Wednesday, August 05, 2009

The US corn lobby, Sen. Charles Grassley and protectionism

The Washington Post has an article on Sen Charles Grassley's hypocritical defense of a tariff on imported ethanol that primarily targets Brazil and defends the US corn industry. Most of Brazil's ethanol is derived from sugarcane. I'm not an environmental economist, but I understand that producing sugarcane ethanol produces net energy. Producing corn ethanol may actually be a net waste of energy.

If the article is true, it is unfortunate that Sen. Grassley would choose a path of protectionism that offers no environmental advantages.

PRESIDENT Obama's nominee as ambassador to Brazil, Thomas A. Shannon Jr., is a longtime diplomat trained to speak honestly without giving unnecessary offense. So when Sen. James Webb (D-Va.) asked Mr. Shannon during his July 8 confirmation hearing about lifting the 54-cents-per-gallon tariff on imported ethanol, most of which comes from Brazil, the State Department veteran responded carefully. "I personally believe that it would be beneficial, sir," Mr. Shannon remarked, "but I recognize that, especially in the U.S. Congress, there are different views at this point in time." In other words: It might be a good idea, but Congress sets policy, not ambassadors.

Innocuous as it was, this statement did not go down well with Sen. Charles E. Grassley, the Republican from Iowa -- and fierce defender of that corn-growing state's ethanol industry, a sector whose prosperity the tariff protects. Even a hint of opposition to the tariff was intolerable to Mr. Grassley, so he threatened to block the Shannon nomination unless the Obama administration "clarified" its stand. No doubt mindful of Mr. Grassley's leverage over the Senate Finance Committee's health-care reform effort, the White House gave him what he wanted: a letter last week from Secretary of State Hillary Rodham Clinton and U.S. Trade Representative Ron Kirk promising "no plans" to change the tariff. Mr. Shannon's confirmation is back on track.

But the price of enforcing Mr. Grassley's taboo is not trivial. The ethanol tariff is but one component of a lavish system of subsidies and protections for U.S. ethanol producers. Ethanol blended into U.S. gasoline gets a tax credit of 45 cents per gallon, regardless of its origins; hence the "need" for an offsetting tariff on ethanol from abroad. (Ethanol imports are also subject to a tax equal to 2.5 percent of its market value.) Mr. Grassley and other supporters say the ethanol tariff preserves U.S. self-sufficiency in renewable fuels. In reality, it artificially boosts the price of U.S.-grown corn, thus distorting the markets for food and energy. U.S. producers may not be able to meet Congress's ethanol consumption target of 36 billion gallons per year by 2022. What better place to get the rest than Brazil, a fast-growing democratic giant with which the United States enjoys a strong political and economic relationship?

The U.S. ethanol tariff irritates that relationship, and Mr. Shannon was absolutely right when he implied that both countries would benefit from free trade. The tariff expires next year; its bipartisan critics in the Senate will probably try again to kill it. To win, they would need help from President Obama, who unwisely backed the tariff as a senator from corn-growing Illinois and as a candidate for the White House -- but who could adjust his position now. Alas, the hope of that is fainter after Mr. Grassley's little power play.

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