Ethanol Imports and the Caribbean Basin Initiative (CBI)

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Prepared for Members and Committees of Congress

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Fuel ethanol consumption has grown significantly in the past several years, and it will continue to

grow with the establishment of a renewable fuel standard (RFS) in the Energy Policy Act of 2005

(P.L. 109-58) and the expansion of that RFS in the Energy Independence and Security Act of

2007 (P.L. 110-140). This standard requires U.S. transportation fuels to contain a minimum

amount of renewable fuel, including ethanol.

Most of the U.S. market is supplied by domestic refiners producing ethanol from American corn.

However, imports play a small but growing role in the U.S. market. One reason for the relatively

small role is a 2.5% ad valorem tariff and (more significantly) a 54-cent-per-gallon added duty on

imported ethanol. These duties offset an economic incentive of 51 cents per gallon for the use of

ethanol in gasoline. However, to promote development and stability in the Caribbean region and

Central America, the Caribbean Basin Initiative (CBI) allows the imports of most products,

including ethanol, duty-free. While many of these products are produced in CBI countries,

ethanol entering the United States under the CBI is generally produced elsewhere and reprocessed

in CBI countries for export to the United States. The U.S.-Central America Free Trade Agreement

(CAFTA) would maintain this duty-free treatment and set specific allocations for imports from

Costa Rica and El Salvador. Duty-free treatment of CBI ethanol has raised concerns, especially as

the market for ethanol has the potential for dramatic expansion under P.L. 109-58 and P.L. 110140.

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Fuel Ethanol .............................................................................................................................. 1

Ethanol Imports......................................................................................................................... 1

Ethanol and the CBI .................................................................................................................. 3

Growing U.S. Ethanol Market .................................................................................................. 4

Duty Drawback ......................................................................................................................... 4

Congressional Action ................................................................................................................ 5

Conclusion ................................................................................................................................ 5

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Figure 1. Annual Ethanol Imports to the United States ................................................................... 2

˜—ŠŒœȱ

Author Contact Information ............................................................................................................ 5

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I

n the United States, fuel ethanol is largely domestically produced. A value-added product of

agricultural commodities, mainly corn, it is used as a gasoline additive and as an alternative to

gasoline. To promote its use, ethanol-blended gasoline is granted a significant tax incentive.

However, this incentive does not recognize point of origin, and there is a duty on most imported

fuel ethanol to offset the exemption. But a limited amount of ethanol may be imported under the

Caribbean Basin Initiative (CBI) duty-free, even if most of the steps in the production process

were completed in other countries. This duty-free import of ethanol has raised concerns,

especially as U.S. demand for ethanol has been growing. Further, duty-free imports from these

countries, especially Costa Rica and El Salvador, have played a role in the development of the

U.S.-Central America Free Trade Agreement (CAFTA).

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Ethanol is an alcohol fuel produced from the fermentation of simple sugars.1 Most ethanol in the

United States is produced from corn. In other countries, sugarcane or other plants are common

feedstocks. In the United States, the increased demand for corn leads to higher revenues for U.S.

corn farmers. Ethanol is usually blended in gasoline (a mixture called “gasohol”) to increase

octane, improve combustion, and extend gasoline stocks. Currently, about 3% to 5% of total U.S.

gasoline demand is actually met by ethanol, and roughly half of U.S. gasoline contains some

ethanol.

U.S. ethanol is generally produced and consumed in the Midwest, close to where the corn

feedstock is produced. The main steps to ethanol production are as follows:

•

The feedstock (e.g., corn) is processed to separate fermentable sugars.

•

Yeast is added to ferment the sugars.

•

The resulting alcohol is distilled.

•

Finally, the distilled alcohol is dehydrated to remove any remaining water.

This final step—dehydration—is at the heart of the issue over ethanol imports from the CBI, as

discussed below.

‘Š—˜•ȱ –™˜›œȱ

According to the United States International Trade Commission, the majority of all fuel ethanol

imports to the United States came through CBI countries between 1999 and 2003 (see Figure 1).2

In 2004, imports from Brazil to the United States grew dramatically, but in 2005, CBI imports

again represented more than half of all U.S. ethanol imports. With an increase in ethanol demand

in 2006 due to voluntary elimination of MTBE—a competitor for ethanol in gasoline blending—

1

For more information on ethanol, see CRS Report RL33290, Fuel Ethanol: Background and Public Policy Issues, by

(name redacted).

