Will Boeing Tariffs Ignite A Trade War?

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The great test to unravel the globalized nature of modern economies was going to happen sooner or later. The just-announced U.S. tariff against Bombardier’s CSeries airliner may not be the first shot nor even the biggest, but it’s illustrative of how difficult placing U.S. trade interests above all else will be. The modern aerospace industry is thoroughly globalized for the simple reason that airplane builders have found efficiencies in outsourcing components to the most efficient producers. The CSeries is a case study in this.

Boeing’s beef with Bombardier is that it’s dumping the CSeries into the U.S. market with a giant 75 airplane order from Delta worth $5.6 billion. Boeing argues that because Bombardier got a $1 billion bailout from the Quebec government, the Canadian company has an unfair competitive advantage.

Boeing claims that Delta is getting the CSeries jets for $19.6 million, less than half the cost of a Gulfstream G600 and two thirds of the $33 million Boeing says it costs Bombardier to build the things. Absurd, replies Bombardier. Boeing proposes a tariff of 219.63 percent to level the field. If it’s approved, that would raise Delta’s price on the CSeries to about $40 million each or about $10 million less than the price of Boeing’s 737 NG. Those two airplanes aren’t exactly direct competitors, at least at the low end of the passenger capacity scale, according to Delta. The CS100 can have as few as 100 seats, while the 737 NG is more like 130. When Delta approached Boeing for something smaller, it said Boeing had no American-made product to offer because it ended the 717 more than a decade ago. Delta said Boeing offered it a batch of used Embraer E190 regional jets it took in on trade-in. (If this sounds like the car business, it’s not that different.)

The proposed tariff has to be reviewed by the U.S. International Trade Commission, which is supposed to be a bipartisan, quasi-judicial panel that adjudicates trade issues. While the notion of “bipartisan” seems a quaint concept of the last century, the USITC nonetheless has to explain why it thinks the tariff is warranted. Presumably, it will have to do so with actual data so perhaps we’ll see enough information to judge the merit of Boeing’s claim.

If the commission approves the tariff and it tanks the Delta purchase, then what? Is Boeing the winner? I’m not sure I see how, since Boeing doesn’t have an airplane that Delta considers competitive. If a tariff kills the CSeries program or even the company itself—probably a stretch—there will be implications beyond Boeing. More than 50 percent of the CSeries components are U.S. sourced, including the Pratt & Whitney geared turbofans that are central to the CSeries’ exceptional efficiency. Moreover, the tariff announcement got the attention of our allies across the Atlantic. The CSeries wings are manufactured in Northern Ireland and a host of other components are built in other parts of the world. Boeing has also been reminded that it has a $5 billion order pending from Canada for F/A-18 aircraft. The politics get even more complicated if the U.S. expects Canada to participate in its overseas adventures using such aircraft.

Depending on the USITC’s ruling, it’s not unthinkable that the Boeing deal could spark a more vigorous trade war across of a range of imports and exports. The politics of this are unpredictable. No one can tell if America-first rhetoric is just a fashionably thin veneer of political blabbering or a deeply held sentiment that’s about to crash head on into the reality of global economics. Historically, trade wars have been circular firing squads and there’s no reason to believe that’s any different today than it was a century ago.

I’ve reported previously that companies like Lycoming and Continental are reducing their outsourcing and bringing some manufacturing back in-house. There’s also a discernible trend of so-called re-shoring of manufacturing in the U.S., but it’s by no means a torrent. Companies outsource for many reasons, but one is that they find efficiencies in engaging other companies who can produce components and subassemblies at lower cost. In aerospace, outsourcing has been a means of reducing the staggering investment required to produce a product like a new airliner. If the political winds shame companies into re-shoring when they otherwise would not, all that will do is make them less competitive, a dangerous direction to go with China looming as an aerospace competitor. Why wouldn’t the same calculus apply to Canada?

Comments (26)

I find it interestng that Boeing is crying foul over the sale of a product line that they don't even produce. It would be like General Motors wanting tarrifs on imported Smart Cars, when they don't produce anything that competes with it. Boeing's design, sales and support for their 717 regional airliner was lackluster at best, and they have never shown much interest in competeing with Bombardier or Embraer in the sub-100 seat commuter jet market. Besides, the billion dollar investment by the Ontario government could hardly be considered as a subsidy for the CSeries jet. They made the investment since they feared the company would not survive without it, thus costing hundreds of Ontario citizens their jobs. Boeing receives considerable tax relief from various states and the U.S. government. How is that any different?

