How a Great Power Falls Apart
Decline Is Invisible From the Inside
South America's Triple Frontier, where Argentina, Brazil, and Paraguay meet at a bend in the Paraná River, has long served as a hub of organized crime and narcotics, weapons, and other contraband smuggling. For decades, these borderlands have been home to a large and thriving Arab merchant community. The area first came to Washington's attention following the 9/11 attacks when security experts suspected jihadists were taking safe harbor there. U.S. officials jumped in, with programs to combat criminal activity, improve intelligence, and strengthen rule of law. But they failed to turn up any terrorists. In fact, their interventions did little to curtail the broader lawlessness that plagues the region.
But now, because of an economic downturn, the very group suspected of harboring terrorists might be the one to finally clean up the Triple Frontier. The 965-square-mile area is a landlocked, porous border-zone that combines impressive natural beauty with haphazard urban sprawl. It consists of three main cities -- in addition to Puerto Iguazú in Argentina, the two larger towns are Ciudad del Este in Paraguay, which has population of 300,000, and Foz do Iguaçu in Brazil, which has a population of 260,000. Connecting the two is the "Friendship Bridge," a three-lane motorway with pedestrian walkways on both sides. It spans the tumultuous Paraná River just nine miles south of Itaipú Binational Hydroelectric Dam, the largest operating hydroelectric dam in the world.
Ciudad del Este and Foz do Iguaçu have a thriving cross-border trade -- to the tune of $5 billion annually (much of this is off the books). Ciudad del Este, a warren of shops with advertisements in Chinese, Korean, Portuguese, and Spanish, is the commercial center of Paraguay. Even with minimal customs enforcement, the city brings in more than $30 million in tariff duties every month. The numbers are significant, considering that Paraguay's GDP was $21 billion in 2011.
Meanwhile, the heart of Foz do Iguaçu is an array of hotels and vacation spots, to which tourists from all over Brazil and across the world retreat year round. The other major city in the area, Puerto Iguazú in Argentina has 40,000 inhabitants and an economy primarily based on tourism to the majestic Iguazú Falls on the Argentina-Brazil border. Tourists visiting the falls often take a day in Ciudad del Este for shopping.
The tri-border area first became an economic powerhouse in the 1960s and 1970s, when generous tax legislation attracted a huge population of foreign merchants -- chiefly of Syrian, Lebanese, and Taiwanese origin. Current estimates set the primarily Shia Syrian-Lebanese community in the Triple Frontier at 20,000, or about three percent of the area's total population. Their main economic activity is the "reexport" trade to Brazil. Merchants in Paraguay import cigarettes, clothing, electronics, perfumes, and other luxury items from the United States, Europe, and China and then sell them to Brazilian sacoleiros (petty merchants, from the Portuguese for "bag") who take the products into Brazil to be resold in Rio de Janeiro (over 900 miles away), São Paulo (over 650 miles away), and everywhere in between.
Paraguay's relatively low import tariffs, free trade zones, and weak enforcement of customs duties make for good business. Electronics and information technology bought in Ciudad del Este are much cheaper than those bought in neighboring Argentina and Brazil. In 2004, for example, eight out of ten computers in Brazil had been purchased in Ciudad del Este for one-half to two-thirds of the price of what they would have cost in Brazil. As many as 30,000 sacoleiros a day transport high-cost items across the Friendship Bridge. Most of the time, they do not declare their purchases, smuggling the goods to avoid Brazilian import tariffs.
Laundering money, selling contraband, and piracy, too, are major parts of the tri-border economy. Crime statistics are notoriously difficult to ascertain, but Interpol has estimated that anywhere between $5 and $12 billion are laundered annually in the dozens of banks and unregistered money exchange houses in Ciudad del Este. There also are hundreds of cases of sex trafficking (almost half of them minors) documented each year. The discovery of drug shipments -- hundreds of kilos of marijuana, dozens of kilos of cocaine -- slipping across the Paraná is a monthly occurrence. Meanwhile, Foz do Iguaçu has one of the highest homicide rates in Brazil -- three times the national average, which, itself, is already among the top 40 in the world.
Authorities have long suspected the presence of Islamic terrorist organizations in the Triple Frontier. Argentine law enforcement (with help from Israeli investigators) traced a wave of bombings directed at Jewish targets in Buenos Aires in the 1990s to the area. The first attack came in 1992, when a truck loaded with explosives was driven into the Israeli Embassy there, killing 29 and injuring 242. The second came only two years later, when a van packed with explosives was detonated in front of a Jewish community center. 85 were killed; more than 300 were injured. Islamic Jihad -- a Lebanese Shia organization -- took credit for the 1992 attack. No group has claimed responsibility for the one in 1994, although Argentine officials blame Hezbollah.
After 9/11, the United States got involved. The George W. Bush administration accused the Shia merchant community there of harboring and supporting Hezbollah, Hamas, and even al Qaeda operatives. Many of Ciudad del Este's residents resented the charge, insisting that they were merchants -- who happened to be Arab -- motivated by profit, not ideology. But Asunción, interested in what it might gain (in prestige, skill, and resources), cooperated with Washington. Meanwhile, Buenos Aires accepted and reiterated the United States' claim. Brasilia, however, took the opposite view, denying that the region was a hotbed of Islamic terrorism and instead blaming the problem on the massive informal trade coming in from Paraguay.
