US, BRAZIL AGREE TO COOPERATE ON BIOFUELS - BUT LEAVE OUT TARIFFS

The US and Brazil -- the world's two top ethanol producers -- on 9 March agreed to advance cooperation on the research and development of biofuels. However, they did not agree on any changes to the substantial tariffs that Brazilian ethanol producers currently face in the US market.

On the sidelines of US President George W. Bush's five-nation Latin American tour, US Secretary of State Condoleezza Rice and Brazilian Foreign Relations Minister Celso Amorim signed a memorandum of understanding to boost cooperation between the two countries at the bilateral, regional and global levels to promote the development of new biofuel technologies, stimulate private sector investment in biofuels, and elaborate uniform standards for green fuels.

The agreement described biofuels as a potential "transformative force in the region to diversify energy supplies, bolster economic growth, advance social agendas, and improve the environment."

At the bilateral level, the two countries intend to advance the research and development of next generation biofuels technologies based on materials such as wood chips and switch grass. Presently, most biofuels produced in both countries are so-called first generation ones made using food crops: sugarcane in Brazil; corn in the US. In addition, the agreement seeks to promote transfer of technology to other countries wanting to produce the fuel, starting with countries in Central America and the Caribbean.

"If we fund projects to produce biodiesel and ethanol in poorer countries, and then the richer countries buy biodiesel that's produced there, then we'll see that investments put into those countries have produced results, and even more important, generated jobs," Brazilian President Luiz Inacio Lula da Silva said at a press conference after the deal was signed.

At the global level, the two countries promised to seek to expand the development of a global market in biofuels by developing uniform standards and codes that will standardise the definition of ethanol, so it can be traded on global markets the same way as other commodities like oil. A week earlier, the US and Brazil announced the creation of an International Biofuels Foum creation to help develop a global biofuels market together with China, India, South Africa and the EU, which all are large potential consumers and producers (see BRIDGES Weekly, 7 March 2007).

The US-Brazil agreement leaves aside the controversial issue of US tariffs on ethanol imports. Brazilian sugarcane-based ethanol is cheaper to produce than corn-based ethanol made in the US, as well as more efficient in terms of both energy and greenhouse gas emissions. However, Brazilian exporters face a 54 cent per gallon tariff barrier to the US market, in addition to a 2.5 percent ad valorem duty. The US government provides a subsidy of 51 cents for each gallon of ethanol mixed with gasoline that is effectively restricted to domestic producers because of the tariff. Washington also heavily subsidises the domestic production of corn. The deal signed in Sao Paulo did not address either the tariffs or the subsidies. Rather, the agreement mentions that issues related to domestic trade or tariffs should be raised in other fora. While Lula has complained about the tariffs as unfair, Bush told a press conference that they would remain in place. He explained that the law imposing the tariffs would expire in 2009, and that the US Congress would consider it then. The tariffs were first introduced in 1980, and have been repeatedly renewed since with some fluctuations in value.

In Washington, Senator Charles Grassley, a Republican from Iowa, expressed satisfaction that Bush and Lula had reached only a narrow agreement, as broader cooperation might have harmed US ethanol producers.

"A cynic might say that this deal is about stimulating demand elsewhere in the Americas to absorb Brazilian ethanol so that it doesn't threaten the US market," said Ron Steenblik, who heads the Global Subsidies Initiative of the International Institute for Sustainable Development.

Officials from the US State Department and the Brazilian Ministry of External Relations respectively will oversee the implementation of the Agreement. Bush and Lula will meet at Camp David on March 31 to continue discussions.

ICTSD Reporting; "US, Brazil sign ethanol deal," ABC NEWS ONLINE, 10 March 2007; "Bush to sign biofuels pact in Brazil," THE ASSOCIATED PRESS, 9 March 2007; "U.S. and Brazil Sign Biofuels Cooperation Accord," ENVIRONMENT NEWS SERVICE 9 March 2007.