2

It should be noted that between 1999 and 2003, Saudi Arabia was the largest exporter to the United States of ethanol.

However, this ethanol is synthetic (produced from fossil fuels) and does not qualify for the tax incentives for ethanolblended fuel. Therefore, ethanol from Saudi Arabia is used as an industrial feedstock and is subject to different tariff

treatment than fuel ethanol.

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imports grew dramatically, roughly quadrupling imports in any previous year.3 Most of this

increase was in direct imports from Brazil. Historically, imports have played a relatively small

role in the U.S. ethanol market. Total ethanol consumption in 2005 was approximately 3.9 billion

gallons, whereas imports totaled 135 million gallons, or about 4%. Imports from the CBI totaled

approximately 2.6%. In 2006, total imports represented roughly 13% of the 5.0 billion gallons

consumed in 2006; ethanol from CBI countries represented roughly 3.4%. In 2007, total imports

represented roughly 6% of U.S. consumption (6.8 billion gallons); ethanol from CBI countries

represented roughly 3.6%.

Figure 1. Annual Ethanol Imports to the United States

Millions Gallons Per Year

U.S. International Trade Commission (USITC), Interactive Tariff and Trade DataWeb, at

[http://dataweb.usitc.gov], accessed March 9, 2006, and USITC, U.S. Imports of Fuel Ethanol, by Source 1996-2007,

Source:

updated February 2008.

One reason for limited imports—even though, in some cases, production costs for ethanol in

foreign countries are significantly lower than in the United States—is a most-favored-nation tariff

of 2.5% and an added duty of 54 cents per gallon.4 In many cases, this tariff negates lower

production costs in other countries. For example, by some estimates, Brazilian production costs

have been roughly 50% lower than in the United States.5 A key motivation for the establishment

of the tariff was to offset a tax incentive for ethanol-blended gasoline (“gasohol”).6 This incentive

3

For more information on the MTBE phaseout, see CRS Report RL31361, “Boutique Fuels” and Reformulated

Gasoline: Harmonization of Fuel Standards, by (name redacted).

4

Technically, the tariff is 14.27 cents per liter, which is equal to 54 cents per gallon.

5

“NCGA’s Adams Addresses World Energy Crisis at ACE Meeting,” NCGA News, August 16, 2004; Kevin Diaz,

“Cargill Takes Heat Over Ethanol Import Plan,” Star Tribune, July 2, 2004.

6

U.S. General Accounting Office, Fuel Ethanol: Imports from Caribbean Basin Initiative Countries, April 1989. For

more information on the excise tax exemption, see CRS Report 98-435, Alcohol Fuels Tax Incentives, by (name reda

cted).

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

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‘Š—˜•ȱ –™˜›œȱŠ—ȱ‘ŽȱŠ›’‹‹ŽŠ—ȱŠœ’—ȱ —’’Š’ŸŽȱǻ Ǽȱ

is currently valued at 51 cents per gallon of pure ethanol used in blending. Unless imports enter

the United States duty-free, the tariff effectively negates the incentive for those imports. With

U.S. wholesale ethanol prices ranging from roughly $1.50 to $2.50 per gallon for most of the time

between January 2006 to March 2008, the tariff has presented a significant barrier to imports.7

However, during the voluntary phaseout of MTBE, there was a significant spike in wholesale

prices between April 2006 and September 2006, with wholesale prices nearing $6.00 per gallon in

some markets during the summer of 2006.8 This runup in prices significantly improved the

profitability of importing ethanol, regardless of the duty.

