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Trade War Escalates After US Slaps Canada’s Bombardier Jet With 220% Tariff

Courtesy of ZeroHedge. View original post here.

The fourth round of Nafta talks began in Ottawa over the weekend, and as US Trade Rep Robert Lighthizer and his Mexican and Canadian counterparts scramble to produce a deal by the end of the year – a self-imposed, “soft” deadline – Boeing inflamed trade tensions by winning a decision to slap a massive tariff on struggling Bombardier’s C-Series jet, potentially severing one of the last lifelines for the once-proud aircraft manufacturer.

As Bloomberg reports, the Commerce Department slapped import duties of 220% on Bombardier’s C Series plane Tuesday, agreeing with Boeing’s complaint that “improper” government subsidies allowed Bombardier to illegally dump their jets on the US market. The preliminary determination threatens to upend Bombardier’s planned deliveries next year to Delta Air Lines Inc., which ordered at least 75 jets with a list value of more than $5 billion, an order which was critical for Bombardier after a rocky stretch of weak sales.

The penalties create a new hurdle for Bombardier’s Chief Executive Officer Alain Bellemare, who is trying to turn the company around after the C-Series came in more than two years late and $2 billion over budget.

The announcement promptly slammed Bombardier securities, and this morning its euro-denominated bonds maturing in 2021 tumbled the most in more than two years. According to Bloomberg, the senior unsecured notes are currently down by more than seven price points at 99.963.

The decision is only the latest provocation from US trade hawks, who’ve sought to impose stiffer import penalties on a range of Canadian industries, frequently blaming government subsidies. In August, Commerce Secretary Wilbur Ross provoked an angry response from Canadian Prime Minister Justin Trudeau – who threatened a “thickening” of the US-Canada border.

The Bombardier-Boeing spat has roiled trade relations just as the U.S. tries to renegotiate NAFTA.

“Even our closest allies must play by the rules,” U.S. Commerce Secretary Wilbur Ross said in announcing the decision on Canadian jets with 100 to 150 seats.

Meanwhie, Canadian officials who are participating in the Nafta talks quickly criticized the Commerce Department's decision, with Foreign Affairs Minister Chrystia Freeland saying Canada “strongly disagrees” with the U.S. probes into its aerospace industry.

“This is clearly aimed at eliminating Bombardier’s C Series aircraft from the U.S. market,” said Freeland, who was scheduled to dine with U.S. Trade Representative Robert Lighthizer in Ottawa on Tuesday during the third round of Nafta talks.

U.K. Prime Minister Theresa May earlier said, “I am bitterly disappointed by the initial Bombardier ruling. The government will continue to work with the company to protect vital jobs for Northern Ireland.” Bombardier is the largest manufacturing company in Northern Ireland; its rail division employs ~3,500 in the U.K., according to the company’s website.

Of course, the decision is only a preliminary finding and must be upheld by the US International Trade Commission for it to take effect in a final decision expected next year, which is, notably, after the deadline for renegotiating Nafta, as Reuters points out. Delta is alleging that Bombardier is engaging in harmful business practices similar with those used by European rival Airbus SE to win business in the 1990s, according to Boeing.

In a statement, Bombardier called the decision “absurd.”

“We strongly disagree with the Commerce Department’s preliminary decision,” Bombardier said in a statement, calling the magnitude of the proposed U.S. duty “absurd.”

The simple truth is that Bombardier created a superior aircraft that is more efficient, more comfortable, and quieter. The C Series serves a market segment not supported by any U.S. manufacturer. Delta wants to bring this remarkable new aircraft to the U.S. flying public. Boeing wants to prevent U.S. passengers from realizing these benefits, irrespective of the harm that it would cause to the U.S. aerospace industry and the cost to airlines and consumers.

And although the ITC’s decision is months away, Bombardier has reason to worry: the tribunal earlier this month ruled in favor of the bankrupt US subsidiary of a German solar panel manufacturer, clearing the way for President Donald Trump to slap import tariffs on cheap foreign solar panels, which are almost exclusively manufactured in China. The move was interpreted as an escalation of the soft trade war that began when Trump ordered an investigation into China’s IP policies that could clear the way for more tariffs.

However, as Reuters explains, to win its case before the ITC, Boeing must prove it was harmed by Bombardier’s sales practices, despite not using one of its own jets to compete for the Delta order. Dan Pearson, a senior fellow at the libertarian Cato Institute think tank in Washington, said before the announcement that proving this argument could be difficult for Boeing.

“This (ITC case) cannot be a slam dunk,” said Pearson, a former ITC chairman. “I‘m having a hard time figuring out how Boeing was harmed by this.”

According to Reuters, the Commerce Department’s announcement and accompanying fact sheet on the preliminary duty order did not provide any rationale or methodology for how it calculated the 220% duty. The CSeries has a “sticker price” of $79.5 million, but carriers like Delta usually receive discounts of about 50%. If imposed, the duties would more than triple the cost of a CSeries aircraft sold in the U.S. to about $61 million per plane, based on Boeing’s assertion that Delta received the planes for $19 million each. Bombardier has disputed the $19 million sales figure.

Though the Bombardier-Boeing dispute has expanded to two Continents, British Prime Minister Theresa May asked the Commerce Department to go easy on Bombardier to protect manufacturing jobs in Northern Ireland, and angered Canadian Prime Minister Justin Trudeau, who put a planned purchase of Boeing Super Hornet fighter jets on hold in retaliation for Boeing’s complaint, Reuters reports that the spate probably wont' affect Nafta negotiations, according to unnamed Canadian officials.

A source familiar with the Canadian government’s thinking said the Boeing trade dispute was  “separate” from the NAFTA talks.

“This in no way is part of our conversation” the source said. “People should not read too much into this piece today.”

Reuters points out that the size of the tariff is unusually high, though Commerce did approve a massive 256% final duty on Chinese cold-rolled steel last year.

Bombardier shares are down 15% over the past month due to uncertainty surrounding the Commerce Department’s decision. Bombardier, which also has a rail business, has endured a string of bad luck this year. Earlier, it missed out an opportunity to combine the rail business with Siemens, the German manufacturer. Instead, Siemens decided to combine the business with French rail operator Alstom.

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