On January 26, President Barack Obama spoke with Brazilian President Luiz Inacio Lula da Silva on the topics of global trade and energy policy. A Lula aide called the 25-minute phone call “productive,” according to an analysis article written by the DC-based Council on Hemispheric Affairs.

A spokesman wouldn’t confirm later to the Associated Press whether the tariff on ethanol imports was specifically discussed during the call, but the topic has certainly been on the minds of Brazil’s ethanol and sugar industry leaders, as witnessed by the ramping up of this lobby’s presence on the ground in DC. Joel Velasco, Washington-based lobbyist for UNICA – Brazil’s largest trade association for sugar and ethanol producers – wrote in a September 2008 column that the trade group’s board made the decision to expand its reach with a permanent presence outside of Brazil, which now includes offices in Washington, Brussels, and soon in Asia.

UNICA’s presence is noticeable in our media as well. A series of ads began running in major newspapers last July, urging Congress to remove the tariff on ethanol imports. The “Are we there yet?” ads featured an energy independence theme and this message: “Congress needs to repeal the cane ethanol tax – or we’ll never get there.”

Timed at the height of gas prices last year, the ads promised that lower-priced ethanol would make a difference for American motorists. American-made ethanol was not mentioned specifically, but no doubt the Brazilian PR campaign hoped to benefit from the bad publicity corn ethanol was getting from the then-hot “food vs. fuel” debate.

Again now in 2009 some are calling for the tariff to be lifted as a way to increase our supply of “green” transportation fuel, a move toward energy independence, they say. Will our leaders be swayed by the argument that more sugarcane ethanol is the answer?

The purpose of the tariff

Often the first argument for dismissing the tariff is that it’s “pure protectionism,” serving no purpose but to keep out foreign competition. Foreign ethanol, including from Brazil, can and does enter the U.S. market. The true purpose of the secondary offset tariff is just that – to offset the value of the blender’s credit (the Volumetric Ethanol Excise Tax Credit), which is available to ethanol used in the U.S. regardless its country of origin. This prevents U.S. taxpayer money from supporting the consumption of foreign ethanol here in the United States.

The blender’s credit (the Volumetric Ethanol Excise Tax Credit) had been 54 cents per gallon – the exact amount as the tariff – but is now 45 cents per gallon due to a revision in last year’s Farm Bill. The tariff is on the books through the end of next year.

The U.S. ad valorem tariff levied on ethanol imports is actually quite modest – 2.5 percent of the product value – which is lower than any other country in the world. Brazil has an ad valorem tariff at 20 percent.

The flow of ethanol imports

Even with the tariff, ethanol imports do flow to America’s shores. Through September of last year, Brazil exported approximately 650 million gallons to North America, according to its Ministry of Trade. In 2007, the number was 450 million gallons, or about 10 percent of the country’s total production.

The Caribbean Basin Initiative (CBI), a unilateral trade program set by Congress to encourage positive economic development in that region, allows ethanol produced in those countries to enter the U.S. duty-free. The total ethanol imports through the CBI are capped at a level equal to 7 percent of the previous year’s U.S. ethanol production.

In addition, a Peru-U.S. free trade agreement went into effect last month, granting free ethanol access from Peru to the U.S. market. According to a Reuters report by Dana Ford, eight ethanol companies have invested $480 million to develop the cultivation, production, and distillation of ethanol there.

In its report “The Future of U.S.-Brazil Energy Relations” by research associate Will Petrik, the Council on Hemispheric Affairs reported that the meeting between Presidents Bush and Lula in March 2007 and the subsequent joint Memorandum of Understanding (MOU) initially had a quick impact, resulting in some ethanol investment in CBI countries. Some are looking to import Brazilian ethanol through these duty-free CBI countries, by dehydrating the anhydrous (wet) Brazilian ethanol there as another avenue to get it to U.S. shores. The MOU loosely established a bilateral agreement between Brazil and the U.S., mainly on research and development of ethanol production and consumption across the Americas.

The impact of removing the tariff

Those for and against lifting the tariff have differing opinions on what impact the move would have. Those in favor cite a desire to lower gas prices by letting in the Brazilian ethanol they say is less expensive and more efficient. Those against note that energy independence will never be achieved by substituting dependence on foreign oil for dependence on foreign ethanol.

The American Coalition for Ethanol (ACE) has been clear on its position on the tariff – no lifting of the tariff and no reduction in its value.

“ACE does not and will not support harmonizing the value of the tariff with the tax credit, effectively reducing the tariff from 54 cents per gallon to 45 cents, unless we receive an iron-clad commitment from Congress that the tax credit will be extended far beyond 2010,” Jennings stated.

This firm stance is rooted in a belief that lifting the tariff would cut the legs out from under a young U.S. ethanol industry and effectively halt the future investment needed to bring new technologies – like cellulosic ethanol – online.

“Making ethanol a global commodity may sound appealing on the surface, but now is not the time to roll back our commitment to this nation being able to produce its own renewable transportation fuel,” Jennings said. “Removing the tariff would be a short-sighted move that would inflict long-term damage on U.S. energy security. Bringing in a little more ethanol today is not worth sacrificing the health of our own industry.”

Bringing the Brazil Model to the U.S.

Jennings pointed out that many times the conversations begin as “let’s do what Brazil has done” but then end with “let’s just import their ethanol instead.”

“The Brazil Model is often cited, and indeed we can look to Brazil as a helpful model for advancing the use of biofuels here in the United States,” Jennings said. “But if we’re going to follow the Brazil Model, we should in fact follow the model – not just a few pieces of it. It is a long-term, follow-through commitment, and a big part of the commitment is to the use of the fuel within your own borders, as Brazil did with making E25 and E100 the fuels of choice. We need to move beyond E10 here, to get beyond the blend wall.”

Brazil’s approach to building an ethanol industry was multi-faceted, and a number of programs remain in place today:

· A minimum blend requirement for every gallon of gasoline to contain 20 to 25 percent ethanol

· A ban on diesel-powered personal vehicles to encourage the sale of flex-fuel vehicles

· A requirement for the government to purchase E100 fuel

· Taxes favorable to ethanol compared to gasoline

· An ad valorem tariff of 20 percent

ACE emphasizes that a well-rounded approach to ethanol will be the most successful in the long run, including a commitment to both producing and consuming ethanol within our borders. Now is not the time to lift the tariff, but now is the time to increase the blend level of ethanol per gallon of gasoline.