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Sep 28, 2017 | 17:08 GMT

6 mins read

Boeing and Bombardier Take Their Dogfight to Court

A new Bombardier C Series aircraft takes flight.
(CLEMENT SABOURIN/Getty Images)
Highlights

  • The U.S. Department of Commerce issued a preliminary determination which, if it is upheld, will place a 219.6 percent tariff on a Canadian-built aircraft.
  • The determination has implications not only for Canada, but for the United Kingdom where some parts for the targeted aircraft are produced. 
  • As Canada and the United States continue NAFTA negotiations, discussions on methods to appeal trade decisions under the agreement will become central.

The aviation sector is one of the few that intersects significantly with geopolitics, and the challenges Canadian plane manufacturer Bombardier faces in the United States will reverberate around the world. On the evening of Sept. 26, the United States Department of Commerce issued a determination on the import of Canadian-built aircraft. The Department of Commerce's preliminary duty determination would place a 219.63 percent tariff on the sale of airliners built by the Canadian-based company Bombardier — including the next generation C Series — once an investigation is complete.

Bombardier has already begun criticizing the investigation, and Canadian Prime Minister Justin Trudeau spoke out against it ahead of the announcement. British Prime Minister Theresa May's office stated that the United Kingdom was bitterly disappointed by the result — which comes as no surprise, given that Bombardier's plant in Belfast builds wings for the company's next generation C Series and its closure could hurt her political position.

The Dispute Takes Wing

The dispute began after Bombardier reached a deal to sell 75 CS100 aircraft to U.S.-based Delta Airlines in April 2016. Boeing has since claimed that Delta is buying the aircraft for $19.6 million each, far below the listed price of $80 million — a point that both Delta and Bombardier dispute. Boeing filed a petition with the Commerce Department in April 2017, asking it to level the playing field by imposing duties of at least 160 percent. Boeing also claimed that the Canadian airplane manufacturer was selling its aircraft to Delta for a price more than 40 percent below production costs. However, Bombardier and others — including several other U.S. airlines like JetBlue — oppose the investigation, and some have argued that production costs often exceed the sale price of an airplane when it is new to production: Delta is, after all, the first purchaser of the new C Series plane. Boeing did not begin selling its own 787 Dreamliner for more than it cost to produce until this year, five years after it first began delivering the plane to customers.

Though Boeing's argument against Bombardier's sales practices is controversial, Boeing and the United States are not the only ones criticizing Canada's financial support for the Quebec-based company. Earlier this year, Brazil asked the World Trade Organization (WTO) to set up a dispute settlement panel for its complaints against Canadian support for the C Series. In its filing, Brazil claimed that the C Series had received $3 billion in support from subsides. Last year, for example, Quebec's provincial government completed a $1 billion investment in the company, acquiring 49.5 percent interest and a limited partnership with Bombardier. The partnership now covers all of the assets, liabilities and obligations related to the C Series, and Canada's federal government approved $372.5 million in interest-free loans to the company in February.

Protectionism — often focused on jobs — has long been rampant in the aviation industry, and political motivation is high. Canadian Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland have already linked Boeing's complaint against Bombardier to future purchases of Boeing military aircraft, including the recently approved purchase of 18 F/A-18 fighter jets for $5 billion. Despite this, the U.S. Commerce Department's large determination — the 219.63 percent tariff is more than the 159.91 percent tariff Boeing pushed for — is just the next major protectionist measure the Trump administration has made in its attempts to prioritize trade enforcement.

What Won't Fly

Bombardier's challenges are also important for Brexit policies. As London continues to negotiate its future economic relationship with the European Union, the aviation and defense industries will play an important role. U.S. criticism is not the only challenge that Bombardier is facing. This week's merger between French-based Alstom and German-based Siemens rail unit threatens the company's rail division, and French President Emmanuel Macron's EU-wide protectionism platform presents other challenges. Should Bombardier and its Northern Irish Plant (Bombardier is the largest employer in Northern Ireland's high-tech sector) lose access to Europe's single market, the effects would only be magnified. The possibility has increased pressure on Prime Minister Theresa May for her failure to protect British jobs, which Labour Party leader Jeremy Corbyn has already begun to criticize her for. It's no surprise, then, that May has come out strongly against the deal and London has begun reviewing its defense contracts with Boeing.

In the next step, the United States International Trade Commission (USITC) will make its own determination on whether the C Series sales threaten material injury to Boeing and the U.S. aircraft industry and, by extension, whether duties may be imposed. As an independent, bipartisan federal agency, the USITC is far less open to political manipulation than the Department of Commerce, which is key.

Bombardier contends that Boeing is trying to block sales of the C Series in general, and the CS300 hundred in particular, because it would directly compete with Boeing's next generation 737 MAX 7 aircraft in the high passenger capacity aircraft market.

Meanwhile, Delta has argued that Boeing — the only U.S.-based manufacturer of large civilian aircraft — does not produce an aircraft with a similar seating capacity to those Delta was attempting to buy, nor has it done so since 2006. Bombardier contends that Boeing is trying to block sales of the C Series in general, and the CS300 hundred in particular, because it would directly compete with Boeing's next generation 737 MAX 7 aircraft in the high passenger-capacity aircraft market.

Should the USITC rule in Boeing's favor, Bombardier could still appeal the decision to the United States Court of International Trade and, more importantly, a binational dispute panel under NAFTA's Chapter 19 dispute mechanism. The latter is particularly sensitive now, given the ongoing status of NAFTA negotiations in which the United States has already pushed to remove Chapter 19, or at least heavily modify it. Under Chapter 19, Canada and Bombardier can request a special binational dispute panel to review the USITC's ruling, instead of appealing to domestic courts. Canada was adamant that the mechanism be included in the 1980s and has already outlined it as a key interest in the NAFTA negotiations.

A Chapter 19 dispute panel sits at the heart of the long-standing softwood lumber dispute between Canada and the United States. The United States has previously tried to impose duties on imported Canadian lumber, only to see binational and WTO dispute panels reject U.S. justifications. As the Boeing-Bombardier fight picks up steam, that option is going to become even more closely inspected and debated in future NAFTA negotiations, the third round of which ended on Sept. 27. 

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