Nevertheless, under pressure, in 2002, Argentina, Brazil, and Paraguay agreed to participate in the U.S.-initiated "3+1 Group on Tri-Border Area Security," which was supposed to increase regional surveillance and intelligence-sharing, investigate transnational crime, and implement anti-terrorism measures. In 2005 Paraguay agreed to a series of joint training exercises between its military and U.S. forces with the goal of stamping out terrorism and transnational crime.
As it turns out, the residents of Ciudad del Este have been affirmed in their claims of innocence. After multiple meetings of the 3+1 Group and years of training and investigation, in 2005, the group announced that "no operational activities of terrorism have been detected at the tri-border area" and in 2012 the U.S. State Department reiterated that, "No credible information showed that Hezbollah, HAMAS, or other Islamist extremist groups used the Tri-Border Area for terrorist training or other operational activity." If there had been a terrorist presence in the area, it was gone. But with government corruption, violent crime, and transborder smuggling still going strong, insecurity in Ciudad del Este still presents a regional problem.
The solution, however, might actually come from the community of border-zone merchants itself. Three interrelated pressures are cutting into profits. First, starting in the mid-1990s, fluctuations in the value of the Brazilian real and changes in tax laws of the Mercosur agreement (the Southern Cone Common Market, comprising Argentina, Brazil, Paraguay, Uruguay) and from Brazil's own tariff policy lowered the costs of electronic and luxury goods within Brazil. Second, Brazil has developed a booming electronics and information technology industry of its own. And, third, increasing Brazilian border controls have made the cost of smuggling reexported merchandise higher. (The watchfulness along the border is partially a result of the countries plans to convert the zone around Foz do Iguaçu and Itaipú Hydroelectric Dam into a major biotechnology and information technology hub.) These changes hit non-technology sectors (clothing, household goods, luxury items) first. Between the mid-1990s and mid-2000s, the rise of Brazil's middle class and lowered production costs in Asia continued to buoy the electronics and IT sector. By 2009, however, those trades had taken a hit as well and only one out of ten computers in Brazil came from Ciudad del Este.
Desperate for a way to halt the economic contraction, merchants in Ciudad del Este's technology sector have taken a gamble on transparency to lower costs in Paraguay and increase sales in Brazil. An importer based in Paraguay acknowledged in 2006 that one of the main reasons he (and others) operated in the informal sector was the price of doing business in Paraguay: in addition to a minor tax increase, the regular cost of bribes for fully registered firms doubled the cost of importing goods into the country. So, with transparency as the goal, traders, looked to USAID, the Mercosur agreement, and the international community to carve out their own niche in the Common Market.
First, using a 2003 Mercosur provision that allowed special tax breaks for technology imports, merchant associations proposed a plan to stabilize profit margins by ensuring that merchandise from Ciudad del Este would still be priced competitively for resale in the Brazilian market. It involved simplifying and reducing the Brazilian federal tax on such goods from 45 to 60 percent down to 25 percent; regularizing and legalizing the reexport trade, which would eliminate the black market premium that drives up costs; and making importing into Paraguay transparent, which would stem the cost of customs bribes.
In order to convince the Brazilian government to grant this concession to Ciudad del Este, merchant leaders started to "formalize" their own businesses. The aim was to encourage all import firms to register, systematize and document all their imports, document all their sales to Brazilian petty merchants, pay all the proper taxes, register all the vehicles they used to transport goods across the Friendship Bridge, and, most importantly, store all of this information in a database housed and monitored in Brazil's Receita Federal (rather than the existing state of control by Paraguay's less attentive Customs Office). By conducting formalization under the aegis of Mercosur, merchants hoped to curtail the predatory pressures from customs officials in Paraguay.
In 2009, the outlines of the merchants' plans were codified; the "Unified Tax Regime" became law following an agreement signed by Brazilian President Lula da Silva and Paraguayan President Fernando Lugo. In February 2012 both countries enacted the UTR. Brazil financed the technical infrastructure and rolled out the new system in June. The first transaction under the new law took place on June 8, when a Brazilian petty merchant bought $1000 worth of electronics from a shop in Ciudad del Este, crossed the Friendship Bridge, and registered the transaction at the Brazilian Customs Office.
If left operational, the UTR's transparency and documentation regimes will eventually help tamp down on transnational crime and provide the very surveillance the 3+1 Group seeks. But recent events in Paraguay have jeopardized the UTR and threaten to punish those merchants who have formalized their businesses. At the end of June, President Fernando Lugo was ousted in an impeachment trial widely understood to have been the result of backroom deals between his vice president's party and opposition parties. Within Paraguay, the anti-democratic impeachment is a step backward -- now, the "fully formalized" firms are at a greater risk from predatory behavior from customs officials who operate with impunity. Governments across Latin America resoundingly condemned the events in Paraguay, describing the transition as a golpe, a coup. Mercosur suspended the country's membership and only icily recognized the new president, Federico Franco. Many speculate that Paraguay might withdraw from the Common Market, which leaves the future of the UTR and the Triple Frontier uncertain.
If Paraguay leaves the Common Market, the UTR will be dead in the water. So, in spite of the current tensions between the new government and Mercosur's leadership, the countries in the area should rally around encouraging it to stay. Further, the UTR only currently covers information technology, home electronics, and related goods. Eventually, it should also cover home goods, clothing, perfumes, and luxury items, to bring more merchants into the formal economy. The experience of the Ciudad del Este merchant community suggests that economic development and business growth are powerful motivators for achieving security goals, but there has to be follow-through.