Tag: Boeing

Happy Ending for Bombardier

In its final ruling issued just minutes ago, the U.S. International Trade Commission determined that the U.S. industry (Boeing) was NOT threatened with material injury by reason of dumped or subsidized imports of 100- to 150-Seat Large Civil Aircraft from Canada (Bombardier). This is big news in the trade world for a variety of reasons.

Typically, domestic industries seeking relief under these statutes (the U.S. Antidumping and Countervailing Duty laws) are successful because the evidentiary thresholds are so low. The antidumping law was changed in 2015 to lower the thresholds even further, which helps explain the near record number of trade remedy case filings in 2017.  Boeing seemed to be testing how low that threshold was. As I wrote a few months ago, “The language in the statute would seem to preclude an affirmative threat of material injury finding if there haven’t been any import sales.” 

I’m glad the ITC seems to have agreed.  It’s important that a case as meritless as Boeing’s, which was predicated on the notion that the domestic industry was “threatened” with material injury by reason of sales by Bombardier to Delta that haven’t even happened, of airplanes that haven’t even been built, which are of a class of aircraft that Boeing doesn’t even produce, was found wanting by the ITC.  Seems like common sense, but the AD/CVD statutes accord very little room for common sense to prevail. It’s good to see some a crucial check on the system working.

But there’s still a lot of work to do to rein in the routine abuses and to make these laws more compatible with economic reality. 

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With Back-to-Back Bombshells, Trade Terrorism Hits the Global Aircraft Industry

This afternoon, the U.S. Department of Commerce announced the preliminary results of its antidumping investigation in large civil aircraft from Canada, launched at the request of the Boeing Company in May. Commerce “calculated” dumping margins of 79.82 percent for Bombardier—the only Canadian aircraft producer in this market—which becomes the rate of duty that any U.S. purchaser would have to post with U.S. customs upon importation. This penalty comes on top of last week’s assessment of 219.63 percent subsidy margins in the companion countervailing duty case.

It goes without saying that neither Delta Airlines (the intended customer) nor any other U.S. carrier is going to pay a 300 percent tax to purchase these aircraft. Unless the U.S. International Trade Commission rules in February 2018 that Boeing is not threatened with material injury by these proposed Bombardier sales, the orders will go into effect (requiring approximately 300 percent duties, although those figures will change—but probably only slightly—between the Commerce preliminary and final), putting the U.S. market out of reach to Bombardier, and Bombardier aircraft out of reach to the U.S. carriers, who need these smaller planes (which Boeing doesn’t even produce) to serve less-travelled routes efficiently.

In a previous post, I described some of the methodological shenanigans that Commerce was likely to perform in this case. Confirmation of those and other capricious decisions will be possible after the official analysis memo is released.  But, if the ITC finds “threat of material injury” to Boeing by reason of these “unfair” prospective Bombardier sales, and AD and/or CVD orders are imposed, in all likelihood, there will be some major issues that Bombardier or Delta will want the U.S. Court of International Trade (or a NAFTA Chapter 19 panel) to review and determine whether Commerce acted beyond its authority.

Even if the ITC goes negative in February—finds no threat of injury—the market for the next 5 months will be in a state of suspended animation.  Uncertainty will rule.  Bombardier will not know how to proceed.  Should it build the aircraft in anticipation of exoneration?  Should it seek other markets? Will it be able to service its debt and keep its workforce? Delta and the other airlines will have to put off plans to modernize their fleets, while remaining unable to perform reliable cost-benefit analyses. The specter of a long adjudicative process offers only distant relief, with plenty of distortions and inefficiencies to endure in the interim.

The U.S. trade laws are a form of economic terrorism. They are deployed unexpectedly and with stealth; they cripple their intended targets, while generating enormous amounts of collateral damage to other companies, industries and jobs; and they cast a long shadow of uncertainty over the costs and conditions of operating in the market prospectively. 

Maybe the political and economic fallout from this case will bring scrutiny of these laws to the level they have long deserved.

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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.

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Will Republicans Make a Principled Stand Against Ex-Im Reauthorization in 2014?

Jobs are good. Exports create jobs. We create exports. Renew our charter.

Such is the essence of the marketing pitch of the U.S. Export-Import Bank, whose officials have begun ramping up their lobbying efforts ahead of a 2014 vote concerning reauthorization of the Bank’s charter, which expires in September.  Last go around, in 2012, Ex-Im ran into some unexpected turbulence when free-market think tanks, government watchdog groups, and limited government Republicans in Congress raised some compelling – but ultimately ignored – objections to reauthorization.

