Overlooking Lago Itapiu, a man-made lake splitting the Paraguayan-Brazilian border, and the Argentine frontier city of Puerto Iguazú lies the Paraguayan city of Cuidad del Este in an area commonly known as the Triple Border. This city, the second largest in Paraguay, quietly hums with activity that its more well-known neighbors do not possess. In 2000, the average daily currency movement in Ciudad del Este was US$12 million and was only surpassed by merchant cities like Hong Kong and Miami.
But how does this city with a population of a mere 223,050 compete with cities that are 35 times as large? Part of the answer is the contraband trade rampant in Paraguay. A native American plant is a keystone to this trade. And it is not cocaine or marijuana; it is tobacco.
Make no mistake, tobacco smuggling rivals and even surpasses the profits of the cocaine trade. Illicit tobacco allows for money laundering and has deep implications for relations in South America. In order to comprehend the situation, it is necessary to understand El Mercado Común del Sur (MERCOSUR),tobacco trade between Brazil and Paraguay, and Tabesa, the largest Paraguayan tobacco company.
The treaty of Asuncion, signed in 1991, brought together the nations of Argentina, Uruguay, Paraguay, and Brazil to begin the process of increased trade relations. This trade network between these nations eventually became MERCOSUR. On paper, MERCOSUR looks formidable: this market includes more than 250 million people and MERCOSUR countries are responsible for 75 percent of the economic activity in South America.
A nativen America plant is a keystone to this trade. And it is not cocaine or marijuana; it is tobacco.
But for an economic bloc of this magnitude to succeed, there needs to be loyalty towards free market ideals which Argentina and Brazil have continuously avoided in certain industrial sectors. MERCOSUR, for all of its rhetoric, is only a glorified political union. It is important to note that member countries lowered tariffs and trade between MERCOSUR countries increased. Yet the absence of supranational institutions allows for much of the benefits of free trade to fall into the black market. Gaping institutional holes allowed for illicit smuggling to develop in the heart of MERCOSUR territory. For example, three MERCOSUR members (Brazil, Argentina, and Paraguay) have different policies on how to deal with cigarette smuggling and thus make it difficult to sustain a cooperative campaign.
One such instance is the trade relation between Paraguay and Brazil. Cigarette smuggling between Paraguay and Brazil evolved during the 1990’s, when Brazil ramped up its tobacco tax in order to reduce domestic consumption. Although in the same economic bloc, Brazil has one of the highest tax rates for cigarettes while Paraguay’s taxes pale to their bigger neighbor’s. The initial implementation of these taxes created situations in which big multinational tobacco companies located in Brazil, like British American Tobacco (BAT) and Phillip Morris, would export cigarettes into Paraguay only to smuggle them back into Brazil to avoid paying taxes.
Many tobacco companies, like SUDAMAX, relocated into Paraguay due to its laissez faire policies and business friendly taxes. In 2006, an average tobacco firm located in Paraguay produced a pack of 20 cigarettes at an astounding US$0.05 and would sell them for US$0.60. But the small domestic market in Paraguay soon became larger with the illicit tobacco smuggling into the bordering countries.
Tobacco production in Paraguay exceeds its own demand and about 90 percent of cigarettes produced disappear into the black market in 2006. That same year, illegal exports were estimated to be 26 times higher than the recorded legal exports. Even more egregious is the fact that there are only 11 firms out of 35 that actually report having workers, meaning that there are 24 firms that could be part of this illegal market. These companies that do not report workers are tied to smuggling since there is no legal workforce.
Yet the unreported numbers of employment is what makes cigarette smuggling so powerful. Without any other employment, many people turn to smuggling as an economic mean to survive. Paraguay’s monthly wage is 1,824 Paraguayan guarini which translates to US$0.32. The allure of money transcends into the Brazilian border. Brazilians involved in smuggling also have the same incentives towards gaining more income as smugglers make US$300 a week, or one and a half times the Brazilian minimum wage.
A World Development Study highlights that the complementary relation between illegal trade and exportable goods actually increases real income. This paper argued that these activities increased Paraguayan real income by US$111 million during 1990.
Government officials in both Paraguay and Brazil then face extremely difficult duties since a corrupt official can greatly damage anti-smuggling operations. Most of the cigarette smuggling occurs through rivers and people carrying containers across borders. In the case that customs officials catch smugglers, they apprehend the goods and release the smuggler due to their reasoning that illicit tobacco is less dangerous than heroin or cocaine.
