Estimating the Effects of U.S. Distortions in the Ethanol Market Using a Partial Equilibrium Trade Model

In this paper we assess the impact of the elimination of trade distortions on imports from Brazil to the U.S. For this purpose, we estimate a partial equilibrium trade model – an ethanol export supply function for Brazil and an ethanol import demand function for the U.S.-, based on annual data from 1975 to 2006, and use the results to compute a “back-of-the-envelope” measure of the deadweight loss derived from those trade distortions as well as one derived from producing the 35 billion gallons proposed in the “Twenty in Ten” 2007 State of the Union Policy Initiative assuming the distortions are not eliminated. Two-stage least squares is used to estimate both functions, the world price of ethanol being treated as endogenous. This paper supports the idea that the U.S. and Brazil would reap gains from trade if trade distortions were eliminated.

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 Record created 2017-04-01, last modified 2018-01-22

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