The Paraguay-Paraná Waterway Controversy and the Costs of Unilateralism

Argentina and Paraguay face off in a diplomatic row over river tolls that raises questions about the future of regional relations.

October 20, 2023

An astronaut photograph from 2011 features the 29 km (18 mile) stretch of the Paraná river, one of the most important transportation routes for Mercosur states (NASA Goddard Space Flight Center / Flickr / CC BY 4.0 Deed)

At the beginning of September, Argentine authorities retained a Paraguayan barge carrying 30 million liters of fuel in the Rosario-Confluencia waterway segment. The barge, traveling to Asunción, initially refused to pay the river toll established by Argentina in late 2022, sparking a diplomatic row. After some  resistance, the barge paid the toll. The retention, however, continued for some days until it was eventually set free.

After months of increasing strain in Argentine-Paraguay bilateral relations, this latest episode catalyzed a rapid escalation of the diplomatic confrontation. In the ensuing weeks Paraguay has retaliated, taking the matter to international arbitration and cutting energy exports to Argentina from the Yacyretá hydroelectric dam.

The controversy over the Paraguay-Paraná Waterway is the latest demonstration of how costly a unilateral decision in waterway policy can become in diplomatic and economic terms within a framework of regional institutions. Moreover, it showcases how Paraguay has strategically pursued a hybrid foreign policy of unilateralism and multilateralism, greatly elevating the costs of the Argentine decision in the midst of a profound economic crisis.

The Paraguay-Paraná Waterway

The Paraguay-Paraná Waterway is a 3,440 kilometer-long natural fluvial transport corridor that allows for  navigation between Bolivia, Brazil, Paraguay, Argentina, and Uruguay. The waterway connects major South American ports and has become an important area of economic activity and a pivotal trading route within Mercosur. Also known as the Southern Common Market, Mercosur is a regional integration initiative that began in 1991, originally between Argentina, Brazil, Paraguay, and Uruguay, and has since become one of the main economic and political blocs in Latin America, as well as its members’ main exports market. The bloc has signed multiple trading agreements with several countries and other regional trade groups, including Chile, India, Israel, and the European Union. The makeup of the bloc’s membership remains in flux, marked by Venezuela’s indefinite suspension in 2017 and Bolivia’s ongoing membership application.

Fluvial transport—the movement of goods or persons by ship or boat on rivers or inland waterways—is key for the economic development and competitiveness of Mercosur given its advantages over other means of transport. Compared to rail and road, fluvial transport demands less investment and energy consumption, and lower maintenance and transportation costs, especially for long distances. It also offers a better loading capacity.

For Paraguay, the waterway is crucial for several reasons. It is the only access point it has to the Atlantic Ocean. The waterway also connects Paraguay with the Mercosur countries, which in 2022 were the final destination of 58 percent of its exports. The advantages of fluvial transport provide Paraguay the necessary competitiveness for its international trade, considering how the country's exports continue to be highly concentrated in products without added value and high vulnerability to international price changes.

The importance of the waterway required the creation of numerous regional treaties and governance bodies to promote its development, integration, and inter-state cooperation. In 1969 Argentina, Bolivia, Brazil, Paraguay, and Uruguay signed the first agreement, the Cuenca del Plata Treaty, which established that the contracting parties agree to join forces in order to promote the harmonious development and physical integration of the Cuenca del Plata—also known as the River Plate basin, referring to the hydrographical area that contains the Waterway–and its areas of influence. It also determined that the contracting parties should develop a collective action plan without damaging projects in their respective territories and within international law.

In 1980 the same states adopted the Santa Cruz Agreement, which established a common regulatory framework for waterway transport, favoring its development, efficiency, and modernization. Then in 1992 came the Waterway River Transportation Agreement, prompting the  creation of the Paraguay-Paraná Waterway Intergovernmental Committee (CIH), the waterway’s inter-state organization and cooperation forum. The increasing institutionalization of the waterway ran parallel to and complemented the 1992 Asunción Treaty that created Mercosur.

