At the end of last year, Brazil achieved one of its most sought-after international trade policy aims: the opening of the U.S. ethanol market. But a host of short-term setbacks, including financing woes and the neglect of sugar plantations, mean that the country is not in a strong position to take advantage of this boon, according to Wharton management professor Felipe Monteiro. Over time, however, Monteiro predicts that the new policy is likely to be a game-changer for the Brazilian sugar industry, encouraging massive investments and opening up the path to ethanol becoming a global commodity.
The U.S. Congress allowed a series of subsidies and tariffs on imported ethanol to lapse at the end of last year. Most importantly, the hefty 54 cent-per-gallon tariff on imported ethanol, levied since the 1980s, was eliminated and a 45 cent subsidy per gallon of ethanol mixed into gasoline to U.S. producers that was worth US$6 billion a year was shelved. Support for domestic, corn-based ethanol has been waning because of its low levels of efficiency. Senators Tom Coburn (R-Okla.) and Diane Feinstein (D-Calif.) campaigned for the removal of the subsidies and in a letter circulated to fellow Senators last December, cited data from a U.S. International Trade Commission study, which found that “eliminating the protectionist ethanol import tariff will result in US$1.5 billion in economic benefits [and] … would also reduce our dependence on foreign oil by leveling the playing field between oil imported from OPEC, which faces no tariff, and more efficient sugar-based ethanol imported from Brazil, India and other democratic states.”
The end of the subsidies for U.S. corn producers should open up the path for sugar-based ethanol, which is cheaper to produce than corn ethanol but has not been competitive thanks to the tariff rates.
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