If This is How US Trade Law Is Supposed to Work, Then I’m Not a Fan

219.63% If the decision from the Department of Commerce goes final, that’s the amount of the countervailing duty (CVD) that an American-based airline would need to pay on top of the purchase price if it wants to fly a Bombardier C-Series aircraft. That is a staggering number, and it’s protectionism at its finest. The most immediate impact is obviously on Delta which is expecting its first C-Series to be delivered next year. While I hope cooler heads will prevail, I fear we may never see a C-Series with that widget on the tail. This is bad news for just about everyone.

It was, unsurprisingly, Boeing that filed a complaint with the feds saying that the C-Series was heavily subsidized and Boeing would suffer harm because of that. This wasn’t an issue until a US airline actually ordered the airplane, but when Delta bit, Boeing flipped. Let’s forget about how much assistance Boeing gets from the US federal government and state and local governments where it has operations (Washington, South Carolina, and headquarters in Chicago) in the form of military orders, tax breaks, and other investment incentives. We need to deal with the simple fact that it is impossible for a new entrant to go into a new aircraft manufacturing segment (not to mention many other important business segments) without government aid. It’s also completely and totally common practice to sell early-model aircraft below cost, because that’s required to get early customers to take the risk which in turn makes the program viable. Manufacturers make up for it in the long run if they create an airplane that’s good enough to attract interest, as Bombardier has done with the C-Series.

Unfortunately, US trade law doesn’t seem to account for the realities of aircraft manufacturing, and Boeing has been able to exploit that fact in spades in order to have the feds eliminate potential competition. CVDs are a tool governments can use to protect domestic industries from harm when foreign competitors use their government subsidies to sell their products in the US below market value (which can significantly shift market share and lead to lost jobs or worse, company failures). CVDs are supposed to ensure that a market isn’t distorted by this government support and remains fair and competitive, but in this case, it has done the exact opposite.

Have there been subsidies? Sure looks like it. On several occasions Bombardier took more than $3 billion of aid (money and land) from the Canadian and Quebecois governments. It took from the British government despite being in such bad shape that no outside lender or investor would have touched it. ( *cough* Maybe GM can talk about what that’s like in the US. *cough*) The Department of Commerce added it up and decided this massively high CVD was required to offset the advantage. Boeing was “only” asking for around an 80 percent tariff, but nay, the feds went with nearly 220 percent.

Boeing likes to pick these fights a lot, including against Airbus in a never-ending case at the World Trade Organization that has frustrated many for years. But at least compared to Airbus, Boeing offers a competitive product. Against Bombardier, Boeing has nothing to offer, and that’s what makes it hard to believe that Boeing can prove the required competitive harm in a case like this. For Boeing, this is more about the potential for future competitive harm. If Bombardier gains traction and makes money with the CS100 and CS300, a CS500 is likely to happen, and then it would compete with Boeing. Is this sounding like a version of Minority Report to you? Let’s call it pre-competition.

To get into more detail, Delta’s order was for 75 of the CS100s. Those airplanes will hold 110 seats. That’s the same number of seats on the Boeing-built 717 that Delta is going to need to replace, since Boeing ended production on that airplane more than a decade ago. That’s also similar to what the 737-600 can hold, but that airplane never got any traction and is long dead. Boeing’s smallest airplane now is the 737-700 which holds 124 in Delta’s configuration. But Delta (like most airlines) doesn’t even like that airplane; it just ordered a few for more challenging “hot and high” routes that need special performance. It’s also an end-of-life model that’s being replaced by the 737 MAX 7, an airplane that’ll have at least a dozen more seats. Even that slightly larger version hasn’t received much love from the marketplace with only 50 orders. Twenty of those are from Canadian airlines, so it could be in even more trouble if Canada retaliates. (The other thirty are from Southwest, an airline which long ago abandoned buying new 737-700s despite them being the backbone of its fleet.) Yet the feds decided that any aircraft which could seat 100 to 150 seats in normal configuration and had a range of 2,900nm would be considered to be in the same competitive set. That ignores reality.

