The Trump era is confirming that cronyism, in the end, doesn’t pay.
Sometimes trade issues are heavily nuanced, requiring a great deal of understanding of complicated economic relationships. But other times trade issues are just one corporation trying to gut-punch another because it can. Boeing’s recent attempt to hit a rival with tariffs is good example.
The conflict between the two aircraft giants originated with Boeing’s move to petition the Department of Commerce to slap tariffs on Canadian jet manufacturer Bombardier. Boeing, an American corporation, presumably saw an opportunity to take advantage of the Trump administration’s general hostility towards trade with our northern neighbor; Trump’s Commerce Department had previously placed significant tariffs on Canadian softwood lumber. Boeing correctly diagnosed the situation, as the Commerce Department responded by hitting Bombardier with a 220 percent tariff.
The root of Boeing’s complaint was a deal between Delta Air Lines and Bombardier for Delta to buy Bombardier’s new C-series jet. The deal was partially financed by Québec’s version of the Export-Import Bank, Investissement Québec. Bombardier offered Delta a fairly low price, but this is a common business tactic to “get your foot in the door” with a major buyer. Nonetheless, Boeing argued that Bombardier was dumping cheap aircraft on the U.S. market because of its funding from Investissement Québec.
The irony in such a claim is palpable. Boeing is one of the most cronyistic corporations in the United States. From 2000 to 2015, Boeing received more loans, loan guarantees, and bailouts from the U.S. government by any other corporation by a long shot. The Ex-Im Bank, which performs a similar function to Investissement Québec, is often referred to as “Boeing’s Bank” — Boeing benefits from approximately 40 percent of the funding Ex-Im pushes out annually to finance American corporations’ sales.
Boeing’s attempt to take advantage of the current administration’s attitude towards foreign imports was especially brazen given that Boeing does not even manufacture any aircraft that would compete with the Bombardier C-series jet. In other words, Boeing saw an opportunity to use protectionist sentiment as a cudgel against an opponent and took it.
Rather than give up the Delta deal, Bombardier partnered with rival aircraft business Airbus to shift production to Airbus’s factory in Mobile, Alabama. In return for a 50.1 percent stake in the production of the C-series jet, Bombardier was able to bypass the tariff. Bombardier’s previous 62 percent stake dropped down to 31 percent, while Investissement Québec saw its stake drop to 19 percent from 38 percent. Boeing was left making angry complaints.
So who won? Certainly not Bombardier, which had to hand over half of a business venture in exchange for essentially nothing. Not the taxpayers of Québec, who will be left picking up the tab for Investissement Québec’s subsidies. And not Boeing or the U.S. government, which will each surely have engendered a great deal of ill will and a substantial risk of retaliation.
The number of lessons packed in this one episode is significant. One is the foolish nature of attempting to protect one heavily state-subsidized corporation against another through trade laws. If Canada wants to drop cheap, subsidized jets on the U.S. market, why not let them? Air travel prices would drop, and the tab would be picked up by the Canadian government.
Another is the need to end the cronyistic subsidy mechanisms that allow certain corporations to prosper at the expense of others. Government enterprises like the Ex-Im Bank subsidize corporations that do not need it, giving them a leg up in the marketplace and risking your money on episodes like that which Investissement Québec just suffered.
Perhaps the most important point on display is the distortive nature of trade barriers. Airbus may be thanking its lucky stars for the windfall that came its way out of thin air, but such economic disruptions are not good for the economy. The federal government picking winners and losers in an arbitrary manner never ends well.
Hopefully the government learns the lessons of this situation as it continues to renegotiate NAFTA. The American people deserve a trade policy that helps them, not a few well-connected corporations.
Delta Skywest Bombardier CRJ-900 (Creative Commons)