Paraguayan president-elect Horacio Cartes is a member of the Colorado Party, which dominated Paraguayan politics from 1947 to 2008. The conservative, right-wing party favors free trade, considers itself pro-business (Cartes himself is a prominent businessman) and has a long-standing relationship with the country's military. Cartes' election signals a return to the status quo that existed before the election of his predecessor, Fernando Lugo, who was impeached in June 2012 in what other regional governments have called a parliamentary coup.
Lugo was elected in 2008 as the leader of a loosely unified coalition of center-left political groups. With only a weak mandate to govern, Lugo lost control of parliament. His removal from office provoked political sanctions from neighboring countries and resulted in Paraguay's suspension from Mercosur and the UNASUR regional political bloc.
The April 21 election was designed to transition Paraguay out of the period of interim government that followed Lugo's ouster. International observers including delegations from UNASUR, Mercosur, the Organization of American States and the European Union certified the election as free and fair, opening the door for the country's eventual readmission to Mercosur and UNASUR.
An Economic Disadvantage
Paraguay is landlocked and has historically been at an economic and military disadvantage to its South American neighbors. As a buffer state between regional powers Brazil and Argentina, Paraguay often tries to play one off the other. The 1864-1870 War of the Triple Alliance, during which Paraguay initiated a war with Brazil, Argentina and Uruguay, shaped the contours of Paraguay's modern political paradigm. Paraguay lost the war to Brazil after a brutal battle and after Uruguay and Argentina dropped out, and after the war, Brasilia maintained a keen interest in Asuncion's internal affairs. This relationship has played a key role in Paraguayan domestic politics, a dynamic that has been affirmed as Brazil has emerged as an important regional and global player both economically and politically.
Given that Paraguay is surrounded primarily by Mercosur states, its membership in the customs union is a political and economic necessity. Persistent and growing disputes within the organization imperil Paraguay's strategic imperatives as well as the political stance of the incoming Colorado government. Argentina's growing trade protectionism, the result of efforts to stave off a balance-of-payments crisis, has been at the core of rising tensions within Mercosur over the past year and a half, since Argentina's efforts to reduce imports in the wake of October 2011 elections have hurt the exports of its Mercosur neighbors.
The three primary Mercosur members have seen steep declines in exports to Argentina between the third quarter of 2011 and the fourth quarter of 2012, with a reduction of 30 percent for Brazil, 27 percent for Uruguay and 41 percent for Paraguay. Over the same period, Argentine imports appear to have dropped by only 12 percent, an indication that Buenos Aires' Mercosur partners may have been disproportionately affected by its trade regime. Beyond the immediate question of Argentina's current trade policy, the demarcation of borders in the Southern Cone causes political instability along the region's only natural export pathway — the Parana River, which opens up into the Rio de la Plata estuary.
Closer to Brazil
While Argentina's reliability as a trade partner has fallen, market share is opening up in other countries. Paraguay had for years opposed the accession of Venezuela to Mercosur, but Asuncion's political suspension from the group opened the door for Venezuela to join in 2012, and Bolivia and Ecuador both hope to join Mercosur in the next year. Their entry would unite Latin America's left-leaning countries into a single trading bloc characterized by industry-determined tariffs and a common external tariff. That the group is expanding to include new members even as trade disputes threaten the unity of the project is a testament to the customs union's political and strategic importance to Brazil, the group's major economic power.
The trade bloc has helped define Brazil's industry-led protectionist policies and has served as a tool for it to manage its relationship with Argentina, though this is not to say Brazil has no frustrations with Mercosur. With exports to Argentina falling and concerns about its domestic manufacturing sector, Brazil wants to increase market share for its exports as well. As a result, Brazil favors expansion of the bloc and is pushing Argentina for help signing a free trade agreement between the European Union and Mercosur. Brazil needs Argentina's approval since Mercosur rules prohibit members from signing unilateral free trade agreements, but considering Argentina's current economic policies, such an agreement with the European Union would run counter to Argentina's interests.
Mercosur also faces an ideological challenge from the Pacific Alliance, which unites the free trade-oriented countries of Mexico, Colombia, Peru and Chile, thus constituting a competing bloc along Latin America's Pacific coast — one more closely aligned with Paraguay's interests. Paraguay has applied for observer status in the Pacific Alliance, but its geographic position in the middle of current and prospective Mercosur states will limit its involvement. To manage this dilemma, Paraguay will orient itself even closer to Brazil, through which its primarily agricultural exports must pass to reach international markets. Paraguay will try to use its business-friendly regulatory structure and low wages to attract Brazilian investment.
