Last week I wrote about a trade spat between Boeing and Canadian aircraft manufacturer Bombardier over alleged subsidies. The US Department of Commerce has sided with Boeing and plans to slap a whopping 220% tariff on each Bombardier C Series airliner imported into the USA. That’s potentially bad news for consumers.
Boeing argued that Delta Air Lines did not pay enough for its 2016 order of 75 CS-100 airliners. Alleging that prices were “abnormally” low and only made possible through illegal Canadian government subsidies, it rendered its 737NG and 737MAX models uncompetitive.
I lay out more details here, but Boeing alleges Delta paid $19.6 million for the order, the aircraft cost $33.2 million to build, and the list price was $79.5 million. With the tariff applied, Delta’s cost would rise to over $40 million, likely torpedoing the deal.
In announcing the preliminary ruling, U.S. Secretary of Commerce Wilbur Ross stated–
The U.S. values its relationships with Canada, but even our closest allies must play by the rules. The subsidization of goods by foreign governments is something that the Trump Administration takes very seriously, and we will continue to evaluate and verify the accuracy of this preliminary determination.
The decision is not final. Now the US International Trade Commission (USITC) will investigate further and issue a final ruling by February 01, 2018. Both sides will have an opportunity to present competing evidence.
Reaction from Boeing
Boeing smugly declared victory, stating–
The U.S. Department of Commerce today affirmed that Bombardier has taken massive illegal subsidies in violation of existing trade law… Subsidies enabled Bombardier to dump its product into the U.S. market, harming aerospace workers in the United States and throughout Boeing’s global supply chain…
Global trade works only if everyone plays by the rules that we’ve all endorsed to ensure fair competition, as adjudicated by independent national and international bodies. This dispute has nothing to do with limiting innovation or competition, which we welcome. Rather, it has everything to do with maintaining a level playing field and ensuring that aerospace companies abide by trade agreements…
Boeing did not mention it sold United Airlines 737-700 aircraft at 70% off list price so the airline would not purchase C-100 aircrafts…
Reaction from Bombardier
Meanwhile, Bombardier expressed far different sentiment that I feel is so cogent I will quote at length:
We strongly disagree with the Commerce Department’s preliminary decision. The magnitude of the proposed duty is absurd and divorced from the reality about the financing of multibillion-dollar aircraft programs. This result underscores what we have been saying for months: the 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.
The simple truth is that Bombardier created a superior aircraft that is more efficient, more comfortable, and quieter. The C Series serves a market segment not supported by any U.S. manufacturer. Delta wants to bring this remarkable new aircraft to the U.S. flying public. Boeing wants to prevent U.S. passengers from realizing these benefits, irrespective of the harm that it would cause to the U.S. aerospace industry and the cost to airlines and consumers.
Looking beyond today’s and next month’s preliminary decisions, the International Trade Commission will determine next year whether Boeing suffered any injury from the C Series. Because Boeing did not compete at Delta and because Boeing years ago abandoned the market the C Series serves, there is no harm.
And that’s really the issue. The survival of the C Series project may be directly attributable to the government subsidies, but how can it hurt Boeing if does not produce a similar aircraft?
Reaction from Delta
Delta also dismissed the notion that Bombardier and Boeing are competing:
We are confident the USITC will conclude that no U.S. manufacturer is at risk because neither Boeing nor any other U.S. manufacturer makes any 100-110 seat aircraft that competes with the CS100…Boeing has no American-made product to offer because it canceled production of its only aircraft in this size range – the 717 – more than 10 years ago.
Don’t you love how Delta fails to mention subsidies when the subsides benefit them?
More Politics
I wrote about Canadian Prime Minster Justin Trudeau threatening to kill a $5BN defense deal with Boeing over this issue and asking British Prime Minster Theresa May to help mediate. May also has a stake in this battle as the C Series’ wings are made in Northern Ireland. This decision will surely ratchet up tensions between Canada and the United States.
And it’s not like the C Series is made of 100% Canadian parts. In fact, over half the parts come from U.S. sourcing, including the Pratt & Whitney engines. A strike against the C Series is also a strike against American jobs.
This could turn into an ugly trade war.
The Winner: Brazil?
Finally, it merits noting that the only true competitor to the C Series is the Embraer E190. Should tariffs successfully be slapped on Bombardier, it could be Embrarer rather than Boeing that is most helped.
I don’t understand how Boeing can argue with a straight face that its 737MAX7 aircraft is actually in the same league as the C Series. It’s very much a stretch.
CONCLUSION
I truly find myself divided on this issue. On the one hand, I think the Bombardier subsides are undeniable and indefensible under international trade agreements. On the other hand, every country seems to find a way to protect its industry and Boeing is just as guilty, the epitome of hypocrisy. Furthermore, the C-Series is actually a wonderful aircraft that provides U.S. jobs and consumer comfort. Finally, Boeing truly doesn’t have an alternative. The 737MAX or 737NG are simply not the same.
Tomorrow I’ll review the C-100…I recently flew it on SWISS from Frankfurt to Zurich. It is a great aircraft.
Like softwood lumber, Canada will not change the way it operates. We’re in for a long back-and-forth battle.
Boeing is not just as guilty. That’s a ridiculous statement and a false equivalence. The differences are in orders of magnitude. Don’t pretend like this is about your concern for the consumer, you only care that you might be be able to fly in a nice shiny new aircraft.
