North Carolina Journal of International Law

"Connecting North Carolina to the World of International Law"

The U.S. Trade War with Bombardier

By: Joshua Bransford

 

 

 

 

 

 

Unbeknownst to many, the United States and Canada have recently been involved in a trade war.[1] The two behemoth corporations, Boeing and Bombardier, have recently been facing off due to issues involving trade tariffs.[2] “Boeing has accused Bombardier of accepting billions in unfair Canadian subsidies that allowed the company to undercut its rivals on price, [and] [t]he Trump administration recently sided with Boeing, slapping Bombardier with a hefty fine.”[3] However, the U.S. International Trade Commission must confirm this ruling before it takes effect.[4] If this ruling is confirmed, not only will airfare be affected, but thousands of jobs within Canada, the U.S., and the United Kingdom are likely to be in jeopardy as Canada and the U.K. have threatened to take economic action against the U.S..[5]

History of the C Series

Boeing has been a significant force in the airline industry for sometime; however, Bombardier’s introduction of the C series, a midsize passenger jet,  is relatively new.[6] Bombardier commenced development of the C series to take advantage of the midsized airline market in the early 2000s.[7] In order to aid Bombardier, “[t]he Canadian government initially backed its development with $340 million.”[8]

Unfortunately for the Canadian airline, recently “the story around the Bombardier C Series program has been blighted [by] cost overruns, developmental delays, and slow sales.”[9] “In 2015, Bombardier was forced to write down $4.4 billion”.[10] Because of this,  the Canadian government was forced to bail out Bombardier in the form of “another $1.3 billion more in investment and repayable loans and guarantees.”[11] Subsequently, the Canadian government also “took a 49.5% stake in the C Series.”[12]

Basis of the Dispute

Luckily for Bombardier, Delta Airlines was willing to purchase a large number of these jets, helping to relieve some of Bombardier’s financial pressures.[13] Ultimately, the airline ordered 135 C series jets from Bombardier.[14] According to Bombardier, “[i]t was the largest order ever placed for the C series, which Bombardier execs called a ‘watershed moment for [its] game-changing aircraft.’”[15] Not only was this deal worth $5.6 billion, but also it also validated the jet, giving it credibility to other potential buyers.

This, however, did not go over well with Boeing.[16] According to Boeing, Delta only paid $19.6 million for each jet.[17] “That’s 75 percent lower than the plane’s list price — and according to Boeing, some 40 percent lower than Bombardier’s true production costs, which it estimates at $33.2 million each.”[18] Thus, Boeing contends that Bombardier is only able to do this because of subsidies provided by the Canadian government.[19] Furthermore, Boeing argues that “Bombardier’s subsidized sales of the C Series airliner in the US came at the detriment of its 737 NG and 737 MAX models.”[20] Subsequently, Boeing filed a trade complaint, accusing “Bombardier of using subsidies to dump its product into the U.S. market”, in violation of the U.S. Anti-Dumping Act of 1916, which is held between the United States International Trade Commission (USITC) and the Commerce Department. [21]

Thus far, the U.S. has agreed with Boeing.[22] “[T]he US Department of Commerce issued a preliminary ruling that would levy a 219.63% tariff on every Bombardier C Series airliner imported into the US.”[23] The Commerce Department reasoned that Bombardier had “taken massive illegal subsidies in violation of existing trade law . . . .”[24] Hence, “a C-Series Bombardier plane that Boeing claims cost Delta $19.6 million apiece would now cost $78.3 million.”[25] This ruling has been one of the first “punitive trade actions” by the current administration as it tries to renegotiate new concessions with the other countries in NAFTA.[26] This ruling, however, will not become binding until it is affirmed by the USITC in early 2018.[27] In order for that to occur, Boeing must prove “that it was harmed by Bombardier’s receipt of subsidies or its below-cost sales.”[28]

How does this affect the international community?

If this ruling is affirmed, it likely will have a negative impact on the United States’ relationship with other countries.[29] Affirming this ruling will likely have a traumatic impact on Bombardier.[30] “There was an angry reaction in Canada and in Britain, where Bombardier employs 4,500 workers in its Northern Ireland factory.”[31] Furthermore, Bombardier does have a large presence in the United States, employing 23,000 Americans.[32] Thus far in response, both Canada and the United Kingdom have threatened to refrain from purchasing military aircraft from Boeing until the dispute is resolved.[33] Quebec’s economy minister, Dominique Anglade. has stated, “[w]e will fight the decision, no question about it . . . [w]e will spare no effort to protect the interests of aerospace workers.”[34] Theresa May, the prime minister of the U.K., has stated, “Boeing’s behavior in its trade dispute with Bombardier is undermining its relationship with the UK.”[35]

Moreover, this ruling is also likely to negatively affect everyday consumers.[36] “Such a high tariff will raise the cost of importing jets from the Montreal-based firm and deprive American consumers of the opportunity of efficient, low-cost travel.” This tariff will also likely impact airline customers in other countries as well,[37] because “[t]ariffs will raise prices for any airline looking to import Bombardier jets, which they have judged as better for their business and the service they provide to their customers.”[38]

Is this ruling likely to be affirmed?

There does not seem to be a clear consensus on the result of this ruling.[39] Bombardier argues that “[t]he U.S. trade laws were never intended to be used in this manner, and Boeing is seeking to use a skewed process to stifle competition and prevent U.S. airlines and their passengers from benefiting from the C Series.”[40] Furthermore, proving that Boeing suffered damage may be challenging. [41] This is partly because Boeing and Bombardier produce different types of airlines.[42] Thus, “[i]f Boeing does not produce this type of aircraft, and if customers such as Delta do not see Boeing’s planes as substitutes for such regional jets, then it is hard to see how Boeing can claim injury.”[43]

However, sales price usually takes precedent over production purpose.[44] For instance, another major airline had an interested in buying jets from Bombardier in order to help the airline better reach the small passenger jet market.[45] Nonetheless, the airline “ultimately chose Boeing airplanes because of price — even though the planes it bought were larger than the airline needed.”[46] Therefore, there is a case that Boeing was harmed.

