The mischief of protectionism
BRITISH PM THERESA MAY, TOO, IS NOT AMUSED.
What a tangled web we we ave when first we practise to deceive ourselves into believing that corporate welfare can be seemly. Consider the caper, both amusing and depressing, that began when mighty Boeing sought protection behind the skirts of the U.S. Department of Commerce.
Boeing, America’s 39th largest corporation by market capitalization ( over US$ 150 billion) and 24 th by revenues ( US$ 94.6 billion), complains that it is being injured because the Canadian aircraft manufacturer Bombardier ( market capitalization around US$ 5 billion) was “dumping” its CSeries passenger planes in the U.S. market.
That is, selling them unfairly cheap ly to U.S. buyers. The nature of Boeing’ s injury is unclear because it does not make a plane that directly competes with the CSeries. Boeing’s complaint came after Bombardier agreed to sell 75 to Delta Air Lines for US$ 5.6 billion, a contract for which Boeing did not bid. The CSeries singleaisle planes, which seat 100 to 160 passengers, are smaller than Boeing’s 737.
All manufacturers of commercial aircraft, including Boeing, sell their products for amounts substantially below list prices. ( Boeing’s 787 lost US$ 29 billion over five years before becoming profitable last year.) Boeing, however, cheekily charges that Bombardier is able tobe excessive ly nice to U.S purchasers because the CSeries receives government subsidies, including equity investments, worth under US$ 2.8 billion. This is, however, the Boeing pot calling the Bombardier kettle black.
Bombardier is indeed subsidized to a fare- thee- well. The Canadian government subsidizes the Montreal- based company, as does the province of Quebec. But the U.S. government essentially provides Boeing with its own financial institution: The company is by far the largest beneficiary of what is known as “Boeing’s Bank” — the misbegotten Export- Import Bank. It provides cheap loans to Boeing’s overseas customers, lowering the real prices they pay. In 2014, 68 per cent of the bank’s long- term loan guarantees — its primary business — was on Boeing’s behalf. Boeing also benefits from government contracts — 23 per cent of its 2016 revenue; the Defense Department is its largest customer — and from state governments’ incentives worth billions (e.g ., US $8.7 billion from Washington state).
Nevertheless, the Commerce Department, succouring Boeing with compassionate conservatism, imposed an astonishing 219.63 per cent tariff on imports of Bombardier’s CSeries, supposedly to compensate for subsidies the company receives, and another 79.82 per cent as punishment for not charging Delta, a U.S. airline, more. This 299.45 per cent duty — Boeing had suggested 160 per cent — would quadruple the planes’ price, effectively closing the U.S. market to them, thereby threatening Bombardier’s survival.
Which probably interests the approximately 7,000 Americans in 17 states who work in Bombardier facilities making aerospace and railroad products. Furthermore, Bombardier spends US$ 3 billion annually on U.S. suppliers in 48 states. Other Americans who might be collateral damage from protectionism are those who make Boeing fighter jets. Canada’s Prime Minister Justin Trudeau responded to the U.S. action by suspending plans to spend over US$4.8 billion on the fighters.
British Prime Minister Theresa May, too, is not amused. Bombardier employs more than 4,000 in Belfast to make the CSeries’ wings. May, weakened by the June general election, clings to power through an alliance with members of Parliament from a party in Northern Ireland. And as she struggles to negotiate Britain’s exit from the European Union, she has been pointing to shimmering future trade agreements with the United States.
Desperate times call for desperate measures, so Bombardier gave 50.01 per cent control of the C Series program to Boeing’s rival in this duopolistic business, Airbus, the European multinational corporation that also gets lavish assistance from governments. For this control, Airbus pays nothing, merely agreeing to put its vast marketing, maintenance and customer service expertise into competition with Boeing in what The Financial Times calls “the booming single- aisle market, which is expected to account for more than 70 per cent of aircraft orders over the next 20 years.”
Bombardier’s and Airbus’ CEOs said with straight faces that their companies’ marriage is unrelated to the fight that Boeing might now regret having started, especially now that Airbus says it will manufacture CSeries planes in the Alabama plant where it makes A320 airliners.
Delta, which says it plans to buy those 75 planes when they are made there, presumably expects Airbus to avoid the 299.45 per cent penalty.
This, however, might depend on U.S. bureaucrats’ abstruse calculations of whether more than 50 per cent of the cost of the CSeries’ components come from U.S. sources.
Evidently it is insufficiently obvious that tariffs should not be imposed on planes made in America by Americans and sold to an American airline. Who will protect Americans from the radiating mischief of protectionism?