Pierre Lemieux

Boeing vs. Bombardier

Pierre Lemieux*
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For decades, Boeing, Bombardier, Airbus, and Embraer—aircraft manufacturers based in the United States, Canada, Europe, and Brazil, respectively—have been involved in protectionist battles that are adjudicated by the World Trade Organization. (The WTO is an international organization with 164 member states, including the United States.) Boeing and Airbus are the main protagonists, but Bombardier and Embraer also spar from time to time. WTO rulings sometimes favor one contestant or the other.

The latest conflict—one between Boeing and Bombardier—illustrates some important economic concepts, illuminates the essentially political nature of protectionism, and explains the benefits of free trade even when some producers face a handicap.

On April 27, 2017, Boeing petitioned the U.S. Department of Commerce to impose antidumping and countervailing duties for a total of "at least" 159.91% on Bombardier's C Series commercial jets. Antidumping duties are supposed to compensate for the sale of an imported good at a price lower than its normal price or "normal value." Countervailing duties are meant to compensate for subsidies from the government of a foreign exporter. On the first ground, Boeing claims that Bombardier is charging Delta Air Lines a price 41% less than the production cost; and, on the second ground, that Bombardier has received $2.5 billion in subsidies from the provincial government of Québec and a promise of a few hundred million dollars more from Canada's federal government.1

The Department of Commerce started an investigation and, in July, made a preliminary determination favorable to the countervailing duty part of the petition. It is expected to make a similar decision on the antidumping duty in October. Soon after, final determinations will be made.

As exceptions to WTO's generally pro-trade rules on tariffs, antidumping and countervailing duties provide producers with a protectionist opportunity. We should not be surprised that corporations take advantage of it if there is an appearance of dumping or a hint of subsidy. When government creates rents—opportunities for obtaining profitable privileges from government—rent-seekers will run to the trough.

What Is "Dumping"?

When petitioned, the Commerce Department nearly always grants antidumping duties. Between 2000 and 2014, the Department dismissed only seven petitions out of 400, implying a whopping 98 percent success rate for complainants. The International Trade Commission, which has to confirm that the American company has suffered "material injury," is a bit more prudent, ruling affirmatively in "only" 83% of the cases. Imposed antidumping duties average 50%. If you are willing to pay a million dollars in typical lawyers' fees (although it can cost several million), you have a high probability of getting your antidumping duties from the Commerce Department. No wonder seeking antidumping duties has become the protectionists' preferred strategy. 2

The national government of a company against whom such measures are taken can appeal to the WTO. However, the final decision takes years and often cuts the baby in two, à la King Solomon.

 
"Unconstrained governments are clubs of producers, not associations of consumers."

The Boeing vs. Bombardier case is even more political than usual. Anthony Velocci, former editor-in-chief of Aviation Week and Space Technology, a trade magazine, observes that two days before presenting its petition to the Department of Commerce, Boeing ran a full-page advertisement in three prominent newspapers showing Donald Trump visiting a Boeing plant "to celebrate jobs."3 The Canadian government reacted to the complaint against Bombardier by suggesting that Boeing is no longer a "trusted partner" and indicating that it may cancel its planned purchase of jet fighters from the Seattle company. Unconstrained governments are clubs of producers, not associations of consumers.

Dumping is a protectionist concept that cannot be defined in a way consistent with free markets. Charging different prices occurs all the time in a free market, for a number of legitimate business and economic reasons: market conditions change; price discrimination (charging more to consumers whose demand is less elastic) is profitable when reselling by low-price buyers is not feasible at reasonable cost; or a producer may simply find it worthwhile to temporarily sell below cost in order to attract new buyers. If the alternative is not selling on a reasonable timetable, it may be better to sell at a price covering variable cost. In some cases, it may be worth selling below total (variable plus fixed) cost. A rational businessman will not consider sunk costs when making pricing decisions.

 

For more information, see "A Brief History of International Trade Policy," by Douglas A. Irwin, Library of Economics and Liberty, Nov. 26, 2001. See also "Time to Dump Dumping," by Michael Munger, EconLog, August 10, 2004; and "Imports and Exports--Dumping", by Frank A. Taussig, Chapter 13 in Some Aspects of the Tariff Question, on dumping, countervailing duties, etc. including terms defined with examples.

