Order Code RS21930
Updated April 24, 2007
Ethanol Imports and the
Caribbean Basin Initiative
Brent D. Yacobucci
Specialist in Energy 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 fuels standard in the Energy
Policy Act of 2005 (P.L. 109-58). This standard requires U.S. gasoline 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 do play a role, albeit small, 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.
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

---

CRS-2
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 2% to 3% 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 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 roughly 3.4%.
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.

---

CRS-3
Figure 1. Annual Ethanol Imports to the United States
Million Gallons Per Year
700
600
500
400
300
200
100
0
1999
2000
2001
2002
2003
2004
2005
2006
Other
Brazil
Caribbean Basin
Source: 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
1996-2006, updated April 10, 2007.
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 are 40% to 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 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 $1.80 to $2.50 per gallon for most of the time between
January 2006 to April 2007, the tariff has presented a significant barrier to imports.7
However, during the voluntary phaseout of MTBE, there was a significant spike in
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.
7 Chemical Week Associates, “Octane Week Price Report,” Octane Week, various issues, January
2006 to March 2006, and Chicago Board of Trade, CBOT® Ethanol Futures Contract: Key
Charts, updated through Feb, 2007, Chicago, February 2007.

---

CRS-4
wholesale prices between April 2007 and September 2007, with wholesale prices nearing
$6.00 per gallon in some markets during the summer of 2007.8 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, and
Trinidad and Tobago.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 In spring and summer of
2004, it was reported that a major U.S. ethanol producer and a major petroleum company
had announced possible plans to construct new dehydration plants in El Salvador and
Panama.17 However, these proposals were met with criticism from corn growers, other
U.S. ethanol producers, and some Members of Congress. Critics argue that expansion of
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.
16 U.S. International Trade Commission, Interactive Tariff and Trade DataWeb, at [http://
dataweb.usitc.gov]. Accessed March 9, 2006.
17 The two companies are Cargill and ChevronTexaco. Rachel Gantz, “Reaction to Bill to Close
CBI ‘Loophole’ Met With Some Concern,” Renewable Fuel News, August 2, 2004.

---

CRS-5
duty-free imports from the CBI would undermine the domestic U.S. ethanol industry.18
Despite criticisms in the United States, a new dehydration facility began production in
Trinidad and Tobago in September 2005.19
Duty-free ethanol imports have also played a role in discussions regarding the U.S.-
Central America Free Trade Agreement (CAFTA).20 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, the ultimate effects of the allocations is unclear.
Growing U.S. Ethanol Market
The U.S. ethanol market has grown dramatically over the past several years.
Between 1990 and 2006, U.S. ethanol consumption increased from about 900 million
gallons per year to 5.0 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.
Partially because of concerns over groundwater contamination by MTBE, there was
a move to amend the Clean Air Act to eliminate the oxygenate requirement. To replace
the requirement, a renewable fuels standard (RFS) was established by the Energy Policy
Act of 2005 (P.L. 109-58). The RFS requires that gasoline sold in the United States
contain a renewable fuel, such as ethanol. The mandate requires 4.0 billion gallons of
renewable fuel in 2006, increasing to 7.5 billion gallons in 2012. As most of this
requirement will likely be met by ethanol, the RFS could lead to nearly a doubling of the
U.S. ethanol market between 2005 and 2012. While domestic producers anticipate greater
demand for their product, 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 is
18 Rachel Gantz, “NCGA Troubled by Report Cargill May Import Ethanol to U.S.,” Renewable
Fuel News, May 17, 2004.
19 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.
20 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.

---

CRS-6
being imported duty-free through a “manufacturing drawback.”21 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.22 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.23 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 2007. 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.
21 For more information on drawbacks, see U.S. Customs Service, Drawback: A Refund for
Certain Exports, Washington, February 2002.
22 19 U.S.C. 1313(p).
23 Peter Rhode, “Senate Finance May Take Up Drawback Loophole As Part Of Energy Bill,”
EnergyWashington Week, April 18, 2007.

---