Boeing-Bombardier Round II: Blame Trade Remedy Laws, Not Trump

The other shoe is about to drop in the Boeing-Bombardier trade row.  But first, some background…

Last week, smack dab in the middle of the third round of the NAFTA renegotiations taking place in Ottawa, the U.S. Department of Commerce issued a preliminary determination in a countervailing duty case brought by the Boeing Company in May. The Countervailing Duty Law provides “relief” (usually in the form of import duties) to domestic industries that can demonstrate that they are “materially injured” or threatened with material injury by reason of sales of subsidized imports.  

In early summer, the U.S. International Trade Commission ruled, preliminarily, that there was a reasonable indication that U.S. manufacturers of large civil aircraft (i.e., Boeing) may be threatened with material injury by reason of prospective sales of aircraft from Bombardier to Delta Airlines, which may be offered at artificially low prices made possible by various government subsidies to the Canadian producer.

Subsequently, Commerce’s investigation turned up 16 different subsidy programs—equity infusions, launch aid, “provision of land for less than adequate remuneration,” various tax credits and incentives, and federal and provincial grants—constituting specific benefits to Bombardier by the governments of Canada, the United Kingdom, and the province of Quebec, which amounted to an aggregate subsidy rate of 219.6 percent ad valorem. 

By historical standards, that is a very large number. If finalized at that rate, the duty would put the U.S. market out of reach to Bombardier and—of greater significance to the U.S. economy—put Bombardier airplanes out of reach to U.S. carriers, reinforcing Boeing’s monopoly power, and ensuring higher costs of air travel and air shipping in perpetuity.

Understandably, many on both sides of the border are upset over these findings. Recriminations and demands for retaliation have been swirling. Canadian Prime Minister Justin Trudeau has threatened to cancel his government’s planned purchases of Boeing fighter jets. Even the UK government, concerned about the future of Bombardier’s manufacturing operation in Northern Ireland, has discussed retaliation.

Many analysts are interpreting Commerce’s announcement of these results as a manifestation of Trump’s “America First” worldview, with its timing intended to secure some leverage for U.S. negotiators in the NAFTA talks. But it is in no way apparent how this finding could or would be used to extract concessions from the Canadians somewhere in the negotiations. Meanwhile, the fact is that determination dates in trade cases are set according to statute (there is some scope for extensions), and this prelim was set well before the NAFTA negotiations were scheduled, which brings us to another unfortunate set of circumstances.

Just as passions are subsiding from last week’s tempest, today the Commerce Department will announce its preliminary finding in a companion antidumping case, which was also filed by Boeing in May. The Antidumping Law provides “relief” (usually in the form of import duties) to domestic industries that can demonstrate that they are “materially injured” or threatened with material injury by reason of “less-than-fair-value” imports (sales made at prices in the United States that are lower than “Normal Value.”). This is a very, very, very, very, very, very, very, very, very, very, very, very bad law, deceptively invoked under the guise of ensuring fair trade and level playing fields, which has no economic justification and is used increasingly by U.S. companies as a weapon of domestic commercial warfare to kneecap U.S. competitors and their own U.S. customers. As was the case with respect to the countervailing duty matter, the U.S. International Trade Commission ruled earlier this summer that there was a reasonable indication that domestic industry was threatened with material injury by reason of less-than-fair-value imports.

Based on the unscrupulous analysis that Commerce seems to have teed up in the AD case (the capricious details of which are described here and here), the results are likely to further inflame the situation and threaten progress in the NAFTA talks, if not North American trade relations writ large.

By the end of this year, Commerce will attempt to verify information on the record, accept new information, and modify its results, accordingly, in these companion cases. But it’s rare that Commerce makes changes favorable to the foreign exporter or U.S. importer between the preliminary and final determinations. Ultimately, the question of whether duty orders will be imposed comes down to the final injury determination rendered by the U.S. International Trade Commission. If the ITC finds that Boeing is not threatened with material injury because, for example, it finds that Boeing doesn’t even produce (nor is it capable of producing over the next few years) the kinds of aircraft that Bombardier is hoping to sell to Delta, then the cases will both terminate and all will be well. That decision is due in February 2018.

Or, if duties orders are imposed, the decisions can be challenged by Bombardier, Delta, or other parties in U.S. court or in a NAFTA dispute panel.  Although the Canadians seem to have a preference for the NAFTA panels, it is highly likely that the U.S. Court of International Trade would find all sorts of overreach by Commerce, if the Commerce analysis is based on the fictitious sales and incomplete cost data that is on the record.

In the meantime, maybe trade analysts, policymakers, and the public can think more deeply about whether these trade laws really serve U.S. interests. The laws, as written, preclude objective analysis at the ITC, forbid consideration of the effects of these punitive duties on downstream U.S. companies and consumers, and give the Commerce Department vast discretion over administrative matters that dramatically affect the bottom line—the duty rates calculated and applied. Pointing the finger at Trump and his America First policies (an understandable impulse that has been on display this past week) instead of focusing on the disruptive effects of these commercial weapons, which are easy to self-administer and operate on statutory auto pilot, wastes an important opportunity to achieve greater awareness and, possibly, some reforms. Why not put these trade remedy laws on the NAFTA negotiating table? Really, how can one NAFTA country’s producers be dumping in another NAFTA country when nearly all tariffs are zero and there is no protected market from which to cross-subsidize cheap exports?  Let’s make these laws inutile among the NAFTA countries. Or push for a public interest test that could authorize the ITC to actually analyze the adverse impact of duties on downstream industries. Instead of piling on and lazily blaming Trump, let’s figure out how to rein in these unbalanced laws that wreaked commercial havoc during the Obama, Bush, Clinton, Bush, and Reagan adminstrations.