Entrepreneurs and other economic agents base their behavior on a cost that has little to do with past accounting costs. Rather, the relevant cost is "opportunity cost"—that is, what is lost from the next-best alternative to whatever action is considered. If the next-best alternative to selling an aircraft at a discount now is to sell it in an estimated one year's time, the cost of selling now is the price that the aircraft would fetch in one year's time less the intervening storage and interest costs. What has been previously paid to build the plane is irrelevant. Ronald Coase explained this concept of opportunity cost in a series of articles for accountants in the 1930s,4 and James Buchanan did so in his book Cost and Choice.5

It will come as no surprise that charging prices below (accounting) "cost" happens in export markets as in domestic markets (except to the extent that in the former, it can trigger antidumping tariffs, which a foreign company may try to avoid). Velocci notes that Boeing itself sold 16 of its 787s to Air Canada at a loss of $305 million. He reports that by the first quarter of 2016, Boeing had lost $29 billion on its sales of the 787, and suggests that the program has only recently started to make money.6 The company must have thought that doing something else would have brought more losses.

Because prices can vary and because minimizing opportunity cost can justify it, dumping is a fuzzy notion with no clear economic meaning. Thus, the calculation of "fair value" or "normal value" used by the Department of Commerce to determine the "dumping margin" (and the consequent antidumping duties) makes no economic sense. The Department determines "normal value" either by observing what the foreign exporter charges in markets other than the United States or by using its preferred method of "constructed value," which amounts to guesstimating the alleged offender's cost of production. Everything is stacked against the foreign target of an antidumping petition. For example, if the foreign company has only once charged a price in America lower than the price on its domestic market, this occasional price is the one that will be used, zeroing out the other prices—hence the name "zeroing" for the method.

Dumping is a purely political and protectionist notion. Douglas Irwin writes that "[i]t is hard to avoid the conclusion that [anti-dumping laws] are simply a popular means by which domestic firms can stifle foreign competition under the pretense of 'fair trade.'" Against Boeing's rent-seeking, Bombardier is very likely to lose.

The Economics of Subsidies

Countervailing duties are the second sort of protectionist measure that Boeing is seeking. That Bombardier did get subsidies is unquestionable. But this should not matter from an American viewpoint if the U.S. government did not side with a few producers (shareholders, executives, managers, and workers) against American consumers. Although business subsidies are a burden for the taxpayers, they are, and should be seen as, a bonus for the customers of the subsidized firms. In this case, Canadian taxpayers are subsidizing American consumers. If Canadian governments subsidize Bombardier aircraft, allowing American airlines to purchase less-expensive planes, competition will push ticket prices down (other things being equal), and American consumers will benefit.

Note that the world market for large aircraft is dominated by the near duopoly of Boeing and Airbus; Bombardier is small fry. This means that conclusions we derive from the perfectly competitive model may not apply. But it also argues for more international competition in the American market, including from Bombardier, Embraer, and possible future Chinese or Russian competitors.

WTO rules prohibit many government subsidies that could artificially encourage exports. The rules allow for exceptions, though, including in research and development. There are many ways to skin a taxpayer—that is, to disguise a subsidy; government investment is one example. Moreover, some economic analysis is required to determine when a subsidy leads to lower market prices and, thus, distorts the allocation of resources. If it doesn't, it amounts to a straight transfer from the taxpayers to the owners and employees of the subsidized firm.

The subsidies that Bombardier received for the C Series do not vary with output and, thus, should not affect the company's marginal cost and the price of its planes. However, these large subsidies probably saved Bombardier from going under and, therefore, effectively brought onto the market planes that would otherwise not be there. This distorting effect may be at least partly compensated by welcome competition in a nearly duopolistic market. So Bombardier's impact on the world allocation of resources is ambiguous.

