Commentary

“America First” Ethos Emboldens Boeing to Battle Bombardier, Benefiting White-Collar Washington

It turns out that President Trump’s “America First” trade policies arecreating jobs right here in the United States. The administration’s enforcement-friendly agenda has inspired a record number of trade cases this year, priming demand for white collar professionals at Washington’s bustling law firms and lobbying shops. But any modest gains in employment in the industries granted “protection” are dwarfed by the jobs lost in U.S. industries that use those now costlier imports for their own production.

The U.S. aircraft manufacturing industry’s demand for tariffs pursuant to domestic trade remedy laws provides a case in point. First, the industry consists of only one firm: The Boeing Company. Boeing is no stranger to taxpayer largesse and its pursuit of government assistance to thwart import competition evokes the famous Gilded Age adage: “The tariff is the mother of the trust.” Boeing is asking the government to impose duties on a certain class of airplanes: 100-to-150 Seat Large Civil Aircraft from Canada.

In April, Boeing’s lawyers—advancing arguments that can only be made with tongues planted firmly in cheeks—filed both antidumping and countervailing duty (anti-subsidy) petitions at the U.S. International Trade Commission (ITC) and the U.S. Department of Commerce (DOC). Under the antidumping law, “relief” in the form of antidumping duties is available if the domestic industry can demonstrate that it is materially injured or threatened with material injury by reason of imports sold at prices that are determined to be less-than-fair-value (LTFV). Relief in the form of countervailing duties is available when material injury or the threat of material injury exists by reason of subsidized imports.

The ITC is tasked with determining whether material injury or the threat of material injury exists and, if so, whether that injury is by reason of LTFV or subsidized imports. To determine whether there is injury, the ITC staff looks at trends in industry performance metrics, such as production, prices, volumes, shipments, profits, investment, return on investment, employment, capacity utilization and other factors that speak to the state of the industry. The DOC obtains sales, cost, and subsidy information from the foreign producers subject to the investigations and performs analyses of the data to determine whether and to what extent there is dumping or countervailable subsidization.

Boeing, which has received tens of billions of dollars in federal, state, and local subsidies over the years and whose sales abroad are famously facilitated by taxpayer subsidized loans through the U.S. Export-Import Bank to foreign airlines, claims that it is threatened with material injury, by reason of sales from Canadian manufacturer Bombardier to Delta Airlines. What makes Boeing’s argument especially audacious is that the sales that allegedly threaten the domestic industry with material injury haven’t yet been made. Those transactions will begin to take place no sooner than mid-2018. And those sales will involve a class of airplanes that Boeing doesn’t even produce and is technically incapable of producing for several years because of a backlog of orders for its larger aircraft. The monopolist is doing quite well, thank you.

Boeing’s argument requires an impossibly expansive definition of what constitutes a threat of material injury. Under U.S. law, the ITC is directed to evaluate a “threat of material injury” by analyzing whether “further dumped or subsidized imports are imminent and whether material injury by reason of imports would occur unless an [antidumping or a countervailing duty] order is issued…”

Trade remedy laws are weapons deployed primarily by U.S. companies to obtain commercial advantages over other U.S. companies.

But that analysis is precluded in this case because there hasn’t been a single sale—dumped, subsidized, or otherwise—in the United States. The language in the statute would seem to preclude an affirmative threat of material injury finding if there haven’t been any import sales, which seems a reasonable stopgap against this particular path to abuse of the trade remedies laws.

The aircraft that Bombardier plans to sell to Delta (CS-100s) are smaller than Boeing’s, and have 109 seats. Boeing chose to stop making aircraft in this class (Boeing 717s) in 2006, originally shifting its focus to the 126-seat Boeing 737-700. It’s more recent emphasis has been the even larger, 138-seat 737 MAX 7.

Delta (and other carriers) requires aircraft of different sizes and seating capacities so that it can cost-efficiently serve higher demand and lower demand routes. Boeing’s larger planes are not good substitutes because the carriers risk flying with empty seats, which means higher costs per seat, lower returns for shareholders, and increased ticket prices. For airlines to operate efficiently, it is essential that aircraft seating capacities and route demand be matched optimally. Airlines cannot profitably fly a 138-seat aircraft on a route where there is demand for only 100 passengers.

By filing these cases, Boeing is effectively asking the government to misappropriate the trade remedies laws to compel its own customers to use aircraft that are uneconomical to fly. That seems a highly suspect strategy for both Delta’s and Boeing’s long-term success.

