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New Hope for Brazil Ethanol

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The US legislative road to opening the market to duty-free Brazilian ethanol remains long, but there is some new hope.


BY JEREMY M. MARTIN
AND VANESSA ORCO

 

It may strike one as odd to associate United States-Brazilian relations and the Tea Party, but they are connected. Evidence of the connection emerged recently in the United States Congress during the debate over reduction of ethanol subsidies and tax credits. Indeed, it seems that the Tea Party-driven focus on fiscal reform and reduced government spending that pervades Washington may just be impacting a long-sought goal of the Brazilian government: Removal of the United States’ duty on imported ethanol.

 

When it comes to ethanol policy, for forty years the United States government has bowed to the desires of the heartland and agricultural lobby in Congress. Corn-based ethanol production has been subsidized, protected from foreign competition and its use has been mandated. As recently as last December, Congress extended the $.45 per gallon tax credit for ethanol used for motor fuel and extended the $.54 per gallon tariff that applies to most ethanol imports. For years, Congress argued that fostering domestic ethanol production aids efforts to reduce U.S. dependency on foreign oil and contributes to energy security, and with a cleaner fuel source for the environment.

 

Regrettably, and as many analyses and studies have shown, corn-based ethanol -- the U.S.’s current commercial ethanol reality -- will not deliver the fuel substitution or environmental improvement that the policy-makers suggest or the law envisioned. To cite one detailed analysis by the Environmental Working Group, between 2005 and 2009 ethanol received subsidies totaling $17 billion with a corresponding 1.1 mile-per-gallon increase in overall fuel economy. The numbers are startling and surely fodder for the Tea Party.

 

For these reasons, many in Brazil have argued that the ethanol debate in the United States has been corrupted by corn. Brazilian proponents point to analyses that indicate Brazil’s sugar-based ethanol is cheaper, more efficient, and cleaner burning. Despite what are argued as advantages, all is not entirely rosy for ethanol in Brazil. The nation is struggling to meet its own domestic demand. Indeed, an internal debate over how to deal with properly stimulating and incentivizing further ethanol production is raging and new rules are on the horizon.

 

But where does U.S. domestic politics and policy-making really intersect with U.S.-Brazil relations?

 

Beyond the fact that Brazil’s success with sugar-based ethanol has routinely cropped up in the U.S. press, trade has been a source of conflict between the nations. Last year, Brazil won a claim at the WTO that deemed the U.S. cotton subsidies violated international trade rules. For months, the win by Brazil at the WTO pointed to the prospect of a similar claim vis-à-vis ethanol. That possibility simmered below the surface in both nations, permeated trade discussions and exacerbated what was already a concern between them.

 

That the United States’ domestic dance with ethanol figures prominently in bilateral trade conversations is not surprising as the U.S. and Brazil are the world’s largest producers of ethanol, accounting for 89 percent of total world production. Unfettered access to the U.S. market for Brazilian ethanol has long been a stone-in-the-shoe of bilateral discourse and relations. Granted, the two nations can tout important efforts to advance collaboration on biofuel development in the hemisphere, but the cooperation has focused on developing the fuel’s potential in other nations from the Andes to Central America to the Caribbean.  Furthering Brazilian ethanol exports to the U.S. market never figured in the bilateral agreement.

 

But here’s where the Tea Party, or more specifically the current climate of fiscal reform in Washington, DC, may just have come to the rescue of a critical element of U.S.-Brazilian relations: Surprising legislative actions last week in the United States Congress on ethanol subsidies and tariffs brought cheers from deficit hawks and Brazilian policymakers alike.

 

On June 14, 2011, the Senate voted 59 to 40 to defeat an effort to end what is purported to be a $6 billion annual tax subsidy for ethanol. The defeat, not unexpected, did however signal an unforeseen change in Congress in terms of support for ethanol. Indeed, by the end of the week the Senate voted 73 to 27 in favor of new legislation sponsored by a California liberal Democrat and an Oklahoma conservative Republican that would effectively end corn ethanol’s tax subsidy and remove the $.54 per gallon tariff on imported ethanol.

 

The legislative road in the United States to opening the domestic market to duty-free Brazilian ethanol remains long with the House of Representatives yet to weigh in.  But comments from Brasilia and Washington clearly underscore the positive potential of the steps taken by the Senate.

 

Whether that means the Tea Party should be compelled to register as a lobbyist of the Brazilian government is unclear.

 

Jeremy M. Martin is the director of the Energy Program at the Institute of the Americas at the University of California, San Diego. The institute is a nonprofit inter-American organization focused on economic development in the Western Hemisphere. Martin can be reached at [email protected]. Vanessa Orco is a summer intern at the Institute of the Americas and a Master’s candidate at the Frank Batten School of Leadership and Public Policy at the University of Virginia. They wrote this column for Latin Business Chronicle.

      

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