WASHINGTONBrazilian President Luiz Inacio Lula da Silvas visit to Camp David last weekend was meant to seal what is being dubbed as the ethanol alliance between the United States and the South American giant. I have no idea whether ethanol will eventually deliver the grandiose promise of a clean environment or the bankruptcy of oil-rich despots. But I do know that there is a huge disconnect between the objectives of the ethanol alliance and current policy.
If the United States wants to boost ethanol consumption and reduce oil-dependency, it needs to make a simple decisioneliminate its 54-cents-a-gallon tariff. Experts tell us that corn-based ethanol, the kind being produced in the United States, is eight times less efficient than Brazils sugarcane version of the biofuel. Alessandro Teixeira, Brazils point man for his countrys ethanol strategy, insists that we are the world leader, and if people really want to benefit from our ethanol industry, they have to embrace it in practice, not in theory. Precisely because corn is much less efficient than sugarcane, the U.S. has been able to replace only about 3 percent of its oil consumption despite a huge government biofuel program.
The second way in which current policy defeats the purpose of the ethanol alliance has to do with Hugo Chavez and Fidel Castro. Clearly, the Bush administration wants to entice Central American and Caribbean countries that benefit from Venezuelan oil subsidies to adopt biofuels in order to become independent of Caracas. The idea is to encourage Brazil to export its technology to those countries and help them build distilleriessuch as the one recently constructed in Jamaicafor ethanol production. But there is a hitch: Due to various preferential trading arrangements, Caribbean and Central American countries dont face the tariffs that currently hurt Brazilian exports to the U.S. So, while Brazil might take some pride in exporting its technology and eventually getting some cash incentives from Washington to help the Caribbean basin liberate itself from Chavez, Lulas real interest lies in exporting to the American and the European markets, both of which are now protected.
Incidentally, ethanol is making Chavez and Castro nervous. One proof is the hysterical article Castro wrote for Granma, Cubas official newspaper, lashing at those who want to convert food into combustibles and accusing them of wanting to condemn to premature death and thirst more than 3 billion people of the world. Although the article was purportedly aimed at President George W. Bush, its real target was Lula, who was about to embark on his trip to Washington just a few weeks after Bush had visited him in Brasilia.
But unless there is a major change in policy, Castro need not worry too much about ethanol. In order for the U.S. ethanol program to achieve, say, what Brazil has achievednamely, replacing 40 percept of oil consumptionthe country would need to make available massive amounts of new farmland on which to grow more corn and, given how inefficient that crop is as a source of energy, waste colossal amounts of capital transforming it. True, the U.S. could help start a sugarcane-based ethanol industry in Florida. But then it would need to protect the Floridians from Brazilian competition, which would not exactly thrill the other member of the ethanol alliance.
One final caveat. It is hard to see how the new ethanol alliance will boost the Doha Round of world trade talks, as some commentators are claiming. The principal stumbling block is the fact that developing countries are using American and European protectionism as an excuse to maintain their own barriers in areas such as services. The U.S. ethanol program already has caused an artificial rise in the price of cereals, giving new arguments to developing nations who want to blame the United States for impoverishing them.
It makes me nervous when governments, rather than investors and consumers, decide what we should invest in and what we should consume. But if the ethanol partners want their grand schemes to have a chance at success, then they at least need to start by being consistent. Otherwise, the Cuban tyrants next article might actually be titled I told you so!