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?
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.
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.