like Brazil. To understand how this works, let’s take a look at one heavily protected industry – the ethanol and sugar business, whose history is intertwined with that of the nation.
Sugarcane has been a mainstay of the Brazilian economy for centuries. The first decree promoting the cultivation of sugarcane and the construction of sugar mills dates from 1516. By the 1700s, sugar exports made up most of the country’s GDP. In 1931, the Brazilian government determined that five percent of ethanol be mixed into imported gasoline; in the United States, feasibility studies on such mixtures were established by the Clean Energy Act only in 2007.
When the 1973 oil crisis threw the industrialized world into a tailspin, the Brazilian government created ProAlcool, a program that heavily subsidized producers and promoted ethanol as an alternative to expensive oil imports. The program grew after the second oil crisis but lost momentum in the 1980s and 1990s, as oil prices declined and sugar prices soared; ethanol-fueled cars peaked at 76 percent of the fleet in 1986. By the time Brazil’s economy boomed, buoyed on the surging commodities prices in the late 2000s, the ethanol industry had been sidelined, even if demand was still robust from the growth of flex fuel cars, which make up the majority of the Brazilian fleet and run on both gasoline and ethanol.
The commodities super-cycle of the early 2000s drove much of the growth in South America in the period. In Brazil, it was no different. What’s more, in 2007 Petrobras, the Brazilian state-owned oil company, announced the discovery of the largest oil field in the Americas in the past 40 years. The government pushed for an all-in strategy that would make its state-controlled oil giant the largest listed company in the world; in 2012 the company unveiled a $235 billion investment plan. It was all a mirage. A combination of incompetence, corruption and a reversal in oil prices drove the company to the brink of bankruptcy in 2016, though it has since recovered.
As the government’s 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