“Boeing is not just as guilty.”
Care to elaborate?
@WR: I’d argue that Boeing is even more guilty. And this is an issue about consumers, not “flying shiny new aircraft”.
Boeing, like most american industries (tobacco for example) always seek protectionism. US3 vs ME3 might ring a bell. Boeing is also a coward. While embraer and brazil bring dispute vs bombardier/canada straight to WTO, boeing only have the guts to do battle in USITC, which off course belong to US government.
I’m sure ruling in favour of boeing will prevail, for whatever reason. If not, US administration will issue ridiculous rule against canadian aircraft industry (just like the stupid laptop ban).
The consumer suffering? Well, no definitive sanction against United on Dr. Dao’s case right? That’s what freedom and democracy stands for….
James,
Your comparison to Bombardier/Embraer is apples and oranges. I highly doubt that if Boeing sold 737’s at a loss to Air Canada that Bombardier would bypass the opportunity to have the case heard by CITT and I am sure that Embraer would go to the Brazil agency that oversees dumping investigations if Bombardier sold the C-100 at the same price to Azul. They took their dispute to WTO because they are fighting over deals that did not take place in their respective countries.
I wonder if Boeing would have filed the claim had Delta not gone so Airbus heavy on their recent orders or had not cancelled their 787 order.
Zippy, let me kindly explain.
Boeing – US legal entity
Bombardier – canadian legal entity
Embraer – brazilian legal entity.
3 legal entity from 3 different sovereignity.
Embraer vs bombardier. Embraer brought the case to neutral governing body, wto.
Boeing vs bombardier. Boeing cowardly take the dispute to USITC to get favorable result because USITC is US governing body.
That’s the facts. Unless there is real case of bombardier having a legal-commercial claim boeing, your story is imaginary at best.
Thank you for your opinion. I respected it. You may want to defend boeing. Maybe for nationality. If that’s the reason, you have proven that american is not capable of fair, clear and concise judgment. Evidently, stupidity such as laptop ban shall continue….
Great point zippy! But what goes around comes around, I will never forget delta airlines occupying the gate in atlanta on qatars inaugural flight. Made my elderly grandma use stairs just to be mean. Being based out of Atlanta, I am forced to fly Delta. I flew them transatlantic and the service was atrocious. Fa told me I should have gave him my trash when he went by earlier! We could go on…
You missed my point, and no I am not defending Boeing I am simply pointing out that Bombarier and Embraer had no other legal recourse in their dispute but the WTO, CITT or the Brazilian antidumping authority could not make a ruling on their dispute because their ruling would only impact the sales of the respective planes in those countries while the WTO gives them recourse in all signatory countries.
I am making no judgment on the merits of Boeing’s complaint (they are also heavily subsidized through government contracts, and state/local incentives), but in this case Boeing made the smart jurisdictional decision as it is a) more likely to go in their favor, b) not wait a decade for WTO to rule, and c) stop the Delta deal from being delivered on.
Going to USITC does not preclude them from joining the WTO dispute at a later time.
Zippy,
Do you realise you’ve just indirectly acknowledge the merits of my initial comments? Protectionism, cowardice, stupid follow-up failsafe regulation, and so on…. instead of fairness….
I think the main problem here is Boeing is using this as a way to stop new aircrafts that can compete with them. Right now, the CS100 doesn’t compete, but the CS300 and potential CS500 could hurt Boeing unless Boeing steps up and gets more competitive. This order is hurting Boeing in the sense that Bombardier is gaining more traction with the C-Series. As Bombardier gains more traction with the CS100 and CS300, it can lead to them developing a CS500. Boeing seems to be trying to stop that with adding tariffs. The thing the government needs to realize in this situation is Boeing doesn’t make an aircraft similar to the CS100. That means Boeing doesn’t have something to compete with what Delta is buying. Hopefully Delta will fight hard against these tariffs and not give Boeing business as a slap to Boeing for what they are doing. Boeing could lose a lot through this if Canada, Delta, and possibly the UK don’t buy Boeing products.
“I highly doubt that if Boeing sold 737’s at a loss to Air Canada”
Actually, they did. They also sold many 787’s to Air Canada at a loss, add every 787 still being made us at a loss due to their promotional pricing (the same that they said is unfair for Bombardier to do).
Note that Air Canada is buying both 45 CSeries and 52 737 MAX aircraft, as they are different planes for different purposes. They are not direct competitors.
Sorry for all the typos there. Stupid phone.
Every 787 Boeing is selling it as a loss. Lets hope this initial ruling against Bombardier will be overturned. Too, lets not forget for example that about half of the local C100 content us USA! sounds like WH base politics – grabbing for headlines wherein the devil is really in the detail.
Frankly, every Canadian airline should cancel their Boeing contracts, and tell them to shove their planes up their asses. Face facts, they are bullys who are using their US lobby and money to screw anyone that might compete with them. Then of course they will whine and cry when someone like airbus etc outguns them. While Bombardier undoubtably got government money to remain solvent, the US goverment has subsidized Boeing in much the same way.
PM Justin Trudeau has publicly considered abandoning a potential F/A-18 Super Hornet purchase, specifically citing this dispute.
I wrote about it and even linked to it in my post above. It is certainly a serious matter.
Aren’t most american (companies) like that?