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U.S. President Donald Trump hosts a working dinner with Brazilian President Jair Bolsonaro at the Mar-a-Lago resort in Palm Beach, Fla., on March 7, 2020.Tom Brenner/Reuters

Brazil is facing a difficult choice between going up against a powerful local sugar lobby and angering a key ally, U.S. President Donald Trump, as a major decision on international ethanol trade looms.

A Brazilian tax-free ethanol import quota used entirely by U.S. producers is set to expire on Aug. 31, unless the government renews it. Allowing 750 million litres a year, it is a welcome volume for U.S. ethanol makers as the pandemic hit their business.

U.S. ethanol producers and the White House expect a renewal of the tax-free quota and Mr. Trump has asked Brazilian President Jair Bolsonaro’s government to eliminate any tariff, currently at 20 per cent, on imports above that quota.

Mr. Trump would like to please ethanol producers and corn farmers before the U.S. election in a time when fuel sales are down owing to the pandemic, which drove plant closings and slashed demand for corn.

Mr. Bolsonaro, meanwhile, was elected with strong support from his country’s powerful farm lobby. The local sugar and ethanol industry, also hurt by the pandemic, urged the government to let the quota expire, ending any tax-free imports.

Evandro Gussi, head of Brazil’s sugar and ethanol industry group Unica, said that any liberalization on ethanol trade should be followed by a U.S. move to reduce its import tax on Brazilian sugar.

Unica believes there is otherwise no gain for Brazil to renew the quota or to eliminate the tariff.

Geoff Cooper, head of U.S. ethanol group RFA, said Brazil faces no taxes on its ethanol sales to the United States and that it would be only fair to have similar rules on the trade between the two biofuel producers.

Mr. Trump hinted at a possible retaliation if Brazil decides to reinstate tariffs on ethanol trade during a White House news briefing on Monday.

“I think that, as far as Brazil is concerned, if they do tariffs, we have to have an equalization of tariffs,” he said. “And you may be seeing something on that very soon.”

A Brazilian Economy Ministry spokesman said the government is still “building its position” on the issue, declining to comment further. The U.S. Trade Representative did not respond to request for comments.

The two leading global ethanol producers regularly sell and buy from each other.

Brazil has a market niche in California because its cane-based ethanol is considered by the state as having a smaller carbon footprint compared with corn-based U.S. fuel, so it gets a price premium.

U.S. sells ethanol to Brazil’s Northeast region, owing to favourable ocean freight from the Gulf.

In 2019, Brazil sold US$628-million of ethanol to the U.S. The U.S. exported US$543-million worth of the fuel to Brazil.

With domestic sales down on both countries, both are looking to boost foreign sales.

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