News at Smith

Why the Bombardier Tariff May Not Be a Win for Anyone

Sep 29, 2017
World Class Faculty & Research

Comments

SMITH BRAIN TRUST – At first blush, the U.S. Commerce Department's decision this week to slap a steep, 220 percent tariff on Bombardier Inc's C-Series jets probably looks like a win for the U.S. and its aerospace giant, Boeing Co.

But tariffs don't really work like that, with a clear ledger of W's and L's, says Gary Cohen, Clinical Professor of International Business and Supply Chain Management at the University of Maryland's Robert H. Smith School of Business.

"You have to look at the whole ecosystem," says Cohen. "You can't isolate one piece of the ecosystem and make a dramatic change to it, without thinking about the impact it will have on the entire ecosystem."

In this case, that ecosystem involves at least four U.S.-based factories owned by the Montreal-based Bombardier. If the tariffs increase price pressures on the company, it may be forced to compress margins and cut costs. And that could imperil jobs at the company's American factories that produce the C-Series jets.

There's also the risk of retaliatory tariffs from Canada and the U.K., which could imperil jobs at Boeing and elsewhere in the U.S.

To be clear, Cohen says, countries should crack down on unfair and anti-competitive trade practices, such as dumping, to protect their economy and its workforce. And he's not saying one way or another whether Bombardier's C-Series sales amounted to dumping. He's saying that issues of global trade require a careful examination and an intense commitment to fairness.

The U.S. Commerce Department on Tuesday slapped a steep, 220 percent tariff on Bombardier C-Series, after a Boeing complaint that accused the Montreal-based plane and train maker of selling its narrow-body aircraft below cost in the U.S. market.

Boeing says Bombardier accepts government subsidies from Canada that allow it to price at unfairly low levels its 110-to-130-seat aircraft in the U.S. It points to the sale last year of 75 C-Series jets to Delta Air Lines as falling under the same unfair sales practices that France-based Airbus SE used in the 1990s.

The U.S. International Trade Commission gets the final call on whether the Commerce Department's big tariff will take effect. That decision is expected sometime next year.

In the meantime, Bombardier officials says they "strongly disagree" with the administration's finding, calling the size of the 220 percent tariff "absurd." And Canadian Foreign Minister Chrystia Freeland called it an "unjust, punitive" ruling.

It also is perhaps awkwardly timed. The proposed tariff was announced as U.S., Canadian and Mexican officials were convening in Ottawa to discuss the future of the North American Free Trade Agreement.

Freeland has threatened to cancel Canada's purchase of Boeing Super Hornet jet fighters.

Canada is not the only ally who appears to be miffed. British Prime Minister Theresa May has also weighed in, saying she is "bitterly disappointed," in the U.S.'s decision to impose tariffs on the planes, which are built in Northern Ireland.

The use of such tariffs in the U.S. has had adverse consequences before. In 2002, President George W. Bush imposed temporary tariffs on steel imports. And the Obama administration imposed similar tariffs on Chinese tires in 2009. Both moves heightened tensions with key U.S. trading partners. And studies have shown that the competitive strains imposed by the tariffs resulted in more job losses than gains.

Higher steel prices stemming from Bush's tariffs, according to one study, resulted in the loss of 200,000 U.S. jobs, with spillover effects that cascaded well beyond the steel industry.

"What is the net gain or net loss of one protectionist move?" asks Cohen. "One trade decision can have widespread ramifications."

GET SMITH BRAIN TRUST DELIVERED
TO YOUR INBOX EVERY WEEK

SUBSCRIBE NOW

Tags: 

About the University of Maryland's Robert H. Smith School of Business 

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty masters, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.