What happens when you mandate use of ethanol and heavily tax its importation?
There was an amusing article in last Friday’s Wall Street Journal ($$$) about a curious loophole in U.S. oil import tariffs. It focuses on a remarkable boomlet of U.S. imports of ethanol from the Caribbean that is not the result of the usual sources of comparative advantage:
These biofuel entrepreneurs won’t actually make ethanol from Caribbean sugar cane, even though sugar makes the best base for the fuel. Instead they’ll just import it from ethanol powerhouse Brazil, and process it here. Then they’ll try to cash in on the islands’ sweet tariff status: an exemption from a 54-cents-a-gallon U.S. tariff on ethanol processed anywhere else….
The Caribbean sugar industry is so antiquated that it can’t produce the fuel competitively from its own cane fields. Instead, Caribbean companies take on a middle step in the production process: They dehydrate the ethanol from its original state, then ship it to U.S. refiners, which add gasoline to make the fuel useable in American cars. The dehydrating meets the U.S. requirement that products be “substantially transformed” in Caribbean Basin countries, if they don’t originate there, to escape tariffs.
Some of us had hoped that President Bush’s visit to Brazil might have signaled that a new era of common sense could have arrived in Washington. But alas, it was not to be. The Washington Post reported that “Bush on Friday refused to discuss Lula’s desire to reduce a 54 percent tariff on imported Brazilian sugar-cane ethanol”, and the
Wall Street Journal claimed that “a U.S. government fact sheet specified that Friday’s initiative ‘does not include discussion of United States trade, tariffs or quotas.’”
You may like ethanol subsidies and mandates. Or you may like ethanol tariffs. But if you claim to like them both, I’m inclined not to take you seriously about either one, since the tariff directly undermines the effectiveness of the mandate. Unless perhaps your policy objective has nothing to do with meeting U.S. energy needs and everything to do with farm politics.
If you’re an economist, the idea of importing dehydrated Brazilian ethanol from the Caribbean just leaves you shaking your head about the craziness of U.S. energy policy. Or, if you’re Senator Chuck Grassley (R-IA), it leaves you thinking we really need to close that Caribbean ethanol-tariff loophole.