Brazil reinstated a 20 percent tariff on US ethanol imports Monday in a setback for President Donald Trump's administration, which lobbied to retain an exemption for the politically important industry.
The South American country had previously exempted up to 750 million liters (198 million gallons) a year of imported ethanol from tariffs, but did not renew the benefit after it expired Sunday, an official said.
"It's a very sensitive issue," the official told AFP, adding it was possible the inter-ministerial committee that decides tariff questions could hold an extraordinary meeting "in the coming days" to revisit the matter.
The US ambassador in Brazil, Todd Chapman, had reportedly lobbied hard to retain the exemption.
Chapman now faces an inquiry before the US House of Representatives' Foreign Affairs Committee over reports he violated a law barring federal officials from engaging in partisan activities by telling Brazilian counterparts that a renewal of the ethanol exemption would help Trump's re-election chances.
Ethanol is a key agricultural export for Iowa, a battleground state in the November election.
Brazilian President Jair Bolsonaro has sought to cultivate a close relationship with Trump, whom he openly admires and to whom he is often compared.
But that has not always shielded him from the Trump tempest. The US notably announced last week it would lower its quota for Brazilian steel imports.
That was a blow to Bolsonaro, who successfully persuaded Trump last year to continue exempting Brazil from the steel tariffs he imposed in 2018.
The ethanol issue is complicated by the fact that Bolsonaro also has a powerful agricultural lobby to contend with at home.
Ethanol is big business for sugarcane producers in Brazil's politically important northeast and southeast. They are also pushing for tariff-free access to the US sugar market.
Brazil and the United States lead the world in ethanol production, together accounting for nearly 85 percent of supply.
The US exported more than 1.25 billion liters of ethanol to Brazil last year, and imported 738 million liters of Brazilian ethanol.
Both countries' producers face slumping fuel demand at home because of the coronavirus pandemic and are keen to boost exports.