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Brazil Urges the US to Close Gap Between Rhetoric and Policy on Ethanol

Brazil's Ethanol SummitToday marks the last day of Brazil’s 2009 Ethanol Summit being held in São Paulo from June 1-3. This international conference has featured a top-level line-up of speakers including former U.S. President Bill Clinton, Brazilian President Luiz Inácio Lula da Silva, and 90 other major figures who taken together reflected a gamut of specialists, entrepreneurs, investors, elected officials and environmentalists. 

Endorsed by Clinton, with some excusable exaggeration, as one of the most important gatherings in the world, panels and their presenters have been addressing problems faced as well as posed by the biofuels industry. These include the merits of new technologies, sustainable economic growth patterns throughout Latin American and Africa, equitable debt solutions for producers, the prospective reduction of climate change, and increasing market access in the US and EU.

One of the dominant themes of the conference, however, has been the 54 cent per gallon U.S. tariff on imported ethanol which has become a thorn in the side of U.S.-Brazil bilateral trade ties. Heavily criticized for instigating a global food shortage in 2007, the largely inefficient U.S.-based corn ethanol agroindustry has been propped up by a series of artificial trade barriers and domestic subsidies that are recurrently and justly decried by Latin American leaders.

Merits of the Brazilian Brand

Even with the 54 cent per gallon tariff barrier, intended to offset the 51 cent per gallon subsidy for blended domestic corn ethanol, Brazil managed to sell 790 million gallons of its more energy efficient sugarcane-based ethanol in U.S. markets last year, once again calling into question both the competitiveness of the U.S.-promoted corn ethanol industry and the actual level of price distortion posed by the tariff.

Brazil is an appropriate venue for the conference as it has grown over the past three decades to become the second largest global producer of ethanol, behind the United States. Moreover, Brazil is able to produce its formidable yield in an exponentially more efficient and environmentally friendly manner than the United States. Whereas U.S. corn-based ethanol can at best be produced with a 1.3-1.6 to 1 lifecycle energy ratio, Brazilian sugar ethanol yields 8.3-10.2 times the power that it takes to produce, which represents a far greater net energy gain.

Additionally, U.S. corn-based ethanol during its lifecycle can reduce carbon dioxide emissions between 10 and 30 percent compared to petroleum based gasoline while Brazilian ethanol does so at a rate of between 86 and 90 percent. Even the most favorable data recently released from the University of Nebraska, giving corn-based ethanol a 1.5-1.8 energy gain and 51 percent green house gas reduction, pales in comparison to the Brazilian sugarcane.

The impressiveness of sugarcane-based ethanol is further enhanced by the fact that Brazil produces nearly twice the ethanol per hectare of land utilized than in the case of the U.S, all the while remaining unsubsidized by the national government.

Despite the superiority of the Brazilian process, ironclad U.S. corn and sugar lobbies staunchly oppose any reduction of the 54 cent per gallon import tariff. In addition, the U.S. maintains a prohibitive 1.73 million metric ton tariff rate quota on imported sugar and contributes over $7 billion, or 73% of all U.S. renewable energy tax breaks, to corn ethanol subsidies every year.

U.S. tariffs, quotas, and subsidies have been decried as anti-developmental and sharply at odds with the from free trade rhetoric espoused by U.S. agencies and Washington-based international actors like the IMF and World Bank.

The “pick and choose” free trade model has not won much favor with the international community and has consistently contributed to undermining U.S. credibility in Latin America. Further criticism has mounted against this country’s burning of millions of tons of corn for energy use every year, especially after the global food shortage hit in early 2007.

Unveiling the Boogeyman

The U.S. ethanol tariff has largely been kept in place by fears that repealing it would undercut the domestic corn industry, subsequently increasing unemployment. However, an economic study released last month by the University of Missouri indicated that lifting the tariff would have mild repercussions for American corn producers but substantial gains for major foreign producers like Brazil.

According to the study, repealing the tariff would result in an 8.8 percent drop in domestic ethanol production from 15.38 to 14.03 billion gallons, all but guaranteeing by a 128 percent rise in imported ethanol from 1.38 to 3.16 billion gallons. Overall, it would lead to a mere 1.9 percent decrease in total corn production from 13.82 to 13.55 billion bushels.

Additionally, the price of domestic corn, wheat, and soybean would drop between 1.4 and 2.8 percent, providing more food access to the estimated 963 million who go hungry every day. Furthermore, according to an Ipsos/McClatchy national poll concluded last week, 57% percent of Americans agree that ethanol production should be driven by demand and not government subsidies whereas only 6% disagree.

While politicians from corn belt states are scrupulously held accountable by their constituents by their ability to extract federal subsidies, it seems problematic that the interests of such a small portion of the population are permitted to sour relations with the rest of the hemisphere, even the world.

Brazilian officials have indicated that sugar production capacity in Brazil is struggling to keep up with rising demand, especially with a shortfall this year in India, the second largest sugar producer after Brazil. The inability to produce a sufficient supply has pushed sugar prices to a three-year high.

Regarding Brazil’s sugar capacity, Antonio Pádua, director of Brazil’s Center South Sugar and Ethanol Industry Association, observed last Monday that “Our production is at its limit. There’s no way [our] mills can make more than that.” This, along with President Clinton’s recommendation not to “try to fight alone,” may have added a small part of the impetus to Brazil’s search for partners in the regional sugarcane market.

In light of these facts, we call for open-minded and even-handed negotiations with Latin American ethanol producers. The U.S. will not be in a particularly strong position to promote free trade while it distorts the normal function of agricultural markets to protect a domestic lobby within its borders.

Such “beggar-thy-neighbor” policies have robbed average people of jobs and food in Latin America and Africa in the recent past, and inevitably will do so again. As well, the U.S. has few grounds to boast of a commitment to clean and renewable fuel while it ignores a cleaner and more efficient alternative fuel available in the hemisphere.

Regional leaders such as President Lula and Organization of American States (OAS) Secretary General José Miguel Insulza have ardently pleaded for the United States to close the gap between its rhetoric and policy.

Hopefully, the Obama administration will take demonstrable strides toward producing a coherent renewable fuel strategy before the U.N. Climate Change Conference takes place in Copenhagen this December.

This analysis was prepared by COHA’s Research Associate Nick Elledge. The Council on Hemispheric Affairs (COHA) – www.coha.org – is a think tank established in 1975 to discuss and promote inter-American relationship. Email: coha@coha.org.

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