focus shifted to fossil fuels, with populist measures including price caps on gasoline prices, ethanol subsidies lagged. Whereas in 2009 researchers had called for the U.S. to learn from the Brazilian promotion of ethanol, by 2017 imports of American ethanol to Brazil had skyrocketed. Brazilian producers, used to protection, demanded the government do something to curb them.
Specifically, Brazilian producers wanted import tariffs and quotas that would further close the market. Their argument has been around since the 19th century: these barriers were needed to protect national workers against the evils of unbridled globalization. Given the clout of said producers, the government ordered its economics team to come up with a report on the costs and benefits of trade barriers to ethanol imports. This included the possibility of commercial retaliation through the World Trade Organization.
The economists recommended that nothing be done, as the direct costs were estimated to be steep. In the U.S., sugar quotas cost over $800,000 per job that is alleged to be saved, almost 20 times the annual salary of a worker in the industry. In Brazil, ethanol quotas would be even more expensive; the average income of a Brazilian worker is a meager $9,000 per year. Most likely, no ethanol industry jobs would actually be saved or created– ethanol would become more expensive for all of society, and employment would decrease in industries that use ethanol as an input. The larger effects of trade globalization are not on employment but on income distribution, as the middle class in the U.S. knows so well.
In the Brazilian case, beyond creating no jobs, the proposed tariffs would likely transfer income from all of society to ethanol producers. Worse, the measures could make renewables relatively more expensive than fossil fuels, acting in effect as a fossil fuel subsidy – which is the world’s dumbest policy. Finally, the move would open Brazil up to a potential retaliation by the U.S. All this made the ethanol producers’ idea of erecting barriers to American imports a losing proposition for Brazil as a whole.
Given these facts, what did CAMEX, the Brazilian foreign trade chamber that reviews trade policy, do? It approved a 20 percent import tariff on ethanol, against the combined wisdom of economists in general and the government’s economics team in particular.
The next step was to open negotiations and get a general tariff and/or quota through Congress, to be operationalized later. Negotiations proceeded. In the end, the parties agree on a 20 percent tariff on American ethanol exports that exceed 600 million liters. The agricultural lobby remains strong, especially in a pre-election year. Ethanol producers won. Brazil lost.
This is protectionism at its worst: In a modern world where climate change is a threat and most countries subsidize renewables, the Brazilian government buckled to provide an indirect subsidy to fossil fuels, at a cost to the population. The saying goes that Brazil is the country of the future that never comes. This tariff on American ethanol is an example of why.
Zeidan is a business and finance professor at New York University in Shanghai and Fundação Dom Cabral.
Tags: Ethanol, Petrobras