These confiscated goods are required to be destroyed in MERCOSUR nations-except in Paraguay- but legal disputes can delay action by so long that these cigarettes find themselves on the market again. Often times, bribes given to Brazilian custom officials allow for cigarette smuggling to occur without any difficulty. The Brazilian newspaper Estado de São Paulo described how in 2008, 750,000 illicit packs of cigarettes traveled 900 kilometers before the Federal Police discovered this huge amount of contraband. Such large shipments of illicit products point to the compliance of both powerful elected and non-elected officials throughout the MERCOSUR region.
Paraguayan tobacco companies, like Tabalera del Este (Tabesa), often have ties to the contraband. Tabesa is the largest Paraguayan tobacco company and controls half of the Paraguayan market. Yet their cigarettes travel further distances than the legal markets; customs officials in both Brazil and Argentina seize Tabesa cigarettes with more frequency than any other brand. This is not simply because Tabesca controls half of the market; a Brazilian customs operation focused on cigarette smuggling, called Operation Fireball, pointed Tabesa as a company that also smuggled their cigarettes into Brazil.
In fact, this acquiescence reaches into the most powerful position in Paraguay: the presidency itself. President Horacio Cartes is a major stakeholder of Tabesca and has been suspected of being part of the smuggling. During the late 1980’s, Cartes found himself exiled in Brazil because Paraguayan courts wanted to prosecute him because of a foreign exchange scam. Cartes lived with Fah Yamil Georges, a Brazilian narcotics smuggler, whose nickname was “King of the Frontier.” Mr. Georges’s illicit activities included money laundering and drug trafficking. When Fah hid in Paraguay, he contacted his old acquaintance Horacio Cartes.
President Cartes’ involvement in cigarette smuggling goes further than just a connection with a Brazilian trafficker. In a Wikileaks DEA document, Cartes was identified as the head of a criminal organization that involved itself in money laundering, most of which comes from the profits of illicit tobacco. A journalistic investigation, led by Colombian newspaper El Tiempo, established that Tabesa had ties with the Mansur family, who are infamously associated with money laundering.
The criminal activity of President Cartes left carbon footprints that are unseen and unheard of by the general population because the emphasis on illegal narco-trafficking overshadows its lesser known, but just as important, sibling. Due to this neglect, groups like the FARC, the Mafia, and Los Urabeños can keep up their operations.
While cigarette consumption in Brazil decreased, due to its high taxes, illicit consumption went from 16.6% to 31.1% between 2008 and 2013. Therefore, it seems that Brazil’s taxes do reduce legal consumption but also increase the illicit consumption of Paraguayan brands that allow criminal organizations to foster . This complicated problem does not have a singular solution as it will call for a host of interrelated measures, such as job creation in undeveloped areas in Paraguay, improvements in collecting taxes in Paraguay, and an increase in the prosecution of cigarette smuggling.
Smuggling is desirable because it sometimes pays twice as much as a legal job. In truth, Paraguay’s poverty is intricately tied with its smuggling. President Cartes plans to have a 600 percent increase in investment in construction and also double the investment in education between the years 2015 and 2018. If these plans are relatively successful, there will be job creation in both the present and in the future, as education will permit other industries in Paraguay to develop. But in order for these plans to be executed, President Cartes will have to ensure that taxes are collected.
Paraguay has made a name for itself due to its low taxation policy and only implemented an income tax in 2013. Its inability to collect taxes effectively makes such a tax negligible. Paraguay collects taxes that are equivalent to 18.2 percent of its Gross Domestic Product (GDP), only slightly below the amount of Malawi, Cambodia, and Cote d’Ivoire collect. Other MERCOSUR countries, like neighboring Uruguay collect taxes that are 29 percent of its own GDP, thereby having the Paraguayan national government have a smaller budget to work with. In the past few years, the World Bank teamed up with Paraguay to increase its tax collection through institutional reforms by creating Consejo Nacional de Empresas Publicas (CNEP) to regulate publicly owned corporations. The government has been savvy about raising foreign investment in the country as Paraguayan bonds sold in the world market gave Paraguay US$500 million in 2013 and just recently launched a US$600 million ten year bond.
Cooperation between countries is needed to stop any sort of international smuggling. Paraguayan officials and Brazil’s federal revenue, Receita, are talking about implementing a system that track and locate tobacco packages to reduce the possibility of these products disappearing and emerging in the black market. Such cooperation between the two governments will be vital in ensuring that cigarette smuggling and its usage as a way to money launder by South American criminal organizations is reduced.
Nonetheless, Paraguay has untapped potential. Paraguay is one of the largest exporters of hydroelectric power and its average population age is 23 years. Its agricultural sector can triple its output. Even the creation of a MERCOSUR common market could facilitate Paraguay’s growth by moving its shadow economy into the light. Until then, Paraguay will be, in the words of Tabesca CEO José Ortiz, “ a big duty free store, and it’s a great deal.”