Corny, Isn’t It?
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Here we go again. Politicians using a laudable, popular objective as a front for what is perhaps not so laudable. Joined by 28 others, Representatives Earl Pomeroy (D – North Dakota) and John Shimkus (R – Illinois) have introduced H.R. 4140, a bill to extend for five years the lives of the various subsidies and import restrictions that have been boosting the corn ethanol industry in the United States. The bill would extend the Volumetric Ethanol Excise Tax Credit, the Small Ethanol Producers Tax Credit, and the Cellulosic Ethanol Production Tax Credit (the latter for three years). No, I don’t understand the differences, either. What prompts this post is that the bill would also extend a special tariff that applies an effective tariff of more than 29% on imported ethanol.
Ask most economists and many environmentalists and I expect they will tell you that this bill is a bad idea. On the environmental side, there is mounting evidence that corn-based ethanol production harms the environment as much as it helps it. Sugar and a few other crops, I’m told, are far more ecologically sound – and Brazil’s sugar-based ethanol is often looked to as the model for the industry. Unfortunately, sugar cane can’t be grown in the sponsoring politicians’ states, but corn can. The economic rationale for corn-based ethanol appears increasingly unsound. To simplify, production of corn ethanol reduces the availability of corn for other uses, such as feed for animal production or, indeed, corn for human consumption. Obviously, this raises the price of corn, and raises the price of everything the consumer buys that is derived from corn. Most economists would say we would be better off if we can produce our ethanol (if it is really needed) from crops or on land that do not compete with as many other uses. Again, sugar, certain quick-growing grasses and various other sources of cellulose come to the fore. This is without considering the costs of operating the corn ethanol industry itself. In a nutshell, it is an industry with doubtful environmental or economic credentials, largely surviving due to the government handouts that Mssrs. Pomeroy, Shimkus and the others wish to extend. And I haven’t even gotten to the part that worries me.
Responding to oil shocks and wanting to nurture an ethanol industry that showed all the signs of becoming a political cash cow for the Midwest, the U.S. Congress in 1980 established a “temporary” import duty of 14.27¢ per liter of ethanol. As many “temporary” things do in Washington, this duty has persisted for a generation. It was argued at the time that the duty was necessary to give our home-grown ethanol industry a chance to get started. We generally complain when we hear the “infant industry” arguments of other countries, but why bother with consistency? Energy independence was the watchword then, not the environment or even economic sense, and our Congress wasn’t going to let us fall prey to a global conspiracy of predatory sugar farmers.
It didn’t matter that our temporary ethanol duty was a pretty clear violation of our GATT (now WTO) commitments. Our U.S. trade negotiators (the same ones the politicians like to say can’t negotiate a good deal) went out and dutifully negotiated a legal figleaf for the duty. So, thirty years later, the previously illegal duty remains in place. The United States imports a bit of ethanol despite the duty. Canada sells us some more corn ethanol duty-free under NAFTA, and Trinidad & Tobago ships in some sugar ethanol at a reduced duty under the Caribbean Basin Initiative. Who gets left out? Brazil, the world’s most efficient producer of sugar-based ethanol.
Where does that leave us? We have an environmentally and economically doubtful industry, propped up by hefty Federal subsidies, and supported by a “temporary” customs duty that keeps out ethanol that makes environmental and economic sense. When applied to 2009 prices, that 14.27¢ per liter duty equals something north of 29%, making it one of our highest tariff walls in any industry. To “temporarily” protect a 30-year-old “infant” industry. When do they grow up?