The ostensible purpose of the Ex-Im Bank is to assist in financing the export of U.S. goods and services to international markets. Even if that were a legitimate role of government, the public must keep a watchful eye on how much and to whom loans are made – especially given the current administration’s tendency to bet big on particular industries and specific firms, and in light of its commitment to seeing U.S. exports reach $3.14 trillion in 2014.

From the U.S. Export-Import Bank’s 2013 Annual Report:

The Ex-Im Bank’s mission is to support American jobs by facilitating the export of U.S. goods and services. The Bank provides competitive export financing and ensures a level playing field for U.S. exporters competing for sales in the global marketplace. Ex-Im Bank does not compete with private-sector lenders but provides export financing that fill gaps in trade financing. The Bank assumes credit and country risks that the private sector is unable or unwilling to accept. It also helps to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters. The Bank’s charter requires that the transactions it authorizes demonstrate reasonable assurance of repayment.

The defensive tone of this mission statement anticipates Ex-Im critics’ objections, but it certainly doesn’t answer them. The objectives of filling gaps in trade financing passed over by the private sector and expecting a reasonable assurance of repayment are mutually exclusive – unless the threshold for “reasonable assurance” is more risk-permissive than the private-sector’s most risk-permissive financing entities.  Therefore, Ex-Im is either putting taxpayer resources at risk or it is competing directly with private-sector lenders for customers in need of finance. And if the latter, then as it seeks to create the proverbial “level playing field” for the U.S. companies whose customers it finances, Ex-Im is un-leveling the playing field for the finance industry, as well as for the U.S. firms in industries that compete globally with these U.S-taxpayer financed foreign companies.

Does the U.S. Economy Need More Boeings or More Facebooks?

Remember the story of that once-great nation that sacrificed its well-paying manufacturing jobs for low-wage, burger-flipping jobs at the altar of free trade? At one time, that story was a popular rejoinder of manufacturing unions and their apologists to the inconvenient facts that, despite manufacturing employment attrition, the economy was producing an average of 1.84 million net new jobs per year every year between 1983 and 2007, a quarter century during which the real value of U.S. trade increased five-fold and real GDP more than doubled.

The claim that service-sector jobs are uniformly inferior to manufacturing jobs lost credibility, as average wages in the two broad sectors converged in 2005 and have been consistently higher in services ever since. In 2011, the average service sector wage stood at $19.18 per hour, as compared to $18.94 in manufacturing. (But I don’t recall buying any $25-$30 hamburgers last year.)

One reason for U.S. manufacturing wages being higher than services wages in the past is that manufacturing labor unions “succeeded” at winning concessions from management that turned out to be unsustainable. The value of manufacturing labor didn’t justify its exorbitant costs, which encouraged producers to substitute other inputs for labor and to adopt more efficient techniques and technologies.

With the superiority-of-manufacturing-wages argument discredited, new arguments have emerged attempting to make the case that there is something special – even sacred – about the manufacturing sector that should afford it special policy consideration. Many of those arguments, however, conflate the meanings of manufacturing sector employment and manufacturing sector health or they rely on statistics that don’t support their arguments or they become irrelevant by losing sight of the fact that resources are scarce and must be used efficiently. And too often the prescriptions offered would place the economy on the slippery slope that descends into industrial policy.

I recently submitted this rebuttal to this essay by an environmental sciences professor by the name of Vaclav Smil, who commits those errors. (Judging from the tone of his mostly evasive response to my rebuttal, Smil doesn’t seem to have much tolerance for views that differ from his own.) Perhaps most noteworthy among Smil’s slew of questionable arguments is his claim that manufacturing companies, like Boeing, valued at $50 billion, are better for the economy than service companies like Facebook, which is also valued at $50 billion because

[i]n terms of job creation there is no comparison… Boeing employs some 160,000 people, whereas Facebook only employs 2,000.

Granted, Boeing’s operations support more jobs. But is that better for the economy than a company that provides the same value using 1/80th the amount of labor resources? Of course not. We need economic growth in the United States to create wealth and increase living standards. Economic growth and employment are not one and the same thing. In fact, the essence of growth is creating more value with fewer inputs (or at lower input cost). Creating jobs is easy. Instead of bulldozers, mandate shovels; instead of shovels, require spoons. Inefficient production techniques can create more jobs than efficient ones, but they don’t create value, which is the economic goal.

