Barriers to the Importation of Brazilian Ethanol Caused by the US Ethanol Policy and the Legality of the Policy Under WTO Law

Abstract

This essay argues that the US ethanol policy is a trade barrier on the importation of Brazilian ethanol. A particularly controversial aspect of the ethanol policy is the secondary tariff imposed on ethanol imports.The secondary tariff causes imported ethanol to be treated less favorably than domestic ethanol, resulting in a de facto violation of the national treatment principle. This is because the Volumetric Ethanol Excise Tax Credit (VEETC), a tax credit of $0.45 per gallon of ethanol blended, is available to US blenders of ethanol and gasoline, regardless of whether the ethanol is obtained from a domestic producer or a Brazilian producer. However, at the border, Brazilian imports are subjected to a secondary tariff of $0.54 (and an ad valorem duty at a rate of 2.5%). As a result, US blenders have an incentive to use US-produced ethanol over Brazilian ethanol, as the use of US ethanol means they receive a tax credit against excise taxes imposed on the sale or use of the gasoline-ethanol fuel blend. Conversely, although US blenders that import ethanol from Brazil also receive the $0.45 tax credit, the tax credit is offset by the secondary tariff. Furthermore, US blenders that import ethanol have to pay an additional $0.09 above the offset of the tax credit, making the secondary tariff "punitive". As such, the structure of the tax credit and secondary tariff compels US blenders to use domestically-produced ethanol as opposed to importing ethanol from Brazil.Thus, it is proposed that in order to remove trade barriers to Brazilian ethanol the US should amend its ethanol policy by eliminating the secondary tariff.