‘Š—˜•ȱŠ—ȱ‘Žȱ ȱ

As Congress noted in the Customs and Trade Act of 1990, the Caribbean Basin Initiative (CBI)

was established in 1983 to promote “a stable political and economic climate in the Caribbean

region.”9 As part of the initiative, duty-free status is granted to a large array of products from

beneficiary countries, including fuel ethanol under certain conditions. If produced from at least

50% local feedstocks (e.g., ethanol produced from sugarcane grown in the CBI beneficiary

countries), ethanol may be imported duty-free.10 If the local feedstock content is lower,

limitations apply on the quantity of duty-free ethanol. Nevertheless, up to 7% of the U.S. market

may be supplied duty-free by CBI ethanol containing no local feedstock.11 In this case, hydrous

(“wet”) ethanol produced in other countries, historically Brazil or European countries, can be

shipped to a dehydration plant in a CBI country for reprocessing.12 After the ethanol is

dehydrated, it is imported duty-free into the United States. Currently, imports of dehydrated

ethanol under the CBI are far below the 7% cap (approximately 3% in 2006). For 2006, the cap

was about 270 million gallons,13 whereas about 170 million gallons were imported under the CBI

in that year.14

Dehydration plants are currently operating in Jamaica, Costa Rica, El Salvador, Trinidad and

Tobago, and the U.S. Virgin Islands.15 Jamaica and Costa Rica were the two largest exporters of

fuel ethanol to the United States from 1999 to 2003. (In 2004 and 2006, direct imports from

Brazil exceeded imports from all other countries combined.)16 Despite criticisms in the United

States, new dehydration facilities began production in Trinidad and Tobago in 200517 and the U.S.

Virgin Islands in 2007.

7

Chemical Week Associates, “Octane Week Price Report,” Octane Week, various issues, January 2006 to March 2006,

and Chicago Board of Trade, Ethanol Derivatives, updated through January, 2008, Chicago, February 13, 2008.

8

Chicago Board of Trade, op. cit.

9

P.L. 101-382, §202; 19 U.S.C. 2701 note: congressional findings.

10

P.L. 99-514, §423; 19 U.S.C. 2703 note: ethyl alcohol and mixtures thereof for fuel use.

11

Ibid.

12

U.S. House of Representatives, Committee on Ways and Means, Hearing on Fuel Ethanol Imports from Caribbean

Basin Initiative Countries, April 25, 1989.

13

69 Federal Register 76956.

14

The quota for a given year is calculated based on 7% of U.S. consumption in the preceding year. Therefore, as U.S.

consumption is growing, the quota represents somewhat less than 7% of total U.S. consumption in that year.

15

Petrojam, Ltd., Petrojam Ethanol Limited - Alcohol Sources. U.S. International Trade Commission (USITC), U.S.

Imports of Fuel Ethanol, by Source 1996-2007, February, 2008

16

USITC, Interactive Tariff and Trade DataWeb, at [http://dataweb.usitc.gov]. March 9, 2006.

17

This project has received particular scrutiny from some critics because its construction was financed through a loan

(continued...)

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Duty-free ethanol imports have also played a role in discussions regarding the U.S.-Central

America Free Trade Agreement (CAFTA).18 Under this agreement signed by the Bush

Administration and the participating countries, specific allocations (of the 7% duty-free cap for

CBI ethanol) are set aside for Costa Rica and El Salvador. These allocations effectively limit the

amount of fuel that other CBI countries can import duty-free. Costa Rica’s allocation is 31 million

gallons per year, while El Salvador was granted an initial allocation of approximately 6.6 million

gallons per year, increasing by roughly 1.3 million gallons in each subsequent year. However, El

Salvador’s allocation may not exceed 10% of the total CBI allocation (or 0.7% of the U.S.

market). The agreement was signed on May 28, 2004. Congress approved the agreement in 2005,

and implementing legislation was signed by President Bush on August 2, 2005 (P.L. 109-53). As

both countries exceeded their allocations in 2005, 2006, and 2007, the ultimate effects of the

allocations are unclear.

›˜ ’—ȱǯǯȱ‘Š—˜•ȱŠ›”Žȱ

The U.S. ethanol market has grown dramatically over the past several years. Between 1990 and

2007, U.S. ethanol consumption increased from about 900 million gallons per year to 6.8 billion

gallons per year. Much of this growth has resulted from Clean Air Act requirements that gasoline

in areas with the worst ozone pollution contain an oxygenate, such as ethanol, and the

establishment of a renewable fuel standard (RFS) in the Energy Policy Act of 2005 (P.L. 109-58).

