What is the significance of the U.S.-Brazil agreement on ethanol? Three experts share their insight.
Latin America AdvisorDuring U.S. President George W. Bush's visit to Brazil..., the two governments signed an agreement to promote the production of ethanol. What is the significance of the agreement? What benefits do you see for the U.S. and Brazil, and for other parts of Latin America and the Caribbean?Marisa Ferreira, Foreign Associate at Saul Ewing LLP:
A deal on biofuels led by the two biggest democracies in the Americas may potentially change the geopolitical outline in the Western Hemisphere, having positive environmental, political, and economic impacts. From a foreign policy perspective, assuming mistrust toward foreign ethanol in the US farm belt can be assuaged, its most serious impact is that it may establish a dialogue that is likely to lead to a broader understanding on trade between the US and Brazil. It may even revive the nearly dead FTAA, and the Doha Round. It also sends a message to oil- and gas-producing countries and alliances in Latin America that are betting on increased polarization between Brazil and the US. Over time, ethanol and other biofuels have the potential to become a driving force for integration among the region's consumers and producers. A case in point is the flurry of Brazilian and US investment in ethanol production facilities in Central America, the Caribbean, and the Andean subregions. From an economic perspective, Brazil has a significant comparative advantage in ethanol production at present because it has developed unique technologies, has available acreage for expansion, and year-round favorable weather conditions. In addition, sugarcane is by far a more efficient raw material for ethanol production than corn. However, these advantages might not be enough to maintain Brazil's edge in the long term. The US has strong national security reasons to diversify its reliance on foreign sources of oil, and has the resources to develop and implement an alternative fuel infrastructure that may eventually surpass the innovative capabilities that Brazilians have developed.
Roger Stark, Partner at K&L Gates: The US/Brazil ethanol agreement reflects 'soft' commitments by the parties to 'advance the research and development of next generation biofuels,' bring the benefits of such biofuels to other countries, and expand the global biofuels market through the establishment of 'uniform standards and codes.' Because the agreement fails to address the most significant barrier to regional trade in biofuels, it is not likely to produce a significant increase in US/Brazil commerce. US tariffs effectively create a subsidy for the Midwest corn industry. In 2006, prices for corn (an ethanol feedstock) nearly doubled compared to prices in the prior two years. These higher prices reflected increased investment in ethanol production coupled with higher demand for ethanol (and corn feedstocks) driven by oil price spikes. Without tariff protection, competition from Brazil and other parts of Latin America—where lower-priced land and labor, and higher yielding feedstocks would allow producers to undercut US ethanol prices—would cause corn prices to fall. US policymakers apparently believe that it is important to foment an indigenous US ethanol industry, but such a policy runs headlong into the broader goal of encouraging free trade. The US and Brazil will likely continue to cooperate in growing their respective shares of the ethanol market, and these efforts may well achieve important benefits for both parties. However, they are unlikely to result in lower-cost ethanol for US consumers or more US/Brazil trade in ethanol or its feedstocks.
Rafael Schechtman, Director of the Centro Brasileiro de Infra Estrutura in Brazil: I believe it is only a first step toward having a global market for ethanol ... This market still needs more producers and more consumers. At the moment, you only have two large-scale producers, so you cannot talk about ethanol as an international market or as an international commodity, but it's a start. It will depend on US policy in favor of biofuels and reduction of emissions from fossil fuels, and also on the question of energy security in the US. It's important for the US to have sources of energy besides oil, but this will take a long time. I don't see a global market for ethanol in five years. The US market is going to grow. The concern about the competition between imported ethanol and domestically produced ethanol in the US is going to disappear. From the point of view of Brazilian ethanol, it is a problem. Right now, [if] Brazil exported ethanol to the US, we're going to have a price increase [for ethanol] in Brazil ... In the US, the ethanol price is much higher, so if the US opens its market to Brazilian exports, the Brazilian producer would rather sell ethanol to the US than in Brazil ... There are people talking about imposing export taxes on ethanol [in Brazil].
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.