U.S. Subsidies Put Chinese Ethanol in Your Gas Tank

Americans are accustomed to buying sneakers, toys and even American flags from the People’s Republic of China (PRC), but now, thanks to the combined policies of the PRC’s 10th Five-Year Plan and the Republican Party’s energy plan, U.S. drivers are filling their cars with Chinese fuel—specifically, Chinese ethanol.

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Ethanol, an alcohol-based fuel typically made from corn or other food plants, garners support from governments at every level as an environmentally friendly domestic source of energy—part of the Bush Administration’s effort to end our “addiction to oil.” There are many reasons to doubt that ethanol is environmentally friendly, but now its claim to be domestic comes into question.

Keith Collins, top economist at the Department of Agriculture, told a Senate committee September 6 that U.S. farmers would need to plant 10 million more acres of corn by 2010 to meet demand for ethanol, food and animal feed.

The demand for ethanol, however, is artificial. Congress in 2005 passed an energy bill mandating ethanol use, and the EPA’s proposed regulations would require that 3.71% of all fuel sold in the U.S. be “renewable,” of which ethanol is the most abundant. This summer, ethanol demand outpaced supply, so ethanol policy had the effect of driving up gas prices.

Collins told Congress: “There will be some costs [to rising ethanol production], there is no question about that. But it can be manageable given the objective of reducing foreign oil imports.”

On September 4, however, Reuters reported that China would export from 500,000 to 900,000 tons of ethanol. “Most of the ethanol cargoes go directly or indirectly to the United States,” Reuters reported, citing ethanol traders.

The U.S. charges a 54-cent tariff on each gallon of imported ethanol. But foreign sellers can still take advantage of U.S. subsidies for ethanol. Under the Caribbean Basin Initiative signed by President Clinton in 2000, a certain amount of ethanol processed in CBI countries can enter the U.S. duty-free. Some Chinese ethanol exports, reported Reuters, “are dehydrated in Caribbean countries for use in the U.S.”

Unlike imports of most Chinese consumer goods, which occur in a more-or-less free market on the U.S. end, ethanol imports are heavily subsidized by U.S. taxpayers.

Communist Fuel

Many state governments are subsidizing construction of ethanol distilleries and pumps. On top of the federal ethanol mandate, federal law grants a 50-cent tax credit for each gallon of ethanol a blender (typically a gas station or distributor) buys. Both domestic and imported ethanol qualify for these subsidies.

Chinese ethanol, however, benefits from one additional U.S. subsidy. In 2004, the Export-Import Bank of the United States (Ex-Im), a federal agency that finances the exports of U.S. companies, subsidized construction of an “ethanol dehydration facility” in Trinidad and Tobago—exactly the sort of facility through which foreign ethanol passes duty-free into the U.S.

Increased ethanol production was a plank in the PRC’s 10th Five-Year Plan, running from 2001 to 2005. China exported more than 125 million gallons of ethanol in 2005, according to Reuters, more than triple its 2004 rate.

China is currently the largest exporter of ethanol after Brazil and the U.S. The PRC’s chief obstacle to expanded ethanol exports is its current crop shortage. To supply the raw material for its ethanol, the Chicago Tribune reports, the PRC is helping Cuba revitalize its sugar industry.