Paraguay and the EU’s Deforestation Law: Indirect Trade Risks and Supply Chain Pressures

Paraguay’s direct exposure to the EU’s deforestation-free regulation is limited, but its strong dependence on soy exports processed through Argentina means up to 13% of its soy trade could be indirectly affected. The main risks lie with small, fragmented timber exporters and weak traceability systems, even though only a very small share of soybean land appears linked to recent deforestation.

A study, produced by the World Bank’s Prosperity and Planet Verticals with support from institutions such as the European Commission’s Joint Research Centre, Paraguay’s National Forestry Institute (INFONA), MapBiomas Paraguay, and the Global Land Analysis and Discovery (GLAD) program, examines how Paraguay could be affected by the European Union’s Regulation on Deforestation-Free Products (EUDR). Adopted in 2023, the EUDR aims to prevent products linked to deforestation or forest degradation after December 31, 2020, from entering the EU market. Although designed to reduce global environmental damage, the regulation is expected to affect exporting countries very differently depending on how they trade, how their supply chains work, and how strong their monitoring systems are. Paraguay, a major exporter of soy and beef, offers an important test case.

Limited Direct Exposure, Bigger Indirect Risks

At first glance, Paraguay seems only lightly exposed to the EUDR. Over the past decade, the EU has become a relatively small export destination for the country. By 2023, just 4.3 percent of Paraguay’s total exports went to the EU, and only 1.6 percent of exports of EUDR-covered products ended up there. This is far lower than in neighboring countries such as Brazil, Argentina, and Uruguay. On paper, this suggests that the regulation would have only a limited direct impact on Paraguay’s trade.

However, this view changes once indirect trade links are considered. Paraguay is landlocked and exports most of its soybeans through Argentina, where they are processed and then re-exported, including to the EU. In 2023, nearly 88 percent of Paraguay’s soy exports went to Argentina. Because a significant share of Argentina’s soy is sold to Europe, the study estimates that up to 13 percent of Paraguay’s soy exports could be indirectly affected by the EUDR. This means Paraguay’s main vulnerability does not come from direct trade with Europe, but from its role within regional value chains.

Heavy Dependence on Land-Use Commodities

The regulation matters for Paraguay because of what the country exports. Soybeans alone accounted for more than 43 percent of total exports in 2023, while cattle products made up another 16 percent. Together, these land-intensive commodities dominate Paraguay’s export economy more than in many other major agricultural exporters. Timber and rubber exports are much smaller in value, but they are still important because they fall under the EUDR and involve different types of producers and firms.

This strong concentration means that even small disruptions in soy or beef supply chains can have economy-wide effects. While Paraguay has successfully diversified its export markets, it remains highly dependent on commodities that are closely scrutinized under the EU’s new environmental rules.

Big Firms Adapt, Small Firms Struggle

The firm-level analysis shows that not all exporters face the same risks. Soy, cattle, and rubber exports to the EU are dominated by a small number of large firms. In soy and rubber, just three companies account for more than 90 percent of exports to Europe. These firms are generally large, diversified, and better able to handle the costs of compliance, such as traceability systems, geolocation data, and risk assessments.

The timber sector looks very different. Wood exports to the EU are spread across more than 200 small and medium-sized firms, none of which dominates the market. These firms often lack the financial and technical capacity to meet EUDR requirements on their own. As a result, they face a higher risk of being pushed out of the EU market, even if their products are not strongly linked to deforestation. The study argues that this creates a clear case for public support, such as shared compliance systems, technical assistance, and collective certification.

Small Land Risks, Big Governance Challenge

Using high-resolution satellite data, the study also examines whether Paraguay’s soybean production is linked to recent deforestation. The results are reassuring but nuanced. Depending on the data source and method used, only between 0.4 and 2 percent of Paraguay’s soybean area appears to be at risk of non-compliance with the EUDR. These areas are concentrated in a few departments, particularly Itapúa, San Pedro, and Alto Paraná.

This suggests that Paraguay’s main challenge is not widespread deforestation linked to soy, but proving compliance. Weak traceability, fragmented data systems, and uneven institutional capacity remain key obstacles.

Overall, the study concludes that Paraguay’s vulnerability to the EUDR is real but manageable. The biggest risks come from indirect exposure through regional value chains and from the difficulties faced by small exporters. At the same time, the regulation could help drive better land monitoring, stronger environmental governance, and deeper coordination within MERCOSUR, turning a regulatory challenge into an opportunity for long-term improvement.