Your counterparty could ditch the smart contract if it's on PayPal too. The actual terms of the contract are less likely to be changed if it's on Ethereum. Insofar as you need USD in your contract, you're right that the blockchain's advantages are diminished, since you need a trusted third party to guarantee the USD even if you use a contract on the blockchain .
If it's on PayPal and it exists in the standard legal framework, the guarantor is the government with all its power. You can go to court over the violated contract and the counterparty will be fined/jailed if found guilty.
It's not about "verifiability", it's about enforcement. And for that you need a capability to inflict violence. So unless people really want ETH-paid militias/sheriffs, blockchain doesn't bring much to the table.
A blockchain's guarantee that the smart contract will remain in force is much more powerful than a government's.
This is because a smart contract on a blockchain is much less likely to be removed or have its terms changed than a smart contract on PayPal, even if the latter is in the "standard legal framework" (which is a new condition you're adding which wasn't part of the original premise, where we were comparing smart contracts enforced by an automated protocol, not contracts in general). This in turn is because political forces can change the standard legal framework much more easily than they can change a blockchain's smart contract terms.
You're certainly right that standard contracts, backed by government, can do things smart contracts can't, but there are things that smart contracts can do just as well as standard contracts (like enforce a contract where both parties pledge collateral), and they will be more faithfully executed on a blockchain than on PayPal.
You asked what advantage a blockchain provides over PayPal as a platform for smart contracts. I gave you an answer.