The Nobel Prize economist Milton Friedman lectured 30 years ago about the folly of protectionist tarrifs and trade wars. He showed that historical attempts to shore up flagging domestic industries through protection only contributed to their continued downward spiral. Protected industries are models of inefficiency and poor customer relations. There are classic examples of that in the airline industry where several foreign carriers survive only because of their government's support, while their service is notoriously bad. If Boeing truly wants to compete in that market, they should first produce a product that is competitive and then complain about what's fair.

Posted by: John McNamee | September 28, 2017 11:44 AM    Report this comment

Maybe they were prodding Delta to buy the 130 seat 737s. Delta could pull 30 seats and we could have the leg-room of yesteryear.

Posted by: Robert Mahoney | September 28, 2017 12:29 PM    Report this comment

One good way to upset our allies and neighbors.

Forbes: "There was an angry reaction in Canada and in Britain, where Bombardier employs 4,500 workers in its Northern Ireland factory.

"We will fight the decision, no question about it," said the Quebec economy minister, Dominique Anglade. "We will spare no effort to protect the interests of aerospace workers.""

In view of the political mess. This is a bad decision. Paul Bertorelli is correct. I admit I was wrong.

Posted by: Rafael Sierra | September 28, 2017 4:27 PM    Report this comment

"In view of the political mess. This is a bad decision. Paul Bertorelli is correct. I admit I was wrong."

Which I suppose means the tariff is more likely to be imposed...

Though on the other hand, I am certain Canada and Britain would be doing the same if the shoe fell the other way.

Posted by: Gary Baluha | September 28, 2017 4:37 PM    Report this comment

I'm unbothered by the Canadian government's bailout of Bombardier. But dumping is dumping. IF Boeing's accusations that Bombardier is selling C-series aircraft at a price that is less than their cost of production prove true, then the tariff is defensible. Regretable, but defensible.

Posted by: Tom Yarsley | September 28, 2017 5:22 PM    Report this comment

If Boeing actually sold an airplane with the specs (100 seat) Delta wants I could see Boeing's point. Boeing does not make a 100 seat plane! Boeing is way out of line on this. I wonder how much revenue Boeing is going to lose if Delta desides to cancel any futher orders from Boeing and buy from Airbus, if Canada cancels their F18 order and any Air Canada order, if the UK via British Airways or their military cancels any further orders. Talk about unintended consequences! What a mess this could become! Sounds to me the Canadian government supported Bombardier just like the US federal government supported Chrysler in the 1980's or the rest of the American auto industry in 2008.

Posted by: matthew wagner | September 28, 2017 5:45 PM    Report this comment

Dumping ? Yah right. Everyone of the first 400 Boeing 787's were sold for less than it costs to build them. This included airplanes sold to Air Canada. But I supposed that doesn't matter when you have an alternate facts government to cover you when you want to abuse international trade agreements.

Posted by: DAVID GAGLIARDI | September 28, 2017 9:51 PM    Report this comment

This story reminds me of the time U.S. light aircraft were "dumped" at heavily reduced prices into Australia in the sixties, to compete against the new Australian designed Victa Airtourer.
The Australian Government refused to give tariff protection to this fledgling industry, resulting in the cessation of any further Airtourer production by Victa.

Posted by: Allan Churn | September 29, 2017 6:56 AM    Report this comment

I'm not sure how Boeing can "know" that Bombardier is selling CSeries aircraft to Delta below cost.....unless, of course, Boeing was offering to sell B-737's to Delta below cost....hmmmm! But assuming that Bombardier is actually selling the aircraft to Delta below cost, Boeing throwing a tantrum about it is just a case of the pot calling the kettle black.

I think that, at least in the short term, Airbus (or maybe Embraer) will be the only winner if this tariff goes through. Meanwhile, Boeing should be more worried about the long-term threat from the Chinese producing DIRECT competitor airliners to Boeing's product line.

Posted by: John Nevils | September 29, 2017 7:57 AM    Report this comment

According to Bombardier's plan, the C-Series production is supposed to support 22,000 jobs in the US. Seems like that should be factored in before levying a 220% penalty on a plane that does not compete directly with Boeing.

