Paraguay in Latin America, Its Role, Weight and Alliances

GUIDES · PARAGUAY · REGIONAL ROLE

Paraguay is a small, landlocked country of about 6.5 million people, but it carries more weight in South America than its size suggests. It co-owns two hydroelectric dams with its neighbours, it is the only South American country that recognises Taiwan, and it has signed a pact setting rules for US troops on its soil.

For American readers that means a new US security partner, a front line in the contest between the United States and China over Taiwan, and a hydropower-rich economy linked to Brazil and Argentina. This guide sets out Paraguay’s assets, its alliances and its open disputes as of Wednesday 7 October 2026.

A Small Country With Outsized Assets

Paraguay’s Ministry of Economy and Finance projects a population of 6.46 million and gross domestic product of US$56.5 billion for 2026, or about US$8,740 a head. It expects growth of 4.2% this year, in line with the central bank’s forecast.

Its main strategic asset is water. Paraguay shares the Itaipú dam on the Paraná river with Brazil and the Yacyretá dam with Argentina, and earns foreign currency from the energy it cedes to both neighbours, the ministry notes. It also earns annual royalties for the use of the river’s hydraulic power.

Paraguay is governed by Santiago Peña, an economist from the conservative Colorado Party. He took office on Tuesday 15 August 2023 for the 2023 to 2028 term, the Asunción daily La Nación reported at the time.

Itaipú and the Brazil Relationship

Brazil is Paraguay’s most important partner. On Friday 2 October Peña called it “our biggest trade partner” and the source of the largest foreign investment in Paraguay. He added that half of the record number of foreigners seeking residency in Paraguay come from Brazil, the Asunción daily ABC Color reported.

The Itaipú treaty, signed on 26 April 1973, says its financial annex, known as Annex C, is to be revised after 50 years. In May 2024 Peña announced a tariff of US$19.28 per kilowatt-month for 2024, 2025 and 2026, ABC Color reported. The deal also let Paraguay sell its energy on Brazil’s free market.

The two governments agreed that after 2026 the tariff should reflect only the dam’s strict operating costs, according to the text of the understanding published by ABC Color. Brazil’s mines and energy minister, Alexandre Silveira, said in December 2025 that the Lula government wants to end the dam’s social and environmental spending from January 2027 and return to a tariff of about US$9, Gazeta do Povo reported. That would mean cheaper power for Brazil and less money for Paraguay.

The talks have not been smooth. In April 2025 Paraguay suspended them after it emerged that Brazil’s intelligence agency, ABIN, had spied on Paraguayan officials in 2022 and 2023, the Asunción newspaper El Nacional reported. They resumed in December 2025 after Brazil handed over a confidential report on the affair, the Brazilian daily Gazeta do Povo reported.

On 2 October Peña said there was no news on the tariff and that “the next news” would be Brazil’s election. In the first round on Sunday 4 October, Senator Flávio Bolsonaro of the conservative Liberal Party won 47.03% of valid votes and President Luiz Inácio Lula da Silva of the leftist Workers’ Party 45.16%, Brazil’s electoral court reported. They meet in a runoff on Sunday 25 October.

Relations also carry the weight of history. On Friday 24 July Lula, defending higher military spending, said that “one fine day Paraguay decided to invade Brazil”, a reference to the 1864 to 1870 War of the Triple Alliance, La Política Online reported. The speaker of Paraguay’s lower house, Raúl Latorre, rejected the remark, and on Thursday 30 July Foreign Minister Rubén Ramírez Lezcano summoned Brazil’s ambassador to receive an official note setting out Paraguay’s position, ABC Color reported.

Mercosur and the EU Trade Deal

Paraguay is one of the four countries that created Mercosur, the South American trade bloc, with the Treaty of Asunción in 1991, alongside Argentina, Brazil and Uruguay. Bolivia has since joined, and Venezuela is suspended from all rights and obligations, according to the bloc’s own website. Paraguay hosted the bloc’s summit in Luque, near Asunción, on Tuesday 30 June 2026.

The European Union and the four Mercosur founders signed a partnership agreement and an interim trade agreement on 17 January 2026, the European Commission says. The trade agreement has applied provisionally since Friday 1 May 2026, removing or cutting tariffs on many goods.

Inside Mercosur, the fight is over who gets the EU’s tariff-free quotas. Paraguay wants 25% in every product line, while Argentina and Brazil want larger shares because their economies are bigger, ABC Color reported. “It is a shame that Mercosur cannot reach a fair, equitable and reasonable agreement,” Foreign Minister Rubén Ramírez Lezcano said on 30 September.

In June he cited a proposal by the other members to give Paraguay between 300 and 600 tonnes of fresh beef within a wider quota, as an example of what he called the asymmetry of the offers.

