The U.S. Commerce Department has just slapped duties of nearly 220 per cent on the import of Bombardier’s CSeries airplanes into the U.S. The move, which stems from a trade dispute with U.S. aircraft maker Boeing, has caused an uproar in Canada, with both Ottawa and Quebec lashing out at the U.S government’s decision.
By now, most Canadians have probably seen the headlines. A duty of 220 per cent sounds draconian (and many trade experts agree that it is). On the other hand, you might have also heard that Washington’s decision is only preliminary.
So what exactly is going on and what does it all mean for Bombardier and the thousands of jobs it supports in Canada?
Here’s our guide to the trade dispute and what could happen next.
This all started in April of 2016, when Bombardier won a major contract to sell up to 125 of its CSeries airplanes to Delta Air Lines. The deal with one of the U.S.’s major airlines was broadly seen as a big victory for Canada’s aircraft maker and a vote of confidence in the CSeries.
About a year later, however, Boeing filed a trade complaint with the U.S. government against Canada’s aircraft maker, arguing, in essence, that the financial help Bombardier has received from the Canadian government constitutes an unfair advantage that could endanger “countless high-paying, skilled U.S. jobs.”
Ottawa has recently pledged $372.5-million in financial help for Bombardier, including for the CSeries. Quebec also injected $1 billion into the company, in exchange for a 49.5 per cent equity stake in the CSeries program.
Specifically, Boeing has made two main allegations: one, that the money Bombardier received from the Canadian government constitutes subsidies, which are generally considered an unfair trade practice under rules set out by the World Trade Organization (WTO), which governs global trade; two, that Bombardier applied below-market prices in selling the CSeries, a practice known as “dumping” and also considered to be against the rules.
Boeing’s filing against Bombardier set in motion a U.S. government investigation into the matter. That’s the way things work, in general, under international trade rules: If a company files a complaint, the government has to look further into the matter before taking any steps.
As the slide below illustrates, the investigation is two-pronged. On the one hand, the U.S. government is looking into whether Bombardier really did receive subsidies and whether dumping occurred. The U.S. Commerce Department is handling this.
But Boeing must also demonstrate that it suffered what trade lawyers call “material injury” from Bombardier’s supposedly unfair competition. This is the subject of a parallel investigation conducted by the U.S. International Trade Commission (ITC), which operates independently from the U.S. Commerce Department.
Both investigations produce an initial, preliminary decision and then a final decision after a more thorough inquiry, as per WTO rules.
According to Jesse Goldman, a partner at Bennett Jones in Toronto, the point of this two-step process is to make sure that, on the one hand, complaints that have no basis can get thrown out quickly, thus limiting the potential harm to the company that is the defendant. On the other hand, if there seems to be merit to the complaint, this also may allow the government to quickly adopt countermeasures to protect the domestic company that appears to be the target of unfair foreign competition.
The ITC’s preliminary decision is the first one to come down the pike. In this case, the commission determined last summer that it should move on to a deeper inquiry into the question of material injury to Boeing. That meant Commerce’s parallel investigation would also continue.
The first preliminary decision in the second investigation came out on Sept. 26, with Commerce imposing 219 per cent countervailing duties against Bombardier. Countervailing duties are meant to counteract the effect of government subsidies to a foreign company, levelling the playing field for the domestic company. That’s where we’re at right now. The 219 per cent refers to the price agreed between Bombardier and Delta.
Note that the duties can’t really be applied right now because Bombardier has yet to deliver its CSeries airplanes to Delta. The duties would kick in whenever Bombardier starts exporting to the U.S.
The next step is Commerce’s preliminary decision on the question of dumping, which could result in additional, so-called anti-dumping duties. That decision will come on Oct. 5.
Commerce will keep looking into the matter, with a final decision on both subsidies and dumping due in December.
That’s not the end of the story, though.
The ITC has then to come up with its own final decision, which is due in early 2018. If the commission changes its mind on the issue of material injury, then the case will be thrown out.
And the ITC could still change its mind, Goldman told Global News. The second phase of the investigation is much more thorough and its outcome isn’t a given.
On the one hand, Bombardier has challenged Boeing’s material injury case, saying that the U.S. aircraft maker didn’t even compete for the Delta deal.
Boeing, though, maintains that the CSeries, in general, represents competition to its flagship narrowbody 737 aircraft. And that argument could stand from a legal point of view, according to Goldman.
Still, Bombardier has also noted that Boeing’s 737 production is sold out through 2020 with a backlog valued at over $230 billion, which also seems a powerful challenge to the idea of material injury to Boeing.
But Canada’s aircraft maker also faces an unfriendly political climate in the U.S., which may increase the odds of a final decision in favour of Boeing.
The number of trade cases that the U.S. government is looking into has seen a 50 per cent increase in recent months, Goldman noted.
“The U.S. is sending a message to Canada that it is going to be extremely active in these […] cases.”
So what if the ITC definitively comes out against Bombardier?
The cost of the duties is so prohibitive that Bombardier and Delta might have to cancel their contract, according to Goldman.
There are avenues for appeal, including through NAFTA’s dispute settlement and through the WTO, but the whole dispute is a blow to Bombardier, one that could prompt copy-cat trade disputes by other competitors of the company, said Goldman.
© 2017 Global News, a division of Corus Entertainment Inc.