Even looking at those broad parameters, it’s hard to see the harm here. You may, as Boeing would, point to United’s decision to purchase 737-700s over a C-Series or any other aircraft as proof that these are competitive, but that’s not really the case. United’s old management team just bit because they already had 737s and the new ones were given to them at dirt cheap prices (probably below fully-allocated costs, but you know, if it’s done by a US manufacturer, that’s ok). As soon as United’s new team came in and realized it was a dog, they switched the order to larger aircraft. Plain and simple, the 737 doesn’t compete with the C-Series, especially the CS100. Delta has made it quite clear that Boeing wasn’t even part of the discussion because it has nothing in the size category Delta needed. So where’s the harm?

I suppose I should clarify that. Where’s the harm against Boeing or (if there was one) any other US-based aircraft manufacturer? The only harm I can see is against Embraer, the only company building true competition for the Bombardier C-Series. Way to go, feds, you may have just (preliminarily) killed competition and given Embraer (a company pushing its own dispute forward with the WTO) the ability to jack up prices since it will no longer have to compete with Bombardier. Looking beyond the manufacturers themselves, there will likely be consumer harm here. But then again, the Department of Commerce doesn’t really take that into account.

Of course, I’m getting ahead of myself here. This ruling from Commerce is just preliminary. The final determination will be December 18 with the final ruling from the International Trade Commission (run by the US and unlikely to disagree) on Feb 1 of next year with the order to follow shortly after. Presumably there are several different ways to appeal beyond that. The current administration has been puffing its chest about unfair trade, so the administration could make an example out of Canada. Just be ready for retaliation from Canada and the UK (the wings are made in Northern Ireland) on this. Boeing’s military and commercial aircraft orders in those countries are at risk, so even Boeing can end up a loser here in the war it started.

What concerns me the most is that if this all drags out, Delta may have no choice but to walk away even before the war ends. It can’t worry about having to put those massive tariffs into escrow accounts while it waits for appeals. It may have its hand forced even if the eventual outcome makes that all for naught.

I’m going to personally hold out hope that there is some kind of settlement that allows Delta to start flying those airplanes. On the other hand, protectionism seems to be in vogue right now, so I wouldn’t place any bets. Maybe Delta can take solace in the fact that this kind of behavior might be beneficial to it in some way. This is exactly the kind of rhetoric that Delta wants to hear regarding Middle East airline subsidies. You win some, you lose some, right? *sigh*

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69 Comments on "If This is How US Trade Law Is Supposed to Work, Then I’m Not a Fan"

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Tim Dunn
Member
extraordinarily well said on every point. Both the UK and Canada don’t appear anywhere close to walking away from this dispute, in part because Boeing seems happy to criticize other manufacturers even while accepting tens of billions of subsidies. If Boeing had a spotless track record on subsidies, then they would have a point but they don’t. Let’s also remember that Delta cancelled an order for early delivery 787s which it inherited from Northwest. They know exactly what kind of discount Boeing gave for high technology new aircraft, not just for end of the line models. The Ejets aren’t really… Read more »
Gary Leff
Guest

Let’s take what you wrote and change the players to talk about Delta’s complaints about Etihad’s 6 US flights and Emirates’ JFK – Milan and Athens flights.

“For [Delta], this is more about the potential for future competitive harm. … Is this sounding like a version of Minority Report to you? Let’s call it pre-competition.”

This is a terrible decision. But the inconvenience *to Delta* doesn’t worry me a whit here.

Fitz
Member

Forget Delta – but broadly something needs to be done to curb the Gulf airlines and their deadly SUBSIDISED predatory inroads into native markets … their goal is long term both to pick up local pointbto point traffic and also to scoop up flights to the Gulf hubs for onward connexions … in Wales UK for instance, they will shortly start flights to their hubs from second and third tier cities … clever and also a big elephant in the room …

Bobber
Guest

Welcome to life under #45

Simon
Guest
The UK can’t do much – while it is in the EU, any retaliation would need to come from the EU as there’s a common customs union. And it’s very unlikely that the EU will do anything to help the British at the moment (or at best, it will become a bargaining chip in the Brexit negotiation). And then when the UK leaves the EU and is free (and desperate) to negotiate a trade deal with the rest of the world, will it really impose tariffs on a US product as an opening gambit? Unlikely, even with the current Government… Read more »
barowsky
Member

What the UK can do, and has threatened to do, is cancel orders for Boeing military planes.

David SF eastbay
Member

Oh the horror, airplanes made in Canada flying in the USA. It’s a good thing we only have cars in this country made by American companies and not by companies say from Japan Korea Germany or anywhere else.

