Fraser Forum

American firms smell blood in the trade waters

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The Trump administration’s war against international competition continues with the U.S. Commerce Department’s ruling this week that Bombardier, an aerospace and transportation company based in Montreal, sold planes to U.S.-based Delta Airlines below the cost of production. Commerce also determined that Bombardier received unfair state subsidies from the Canadian and British governments that helped Bombardier win sales to Delta.

The Commerce Department proposed that an interim tariff of approximately 220 per cent be imposed on imports of Bombardier’s C-Series jet into the United States. This action would clearly threaten the agreed-upon sale to Delta involving up to 125 jets worth around US$5.6 billion. However, the proposed tariff would not take effect until the U.S. International Trade Commission makes a final ruling on the Commerce Department’s proposal. The ruling is expected in February 2018.

U.S.-based Boeing Corporation initiated the complaint that Bombardier’s export sales to Delta were priced below cost in the U.S. market and that Bombardier benefited from unfair government financial subsidies. In particular, Boeing highlighted direct financial aid from the governments of Canada and Britain, as well as a C$2.5 billion investment in the company from the Province of Quebec and its largest pension fund as the main sources of unfair government subsidies.

Boeing argued, somewhat confusingly, that the subsidies made it possible for Bombardier to price below cost or, equivalently, to engage in dumping, although one would think that the subsidies effectively lowered Bombardier’s costs so that it would not incur sustained financial losses on its airplane sales by selling at prices below its long-run incremental costs. The confusion about the linkage between government subsidies and dumping was not relieved by the Commerce Department’s ruling, since the department’s preliminary duty order provided no rationale or methodology for how it calculated the 220 per cent duty.

This latest trade complaint initiative might be dismissed as yet another episode in an ongoing saga of trade actions launched by governments on behalf of domestic airline manufacturers. Indeed, the U.S., Canada, Europe and Brazil have been involved for decades in protectionist trade disputes that have been adjudicated by the World Trade Organization.

But what makes the latest U.S. initiative particularly troublesome is that Boeing did not compete for the Delta order. Rather, Boeing’s motive appears to be to delay or prevent the entry of a competitor into a segment of the civilian airliner market in which it currently does not successfully compete. Undoubtedly, Boeing felt empowered to pursue its trade complaint by the Trump administration’s mercantilist trade rhetoric, and other U.S. companies will feel further empowered to call for protectionist government initiatives against foreign competitors by the Commerce Department’s ruling.

While Canada might ultimately challenge any final U.S. tariff decision, in part on grounds that Bombardier is expected to repay the government financial assistance, and hence, the assistance does not qualify as a subsidy, most observers would agree that airplane manufacturers everywhere, including Boeing, are beneficiaries of direct or indirect government financial assistance.

Furthermore, usually consumers in the importing country wind up paying the tariffs imposed on the products of the foreign company charged with unfair trade practices. In this specific case, U.S. airline passengers will ultimately face higher ticket prices as airplane costs increase for airline service providers such as Delta.

Unfortunately, public choice dynamics mitigate against taxpayers rebelling over government handouts to specific companies and consumers rebelling against their governments imposing tariffs in the name of pursuing “fair trade.” Those harmed by government subsidies and tariffs are typically large in number, while those benefited by such actions are usually concentrated interest groups. The latter simply have much stronger incentives to seek government-created “economic rents” than the former have to prevent rent-creation.

The Trump administration’s open and cynical “Buy American” policies will only strengthen rent-seeking initiatives on the part of U.S. companies facing foreign competitors. It will also motivate other governments to protect their own domestic companies from U.S. competitors.

Where are Adam Smith and David Ricardo when we really need them?