MEXICO CITY — Paraguay plans to double textile exports to $200 million and generate 70,000 apparel jobs by 2025 under a new strategy to promote the sector, said officials at main trade lobby AICP.
The effort comes as neighboring Brazilian clothing makers are rushing to source in the country to profit from a “fiscal paradise” provided by a generous maquila law and cheap labor and energy costs.
Under decree 4746 launched last spring, the small country, which is wedged between Brazil and Argentina, is moving to develop its textiles, apparel and fashion sectors to employ 105,000, up from 35,000 currently, in eight years, said AICP general manager Adriana Chaparro.
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“It is a challenge, but if we can achieve it, the sector could make up 5 percent of GDP from 3 percent now,” she said.
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The bill allows textile and apparel manufacturers to import raw materials tax free from the Mercosur Block (a troubled free-trade zone comprising Brazil, Argentina, Uruguay and Paraguay) and anywhere in the world to ship duty free to Brazil. This is as long as 40 percent of the final product is made by Paraguayan hands. Foreign makers pay 1 percent VAT and 10 percent annual income tax.
Labor costs are around $4 an hour compared to about $6 in Brazil, while electricity costs $62 a megawatt per hour versus up to $308 in Brazil, according to AICP exports director Emilio Olmedo.
In the past two years, 10 to 15 Brazilian firms have moved to Paraguay to slash costs as a stinging recession squeezes margins. These include Guararapes, which owns the Riachuelo department stores; America 1500; Quailty Cotton, and Brand Lee, Olmedo said.
Meanwhile, Portuguese and Spanish fashion brands are also considering setting shop in Paraguay to sell to Brazil and the Mercosur area.
“If you are a Portuguese company, you have to pay taxes to ship to Brazil so it makes more sense to come to Paraguay and export duty free,” said Chaparro, adding that Lanidor, a major Portuguese women’s label, and fast-fashion players like Inditex are looking at Paraguay.
AICP hopes the growing investment will help the nation acquire the know-how to make value-added tops instead of the jeans and pants and other bottoms it has specialized in.
“Our strength is denim, jeans and shorts, but now we have the possibility to diversify into tops and tailored products,” Chaparro said. “Paraguay is so small that when someone like Riachuelo comes to build a factory, it is a big development milestone.”
Guararapes arrived in April 2015. It now reportedly makes 10,000 women’s garments after investing $10 million.
Decree 4746 aims to double exports to $200 million in eight years, up from around $93 million this year, when they will gain 5 percent from burgeoning Brazilian and Argentinian demand.
Paraguay sends 50 percent of its clothes to Brazil and 28 percent to Argentina but is looking to bolster trade with Ecuador, Spain and the U.K., Olmedo said.
The U.S is also on the radar, especially after President Trump’s suggestions of a 20 percent tariff on Mexican exports, opening markets elsewhere.
“We are very interested in the U.S. because of its size and higher prices,” said Olmedo, adding that Levi’s and Wrangler are eyeing sourcing opportunities. “If we can find a niche, our companies will move quickly.”
Brazilian trade lobbies looking to protect jobs have slammed Paraguay, saying it doesn’t have the scale and quality standards to ship to its border.
“They think we are the China of South America but they speak without knowledge,” Olmedo claimed. “We can be the new textiles powerhouse of South America. We are not like China and we have a very generous maquila regime.”
The jeans sector is well developed, selling high-quality styles for as low as $8 compare to $17 for Brazilian competitors, according to Olmedo.
He noted Paraguay still needs a lot of manufacturing know-how, adding that the industry development scheme envisages major worker training programs and international partnerships to boost their sewing skills.
The push is also part of Paraguay’s efforts to publicize its Senti Paraguay “made in Paraguay” brand in which other sectors are also developing.
But there are big challenges. Blue Design’s owner Jorge Bunchicoff said the country lacks a sourcing backbone to support a major manufacturing hub, requiring up to $10 billion in investments. “Paraguay doesn’t have a textiles tradition like India or Mexico so there aren’t enough yarn, fabric or accessories suppliers nor major importers,” Bunchicoff said. “We have to import everything so our lead times are long.”
The nation’s government in Asuncion is offering low-interest loans and guarantees to help grow the hub.
“They are giving the maximum benefits so that the industry [can be] tremendously competitive,” Bunchicoff claimed. “Labor and energy costs are very low and there is a fiscal paradise. You only pay 1 percent value added tax while in the U.S. you pay 35 to 50 percent. Income tax is capped at 10 percent and the law states you have a minimum of 10 years to use those benefits if a new government takes over.”
Infrastructure is also poor, but projects are under way to significantly enlarge road, transport and electricity infrastructure, Bunchicoff concluded.