Ethanol-added gas pump. Photo by Drew Celley (<a href="" target=_blank>CC</a>).
Ethanol-added gas pump. Photo by Drew Celley (CC).

Policy Innovations Digital Magazine (2006-2016): Briefings: Unethical Ethanol Tariff

Apr 4, 2007

Brazilian President Luiz InĂ¡cio Lula da Silva and U.S. President Bush met last week at Camp David to discuss the future of ethanol. As the world's largest producer of sugar and a pioneer in the production of ethanol, Brazil is a key ally in Bush's plan to reduce America's foreign oil dependence and environmental footprint.

Imports of Brazilian ethanol could be a major step toward achieving Bush's goal of reducing American gasoline consumption by 20 percent over the next ten years. As ethanol can be produced from sugar, increased consumption of the fuel in the United States could also lead to a higher commodity price for sugar producers in Brazil, with the potential to lift thousands out of poverty.

Despite these potential benefits, there is disagreement on whether producing fuel from food crops such as sugar or corn is truly a panacea. Breaking nearly a year of silence due to ill health, Cuban leader Fidel Castro recently lambasted the U.S. plan. According to Castro, the diversion of food crops to fuel production devastates the poor of Latin America, who can no longer afford basic food staples. For instance, due to its use in the production of ethanol, corn prices have risen more than 80 percent since last summer, from $2.17 to nearly $4 a bushel. This increase has caused tortilla prices in Mexico to rise by nearly 50 percent over the same period.

Enrique Ochoa, a scholar specializing in Latin America and food issues, has argued that the rising price of corn has been especially difficult for Mexican consumers because of NAFTA. Due to the NAFTA requirement that the Mexican corn market be opened to U.S. imports, many Mexican corn producers were put out of business by cheaper American imports. This reduction in domestic corn production made Mexico more vulnerable to steep price increases.

But the effects of rising corn and sugar prices are not all bad. The use of sugar in ethanol production has the potential to benefit thousands of rural farmers in Latin America who depend on the commodity's price. If the United States were to increase imports of Brazilian ethanol, the additional demand could lift the price paid to Brazilian sugar producers from a recent low of only nine cents per pound. In this way, Castro's complaints over the rising prices of food commodities fail to consider the benefits for producers in developing countries.

Similarly, Ochoa's analysis of rising tortilla prices in Mexico fails to grasp the complexity of commodity prices and agricultural trade policy. There is no doubt that the implementation of NAFTA led to reductions in Mexican corn production, but that development alone did not lead to rising corn prices. In fact, the cheaper American corn imports made possible by NAFTA had the potential to lower food prices.

Despite the above criticisms of biofuel consumption and free trade, the key to higher living standards for the poor of Latin America does not lie in protectionist trade measures or abandoning ethanol production. Rather, an American commitment to free trade would allow all to benefit from the advances in biofuel technology.

At the heart of the issue is U.S. ethanol policy. Despite the Bush Administration's explicit support for increased U.S. ethanol consumption, the United States maintains a tariff of 54 cents per gallon for imported ethanol. This tariff limits U.S. ethanol imports and creates a higher domestic price than would otherwise result from a more open market.

By limiting market access for Brazilian ethanol producers, who would benefit from increased exports, the U.S. tariff also limits the subsequent benefits that would accrue to Brazilian sugar producers. Furthermore, since ethanol production in the United States is based on corn, the tariff also leads to a higher price of corn in the United States. This artificially inflated price is then passed on to Mexican consumers in the form of higher food prices.

In these ways, it is the U.S. tariff on ethanol imports that may have caused higher tortilla prices in Mexico and slowed the growth of Brazilian ethanol production. If the United States were to eliminate its ethanol tariff, we would likely witness market changes that would greatly benefit everyone involved.

The ramifications of the U.S. ethanol tariff display the ethical consequences of American trade policy. Although free trade agreements such as NAFTA hold the potential to benefit Mexican consumers through access to cheaper goods, these benefits can be eliminated by later market distortions, such as the ethanol tariff. In order for Mexican consumers to benefit from open markets, the United States must be committed to a free trade policy that does not distort the price of basic commodities such as corn. Likewise, in order for Brazilian ethanol and sugar producers to benefit from global trade, they must be granted tariff-free market access to the United States.

If the United States is to share the benefits of globalization with developing countries, it must maintain a commitment to open markets for foreign imports and carefully consider the global impact of its trade policy.

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