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End of ethanol quota causes deadlock

07/30/2020 | 16h23

Close to expiring, the quota for the entry of imported ethanol without charging the common external tariff (TEC) in the Brazilian market is the subject of an impasse in Brasília. The government plans to end the quota, which currently guarantees the entry of 750 million liters per year at zero rate, but is in the middle of a crossfire.


The USA, the main beneficiaries of the measure, put pressure on Brazil to adopt a TEC equal to or less than 2.5% for all imported volume. Today it is 20% on imports over-quota. The Northeast and agribusiness benches in Congress also do not want the quota anymore, but defend the application of the "full" tariff for everything, claiming to fear a flood of the Brazilian market by American corn-based ethanol.


In the face of pressure, a possibility studied by President Jair Bolsonaro's assistants was to set an intermediate rate, closer to 10%.


There is consensus on extinguishing the quota, which was created in 2017 and originally had a forecast of 600 million liters per year. Its validity is from September 1 of a year until August 31 of the following year. In 2019, with the strengthening of Brazil-United States relations, the quota increased to 750 million liters.


Four ministers - Paulo Guedes (Economy), Teresa Cristina (Agriculture), Ernesto Araújo (Foreign Affairs) and Bento Albuquerque (Mines and Energy) - had a meeting yesterday afternoon to discuss the matter. As a sign of how delicate the issue is, they agreed on the end of the quota, but did not reach any conclusion on the new rate. Agriculture is sympathetic to the claim of Brazilian mills, which struggle to keep TEC at 20%. "It is President Bolsonaro who will decide," says a source, acknowledging the impasse.


Two factors - one political and one diplomatic - weigh in on the uncertainty. Behind Democrat Joe Biden in every poll, Donald Trump would like to use the full opening of the Brazilian market as good news for traditionally Republican states that form part of the so-called "Corn Belt", such as Iowa, Indiana and Missouri. This would help him to contain any eventual advance by Biden in his strongholds. The election takes place three months from now.


In addition to the wide-open crowd by Trump, the Bolsonaro government recognizes that, after three years of partial market liberalization through quotas, a commercial retreat would be diplomatically embarrassing. Also because, in exchange for more access to Brazilian purchases of ethanol and wheat, the Americans increased their quotas for sugar imports in April and ended the embargo on fresh beef from Brazil in February. From April to June, Brazilian sugar shipments to the USA tripled in comparison with the same interval of 2019, to 176 thousand tons.


In this reasoning, ending the quota and leaving a tariff of 20% for all ethanol would mean going back in the partnership with the United States (a topic dear to Chancellor Araújo) and in the opening of the economy (Guedes' wish).


On the other hand, there is the sensitivity of displeasing a political group with good communication at the Planalto Palace. Not only the agribusiness group, but parliamentarians from the Northeast insist on a 20% TEC. One of the producing states in the region is Alagoas, from deputy Arthur Lira (PP), Bolsonaro's new ally and a possible candidate for mayoral candidate next year. The government also knows that, in order to shield itself from an impeachment process, it cannot do without the support of these wings in Congress. Yesterday, Paulo Guedes even received several representatives of entities from Northeastern sugar mill owners, who in turn took the opportunity to reinforce the claim to end the quota for imported ethanol at the 20% tariff.


Last year, an emergency regime was approved for the processing of a draft legislative decree presented by Deputy Aguinaldo Ribeiro (PP-PB) to revoke the quota of imported ethanol without tariff. Northeastern mills moved, but the project ended up not succeeding after Minister Tereza Cristina acted to distribute the input of imported ethanol through phases of the sugarcane harvest, in such a way as not to harm the mills in the region so much. Only now has the matter returned to the agenda.

Font: T&B Petroleum/Boletim SCA
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