With the expiration of the U.S. tariff on ethanol imports at the end of 2011, this year marks a potential watershed in U.S.–Brazil trade ties. For three decades, Washington protected corn-based ethanol producers from Brazil’s more environmentally-friendly and economically-efficient sugar-based ethanol. Now, without the 54-cent-per-gallon tariff on imported ethanol or the corresponding 45-cent-per-gallon tax credit, the U.S. market is open for business for ethanol imports.
The demise of these protectionist measures removes a bone of contention with the Brazilian government, saves U.S. taxpayers about $6 billion a year and expands access to cleaner energy for U.S. consumers. Though the move will have positive foreign policy repercussions, it stemmed from domestic political dynamics: as the industry matured, subsidies became a harder sell, particularly at a time of high corn prices.
Ironically, Brazilian ethanol production fell in 2011, requiring imports from the United States to meet local demand. This unusual situation, largely due to poor weather and delays in crop replanting after the 2008 financial crisis, will minimize the immediate impact of the end of the U.S. ethanol tariff. Still, industry analysts expect new investment to revive exports.
Some trade experts in Washington have criticized the U.S. government for not leveraging the tariff expiration to negotiate reductions in barriers for U.S. goods to Brazil. But this view fails to recognize that the unilateral change in ethanol policy benefits U.S. domestic interests from the perspectives of clean-energy supporters, budgetary hawks, and consumers. A public effort to extract concessions from Brasilia would most likely have proven unsuccessful and hypocritical, given the tariff-free access that U.S. ethanol exports have to the Brazilian market.
In the meantime, the boon to free trade between the two dominant countries in ethanol production should accelerate cooperation on biofuels. A 2007 Memorandum of Understanding (MOU) established collaboration on technology sharing, technical assistance and multilateral efforts to advance the global development of biofuels, but U.S. trade barriers remained an obstacle.
Nevertheless, expanding biofuels cooperation has attracted attention in Washington to Brazil’s profile as a leader in reducing dependence on foreign oil through alternative energy. According to an AS/COA report, Energy and Climate Change in Brazil, full integration of biofuels into the world’s energy matrix requires the creation of a truly global market, for which U.S.-Brazil cooperation is essential.
As The Economist noted, “If ethanol is ever to become a globally traded commodity—the long-term dream of boosters in both countries—the two sides need to make common cause.”
Beyond ethanol, cooperation here also has the added geopolitical benefit of deepening a crucial bilateral relationship in the Western Hemisphere.
Kezia McKeague is a guest blogger to AQ Online. She is director of government relations at the Council of the Americas in Washington DC.