Mercosur shields Paraguay from Trump tariff pain, says finance chief

Membership in one of the world’s most protectionist trade blocs will help shield Paraguay from the worst of near-term disruptions caused by US tariffs, the country’s finance chief said in an interview.

Amid escalating global trade tensions, Paraguay is seeking to deepen political and economic ties with neighbouring countries like Brazil and Argentina within the Mercosur customs union, which includes those nations and Uruguay.

“We are calling for more regional integration in South America if we are having problems up north,” Paraguay Finance Minister Carlos Fernández said on the sidelines of the International Monetary Fund’s spring meetings in Washington. If “we cannot trade anymore south to north, start trading south to south.”

High trade barriers and fears about opening fragile manufacturing sectors to competition have long bogged down Mercosur’s efforts to forge new partnerships, including a sweeping trade deal with the European Union that it finally reached in December after more than two decades of talks.

But following Donald Trump’s tariff announcements, Mercosur nations decided to relax some common external levies to provide flexibility to negotiate deals, or to retaliate. The leader of its largest member, Brazil’s Luiz Inácio Lula da Silva, has also renewed calls for expanded economic ties within Latin America to counteract Trump’s trade war with China.

Paraguay’s US$45-billion economy is especially dependent on trade with neighbouring Argentina and Brazil, which combined bought 63 percent of its exports last year. While trade policy from the Trump administration creates a large degree of uncertainty, the country is more susceptible to what happens closer to home.

“We are ready for whatever shock coming from abroad. We are living in a tough neighborhood surrounded by Argentina and Brazil,” Fernández said. “Given the trade relations and economic integration we have with them, the effects of volatility in those two countries are much more important than any volatility coming from the US.”

Mercosur is expecting to reach a free-trade agreement with the United Arab Emirates by the end of 2025. And with a 10-percent tariff making Paraguayan beef exports less competitive in the United States, the country is also working to sell more to markets like Korea, Japan and Taiwan.

Paraguay boasts one of the fastest-growing economies in the region since the pandemic, although about a fifth of its 6.1 million people live in poverty. Despite rising risks to the global economy from Trump’s trade war, the central bank revised this year’s growth forecast to four percent, from 3.8 percent previously.

Paraguay won its first investment grade credit rating last year when Moody’s raised the country to Baa3 from Ba1 with a positive outlook thanks to sound public finances and a growing economy. S&P Global Ratings and Fitch Ratings rate the country one notch below investment grade at BB+.

Fernández reaffirmed the government’s goal of lowering the fiscal deficit to 1.9 percent of gross domestic product this year and to 1.5 percent by the end of 2026.

Bond investors are betting on further growth, fiscal consolidation and rating upgrades. In February, Paraguay sold US$1.2 billion in global bonds divided evenly between US dollar and local currency denominated securities. The issuance marked the second consecutive year Paraguay sold fixed-rate Guarani bonds on international debt markets.

For the rest of 2025, the country will assess available financing sources in the domestic market instead of tapping the global market again, while being mindful of not competing with the private sector, Fernández said.

The country’s dollar bonds have delivered investors a return of 0.5 percent this year, underperforming an average for emerging market peers, according to data compiled on a Bloomberg index.

Taiwan ties

Paraguay enjoys outsized geopolitical influence as one of the few countries that maintain diplomatic ties with Taiwan. China has steadily won over former Taipei allies in Latin America, with Honduras, Panama, El Salvador and the Dominican Republic switching to Beijing in recent years.

But the alliance limits Paraguay’s ability to sell goods to China, and it reported a trade deficit of more than US$5.1 billion with the Asian superpower last year.

“We have no problem in signing a free-trade agreement with China. We are open to that,” Fernández said. “The only issue there is that we want to choose who we are going to have a beer with. I mean, we want to choose our friends. We’re friends with Taiwan.”