Hold Your Horses, Brazil

Brazil has been quite vocal in their dissatisfaction with the U.S.'s 54 cents-per-gallon tariff on ethanol imports for quite some time. Despite Brazil's objection there is a specific rationale for instituting this tariff not only in the U.S., but also in other countries with budding ethanol industries. Such tarrifs will help promote the global spread of ethanol manufacturing rather than ceding the control of this industry to an oligopoly of a few nations. In the long run a "local-global" scheme that places centers of ethanol production close to centers of consumption will improve the ERoEI of ethanol by minimizing fuel transportation costs.

Why so anti-free-trade?

The problem with the laissez-faire approach with regards to import and export is that it prevents local industries from thriving.  For example, New Zealand's LanzaFuels recently announced its plans to put local ethanol production on hold due to cheaper imports from Brazil. If it weren't for the U.S.'s tariff and farm subsidies, we would be experiencing a similar scenario; our corn-based ethanol would have no chance against Brazil's sugar-cane ethanol. Countries need to build a strong platform for their local industries before they begin importing. Free-trade will only cause major players to rule the market, and almost impossible for local startups to get off their feet.    

But why promote protectionism?

I am not inherently pro-protectionism nor anti-globalization, however I believe to maximize ethanol's ERoEI, centers of production will have to be geographically close to centers of consumption. We cannot rely on the free market to make this happen, since current fuel prices still allow trans-oceanic transport of ethanol to be part of a sustainable business plan.  However, once fuel prices escalate, it may be too late to re-organize the ethanol industry from an oligopoligistic import-export based model to a much more efficient distributed "local-global" scheme. 

High tariffs among ethanol producing countries will help keep ethanol production local. Such tariffs will not only allow local companies to become competitive, but can also give foreign companies an incentive to set up shop abroad rather than export their ethanol from home.  Of course, to enable such "export of manufacturing" (similar to Toyota setting up automative factories in the U.S.), fewer restrictions will have to be made for setting up shop abroad.  

Well, if Brazil was to set up shop in the U.S., wouldn't Brazil have a disadvantage due to U.S. farmer subsidies?

That is true. Farm subsidies go directly against the spirit of globalization by placing foreign companies at a disadvantage to local enterprises.  Perhaps one way to modify this is to give subsidies based on geographical location rather than nationality.

Ultimately, once the ethanol industry begins to walk, then it will be time to throw away the tariffs and implemenent free-trade. For now, tariffs will be necessary for local industries to develop. So Brazil, HOLD YOUR HORSES.


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  • 9/4/2007 10:59 AM DV wrote:
    Yes, but wouldnt free trade and cheap imports from Brazil also spur demand?

    My grievance with the declining profit margin arguement that many people raise, is that profit margins don't matter if your demand growth outpaces the PM decline.

    Thus, while Brazilian ethanol would decrease American ethanol demand in the short run, it will most likely increase demand for flex-fuel vehicles and overall demand for ethanol. In the long run, American producers will be winners too.

    This arguement can be debated for a long time though, and you do make some valid assertions.
    Reply to this
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