The Diplomatic Crisis

Despite this broad array of regional cooperation instruments governing the waterway, member countries were unable to avoid clashing with one another. In December 2022, Argentina announced that it would introduce a river toll on the Waterway Santa Fe-Confluencia stretch. They would charge $1.47 USD per ton for non-domestic or international cargo, and $1.47 Argentine pesos per ton for domestic cargo. The measure came at a difficult time for Argentina, which continues to face a profound economic crisis marked by growing levels of poverty—reaching 40.1 percent this year skyrocketing inflation that reached 12.4 percent only in August, the highest since 1991 negative net foreign currency reserves;and a crushing international debt with the IMF, the biggest loan package in the IMF history.

The announcement immediately sparked profound discontent in Paraguay, as the overwhelming majority of the barges that navigate the Argentine stretch of the waterway are Paraguayan. Official complaints were issued by  Paraguay’s President Santiago Peña, his foreign minister, and Paraguayan vessel companies, who have all demanded the annulment of the toll. Since the implementation of the toll, several Paraguayan barges have been retained for choosing to not pay. Port access is vital for land-locked countries, making Argentina’s decision all the more damaging to Paraguay.

Despite attempts to find a multilateral solution during CIH meetings, the conflict eventually escalated this September after Argentina retained a Paraguayan barge that had ultimately paid its $27,000 toll. Peña claimed that Argentina was breaching the free trade agreements consecrated in the Asunción Treaty, requesting international arbitration through the bloc’s judicial body, the Permanent Review Tribunal (TPR).

Paraguay has since carried out a hybrid foreign policy to pressure Argentina to eliminate the toll. Peña has strategically framed Paraguay’s demands in multilateral terms by taking the matter to the TPR and gathering the support of other Mercosur members, while criticizing the unilateral nature of Argentina’s decision. Moreover, Peña stated that he would also take Paraguay’s claims to the United Nations. Additionally, Paraguay has halted the export of energy from the Yacyretá hydroelectric dam to Argentina, allegedly due to an existing debt from the neighboring country and the current heatwave, though Argentine experts see it as retaliation. Argentina has responded by halting its gas exports to Paraguay.

The confluence of the Iguazú and Paraná rivers from the Argentinean side of the Triple frontier connecting the Mercosur states Argentina, Brazil, and Paraguay. (Phillip Capper from Wellington, New Zealand / Wikimedia Commons / CC BY 2.0)

Competing Arguments

Argentina has justified its decision by stating that the international treaties governing the waterway allow for the imposition of a toll for the services provided. The Argentine ambassador in Paraguay, Domingo Peppo, declared that Argentina delivers between $20 and $25 million annually in services that should be paid by all, including the country that uses the waterway the most (Paraguay).

On the other hand, Paraguay claims that Argentina has violated international treaties governing free trade. According to Peña, Argentina is breaking the rule of free circulation consecrated in the Waterway River Transportation Agreement and the Asunción Treaty.

At first glance, the treaties appear to support Paraguay’s claim on the obligation of signatory countries to ensure the free navigation of the waterway. The different pricing between international and domestic traffic appears to violate the Santa Cruz Treaty, which outlaws differential treatment due to flag state.

Argentina, however, looks to the Waterway River Transportation Agreement to support its case. The treaty allows for a toll charge according to the services provided by signatory countries, just as the Argentine Ambassador in Paraguay argued. Argentina could also argue that this treaty has more hierarchy over the previous ones given that it was signed more recently.

Nevertheless, the interpretation of international law and the complex interactions among multiple treaties can lean in favor of any of the parties involved.

