The Potential Effects of a Brazilian Free Trade Agreement on the U.S. Ethanol Industry

Abstract

The United States and Brazil accounted for 89% of the total world production of ethanol in 2008. The United States government has been heavily involved in cultivating a domestic corn based ethanol industry through a $0.46 per gallon tax credit and an import tariff to protect from foreign producers. Currently, the U.S. import tariff is $0.57 per gallon. The tariff restricts the amount of ethanol imports from Brazil- even though Brazil continues to have a significant comparative advantage in ethanol production and will most likely surpass the US in production since they’re projected to quadruple their production by 2025. Using regression analysis to define both the US and Brazilian ethanol markets, I can estimate the level of ethanol trade between the US and Brazil if the tariff were to be eliminated. Increasing ethanol trade from Brazil could have a wide variety of implications in food prices, fuel prices, renewable energy, relations with one of the fastest rising political and economic powers in the world, and many other fields. This research project is simply to find the scope of trade that could ensue in the absence of an import tariff.