The thrust of Boeing’s argument is that the ITC should conclude that sales by a foreign company of aircraft in a product class from which Boeing chose to withdraw in 2006 threatens Boeing with material injury because, if it wanted to, Boeing could choose to return to competing in that space. That argument is equivalent to claiming that foreign producers’ U.S. sales in any market—large aircraft, small aircraft, flying cars, jetpacks—can constitute a threat of material injury because Boeing might decide at some point in the future that it wants to compete in that market.

This is logically incoherent and comports with the definition of brute discriminatory protectionism that is not permitted under U.S. law or the World Trade Organization agreements.

As summarized in a legal brief submitted by Delta to the ITC:

Boeing has not demonstrated a reasonable indication of an imminent threat of material injury to the domestic industry. Instead, Boeing has built its case around a single sale it did not lose, for an aircraft it does not produce, in a market segment it ceased serving in 2006.

The Canadian government, in a submission to the ITC, wrote:

The Commission has never before addressed such a case, with (1) zero subject imports during the period of investigation, (2) no domestic shipments during the period of investigation, and (3) no near term subject import or domestic shipments expected…The argument that Boeing is somehow going to suffer injury in 2020 and beyond is the very definition of the type of ‘conjecture or supposition’ that the statue prohibits.

The antidumping and countervailing duty laws are portrayed by its defenders as tools necessary to protect upstanding U.S. companies and their workers from predatory foreign firms and their enabling governments. That has an appealing rhetorical ring to policymakers. After all, who’s not for fair trade and level playing fields?

But in reality, the laws are used for more nefarious purposes. Often, U.S. companies pursue trade remedy actions to obtain commercial advantages over their domestic competitors by, for example, subverting their supply chains. A notorious case from last decade concerning wooden bedroom furniture from China is a good example. The petitioners in that case were U.S. producers who were supplementing their domestic production with imports from their factories in the Philippines, Vietnam, and Brazil. Their target was a second group of U.S. producers, who were supplementing their production with imports from their factories in China. The petitioners invoked unfair trade and suggested that duties, once imposed, would enable them to bring jobs back to the U.S. furniture-making industry, but their plans were really to import more once they had knocked out their domestic competition with duties on imports from China.

A second and far more prevalent motive is for U.S. producers of industrial raw materials or other intermediate goods to file cases for the purpose of cutting off their own customers’ access to foreign sources of supply. A 2011 Cato Institute study found that 80 percent of all U.S. antidumping investigations launched in the 10-year period between 2000 and 2009 were on upstream products, such as steel, that are consumed by downstream industries, such as appliance manufacturers. Imposing duties on steel may help steel producers in the short run, but they raise the cost of production for the appliance manufacturers, putting them at competitive disadvantages relative to foreign appliance manufacturers. Remarkably, the ITC is statutorily prohibited from even considering the adverse impact of trade remedies duties on downstream industries.

The aircraft case features these characteristics. Boeing is an upstream producer. It manufactures aircraft, which are production inputs for commercial airlines. Airplane prices artificially inflated by antidumping or countervailing duties represent higher costs and lower profits to the airlines, which usually translates into higher ticket prices and higher freight rates, which tend to raise the cost of business travel and air delivery, which both reduce business profits, investment, and employment.

Boeing and Delta have danced this dance before. During the arduous policy debate over whether or not Congress should renew the charter of the Export-Import Bank, Delta proved to be a real thorn in Boeing’s side. Delta presented a compelling argument that extending tax-payer subsidized, less-than-market-rate loans to companies like Air India or Etihad enables these Delta competitors to obtain aircraft at lower total cost than would be the case in the absence of those loans. Given that airplane costs represent a significant portion of total costs in the commercial airline industry, U.S. taxpayers—through these loans—are subsidizing Delta’s competition, essentially putting Boeing’s well being ahead of Delta’s and all other domestic carriers, for that matter.

Similarly, by seeking duties on aircraft that Delta wants to purchase from Bombardier, Boeing’s actions will raise Delta’s costs in absolute terms and relative to carriers, such as Air India and Etihad, who will remain free to purchase Bombardier’s aircraft without the added duties.

Although characterized by proponents as legal tools to protect U.S. manufacturing jobs from predatory foreign firms and their enabling governments, in reality the trade remedy laws are weapons deployed primarily by U.S. companies to obtain commercial advantages over other U.S. companies. Any jobs created or saved in the process tend to accrue to the Washington law firms and lobby shops that craft the cleverest legal and political arguments, while the collateral damage to downstream industries and their workers gets swept under the rug.

Daniel J. Ikenson is the director of Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.