U.S. Comparative Advantage in Bioenergy: A Heckscher-Ohlin-Ricardian Approach

Much of the current literature on trade in biofuels is focused on the partial equilibrium welfare effects in the U.S. ethanol sector of potentially distorting policy instruments such as tax credits to blenders and import tariffs (see Elobeid and Tokgoz 2006; de Gorter and Just 2007). However, recent studies by the OECD (2006) and the World Bank (Kojima, Mitchell, and Ward 2007) have expanded the analysis to consider the future prospects for trade in both ethanol and biodiesel, paying particular attention to current production costs across countries and the connection between thresh old prices for crude oil prices and biofuel pro duction costs as well as the land requirements needed to meet the types of biofuel production mandates being implemented in the United States, the European Union (EU), and else where. Two key stylized facts can be gleaned from these latter studies: while increasing crude oil prices have improved the economic viability of say U.S. corn-based ethanol, Brazil continues to have a significant comparative advantage in producing ethanol from sugarcane (OECD 2006; Kojima, Mitchell, and Ward 2007); sec ond, the land requirements necessary to meet targets being set for the proportion of biofu els used in transport fuel consumption show that again Brazil has a clear comparative ad vantage. For example, Brazil only requires 3 % of its agricultural land to meet a 10% share of biofuels in domestic transport fuel consump tion, compared to 30%, 36%, and 72%, re spectively in the United States, Canada, and the E.U. (OECD 2006). This all seems to point to a simple, but rather predictable story of trade in biofuels: in the absence of trade-distorting policy instru ments, Brazil currently has a comparative and maybe even an absolute advantage in produc ing biofuels, based on lower ethanol feedstock costs and relative abundance of agricultural land. Even in the presence of trade distortions, Brazil exported 20% of its production during the 2006-7 harvest season (Kojima, Mitchell, and Ward 2007), and this would increase sub stantially if the United States removed its ethanol import tariff of 54 cents per gallon (Elobeid and Tokgoz 2006). However, the mar gin for competitiveness in biofuels is rather narrow, only 10% of production being traded internationally, of which Brazil accounts for 50% (Kojima, Mitchell, and Ward 2007). This is a static story, though, based on cur rent crop yields as well as existing biofuel production technologies. Consequently, in try ing to analyze the potential for United States comparative advantage in biofuels production, it is important to account for technological innovation that may occur within the next decade, notably in the production of ethanol from cellulosic material. To that end a styl ized trade model is set out in the first part of this article, which allows for the possibil ity that the United States could become a fu ture exporter of biofuels. The model draws on a Heckscher-Ohlin-Ricardo approach origi nally due to Davis (1995), as well as analysis of trade in the presence of external economies (Helpman and Krugman 1985). Given this analysis, the second part of the article is con cerned with the possibility that current U.S. policy toward corn-based ethanol production may actually stymie the potential for future exports, drawing on recent literature analyz ing the infant-industry argument for protec tion (Saure 2007).