Recently, a third option has been thrown on the table[47] Airbus has now stepped into the dispute.[48] Airbus has offered to buy a controlling interest in Bombardier.[49] This means that Bombardier may be able to construct their jets “at Airbus’ U.S. plant in Mobile, Alabama.”[50] This may make the trade complaint irrelevant for future C series jets.[51] Still, this solution may present its own legal issues.[52] ““There is a legal question of how much of the parts and components and value-added needs to actually happen in the U.S. for tariffs to no longer apply,” said Chad Bown, a senior fellow with the Peterson Institute for International Economics.”[53] Nonetheless, Tom Enders, Airbus’s CEO, has stated, “[t]his is a win-win for everybody . . .  [n]ot only will this partnership secure the C Series and its industrial operations in Canada, the U.K. and China, but we also bring new jobs to the U.S..”[54]

There are now multiple corporations and countries, with large financial stakes, invested in the outcome of this proceeding. Furthermore, producers and consumers worldwide have a financial interest in the disputes impact on airline industry. Thus, regardless of the outcome, the final decision will have a major impact on international relations and the airline industry.[55]

 

[1] Ashley Nunes, Why are Boeing and the U.S. in a trade war with Canada and the U.K.?, Wash. Post. (Oct. 17, 2016) https://www.washingtonpost.com/news/monkey-cage/wp/2017/10/16/why-are-boeing-and-the-u-s-in-a-trade-war-with-canada-and-the-u-k/?utm_term=.c0fcc8a2d3a5 [https://perma.cc/49QQ-DM5Y].

[2] Id.

[3] Id.

[4] Benjamin Zhang, Boeing scored a big victory against its Canadian rival, but it may start a nasty trade war, Bus. Insider, (Sept. 26, 2017) http://www.businessinsider.com/boeing-commerce-department-bombardier-tariff-219-trade-war-2017-9. [https://perma.cc/GF3C-3RZJ].

[5] Nunes, surpa note 1.

[6] Id.

[7] Id.

[8] Id

[9] Zhang surpa note 4.

[10] Id.

[11] Id

[12] Nunes, surpa note 1.

[13] David Fickling, Boing’s Bombardier Nightmare, Bloomberg, (Oct. 16, 2017) https://www.bloomberg.com/gadfly/articles/2017-10-16/boeing-s-bombardier-own-goal. [https://perma.cc/ABE8-HJER].

[14] Nunes, surpa note 1.

[15] Id.

[16] See Fickling, surpa note 13.

[17] Nunes, surpa note 1.

[18] Id.

[19] Zhang surpa note 4.

[20] Id.

[21] Nunes, surpa note 1.

[22] Charles Wallace, With Tariffs On Jets, Trade War Looms With Canada ― And Perhaps The U.K. Too, Forbes, (Sept. 27, 2017) https://www.forbes.com/sites/charleswallace1/2017/09/27/trade-war-looms-with-canada-over-tariffs-on-jets/#1c954fb041e8. [https://perma.cc/C4UC-4XYM].

[23] Zhang surpa note 4.

[24] Id.

[25] David Reid, Boeing versus Bombardier: Here’s what happens next, CNB, (Oct. 17, 2017) https://www.cnbc.com/2017/10/17/boeing-and-bombardier-next-steps-in-the-trade-battle.html. [https://perma.cc/BN6E-5MPP].

[26] Wallace, surpa note 22.

[27] Nunes, surpa note 1.

[28] Id.

[29] Phil Levy, Trade Wars Take To The Air — Bombardier’s Away, Forbes, (Sept. 27, 2017) https://www.forbes.com/sites/phillevy/2017/09/27/trade-wars-take-to-the-air-bombardiers-away/#74bb9d27aaa6. [https://perma.cc/BPK9-PCVP]

[30] See Zhang surpa note 4.

[31] Wallace, surpa note 22.

[32] Nunes, surpa note 1.

[33]  Zhang surpa note 4.

[34] Wallace, surpa note 22.

[35] Boeing’s Bombardier row undermines its UK ties, says May, BBC. (Sept. 28, 2017) http://www.bbc.com/news/business-41429079. [https://perma.cc/H6UY-XK4K].

[36] Yaël Ossowski, Consumers Lose No Matter Who Wins The U.S.-Canada Jet Subsidy War, Huffington Post, (Sept. 27, 2017) http://www.huffingtonpost.ca/yael-ossowski/consumers-lose-no-matter-who-wins-the-u-s-canada-jet-subsidy-war_a_23224472/. [https://perma.cc/5GZX-HE78].

[37] See id.

[38] Id.

[39]  Zhang surpa note 4

[40] Nunes, surpa note 1.

[41] See Levy, surpa note 28.

[42] Nunes, surpa note 1.

[43] See Levy, surpa note 28.

[44] Nunes, surpa note 1.

[45] Id.

[46] Id.

[47] See Reid surpa note 25.

[48] Id.

[49] See id.

[50] Boeing outmaneuvered? Airbus takes Bombardier under its wing, HeraldNet, (Oct. 17, 2017) http://www.heraldnet.com/business/bombardier-to-partner-with-airbus-on-c-series-program/. [https://perma.cc/QA66-257P].

[51] Id.

[52] See id.

[53] Id.

[54] Id.

[55] See Yaël Ossowski surpa note 36.

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