By Fabiana Batista, Jennifer A. Dlouhy and Eric Martin

A day after letting it lapse, Brazil is considering reapplying a tariff-free quota on American ethanol imports for 90 days in a show of goodwill to President Donald Trump ahead of U.S. elections, people with knowledge of the matter said.

Officials from the two nations are engaged in talks after the quota of 750 million liters (198 million gallons) expired on Monday, three people said, asking not to be identified as discussions are private and ongoing. A decision may be made as soon as Tuesday, they said.

Charging the 20% tariff would be a blow to the U.S. ethanol industry and electorally important Midwestern states such as Iowa and Illinois. It may also further exacerbate trade tensions between the two countries after Trump last week cut the cap on allowable steel shipments from Brazil.

But by continuing to waive the tariff on U.S. imports and strengthening his relations with Trump, Brazilian President Jair Bolsonaro would risk angering the domestic ethanol industry that has been hit hard by a pandemic-driven slump in demand. Reinstating the quota may also irk farming factions among Brazilian lawmakers, which opposed the measure unless the U.S. offered something in return such as opening up to Brazilian sugar imports.

Related:Brazilian ethanol trade in Trump sights

“If the import quota was to be extended, a flood of U.S. ethanol would enter, hurting the nation’s mills,” Evandro Gussi, president of Brazil sugar-cane group Unica, said in an interview last month.

Brazil is the top foreign market for U.S. ethanol, and the corn-based fuel additive represents about half of U.S. agricultural trade with the country. Some U.S. ethanol plants already have closed and others have scaled back as fuel demand plummeted amid the coronavirus pandemic

“A 20% tariff would absolutely erode the volume that we’re sending to that market,” Renewable Fuels Association president Geoff Cooper said in an interview last week.

Trump raised the prospect of retaliatory tariffs, saying in August that “as far as Brazil is concerned, if they do tariffs, we have to have an equalization of tariffs.”

Retaliation could take many forms -- including tariffs on other products imported from the South American country. Brazil also gets preferential treatment under U.S. Generalized System of Preferences, and the Trump administration already terminated India’s and Turkey’s status as beneficiaries of that program last year.

Neither the Brazilian President’s Office nor the Foreign Ministry responded to requests for comment. The U.S. Trade Representative declined to comment.

Related:Brazilian ethanol tariffs in limbo

--With assistance from Jenny Leonard, Simone Iglesias and Samy Adghirni.

© 2020 Bloomberg L.P.