Ben in DC
Guest

Also a good thing that those American brands would never make a number of their cars and SUVs in Canada. Oh wait…

A
Guest
To take a contrarian view here lets not forget that be it not for the Canadian gov’t Bombardier Aerospace (Canadair) would’ve probably ceased to exist a generation ago. I’ve always said that US bankruptcy law is corrupted to let poorly run businesses labor on, well national subsidies are no different and Cranky rightly points out that it’s systemic to the industry today. Nobody can argue that Airbus wouldn’t exist if not for EU member nations support. Is it coincidence that McDonnell Douglas was absorbed into Boeing not long after airlines started buying large quantities of Airbus? Historians will say other… Read more »
Tim Dunn
Member

the exact same thing can be said about the US auto industry which was bailed out by the US government on very similar terms to what Canada did with Bombardier.

A
Guest

For the record I wasn’t a fan of the auto industry bail outs. Yes, a perfect analogy

tvmccabe
Member

True.
But the big difference is both Ford and GM have quite a few plants in Canada so Canadian was a prime recipient of the bail out along with all the GM, Ford and parts makers in Canada.

Viaqwerty
Guest

The US government provided 90%of the bailout, the Canadian & Ontario governments the other 10%….as they recovered, the big 3 shifted more of their production to Mexico

tvmccabe
Member

Yes. The UAW agreed to the future move of new jobs to Mexico to reduce their give backs by active members in Canada and the US during Chap 11. Said differently they sacrificed the yet unborne Ford and GM workers in Mexico to protect themselves in Canada and the US

Tim Dunn
Member

Bombardier has rail and aerospace manufacturing sites in the USA
http://us.bombardier.com/us/bt_manufacturing.htm
http://us.bombardier.com/us/aerospace_manufacturing.htm

as well as service and parts facilities and

many very well-known suppliers

http://us.bombardier.com/us/aerospace_suppliers.htm

Bombardier probably has more US business connections than Boeing or the US automakers do in Canada.

Ron S
Guest

From the media reports I’ve read up here in Canada, apparently a lot of the parts for the C-Series will come from US suppliers. The reports quote ~22,000 US jobs related to parts orders. I’m wondering if in a ‘normal world’ Boeing was aiming high at 80% expecting a correspondingly lower final ruling, but instead the ‘new reality’ decided 220% was a good starting point?

Zack Rules
Guest

I suppose there is no way Delta could lease the planes for the time being? If I were them, I would never buy Boeing again and cancel the remaining 737-900ER orders.

Nick Barnard
Member

Yeah. I was wondering the same thing… why couldn’t the deal be changed to the planes being sold to Aercap or someone and leased to Delta? Or has this loophole already been closed?

Eric Morris
Guest

Capitalism breathes through the loopholes. Ludwig von Mises

George
Guest

A.Net thread on “what will Delta do” provides answers, with posters in the know claiming that aircraft must be on US registry in order to be flown in regular service, and as such, must be imported anyway, even if leased from a leasing company.

http://www.airliners.net/forum/viewtopic.php?f=3&t=1374845

tvmccabe
Member
I guess we all need to reflect on how Airbus was nearly 100% funded by European Governments 40 years ago when Airbus was in its infancy and developing the A300 and A310 widebodies. Airbus would have never gotten off the ground without massive government funding. And we know what happened. McDonald Douglas and Lookheed were soon driven out of the widebody market and Airbus entered.the widebody market. Let’s take the long view with government funding, which the US never did effectively with Airbus. Boeing is the a major contributor to reducing the US’s trade deficit. But with the Canadian, and… Read more »
Ben in DC
Guest
Not disagreeing with the subsidies Airbus received, but that’s not what did McDonnell Douglas in. They went away because they refused to invest in new products. Their last all-new design was the DC-10 in the late 60’s. The rest were updates to existing products. Sound familiar? Boeing is playing the same game. They don’t want to invest large sums of money into new products after the 787 debacle, and so they keep updating a 737 design that should have long been retired. The only reason they get away with it, whereas McD didn’t, is that Airbus is their only major… Read more »
Tim Dunn
Member
What seems to be lost in all of the discussion about the C series is that the plane is flying and is performing better than promised. It is a very solid piece of technology. The C series is not going away. The problem is money but you can be assured that if push comes to shove, there will be someone that is interested in buying the C series. Even though there are laws preventing US airlines from controlling airframe manufacturers, don’t rule out that Delta might have a financial solution of its own up its sleeve. If they can justify… Read more »
ORDflyer79
Guest