As for the subsidies to Boeing, these seem to be mainly tax breaks from the Washington state government. These tax breaks may amount to more than the subsidies to Bombardier, but opinions differ on that.7 Note that government contracts for military aircraft do not necessarily constitute a subsidy—unless government does not have a legitimate national-defense function. A rational corporation will not cross-subsidize its activities. Subsidized inventions produced by military research that can also be used in civil aircrafts—a case of joint products—do not necessarily imply subsidization of the latter.

Conclusion: Rent-Seeking vs. Consumers

The whole process looks absurd, but it is simply political. Aerospace companies—either Boeing vs. Bombardier or Airbus vs. Boeing—lobby for subsidies whose final impact on the world market is not easily measurable, and each company attacks the other's subsidies. Great companies become efficient at playing the political game instead of concentrating on producing goods that consumers want. These companies and "their" governments don't stop invoking the socialist mantras of "fair trade" and "level playing field."

There is no way for bureaucrats to calculate meaningful costs or subsidies. The only known mechanism to get rid of inefficient producers is to let consumers choose and let the free market work, whatever the real or imagined advantages or handicaps of the competitors. What is needed is not the fair or level market, but the free market.

If Canadian taxpayers are foolish or impotent enough to subsidize American consumers, why would the latter complain—and forego the opportunity of getting cheaper airline tickets? Consumers don't complain: it's the domestic producers (Boeing in this case) that do because they fear they will be unable to compete with subsidized companies. If so, let it be. But note that this fear of competitive impotence is not necessarily justified. Subsidized companies are typically less efficient, and their handicap doesn't diminish with time. Moreover, it is far from certain that the next time Bombardier hits a rough patch (it regularly does), the Canadian taxpayers will remain so docile.

One can understand why Boeing and its competitors are playing the political game against consumers. One can also understand why Bombardier is playing the political game against Canadian taxpayers. But we consumers should not be fooled. Competition, even subsidized competition, helps us. These rent-seeking games should not, and would not, be available in a truly free society.


Footnotes
1.

Petition for the Imposition of Antidumping and Countervailing Duties on 100- To 150-Seat Large Civil Aircraft from Canada, at http://ghy.com/images/uploads/default/Boeing-Bombardier-C-Series-Petition.pdf (accessed August 31, 2017).

2.

See Douglas A. Irwin, Free Trade Under Fire, 4th Edition (Princeton NJ: Princeton University Press, 2015). Chapter 5.

3.

Anthony L. Velocci, "Opinion: Why Boeing's Charge of Bombardier 'Dumping' Doesn't Add Up," Aviation Week & Space Technology, May 5, 2017, at http://aviationweek.com/commercial-aviation/opinion-why-boeing-s-charge-bombardier-dumping-doesn-t-add (accessed August 11, 2017).

4.

See, for example, Ronald H. Coase, "Business Organization and the Accountant," in James M. Buchanan and George F. Thirlby, L.S.E. Essays on Cost (1934) (Indianapolis: Liberty Fund, 1999), at http://www.econlib.org/library/NPDBooks/Thirlby/bcthLS5.html, Library of Economics and Liberty, (accessed August 11, 2017). See also Pierre Lemieux, "The Power of Exchange: Ronald H. Coase, 1910-2013," Regulation 36-4, pp. 50-55, at https://object.cato.org/sites/cato.org/files/serials/files/regulation/2014/1/regulation-v36n4-4-edit.pdf (accessed August 11, 2017). Ronald Coase received the Nobel Prize for Economic Sciences in 1991.

5.

James M. Buchanan, Cost and Choice: An Inquiry in Economic Theory (1969) (Indianapolis: Liberty Fund, 1999). James Buchanan also won the economics Nobel Prize in 1986.

6.

Velocci, op. cit.

7.

See "US and EU Both Claim Victory in Boeing-Airbus State Aid Dispute," Financial Times, June 9, 2017; and "Boeing Illegally Given $5.7 Billion in Tax Breaks by Washington State, WTO Rules," Los Angeles Times, November 28, 2016.


*Pierre Lemieux is an economist in the Department of Management Sciences at the Université du Québec en Outaouais. He is the author of A Primer on Free Trade: Answering Common Objections, published at the Mercatus Center. A follow-up book is forthcoming.

For more articles by Pierre Lemieux, see the Archive.

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