Bridges Weekly Trade News Digest • Volume 14 • Number 43 • 9th December 2010
Future of US Ethanol Subsidy, Import Tax under Review
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US legislators are currently considering a bill that contains elements set to extend a controversial ethanol subsidy as well as double the import tax on ethanol, say observers on Capitol Hill.
The omnibus bill, which deals with tax issues more generally, was recently drafted by Senator Max Baucus, chair of the Finance Committee. It would include US$5 billion annual subsidies to the mature US corn ethanol industry, as well as double taxes on imported ethanol.
The United States has been subsidising and protecting corn ethanol through the imposition of trade barriers on imported ethanol for the past 30 years. During the last three years, the Obama administration has made various attempts to reduce trade distortions and avoid a potential trade war that was looming since the Bush Administration’s 2008 Farm Bill. Unless extended, the current subsidy for and import tax on ethanol will expire at the end of the year.
The ethanol subsidy is far from being generally accepted, however. Opponents of the draft bill, including green groups, argue that the proposal would increase dependency on foreign oil from OPEC states. ‘This is bad trade policy, bad environmental policy, and bad energy policy’, Senator Dianne Feinstein commented. Other analysts suggest that those most affected by the measure would be the American drivers since the resulting lack of competition would keep ethanol prices artificially high.
The draft bill has also raised concerns in ethanol exporting countries, Brazil in particular. “Rather than lowering prices at the pump for Americans with access to cleaner, more affordable alternatives like sugarcane ethanol, the US is intent on starting a trade war with Brazil - a long-time democratic ally,” Joel Velasco, Chief Representative of North America’s Brazilian Sugarcane Industry Association ( UNICA), said on 7 December.
In an official statement, UNICA warns that if the US doubles the import tax on ethanol, Brazil might initiate dispute settlement proceedings at the World Trade Organization (WTO). “The U.S lost its first battle over cotton subsidies earlier this year - and will lose again on ethanol,” Joel Velasco warned.
Opponents of the deal argue that it would transform existing import taxes from an offset duty - a duty that balances tax credits so as to ensure that foreign production is not subsidised - to a punitive duty. In that case, Brazil could argue that the measure violates the non-discrimination principle of the WTO. However, relief through a judgment by the WTO’s court could not be expected for several years. The cotton subsidy case, for instance, has been going on since 2002.
Brazil, the world’s second largest producer and leader in sugarcane ethanol ended government subsidies for ethanol more than a decade ago and eliminated its import tariff early this year. Its ethanol industry is the most mature and competitive worldwide. In various fora such as the WTO Doha Round negotiations, Brazil is lobbying for better market access for its ethanol producers. The US is the most important export market for Brazilian ethanol.
ICTSD reporting. ‘America’s Ethanol Industry Still Playing Games Says Brazilian Sugarcane Industry’ Clean MPG. ‘Lame Duck Congress Goes from Bad to Worse on U.S. Ethanol Policy’ Sweeter Alternative.
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“Opponents of the deal argue that it would transform existing import taxes from an offset duty — a duty that balances tax credits so as to ensure that foreign production is not subsidised — to a punitive duty.”
This is what I don’t understand, the notion that somehow parity between the tax-credit subsidy and the import tariff is fine, that one cancels out the other, leaving potential exporters of ethanol to the United States neither favoured nor penalized.
The U.S. ethanol industry lobby group, the Renewable Fuels Association (RFA), has long defended the import tariff along these lines. On 30 November, in an open letter to lawmakers, it wrote:
[my emphasis]
One could respond with, I suppose, “Well they would say that, wouldn’t they.” Especially if they can get away with it.
That’s what I don’t understand: how they get away with it.
In a recent opinion piece on the web site of UNICA, Brazil’s Joel Velasco, UNICA’s man in Washington, writes:
[my emphasis]
OK, he doesn’t quite come out and endorse parity, but he offers it as better than nothing, and then (sse the linked article) provides a string of quotes from various people — including the President and CEO of the RFA (”We think the only reason to have the secondary tariff is to protect the taxpayer, not the industry”) — who support parity.
Again, one could respond with, I suppose, “Well, UNICA probably has its reasons for taking this stance.” It does, after all, still call for the complete elimination of the tariff.
But what I really do not understand is why the trade community has remained silent during this debate.
Let’s take this discussion away from ethanol and its politics and take a different, hypothetical example.
Say a country is a big producer and consumer of rice. Currently it provides an import tariff on rice that is so high, it shuts out imports. Now the government decides that rice is better for the environment than wheat, so it provides a unit subsidy to wholesalers of rice that is exactly equal to the import tariff. They get this subsidy whether the rice is procured domestically or whether from imports. The effect is that wholesalers will now be willing to pay more for rice because they get a subsidy for doing so. So more domestic suppliers can cover their costs and still find a buyer.
Do the foreign suppliers now have better market access? That depends on the supply response of domestic producers and the height of the tariff. If domestic producers can supply all of the domestic market, then the answer is “No, they are not better off.”
What matters to market access is not the size of the subsidy, but the height of the tariff. If both the tariff and the subsidy are small, the effect on imports will be small. If both the tariff and the subsidy are large, the effect on imports will be large.
Or am I missing something?