This was incredibly well-stated. Boeing does an incredible job of taking subsidies from various US governmental entities and is the first to complain when it doesn’t get its way. Boeing made a conscious decision to end 717 production and is now mad when someone else comes in and makes a more competitive product? Ridiculous. The big loser here will be the entire North American aviation industry. I think that US/Canada are much better with a strong industry with Boeing and Bombardier. Don’t think China will wait…

Matt D
Guest
I agree with you on pretty much every point. But at the same time, let’s also be honest. There are some perks to having “friends in high places”. And when you’re in business, you use any and all tools at your disposal to quash competition. If you have the US Capital in your back pocket, that’s a pretty sweet tool indeed. Not so much if you’re on “the other side”. And that’s what this is really all about: envy, resentment, and “it’s not fair”. Well no it isn’t. And neither is life. And yes. This could blow up in Boeings… Read more »
michael.sassine
Member

Curious to explore what other options DL has on the matter. For example, could they set up an offshore leasing company to buy the aircraft and then lease them back to DL?

?????

Ben in DC
Guest

I was wondering if Virgin Atlantic could take over the order, then lease the planes back to Delta.

michael.sassine
Member

I was thinking that too. Let’s say DL transferred the order to Virgin Atlantic, who then leased them back to DL. I assume they wouldn’t be able to give them an N-Reg, they’d have to be registered in the UK or Ireland or whatever. Could DL use them in domestic service? Could DL pilots fly them?

George
Guest
Kilroy
Guest

Agreed.

I’m wondering if this might get rolled into the US-Canada lumber trade disputes.

Ghostrider5408
Guest
I find it interesting that you center this article around Delta throughout. While I am not going to comment on the merits of the case but with 40 years in and around aviation instead a unilaterally calling Boeing on the carpet why don’t you wait to see what the outcome is? I would suspect ( I do not have first hand knowledge) that things will come to light OR they won’t and a deal will be made. If you don’t think the foreign manufacturers are not subsidized, please You know it’s sad this country is so divided. I for one… Read more »
Tim Dunn
Member

I don’t know of a single airline pilot that says they would rather sit in the cockpit of a 737 over an A320. I don’t hear much about “feel good” from 737 pilots as the lack of space and the deafening noise levels that don’t exist in other aircraft. The C series cockpit is at least as comfortable and technologically advanced as anything out there…

but perhaps you either meant something different about “feel good” and/or talk to a different group of pilots than I do.

Oliver
Guest

They feel good? What I feel is the seat I am sitting on, which isn’t made or designed by Boeing.

Ron S
Guest

I think it’s even bigger. The entire NAFTA free-trade agreement is being renegotiated at Trump’s insistence. Maybe this Boeing case against Bombardier is an extreme example of US chest pounding to prove Trump’s USA-first intentions (even if it will endanger US jobs reliant on Bombardier’s parts orders) and set the tone for what have apparently been difficult early NAFTA negotiations.

What’s the saying? “Hurt those you love the most.” In this case, by taking on one of its largest trading partner (Canada), Trump’s USA can prove it means business with everyone, even those with seemingly close, special relationships.

Tim Dunn
Member

perhaps you might want to see the outcome before declaring victory for the present strategy.

May I remind you that Trump campaigned on the platform of building a wall between the US and Mexico and making Mexico pay for it and yet the US Congress of his own party isn’t moving forward on the plan.

As the saying goes, politics are local and trade disputes that might sound great in Washington are intolerable at the local level where real people’s lives and livelihoods are at stake.

Southeastern
Guest

Is that $3 billion Canadian?

As a WA resident we got you guys beat. We gave Boeing $8.7 Billion!

https://www.seattletimes.com/seattle-news/boeings-historic-tax-break-from-state-even-bigger-than-thought/

…actually it looks like it’s going to be much much much more.

David A
Guest

Are U.S. carriers permitted to lease from Canadian or U.K. leasing companies? If Delta leased thru a non-US leasing company, could that circumvent to tariff? Or would a US tail number quash that loophole?

