Robust trade is the lifeline for any nation’s economy. In this era of globalization, aspects of national trade and economy are intricately connected with the trade practices of other countries in the world. To ensure that all signatory nations have equal opportunities to prosper economically and trade their goods and produce fairly, the World Trade Organization has through its statutory body, promulgated trade dispute mechanisms. All nations look at their own national interests and try and leverage bilateral, multilateral, and international mechanisms to their best advantage. Not surprisingly, clash of interest occurs and one such clash of interest between the world’s only superpower, the US and an emerging economic power, Brazil has been over the levying of a significant tariff on Brazilian ethanol imported into the United States. Brazil has had successfully used the dispute settlement mechanisms of the WTO in its previous trade disputes with the United States and the present impasse over the ethanol import tariff is being viewed by the Brazilians as yet another issue which may require resolution through the WTO. This essay focuses on the pros and cons of Brazil adopting the WTO trade dispute mechanism for resolving its imported ethanol tariff trade dispute with the United States.
The US and Brazil Account for Over 75 Percent of Gross World Ethanol Production
The United States produces 7.4 billion gallons of corn-based ethanol and Brazil produces more than 6 billion gallons of sugarcane-based ethanol per year. Grain-based ethanol costs some 50% more to produce in the United States than in Brazil which produces cane-based ethanol. Brazilian sugar-cane ethanol is the only bio-fuel that is consistently priced below its fossil-fuel equivalent. Also, sugarcane-based ethanol is far more efficient than corn-based ethanol (see graphic in Figure 1).
Thus it comes as no surprise that American farmers of corn based ethanol fear getting wiped out by the competition. To further encourage domestic production, Ethanol producers in the US are given generous financial incentives, “including a $0.51 of tax exemption on federal excise tax per gallon of ethanol blended with gasoline, a $.10/gal tax credit for “small” producers making less than 60 million gallons, and a $0.54/gal import tariff on ethanol”. The new US Law,- Food, Conservation and Energy Act 2008 continues to levy the tariffs on ethanol imports but has markedly reduced fuel blending subsidies to US ethanol blenders. This has been objected by Brazil who say that the “difference will create distortive trade effects that will increase the use of domestic ethanol over imported ethanol.
The World Trade Organization itself has sympathies for Brazil as is evident from their Public Forum report that states that “Brazil – the world’s premier bio-fuel producer in terms of efficiency and quality (in terms of GHG emissions) – is locked out of the markets of the US, EU and Australian markets due to high tariffs. The WTO also observes that such tariffs lead to higher food prices that exacerbate global food shortages. Thus, with international pressure from developing world, it may well be a good opportunity to petition the WTO against the unfair import tariffs imposed on it by the US. The head of Brazil’s Sugar Cane industry has stated that “going to the WTO and asking the dispute settlement body to analyze the legal basis of the U.S. tariff is now possible.” Brazil has also been complaining of discrimination within the imported ethanol tariff regime.
The Caribbean Basin Initiative and the Central American Free Trade Association (CAFTA) agreements allow Caribbean and Central American countries to purchase ethanol from other countries such as Brazil, reprocess it, and export to the U.S. without paying the import tariff. Under the North American Free Trade Agreement, ethanol from Canada or Mexico is duty-free. Brazil states that this policy is discriminatory and can be contested at the WTO Dispute Settlement Body. Brazilian interlocutors also observe that despite the fact that the US Congress had tried to eliminate tariffs on imported ethanol through introducing two bills: H.R. 6183 (Brown-Waite) and H.R. 6137 (Shadegg), “another bill was introduced, S. 3080 (Feinstein) that would require the President to periodically adjust the ethanol tariff so that it remains the same as the blender’s tax credit”.
President Obama despite his campaign stridency against removal of the import tariff on imported ethanol has remained ambivalent in recent months. More so, the last official position on the tariff retains its validity till 2010. Considering all these factors, the Brazilian side feels that ‘Offence is the best Defense’ and that the time has now come to ‘up the ante’. Their hard won Cotton dispute with the US in the WTO too has not seen substantive movement on ground with the US still dragging its feet over the compensation awarded to Brazil by the WTO. So, the Brazilian interlocutors feel that they can combine the two issues and argue the case that the US cannot possibly argue for Free trade while maintaining its own unfair protectionist regimes.
The confidence of the ‘WTO route’ lobby in Brazil may be misplaced. The US stance is based on some legal justification. Senator Chuck Grassley, a ranking member of the Finance Committee has stated that “Per Schedule XX – United States of America annexed to the Marrakesh Protocol to the General Agreement on Tariffs and Trade 1994, a tariff of 54 cents per gallon is bound in the U.S. schedule as a permitted other duty or charge”. Grassley further adds that “a reduction in the tariff could result in the United States sending even more dollars abroad to purchase fuels, dollars that would otherwise flow to rural communities in the United States”. This statement very clearly captures the popular sentiment and the domestic political compulsions of US politicians who see dangers in any reduction in protectionist measures as a threat to the US economy.
In the present circumstances of global financial meltdown and the massive $787 Billion stimulus package, President Barack Obama may find it extremely difficult politically to sell the idea to the Congress and even to the American people that reduction of tariff duties that would help another country would in any way be helpful to Americans. The current economic situation in America makes it politically impossible for the administration to yield on any trade measure that will see American taxpayer’s money going out of the country and not help in job creation within the country. The legal difficulties for Brazil get compounded because “WTO’s permissible limits on tariff level are often much higher than the actual tariffs that countries might levy. US lawmakers have often argued that Brazil has the option of taking the Caribbean route to circumvent the import tariff but has not done so far. This stance, however, obfuscates the fact that the volume of ethanol allowed under the Caribbean route is capped at seven percent of U.S. ethanol consumption.
The pros and cons of taking the ethanol import tariff issue to WTO are clearly weighted against the Brazilians. The US is far too powerful a country which has significant leverages in all other world bodies and can appreciably hurt Brazilian interests at will. Referral to the WTO may spark off a trade war and cross-retaliation measures across other trade disciplines governed by the WTO charter, an exchange in which the US is sure to prevail. Should the Brazilian side wish to enhance their chances of victory, a broader-based consensus with other like-minded developing or developed countries would need to be formed.
Brazil could look at tackling the issue in concert with Canada which has significant dispute with the US over its Corn subsidies. A better way ahead could be bilateral resolution. In any case, under the present global economic conditions and the state of the US economy, the US administration lacks the necessary domestic political space and support. The low global oil prices too would negatively impact any constructive move towards reducing or removing the import tariff on ethanol in the US as oil is cheaply available. More importantly, a move to take the dispute to the WTO may spark a global trade war and an end to free trade as the world knows it.
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