A Close Security Partner for Washington

Under Peña, Paraguay has tightened its security ties with the United States. On Monday 15 December 2025, Secretary of State Marco Rubio and Ramírez Lezcano signed a Status of Forces Agreement in Washington. It sets a legal framework for US military personnel and Pentagon civilians in Paraguay, for training, humanitarian aid, disaster response and other shared security interests, the State Department said.

Paraguay’s Congress approved it as Law 7630 of 2026, and it entered into force on 17 March 2026, according to the State Department’s treaty office. Rubio said the deal reflected “Paraguay’s growing importance as a regional leader” on security, and described transnational criminal and terrorist networks as the main threat in the hemisphere.

Taiwan’s Last Ally in South America

Paraguay has recognised Taiwan, formally the Republic of China, since July 1957, Taiwan’s presidential office says. It is one of only 12 countries worldwide, and the only one in South America, that do so, the Taipei Times notes. Beijing claims Taiwan as part of China.

Peña doubled down in May. On a state visit on Friday 8 May 2026 he and President Lai Ching-te witnessed the signing of a treaty on mutual legal assistance in criminal matters, a cybersecurity agreement and an agreement on a Paraguay-Taiwan sovereign artificial intelligence and computing infrastructure project, Taiwan’s presidential office said. Taiwan also opened its market to Paraguayan poultry, adding to pork and beef.

Peña used the visit to condemn China’s military exercises around Taiwan and its economic pressure on Taipei, according to the same account.

What It Means for You

Investors. Paraguay now trades with the European Union under the interim agreement, but how its quotas will be shared is unsettled. Power-hungry businesses, from data centres to industry, should watch the Itaipú talks, since the tariff for 2027 onwards has not been agreed.

US policy watchers. Paraguay is a test of whether small allies stay with Taipei and Washington under pressure from Beijing. The new forces agreement also makes it easier for US troops to train and operate in the heart of South America.

Expats. Peña says Paraguay is receiving a record number of foreigners seeking residency, half of them from Brazil. The outcome of Brazil’s runoff will shape the border economy, the energy talks and the quota fight.

What Is Not Known

The Itaipú tariff from January 2027 and the text of a new Annex C have not been agreed, and Peña has given no deadline.

Mercosur has not agreed how to split the EU quotas. It is also unclear whether Paraguay’s ties with Taiwan would survive a change of government after the 2028 election.

Frequently Asked Questions

Why does Paraguay matter in Latin America?

Paraguay co-owns the Itaipú dam with Brazil and the Yacyretá dam with Argentina, is a founding member of Mercosur, is the only South American country that recognises Taiwan and has a Status of Forces Agreement with the United States.

Who is Paraguay’s president?

Santiago Peña, an economist from the conservative Colorado Party. He took office on 15 August 2023 for the 2023 to 2028 term.

What is the Itaipú dispute about?

Paraguay and Brazil are renegotiating Annex C of the 1973 Itaipú treaty, which sets the dam’s tariff. A tariff of US$19.28 per kilowatt-month applies until the end of 2026, and the terms from 2027 have not been agreed.

Does Paraguay recognise Taiwan?

Yes. Paraguay has recognised Taiwan since July 1957 and is the only South American country among Taiwan’s 12 diplomatic allies. President Santiago Peña made a state visit to Taipei in May 2026.

What is Paraguay’s dispute in Mercosur?

Paraguay wants 25% of Mercosur’s export quotas in every product line under the EU trade deal, which has applied provisionally since 1 May 2026. Argentina and Brazil want larger shares because their economies are bigger.

Sources: Paraguay Ministry of Economy and Finance, Macroeconomic Panorama, January 2026; Itaipú Binacional, Annex C to the Itaipú Treaty; ABC Color, text of the Itaipú understanding, 10 May 2024; El Nacional, Itaipú talks suspended, 26 May 2025; Gazeta do Povo, Itaipú talks resume, 7 December 2025; ABC Color, Peña on Itaipú and Brazil’s election, 3 October 2026; Brazil Superior Electoral Court, first-round result, 5 October 2026; La Política Online, Paraguay and Lula’s remark, 27 July 2026; ABC Color, Brazil’s ambassador summoned, 30 July 2026; Mercosur, about the bloc; European Commission, EU-Mercosur interim trade agreement applies provisionally, 30 April 2026; European Commission, EU-Mercosur agreements signed 17 January 2026; ABC Color, Paraguay on the EU quota split, 30 September 2026; US State Department, Rubio and Ramírez Lezcano sign SOFA, 15 December 2025; US State Department, remarks at the SOFA signing, 15 December 2025; US State Department Office of Treaty Affairs, Paraguay 26-317, entry into force 17 March 2026; Paraguay Congress library, Law 7630/2026; Office of the President of Taiwan, Lai and Peña talks, 8 May 2026; Taipei Times, Peña state visit, 8 May 2026; La Nación, Peña takes office, 14 August 2023. All accessed 7 October 2026.