Ben in DC
Guest

Thanks for writing about this Cranky. I appreciate the fact that you brought up the United deal. The fact that United will get a bunch of 737 MAX 10s out of a deal for ridiculously cheap 737-700s is comical. I have no problem with Boeing doing that deal though, just the fact that they then turned around and said ‘no fair’ when Bombardier played the same game.

I’m sure Boeing tried to do the same deal with Delta it did with United, but in the end, Delta was obviously more interested in the product itself, not just the price.

TRB
Guest
The e best thing Boeing could do is buy the C-Series off of Bombardier. They did shop it to Airbus once. Keep a line in Quebec and add a line in the States. 5hefe it could get back some of the purchase has price with another bidding war between States for that line. Their it would build some of the 30ps and the eventual 500. This would replace the woeful 737 on the lower end of the lineup, leaving the Max 8s and higher and extend is reach back into an area it abandoned with the 717. It would allow… Read more »
southbay flier
Guest

This was huge news in the UK last week. I think Boeing will be the ones feeling the pain at the end if the UK and Canada go through cancel their orders for military planes and add huge tariffs onto Boeing products.

There is no Boeing product that competes with the C-series. Plus, the 737 is a 1960’s design with a 1950’s fuselage. I’ve never had any love of the 737, and after the 737-900, which takes forever to get off the ground, I really hope that airlines would avoid that plane.

Joseph
Guest

What would keep DL from entering into an agreement with another airline, to have them purchase the c-series and then lease them to DL?

Oliver
Guest

The law, apparently ;)

(see some responses upthread when others suggested this)

Troy
Member

This could be Boeing’s revenge on Delta for cancelling the 787-8 order and ordering all of those 359’s and 339’s instead.

Tim Dunn
Member
You do realize that Delta knows what Boeing sold those 787s to Northwest for and I can absolutely assure you that they got heavily discounted launch pricing that did not come close to covering the development costs – just as they are accusing Bombardier of doing. The problem with the current US findings on the case is that they took an absolutely snippet of information and decided to implement a globe-shaking penalty in an industry where there are so many caveats in how airplanes are priced and sold. The best thing the US could do is take a serious step… Read more »
letstry2
Member

If Boeing had there way no aircraft manufactured anywhere outside the US would not be allowed to even land here.They have managed to run every us produce i..e. Lockheed and McDonnell Douglas out of business and now there trying it with companies outside the US.

Etienne Fortin
Guest

I would also add that Boeing said for years that the C-Series was looking at a market that do not exist and so was skinned to fail. And yet all of a sudden it compete with them.

Etienne Fortin
Guest

Skinned = doomed. Freaking autocorrection!

MostlyAir
Guest

What ever happened to those Republic/Frontier C-Series orders?

Stephen D. Griffith
Guest
The issue is not the current capacity of the aircraft, but the inexorable march upwards in size evidenced by both Bombardier and Embraer. Read “Disruptive Innovation” by Harvard professor Clayton Christensen or see one on YouTube. His best example is Toyota which started in the unattractive market space dismissed as unprofitable by the U.S. car manufacturers. They now participate in all segments, including lucrative SUVs and trucks. Attacking from the bottom is a classic strategy. The low end segments are not deemed worth defending by competitors. This is why Apple keeps around older model phones at lower price points. Secondly,… Read more »
Fitz
Member

The surcharge has now risen to nearly 300% … more bullying from Boeing – which does not need to bully.
And 4000 jobs in fragile Northern Ireland are at risk …
We boycotted Boeing on our trip to the Far East last week and will do so again next week …

Dave Tanner
Guest
An interesting take on this recently appeared in Aviation Week (http://aviationweek.com/commercial-aviation/opinion-why-boeing-vs-bombardier-really-about-china) claiming that the move was more about thwarting China’s aviation ambitions than keeping Bombardier out of the US. Bombardier and Comac have been working together since 2012 improving the C Series and C919. While Bombardier may never be a real threat to Boeing, the same is not true of Comac. Because products can qualify for NAFTA preference even when only 50% of the transaction value is provided by a member country, this potentially opens the door for Chinese aerospace companies to access those same NAFTA preferences via a C-Series… Read more »
Emmanuel
Guest

Well written and thought out article, does any one knows if such trade laws exists in Ghana?

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