Posted by: Rob Hollingsworth | September 29, 2017 7:59 AM    Report this comment

Another trickle down result from a protectionist leader. I can only hope and pray that our Canadian government pulls the plug on electricity we produce and sell below cost to the US, puts a stop to pipelines ferrying OUR oil south and stops the ownership of Canadian companies by American entities. I'm sure if Boeing and the US government want a trade war we can totally scrap the horrific NAFTA agreement and get back thousands of jobs lost to the US because of it. There is getting to be less and less to like about the US.

Posted by: Michael Sales | September 29, 2017 8:19 AM    Report this comment

Paul, you need to check your math. A 219% tariff on a $19 million plane is around $40 million - for the tax alone! The total price per plane would be around $60 million.

Posted by: Rush Strong | September 29, 2017 8:34 AM    Report this comment

"There is getting to be less and less to like about the US."

Unfortunately, some of us US citizens are thinking the same thing :-( The good news is, the US has periodic swings in policy extremes and doesn't usually stick to one extreme or the other for too long.


"Boeing should be more worried about the long-term threat from the Chinese producing DIRECT competitor airliners to Boeing's product line."

They should be worried about this, though I know personally I would never fly on a Chinese aircraft to the point of accepting a less-optimal flight to avoid one of them. Not so much because I'd be worried about safety (though I would be), but rather because so much of their technology is from clandestine reverse-engineering of other products.

Posted by: Gary Baluha | September 29, 2017 8:41 AM    Report this comment

Boeing points to two sources of government funding as evidence of subsidization. However, the $1B from Quebec was for 49% equity in the C-series project (so they own shares) and the Feds loaned (repayable) $375M. Not exactly free money. Trade wars usually end in tears for everyone.....

Posted by: Rob Hollingsworth | September 29, 2017 8:49 AM    Report this comment

I pulled the claimed $40 million for Business Insider, who quoted another source. The 220 percent assumes the tariff is on the full claimed sticker price. It may or may not be. Hence the math seems screwy.

Posted by: Paul Bertorelli | September 29, 2017 9:41 AM    Report this comment

Yeah, this really isn't about the CS100. It's all about the 130 seat CS300 which I imagine Boeing is truly terrified of. They need to raise a stink about the first one in "their" market in order to set a precedent when the real threat come around.

Gerry

Posted by: GERRY VAN DYK | September 29, 2017 10:00 AM    Report this comment

This isn't really about the CS100, it's all about the 130 seat CS300, which I imagine Boeing is truly terrified of. They need to raise the stink about the first sibling in "their" market to set the precedent for when the REAL threat comes along.

Gerry

Posted by: GERRY VAN DYK | September 29, 2017 10:02 AM    Report this comment

Actually this isn't about the CS300 either, it's about the CS500 which would be a direct threat to Boeing's 737 Max. This is a preemptive strike against a very real threat of a superior aircraft to a twice rehashed model. Boeing realizes too late that it missed the boat with it's latest version of the 737, working quickly to develop a band aid and stretch it to the 737-10, while simultaneously ignoring the smaller market. They have no one to blame but themselves!

Posted by: Thomas Wiley | September 29, 2017 11:18 AM    Report this comment

It's true that Boeing used to sell the 717 and if it had continued that program they wouldn't be in this mess. But if you'll remember back to those years the Boeing 717 (Then built by McDonnell Douglas) was being severely squeezed by a Airbus with even more unfair subsidies, Our government did nothing about it and Boeing and McDonnell Douglas continued to bleed marked share to Airbus and now potentially Bombardier. The US commercial aircraft business is still 2nd to none and if it wasn't for the unfair trade we would still have greater than 75% or more of the worlds market share.

Posted by: John Burke | September 29, 2017 7:58 PM    Report this comment

A leader who does not read history but places his own interpretation on it, torch lit parades by fascists, corrupt ministers who think nothing of using tax payer money for private flights, and now protectionist measures aimed at allies. Welcome back to the 1930s.
It would almost be amusing if one did not remember 1939-1945, and realize whose side many of those close to power now, would have been on.

Posted by: John Patson | September 30, 2017 3:58 AM    Report this comment

John nailed that one. I, too, think of
A bad armistice
A lengthy recession/depressionOficina
An unchecked dictator bent on building military might
and I wonder who among us would have been on the side of Neville Chamberlain.