Increasing Tensions and Potential Costs

The foreign policy realm, particularly within Mercosur and the Argentine-Paraguay bilateral relationship, offers opportunities for Argentina and Paraguay’s mutual benefit. This holds especially true for Argentina, which should prioritize strategic foreign policy to mitigate its internal economic crisis by strengthening its strategic relation with Paraguay and the remaining Mercosur members to somewhat counteract its internal macroeconomic crisis. Since the waterway is the main trading route within the Mercosur South American trading bloc, harmonious governance and cooperation over waterway usage is key for Mercosur’s continuity and viability. With no resolution in sight, this diplomatic crisis stands to disrupt any notion of Mercosur unity.

Both Argentina and Paraguay will continue to be affected. Paraguay is one of Argentina's main electricity providers. With the cut of energy exports from Paraguay, Argentina has to cover its demand by buying at a higher price from Brazil. Consequently, Paraguay now has to cover its demands with Bolivian imports at a higher price. Depending on how the conflict evolves, the economic costs for Argentina and Paraguay may reach considerable figures as both simultaneously lose their main energy providers and markets.

The toll controversy has also generated criticism of Argentina by other Mercosur members, with representatives from these countries expressing their concern over the toll. Even Brazil’s Foreign Policy Minister denounced the toll, which is particularly important for Argentina given that Brazil is its main regional trading partner in the region.  What’s more, Paraguay’s threat to take the matter to international arbitration has gathered the support of Brazil, Uruguay, and Bolivia. The diplomatic costs of the controversy for Argentina may continue to increase depending on how the conflict develops, as its credibility and commitment to cooperate with the bloc are questioned by its partners.

Furthermore, Argentina and Paraguay have an important bilateral relationship based on multiple areas of cooperation including trade, energy, security, and defense. As an example, in 2017 both countries held the II Binational Meeting of Ministers and Governors where they signed multiple treaties to combat human and drug trafficking, improve telecommunications and Internet connectivity, and strengthen cooperation on fiscal, economic, and integration policies. What's more, both countries are united by deep cultural ties, considering that Argentina has the largest community of Paraguayans in the world—almost two million. This waterway row chips away at a strategic and profound bilateral relationship that should be carefully preserved given the mutual economic benefits it represents and the ties that unite both countries.

The Future of the Conflict

Paraguay will most certainly continue with its hybrid foreign policy that has proven to be most effective.

The evolution of the conflict also showcases the costs of a unilateral foreign policy within a framework of regional institutions. Despite whether Argentina was in its right or not to create a toll over its stretch of the waterway, it committed a critical error in making a unilateral decision, resulting in increased diplomatic and economic costs due to a failure to consider foreign policy implications in its national decisions.

A multilateral organization only works if their members believe that the others will abide by the rules. The waterway dispute therefore constitutes an additional obstacle to the continuity of Mercosur.

What can we expect from Argentina’s foreign policy in the upcoming months? Buenos Aires will most certainly prioritize the CIH as a forum of dialogue with Paraguay and the remaining bloc members to try to appease the controversy and disarm Paraguay’s arguments of “Argentine unilateralism.” Moreover, Argentina will also continue to use its gas reserves to pressure Paraguay to soften its stance, considering that Asunción is a net importer of this fuel. The CIH declared a 60-day period in which Argentina will abstain from retaining barges but will continue to charge the toll, and Paraguay resumed electricity exports, which signals an intention by Peña to resume Argentina’s gas exports.

Despite its significant regional implications, the waterway controversy has faded from the Argentine public discourse. With Argentina gearing up for upcoming elections marked by a close race between three candidates and set against the backdrop of a profound economic crisis, the focus has shifted away from this issue. The waterway was not even mentioned in the latest debate between the foreign policy representatives of the main political parties. However, the upcoming president will inherit the difficult task of dealing with this matter, which will require skillful diplomacy and sensitivity given its potential to impact Mercosur viability and Argentina’s regional positioning.

Salvador Lescano holds a bachelor’s degree in International Studies with a minor in Government from Universidad Torcuato Di Tella. He currently works as a Project Assistant for biomass projects at LIGNIS and has contributed articles on Latin American politics for Global Americans, STGEUI’s Latin American Focus Group and  London Politica.

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