The U.S. Commerce Department stunned both sides by imposing a tariff of 219 percent on every CSeries airplane that’s sold to a U.S. airline. The ruling is likely to exacerbate already-tense trade relations between the U.S. and Canada.
The U.S. Commerce Department sided with Boeing on Tuesday in the jetmaker’s tense trade dispute with Bombardier, imposing a massive tariff that would more than triple the price of Bombardier’s CSeries jets sold to American airlines and could further erode relations between the U.S. and Canada.
Commerce slapped a 219 percent tariff on the planes after concluding that Bombardier’s crucial CSeries sale to Delta Air Lines last year was supported by subsidies from the governments of Canada and the U.K.
“The U.S. values its relationships with Canada, but even our closest allies must play by the rules,” Commerce Secretary Wilbur Ross said in a statement. “The subsidization of goods by foreign governments is something that the Trump administration takes very seriously, and we will continue to evaluate and verify the accuracy of this preliminary determination.”
A decision in favor of Boeing was widely expected, but the size of the tariff imposed on Bombardier — 219.63 percent, to be precise — shocked all sides, especially the Canadians.
Mike Nadolski, Bombardier’s vice president of communications, called the amount “absurd and divorced from the reality about the financing of multibillion-dollar aircraft programs.”
In its petition, Boeing had asked for a 79 percent tariff because of the subsidies.
It’s unclear how Commerce arrived at the much higher figure. A fact sheet released with the decision says only that it used the “reported information” presented by Bombardier and the governments of Canada, Quebec and the United Kingdom.
If this tariff is applied to the price Delta paid, which is not publicly known but is estimated at around $25 million to $30 million per airplane, it would pump the price of each jet up to around the list price of $79.5 million.
But in the aviation world, no buyer ever pays list prices. Discounts of 50 percent are standard for large orders. And for a high-profile launch order like the Delta purchase, even bigger discounts are typical.
The ruling threatens to spark a trade war with Canada, where the aircraft is assembled in Montreal, Quebec. It will also draw in the British government because the CSeries wings are built in Belfast, Northern Ireland.
“Boeing is behaving in a predatory way,” Quebec Finance Minister Carlos Leitao said Tuesday at a conference in New York before the ruling was announced. “Boeing is clearly trying to drive Bombardier out of business.”
Nadolski said Bombardier “created a superior aircraft that is more efficient, more comfortable, and quieter” and that “Boeing is seeking to use a skewed process to stifle competition.”
Boeing issued a statement anticipating that criticism, saying the dispute “has nothing to do with limiting innovation or competition, which we welcome.”
“Rather, it has everything to do with maintaining a level playing field,” Boeing added.
Final decision by February
The decision won’t be final until validated by further rulings of the U.S. International Trade Commission (ITC), a process scheduled to end in early February.
That’s about a month before the first CSeries jet coming into the U.S. market is due to be delivered to Delta Air Lines.
In another step, Commerce must rule next month on whether the pricing Bombardier offered Delta in its sale of 75 CSeries jets was so low it constitutes price dumping.
Boeing in its statement stressed that this second-stage ruling could add further tariffs.
“Early next month, Commerce is expected to confirm the magnitude of the illegal dumping and announce additional duties associated with that finding,” Boeing said.
Boeing’s petition asked for a separate tariff of 80 percent for the alleged dumping.
After Commerce makes that decision, the ITC must assess if there is “injury” to Boeing. It will then finalize the size of the tariffs.
Bombardier claims that will be the weakest point of Boeing’s case.
Nadolski argues that it will be impossible to prove injury to Boeing from the sale of the CSeries jets to Delta, because Boeing did not offer a competing product in that sales campaign.
Delta was seeking offers for a 100- to 110-seat jet, and Boeing’s smallest aircraft, the 737-700, seats 126 passengers.
“Boeing did not compete at Delta and because Boeing years ago abandoned the market the C Series serves, there is no harm,” Nadolski said.
Delta issued a statement blandly noting that the outcome is “just preliminary” and claiming confidence that the final outcome should be different.
Boeing insists there is injury to its competitive position, pointing out that Delta has options to convert a portion of its order to Bombardier’s larger CS300 model, which would compete directly with the 737-700.
Following this one-sided preliminary result, Bombardier’s hope of turning everything around in the later rulings looks slim.
And if Tuesday’s ruling largely stands at the end of the process, it has the potential to wreck the sale to Delta. The purchase of the jets won’t make economic sense for the airline with a price markup of 219 percent, or even higher after next month’s ruling.
It could even kill all further CSeries sales in the U.S.
Over the weekend, JetBlue chief executive Robin Hayes wrote a letter supporting Bombardier to the ITC, saying that his airline — which currently flies only Airbus and Embraer aircraft, with no Boeing or Bombardier planes in its fleet — is potentially interested in buying the CSeries, but couldn’t do so if Boeing succeeds in adding tariffs to the price.
“JetBlue will lose access to a competitive and innovative platform that could bring significant benefits to the American flying public,” Hayes wrote.
Bombardier claims that half the content of each CSeries jet comes from U.S. suppliers, which means multiple American companies are uneasy about Boeing’s challenge.
Rockwell Collins and Honeywell are key suppliers of avionics to the CSeries.
Pratt & Whitney, a unit of United Technologies headquartered in East Hartford, Conn., supplies the CSeries geared turbofan engines. Both of Connecticut’s U.S. senators wrote letters supporting Bombardier to the ITC.
Any way around the tariffs?
Canada’s government has already indicated that it won’t just roll over and accept a Boeing win.
Prime Minister Justin Trudeau said last week that the all-but-completed $5.2 billion deal to buy 18 Boeing F/A-18 Super Hornet jet fighters and related U.S. military hardware is on hold.
“We won’t do business with a company that’s busy trying to sue us and put our aerospace workers out of business,” Trudeau said.
In an interview before the decision was announced, Bombardier’s Nadolski said the planemaker had been weighing contingency plans in the event of the Commerce decision going against it.
While Nadolski declined to disclose those plans, some analysts have suggested one possible approach: Bombardier could move to protect its customers by having one of its U.S. subsidiaries be the formal importer of any CSeries aircraft — so that subsidiary could pay the tariff before passing the jet on to the U.S. airline.
That’s a way of preserving the sales momentum the CSeries finally garnered with the Delta order last year.
However, it would be expensive and risky for Bombardier. It makes sense only with the assumption that an adverse ruling will be reversed upon appeal and the tariffs reimbursed.
Appeals will inevitably be slower than the fast-track ITC procedure.
Bombardier may appeal initially to the U.S. Court of International Trade in New York, then to the Court of Appeals and potentially even the U.S. Supreme Court.
Beyond that, it must take its case to an international forum.
The Canadian government could appeal to a dispute panel of the North American Free Trade Agreement (NAFTA) and then to the World Trade Organization (WTO).
But international arbitration of such trade disputes typically plays out over many years.
In the meantime, the huge tariffs will apply to all U.S. sales, like millstones hanging from the wings of the CSeries.