A reactionary ethanol plan from Grassley

Grassley has once again expressed his desire to drive an ever increasing percentage of the U.S. corn crop towards ethanol production. He recently reaffirmed his support for the ethanol import tariff in a letter he sent to Susan Schwab, U.S. Trade Representative. Read Grassley’s letter here. This letter was in response to a letter sent to Schwab from Senator Dianne Feinstein inquiring if the ethanol tariff was in violation of international law. This letter was prompted by a statement from Roberto Azevedo, Brazil‘s WTO ambassador, that there was a “strong possibility” that Brazil would file a formal complaint about the U.S. ethanol tariff this month.

Grassley responded in his letter that the U.S. tariff is allowed under WTO rules and it was agreed upon with consensus, including Brazil, at the conclusion of the Uruguay Round of WTO negotiations. Grassley also warns that reducing or eliminating the tariff would undermine the effort to shift from foreign to domestic energy sources.

Grassley also defended the tariff by saying that Brazil had yet to take full advantage of the Caribbean Basin Initiative. This allows Brazil to export ethanol to the U.S. duty free in an amount no greater than 7% of the total U.S. ethanol market. Grassley said “[a]s Brazil is not taking full advantage of its ability to export ethanol duty-free to the U.S. market, I fail to see why the United States should make its tariff treatment of Brazilian ethanol yet more generous by lowering the tariff.”

Grassley makes a number of good points in his letter, all worth considering. However, he fails to address the forced increase in demand for ethanol caused by the renewable fuel standard. This federal biofuel mandate increases annually from 9 billion gallons in 2008 to 36 billion gallons in 2022. This will place increasing pressure on our nation’s corn crop. While it can be expected that we will have increases in corn yield, that we will improve the corn ethanol production process, and that we will begin to utilize cellulosic ethanol, the pressure on the corn market will still be dramatic.

With increased demand on U.S. corn for food, feed, and fuel, we may find it difficult to achieve the renewable fuel standard. That is unless we begin to look at importing ethanol, especially the more efficient sugar cane ethanol produced in Brazil. By waiting to remove or reduce the ethanol tariff, we are essentially telling Brazil no thanks. We would rather have higher food and fuel prices than purchase your cheaper ethanol.

Brazil is prepared to provide ethanol exports; it is currently the largest exporter of ethanol. However, under the current system Brazil is required to reprocess ethanol in a Caribbean country to avoid the U.S. import tariff. While this option helps to avoid the tariff for up to 7% of the U.S. ethanol market, it increases costs and reduces the cost effectiveness of exporting to the U.S. The largest producer of Brazilian ethanol places the blame for reduced exports on U.S. and EU trade tariffs. The U.S. would rather pay more for domestic ethanol to provide jobs according to Petrobras Executive Manager of Energy Development Mozart Schmitt Queiroz.

So I put it to Grassley, should we wait until the need is not being met to take action? Or, should we anticipate the future, develop good relations with the largest exporter, and secure affordable fuel sources? Grassley would like us to use domestic ethanol to reduce the need to import foreign fuel while ignoring market principals and our wallets. If Brazil can supply a fuel source other than Middle Eastern oil at a price lower than we can produce the same fuel then why wouldn’t we allow it into our markets? Brazilian ethanol will drive innovation in the U.S. biofuel market, bring down prices, and allow the market to function properly. Please Mr. Grassley, don’t wait until another energy crisis strikes to take action, anticipate the future and take action now.

Greg Forbes
Editor, grassleywatch.com

Originally posted 09/03/2008 on Grassley Watch