Ethanol Imports and the Caribbean Basin Initiative

Ethanol Imports and the
Caribbean Basin Initiative (CBI)
Brent D. Yacobucci
Specialist in Energy and Environmental Policy
Resources, Science, and Industry Division
Summary
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. 110-140.
In 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).
Fuel Ethanol
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.
Ethanol Imports
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 — 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

¹ For more information on ethanol, see CRS Report RL30369, Fuel Ethanol: Background and
Public Policy Issues, by Brent D. Yacobucci.
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 ethanol-blended fuel. Therefore, ethanol from Saudi Arabia
is used as an industrial feedstock and is subject to different tariff treatment than fuel ethanol.
³ For more information on the MTBE phaseout, see CRS Report RL31361, “Boutique Fuels” and
Reformulated Gasoline: Harmonization of Fuel Standards, by Brent D. Yacobucci.

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
⁵⁰⁰^M^{illion G}^a^llons^P^e^r^Y^e^a^r
⁴⁵⁰⁷⁰⁰
⁴⁰⁰⁶⁰⁰
³⁵⁰⁵⁰⁰
³⁰⁰⁴⁰⁰
²⁵⁰³⁰⁰
²⁰⁰
²⁰⁰
¹⁵⁰
¹⁰⁰¹⁰⁰
⁵⁰⁰
1999 200 0 2 001 2 002 2003 20 04 2 005 20 06 20 07
⁰
¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷OtherBrazilCaribbean Basin

^Source:^U.S^.^In^t^e^rn^atⁱ^oⁿ^a^l^T^r^{ade C}^o^m^mⁱ^s^sⁱ^on^(US^I^T^C^),^Inter^a^{ctive Tar}^{iff and Tr}^{ade DataWe}^b^{, at}
^[h^ttp://dataw^eb.u^s^itc.g^ov^{], acces}^s^e^{d March}^{9, 2006, an}^{d USIT}^C^,^U^.^{S. Im}^por^t^s^of^Fuel^Et^hanol^{, by Sour}^ce
^1996-2007^{, u}^pdat^e^{d F}^e^bru^a^ry^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-⁴
favored-nation tariff of 2.5% and an added duty of 54 cents per gallon. 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 incentive⁶
for ethanol-blended gasoline (“gasohol”). This incentive 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
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 Salvatore Lazzari.

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.
Ethanol and the CBI
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

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.

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.
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.
Growing U.S. Ethanol Market
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.
Duty Drawback
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 is¹⁹
being imported duty-free through a “manufacturing drawback.” If a manufacturer
imports an intermediate product then exports the finished product or a similar product,

¹⁷ This project has received particular scrutiny from some critics because its construction was
financed through a loan 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 J. F. Hornbeck.
¹⁹ For more information on drawbacks, see U.S. Customs Service, Drawback: A Refund for
Certain Exports, Washington, February 2002.

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 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.
Congressional Action
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.
Conclusion
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.

²⁰ 19 U.S.C. 1313(p).
²¹ Peter Rhode, “Senate Finance May Take Up Drawback Loophole As Part Of Energy Bill,”
EnergyWashington Week, April 18, 2007.