Are Latin American and Caribbean Biofuel Policies Consistent with their Comparative Advantages?

The objective of this article is to evaluate in what extend the comparative advantages of the biofuel feedstock of Latin American and Caribbean countries explain their biofuel policies. To achieve this goal, we analyze current biofuel policies of four major economies of the region – Argentina, Brazil, Columbia, and Mexico (LAC4). In 2013, the share of these LAC4 countries in total soybean and sugarcane production of the region was more than 80 percent. The classical Ricardian trade model, which recommends that countries should focus on producing and exporting goods and services on which they have relative advantage over their trading partners, provides the empirical framework for this study. Using panel data from 1991-2011, a biodiesel policy equation and an ethanol policy equation are estimated to evaluate the significance of biofuel policy drivers obtained from previous studies. Comparative advantages constitutes one of these drivers. Two sets of equations are estimated considering the comparative advantage approach from Vollrath (1991) and Doku and Di Falco (2012). Even if the comparative advantage is significant with the ethanol policy variable, other factors such as technology and energy imports contribute more to ethanol’s policy promotion. Similar results are observed for the biodiesel equation specified with this measure for comparative advantages. Additionally, when the measure proposed by Doku and Di Falco (2012)is applied for comparative advantage, for the ethanol policy equation comparative advantage gains relevance becoming as significant as the price of sugarcane, agricultural population and energy imports. By contrast in the biodiesel policy equation energy imports resulted to be more significant than the rest of the variables. In this case, even if comparative advantages were a driver other variables explained more the biodiesel policies. Using this alternative measure, the comparative advantage factor presents a larger effect in both, the ethanol and biodiesel equation, than using the RCA approach.