Posted by: Tom Yarsley | September 30, 2017 5:06 AM    Report this comment

On one hand, what's the point of having a "bipartisan" U.S. International Trade Commission if we're now in a global economy where every Country can do what it wants to garner business without fear of retribution? On the other, Boeing learned from it's incessant 'crying' about Northrop Grumman / Airbus winning the KC-46A program -- TWICE -- that it could get what it wants if it just engaged it's law department and cried to Uncle Sam. It will be interesting to see what final decision is made. I see merit both ways.

Boeing established a second plant in 'right-to-work' SC because the unionized workers in WA were getting restless and then held shuttering WA over their heads if they didn't capitulate. They're the 800 pound gorilla in the commercial aviation business and ... 800 pound gorillas usually get their way. I just learned this from a personal 800 pound gorilla fight I had with an avionics gorilla.

I took an interest in the USITC and did some research this AM. They're asking for a FY18 Budget of $93.7M to support it's operations. All that to determine in their Harmonized Tariff Schedule of the U.S. 2017 Rev 1 dated July 1, 2017, Section XVII, Chap 88 Heading 8802.40.40: it appears there is NO current tariff on passenger transports over 15,000kg.

Check out: hts.usitc.gov/current and Section XVII, Chapter 88

Government bureaucratic gobbly-gook reading at it's finest. Assuming that they DID rule in favor of Boeing ... where does that tariff money go ??? I couldn't find it in their giant manual?

Posted by: Larry Stencel | September 30, 2017 9:57 AM    Report this comment

Got to see this:

www.fliegerfaust.com/boeing-cseries-2470429462.html

Posted by: Rafael Sierra | September 30, 2017 11:35 AM    Report this comment

Boy Paul if you want to get the blood boiling in readers this is a good subject. Aircraft manufacturing drives a lot national pride that people allow to interfere with their notion of a level playing field. Both Bombardier and Boeing are significant contributors to their respective countries exports, jobs, economy, etc. Both play for keeps. Both build good products.

This is not a story of david v goliath. Both companies are large and full of smart people determined to succeed.

To state that Boeing is not harmed is not correct. I suspect the argument is if BBD sold the plane at a more realistic price then maybe Boeing's larger products competitive. E.g. do you get more plane for the same price. And since Boeing (and Airbus) builds at a rate of nearly 50 planes a month one would expect a price reflecting the economy of scale. These are rates that BBD is quite away from.

This is not just a case in front of US Trade, Embraer has filed a complaint with the WTO and the WTO has engaged. Clearly an issue bigger than just US - sounds like others smell something they don't like or if it is OK they at least want to be able to do the same.

There are also a few anecdotal things going on that bother me:
Bombardier is working thru a corruption scandal in Sweden associated with train sales.
Their contract with Toronto for trains has led their customer to haul them in court, my favorite quote being "for this much money we could of built it ourselves".
BBD's business jet competitors have all noted in their earnings calls the challenges of selling planes against a competitor on the verge of collapse who is selling planes at fire sale prices.

We could go on and on but clearly this is a company that has been and continues to be up against the ropes. It should be no surprise that their competition is watching to see if they crossed the line.

A healthy aviation industry is a safe industry - so we need to ensure the field is kept level. Let's let the courts sort it out.

Posted by: Rob "daSlob" Schaffer | September 30, 2017 11:38 AM    Report this comment

For space reasons, I didn't mention Boeing's 70 percent discount deal to United for 737s. Hard to imagine those were not sold well below cost. That funny video link Raf posted mentions it.

Larry, tariff revenues go to the levying country. It's just another tax. That's why they're often such a scam. They don't help anyone in the long run but someone gets ill-begotten tax reveue.

Posted by: Paul Bertorelli | September 30, 2017 3:10 PM    Report this comment

Yeah ... I surmised that, Paul ... I was mostly speaking 'tongue-in-cheek.' So a quasi-government agency will determine if there's an issue and IF it decides that way, it's Govment gets some free money. Hmmm ... can you say 'vested interest?'

RAF ... you're link made me laugh pretty hard !! That video snip must be THE most used piece of video ever. I liked the one about the tailwheel pilot, too.

Posted by: Larry Stencel | October 1, 2017 1:27 PM    Report this comment

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