where theywilloperate, forabusiness permit.43
64. Since 1989 aregime ofinvestment incentives hasbeenoperated bytheMinistry ofIndustry
andTrade. These incentives, granted under Law60/90 mainly intheareaofmanufactures, were
extended in1994 tocover transport, warehousing, health, mass media, telecommunications and
tourism-related construction projects (mainly hotels andshopping centres/malls) and,mostrecently,
in1996toinclude educational projects.44Incentives, validforaperiod offiveyears, include exemptions
from taxesforthecreation ofenterprises; tariffs onimports ofcapital goods, rawmaterials andinputs
anticipated intheinvestment project (Chapter III);taxes andcharges onforeign loans; atemporary
exemption of95percentofthecorporate earnings tax;andtaxexemptions onrents, royalties, patents,
etc.These incentives canbeextended uptotenyears where investment isduetorepatriation ofcapital
ordestined toregions determined bytheTechnical Secretariat forPlanning (section (II)(3)(i)). There
arenoexport performance requirements. Between 1989 and1996, these incentives were usedby
3,195 enterprises, creating 76,206 jobsandgenerated total investments ofaround US$2 billion
(G/4.1trillion), athird ofwhich wasforeign investment. Most oftheinvestment tookplace in
manufacturing (food, tobacco, textiles, chemicals) and services (warehouses, construction,
transportation).45
65. Inaddition, asexplained inChapters IIIandIV,incentives intheformofreduced energy tariffs
areavailable forelectricity-intensive industries.
66. Norestrictionsonconversionortransferofforeigncurrencyareinforce(ChapterI).Law60/90
allows fortherepatriation ofcapital andprofits andprovides guarantees against inconvertibility;
repatriated profits aresubject toa5percenttax.Since 1994, contracts andbusiness transactions in
foreign currencies havebeenpermitted, thuslegitimizing along-standing practice.
67. Since 1991, theDirectorate General forExport andInvestment Promotion (Pro-Paraguay),
aninter-departmental organization oftheMinistries ofIndustry andTrade andExternal Relations, has
beenresponsibleforfosteringforeigndirectinvestment(FDI)inflows.Interalia,Pro-Paraguayidentifies
andpromotes feasible projects. TheInvestment Council wascreated in1991 asanadvisory body
42Article 109oftheConstitution; sofar,there isnorecord ofanyexpropriations. In1995, theCongress
voted toexpropriate 287,000 hectares oflandfrom aprivate landowner, butthecasehasyettoberesolved.
43TheCivil Code andLaw1034/83.
44Decree Law19,28April 1989; Law60/90, 26March 1991; Decree 23069, 30July1993; Decree 5559,
7September 1994; GATT document L/7210, 30April 1993; Pro-Paraguay (1996).
45Data supplied bytheMinistry ofIndustry andTrade.Paraguay WT/TPR/S/26
Page 29
(with private sector representation) totheMinistries ofIndustry andTrade andFinance.46TheCouncil
registers applications forandauthorizes thegranting ofincentives under Law60/90.
68. Efforts toimprove thelegal framework onguarantees available toforeign investment have
alsobeenundertaken onabilateral, regional andmultilateral basis. Since theearly 1990s, Paraguay
hasdoubled thenumber ofbilateral investment promotion andprotection agreements, withtrading
partners, which now include agreements with theUnited States 'Overseas Private Investment
Corporation (OPIC) andseveral European partners. Common MERCOSUR ruleshavebeenadopted
inthisareacovering investment frompartners andthirdcountries.47Paraguay isamember oftheWorld
Bank'sMultilateral Agency forInvestment Guarantees (MIGA).
69. Paraguayan legislation allows international arbitration fortheresolution ofdisputes between
foreign investors andtheGovernment; since 1982 Paraguay hasbeenamember oftheInternational
Centre fortheSettlement ofInvestment Disputes.48Disputes withMERCOSUR partners areresolved
within theauspices ofthemechanism discussed inSection (7)(ii) ofthisChapter.
70. There arenoprohibitions oninvestment outflows.
46IDB(1996).
47These arecontained in:MERCOSUR Decision 11/93, theProtocol ofColonia, Protocol forReciprocal
Promotion andProtection ofInvestment within MERCOSUR; andLaw593(16June 1995) adopting
MERCOSUR Decision 11/94, Protocol forReciprocal Promotion andProtection ofInvestment Originating in
non-members ofMERCOSUR.
48Law 944, 22October 1982.