The RFS required that gasoline sold in the United States contain a renewable fuel, such as

ethanol. The mandate required 4.0 billion gallons of renewable fuel in 2006, increasing to 7.5

billion gallons in 2012. The Energy Independence and Security Act of 2007 (P.L. 110-140)

expanded the RFS to 9.0 billion gallons in 2008, increasing to 36 billion gallons in 2022. In

addition, the expanded RFS specifically requires the use of an increasing amount of “advanced

biofuels”—biofuels produced from feedstocks other than corn starch (including sugar cane

ethanol). While domestic producers anticipate greater demand for their product under the RFS,

they are also concerned that duty-free ethanol imports through the CBI could dramatically

increase, to their detriment.

ž¢ȱ›Š ‹ŠŒ”ȱ

In addition to the concerns over imports of duty-free ethanol from CBI countries, there is growing

concern that a large portion of ethanol otherwise subject to the duties is being imported duty-free

through a “manufacturing drawback.”19 If a manufacturer imports an intermediate product then

exports the finished product or a similar product, that manufacturer may be eligible for a refund

(drawback) of up to 99% of the duties paid. There are special provisions for the production of

petroleum derivatives.20 In the case of fuel ethanol, the imported ethanol is used as a blending

component in gasoline, and jet fuel (considered a like commodity) is exported to qualify for the

(...continued)

insured by the U.S. Export-Import Bank.

18

For more information on CAFTA, see CRS Report RL31870, The Dominican Republic-Central America-United

States Free Trade Agreement (CAFTA-DR), by (name redacted).

19

For more information on drawbacks, see U.S. Customs Service, Drawback: A Refund for Certain Exports,

Washington, February 2002.

20

19 U.S.C. 1313(p).

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‘Š—˜•ȱ –™˜›œȱŠ—ȱ‘ŽȱŠ›’‹‹ŽŠ—ȱŠœ’—ȱ —’’Š’ŸŽȱǻ Ǽȱ

drawback.21 Some critics estimate that as much as 75% or more of the duties were eligible for the

drawback in 2006. Therefore, critics question the effectiveness of the ethanol duties and the CBI

exemption.

˜—›Žœœ’˜—Š•ȱŒ’˜—ȱ

Some Members of Congress have expressed concern over duty-free imports of dehydrated

ethanol that originates in Brazil or other countries. Therefore, there is growing interest from some

Members of Congress to eliminate the CBI exemption and/or modify the manufacturing

drawback for petroleum products.

Although some stakeholders are concerned over increased ethanol imports and their effect on the

U.S. industry, others believe that tariffs on imported ethanol should be eliminated entirely. They

argue that increased use of ethanol, regardless of its origin, would further displace gasoline

consumption. They also argue that inexpensive imported ethanol would help mitigate any fuel

price increases from the renewable fuels standard.

˜—Œ•žœ’˜—ȱ

With growing demand for ethanol, there is increased interest in foreign imports. Because ethanol

from CBI countries is granted duty-free status, there is the possibility that imports of dehydrated

ethanol will grow because of this avenue provided in the law. While CBI countries have not yet

reached their quota for ethanol refined in other countries and dehydrated in the Caribbean, CBI

imports have increased over the past few years, and may exceed the quota in future years. CBI

imports have the potential to increase significantly over the next few years, especially as the

domestic market grows under the renewable fuels standard. In addition, the manufacturing

drawback could provide another avenue for duty-free ethanol imports directly from Brazil and

other countries.

Low-cost ethanol imports could have an advantage over domestically produced ethanol, which

could affect the U.S. ethanol industry and American corn growers. However, the U.S. ethanol

industry has grown significantly in the past several years, and will likely continue to grow

regardless of the level of imports.

ž‘˜›ȱ˜—ŠŒȱ —˜›–Š’˜—ȱ

(name redacted)

Specialist in Energy and Environmental Policy

[redacted]@crs.loc.gov, 7-....

21

Peter Rhode, “Senate Finance May Take Up Drawback Loophole As Part Of Energy Bill,” EnergyWashington Week,

April 18, 2007.

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

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