With 2,000 workers producing the same value as 160,000 – one producing the same value as 80 – Facebook is 80 times more productive than Boeing, freeing up 158,000 workers for other more productive endeavors (perhaps 79 more Facebook-type operations). If those companies were individual countries, the per capita GDP in Facebookland would be $25 million, but only $3.125 million in Boeingia. Where would you rather live?

Smil calls my assessment a cruel joke, presumably for its failure to empathize with unemployed and underemployed Americans, by considering value before job creation.  But policies designed to encourage more Boeing’s, as Smil supports (or, in fairness, any businesses that employ at least X number of people or meet this requirement or that) would likely retard the establishment of firms, like Facebook, that produce the goods and services that people want to consume. The provision of goods and services that people want to buy – rather than those that policymakers in Washington think people want to buy (or are happy to force them to buy) – is the essence of value creation.

Thus, policies should incentivize (or, at least not discourage) the kind of innovation and entrepreneurship needed to create more Facebooks? This kind of business formation occurs in environments where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where skilled foreigners aren’t chased back to their own shores; where there are limited physical, political, and administrative frictions; and so on. In other words, restraining the role of government to its proper functions and nothing more would create the environment most likely to produce more Facebooks in both the manufacturing and services sectors.

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The National Equalization of Opportunity Board

The National Labor Relations Board filed a complaint last month to stop Boeing from building its new 787 in South Carolina rather than Washington State. As Arthur Laffer and Stephen Moore explain in today’s Wall Street Journal, the Board’s action stems from Boeing’s declaration that it cannot “afford a work stoppage every three years” as has been happening in Washington. The New York Times seems to endorse the NLRB complaint, implying that the federal government must force companies to do business in agency-shop states like Washington, because otherwise they couldn’t compete with more efficient right-to-work states like South Carolina.

Laffer and Moore claim that the NLRB’s move is unprecedented, but it is actually highly reminiscent of the “Equalization of Opportunity Bill.” The EOB forbade entrepreneurs from owning more than one business, in order to allow less efficient, less capable entrepreneurs to compete with them. The EOB is, of course, a measure enacted by the United States Government in Ayn Rand’s Atlas Shrugged.

Yet more evidence that the Obama administration is not only conversant with Rand’s classic, it is using the book as a policy model. It’s just a little confused as to which characters were the heroes and which the bad guys.

Boeing’s Tanker Win Is a Small Taxpayer Win

The Defense Department announced yesterday that it is awarding its aerial refueling tanker contract to Boeing. We’ll pay them $3.5 billion for the first 18 tankers and $35 billion if all the planned 179 tankers get built. These are essentially gas stations in the sky that extend the range of bomber and fighter aircraft.

The decision is causing great consternation in Alabama, where EADS, the losing bidder, would have located most of the manufacturing for the deal. Governor Robert Bentley compared the loss of federal spending to a “death in family.” I’ll leave it to others to speculate as to what that says about his priorities and just point that the decision is good for Americans generally.*

From a military perspective, both aircraft likely would have performed well. Tanker technology is not cutting edge these days, so technical risks in development are relatively low. And given that the Pentagon knows that its decision will come under great scrutiny, it is reasonable to accept its judgment that Boeing’s offer is better.  

The main reason why taxpayers come out ahead here is, however, one that the Pentagon is not allowed to consider when weighing bids: how the award affects future political pressure for spending.  I explained these politics in 2008, before EADS took over the bid of its Airbus subsidiary:

The political problem with the Airbus deal is that it opens a production facility in Alabama to make conventional aircraft assembled elsewhere into tankers, but will not close Boeing’s similar plant in Wichita, Kansas. This means taxpayers have a new mouth to feed. Because they create concentrated interests, US military production facilities are nearly impossible to close. In the private sector, sellers make money by cutting costs and delivering products more efficiently. In defense contracting, companies succeed by keeping production lines open and relying on local Congressman, workers and lobbyists to get them work. That’s why the US has twice the number of shipyards it needs despite consolidation in the shipbuilding industry. It would have been better to keep all the production in Europe, preventing new domestic lobbies from forming, or more realistically, accomplish the same thing by making Airbus lease Boeing’s plant.

*It’s worth asking whether 179 is excessive, given that precision munitions are vastly increasing the striking power of each aircraft. Today we can destroy exponentially more targets with the same forces relative to twenty years ago, and we continue to grow that ratio.