Monday, April 2, 2007

Ethanol Tariff

On climate change I take a definite middle of the road position, eschewing both the "sky is falling" and "head in the sand" camps. I'm skeptical but not dismissive. I do not support a pollution tax (rather I prefer the more market based cap and trade type regimes). On the other hand, I definitely think that investing in alternate fuel sources is prudent both environmentally and economically. We have only a finite amount of fossil fuels, after all. With that in mind, I am angry (yes, angry!) at the U.S.'s current 53 cent per gallon tariff on Brazilian ethanol. It may seem odd that someone would get so hot and bothered about a tariff, but certainly even the most mundane economic policies have significant real world consequences. Allow me to outline briefly my problems with it.

Economically: Tariffs notoriously distort international trade and thus allocation of resources both domestically and abroad. The tariff artificially inflates the price of Brazilian sugar cane ethanol for American consumers. American consumers are then more likely to prefer to buy the comparatively cheaper American corn ethanol. What's wrong with this? First it robs consumers of ethanol by making them buy more expensive American ethanol instead of the otherwise cheaper Brazilian alternative. Second, it destroys incentives of American ethanol producers to find more cost effective means of production. Third, it gives consumers of ethanol in other countries access to a less expensive source that not available to Americans. Fourth, it encourages investment in an American industry that may not be best use of those investment dollars. Finally the enforcement of the tariff requires government resources that could either be used elsewhere, or preferably, given back to the taxpayers. Some justify the tariff as an offset to Brazilian ethanol subsidies, which artificially reduce the price of ethanol. However, why shouldn't Americans be allowed to take advantage of the Brazilian government's fiscal decision? Furthermore, with our own agricultural subsidies, this is an almost laughable case of the pot calling the kettle black.

Environmentally: Ethanol is a cleaner fuel derived from renewable resources. With the problems created by fossil fuel pollution (my climate change skepticism is not so strong as to completely deny that pollution is *bad*) a cleaner fuel source which is cheaper should be welcomed not punished with a tariff. I do not mean to suggest that ethanol is the answer to all our fuel problems, but it is certainly an alternative worth exploring.

Internationally: The primary reason that the middle east is of any importance to us is oil. I am not making a normative judgment, just pointing out that were we not so dependent on oil, the Middle East would be about at important to U.S. national interests as is Africa. We wouldn't be inciting the terrorists, making questionable and uneasy alliances with Middle Eastern governments, and fighting a war that few support. Moreover, the tariff on Brazilian ethanol closes off a huge market to Brazilian ethanol producers, making it more difficult for them to further develop.

It just seems insane that we would cling on to this policy with no many negative attendant consequences. Do I have any thought to the American corn farmers protected by this tariff? Of course, but if they are unable to compete with Brazilian sugar farmers, then it is immoral to encourage them to continue in a failing industry at the expense of all American consumers.

2 comments:

Marcia said...

There was recently a really good discussion of just this topic on NPR. I believe it was on while Bush was doing his tour of Central America (right before Spring Break).
I have to admit my lack of knowledge about such things, and I found it very educational - they had a bit of a roundtable discussion and the guy from Brazil had some very strong feelings about the discouragement of sugar-based trade. It was nice to see your thoughts laid out so clearly on the matter.

Icon said...

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Iconoclast2222@verizon.net