Last week, the US Commerce Department made a second ruling in the Boeing-Bombardier case, adding a further 80% antidumping duty to their already proposed 220% subsidy duty on Bombardier C Series planes. That takes the proposed tariff to a whopping 300%.
Working on major Trade Deal with the United Kingdom. Could be very big & exciting. JOBS! The E.U. is very protectionist with the U.S. STOP!
— Donald J. Trump (@realDonaldTrump) July 25, 2017
For anyone who hasn’t been following the airplane saga, here’s a quick recap. Boeing, an American firm, is suing Bombardier, a Canadian firm, for allegedly selling planes to Delta airlines at “absurdly low prices.” In reality, we don’t know how much the new C Series planes were sold for (that information has not been released), but we do know that Quebec’s provincial government injected $1 billion into the airplane manufacturer for a 49.5% stake in the company, and that the Canadian federal government followed suit with a $300 million finance package to keep the company going.
It’s not about subsidies…
Subsides to nationally important businesses are nothing new. The US government injected around $50 billion to bail out General Motors, converted to a 61% equity stake. Multiple banks on both sides of the Atlantic received big bailouts to stay afloat (or rather to keep the global economy afloat) during the financial crisis. French-based aerospace company Airbus and Boeing have been battling each other via the World Trade Organisation for years over various subsidies. In fact, subsidies are particularly likely in sectors where R&D investment is, pardon the pun, sky high. And anyway, as Mark Littlewood, Director General of the Institute of Economic Affairs, points out – consumers are the beneficiaries:
“A British or Canadian subsidy is effectively a gift to American users of Bombardier products and services – a gift the US government is seeking to block… I think it’s unwise for governments to subsidise industries but if, for example, the Japanese wish to flood the UK market with cheap, subsidised Nintendos, I’d rather the UK government didn’t stop me from buying one on the grounds that it’s unfair to British producers of competing products.”
It’s not about predatory pricing…
Let’s put the state investment to one side then. What about Boeing’s accusation of predatory pricing? We don’t know what the price was, so it’s hard to say. Boeing claim Delta were buying the Bombardier planes for just under $20m, compared to a list price of around $80 million. Bombardier says that’s not true, and anyway, CNN Money reports that steep discounts (40%-60%) are common in the airline industry. Plus, let’s not forget that to disrupt a potential Bombardier- United deal, Boeing gave United a virtually unheard of 70% discount to buy their planes.
Even this, however, is missing the point. It would be more accurate to see Bombardier’s pricing as an introductory offer on a new product to the US market. If I wanted to introduce a new chocolate bar, to compete against well-established chocolate bars, I would sell it on a limited-time-only discount. People would try it, hopefully decide they like it, and then continue to buy it full price – and others would follow suit having heard how delicious it was. It is worth mentioning that the C Series plane is more efficient and offers more passenger space.
It’s about market dominance.
The real issue is a monopolistic company is seeking to protect its dominance. Boeing is, after all, the only provider of commercial airplanes in the US, which helps explain why three US airlines have written to the Commission to defend Bombardier. JetBlue Airways CEO Robin Hayes called on the Commission “to reject the [Boeing] petitions and permit free and unfettered competition in the aircraft manufacturing sector.” Amen to that.
And the lesson for a post-Brexit US-UK trade deal?
What then, if anything, might this sorry saga mean for a post-Brexit free trade agreement with the US? Does it undermine Donald Trump’s suggestion of a “very big and exciting” deal? Littlewood thinks drawing lessons is “difficult and possibly even wrong-headed”, Canada already has a free trade deal after all, and that hasn’t prevented the US behaving as it is. Perhaps most importantly, however, he points out that:
“the UK’s membership of the EU doesn’t appear to have done a great deal to have helped, rather undermining the suggestion – at least in this instance – that membership of a major trade bloc is fundamental to protecting our interests. The benefit of us striking our own trade deals will be that these are precisely the sort of issues we need to iron out and are presently incapable of doing so within the auspices of the EU.”
It’s a warning that surface-deep scaremongering by Brexit-bashers might not be the most helpful. The Financial Times headline ‘Bombardier exposes post-Brexit realities’, for example, could just as well have read ‘Bombardier exposes Trump-era realities’ – Britain has to face those in or out of the EU.
One reality deserving of more focus is the interlinked nature of global trade. When the final decision on tariffs is taken in early 2018, someone might like to remind President Trump that 23,000 US jobs are reliant on the production of a plane his government could put out of business.