Bombardier duties threaten to ratchet up tensions in NAFTA talks

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The Trump administration's decision to hammer Bombardier with a 220-per-cent tariff on its C Series jets is threatening to devolve into a blow-for-blow battle between Canada and its largest trading partner, cranking up tensions amid the renegotiation of the North American free-trade agreement.

Commerce Secretary Wilbur Ross announced preliminary countervailing duties late Tuesday as his colleague, trade tsar Robert Lighthizer, sat down to dinner with his Canadian and Mexican counterparts at the third round of NAFTA talks in Ottawa.

The tariff is ostensibly meant to protect Boeing, which accuses Bombardier of being unfairly subsidized by the Canadian, Quebec and British governments. But Mr. Ross's duty rate goes far beyond the 80 per cent Boeing requested.

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The move could give the United States added leverage at the NAFTA table.

It could, however, backfire by toughening Canada's resolve on the already-thorny matter of the Chapter 19 dispute-resolution provision.

And it could also serve a narrower purpose: Ratcheting up pressure on Canada to agree to a deal with the United States to limit Bombardier's competitiveness.

Foreign Affairs Minister Chrystia Freeland said on Wednesday she pressed Mr. Lighthizer on the matter during NAFTA talks. She said she has already spoken several times with Mr. Ross on the matter and was scheduled to speak with him again, and she met last week with Boeing president Marc Allen in New York.

"We all know that it's an administration that's openly protectionist. It's an administration that talks openly of an 'America first' policy. That's the reality Canada has to work with," she told reporters in Ottawa. "We will continue to work directly on each issue. It's what we have to do."

Trade Minister François-Philippe Champagne doubled down on Prime Minister Justin Trudeau's threat to retaliate by shredding a plan to buy Boeing Super Hornet fighter jets.

"We will not do business with a partner who is not reliable and Boeing today showed that it is not a reliable partner in this matter," Mr. Champagne said before a caucus meeting Wednesday.

In Quebec City, Premier Philippe Couillard encouraged the federal government to hold a "very hard line" and not allow "a bolt, a part and certainly not a plane" from Boeing to be imported into Canada until the fight is resolved. "Quebec is being attacked. Quebec will resist," he told reporters in a prepared statement.

The politicization of what is normally an administrative process for settling trade disputes is very unusual, said Chad Bown, a former White House and World Bank trade economist. But U.S. President Donald Trump set a precedent earlier this year by personally speaking out on the softwood-lumber dispute.

"Normally, government leaders don't get involved in this stuff. It's purely a bureaucratic process that plays out behind the scenes," said Mr. Bown, senior fellow at the Peterson Institute for International Economics, a Washington-based think tank. "But Trump opened the door to this back in April when he weighed in on softwood."

Mr. Trump is probably hoping the dispute gives the United States leverage in NAFTA talks, allowing it to hold out the option of a resolution in exchange for concessions at the bargaining table, Mr. Bown said.

Mr. Trudeau's gambit – making an overt threat early in the process – appears to be an attempt to end the dispute by setting out the consequences to the United States, Mr. Bown said. Still, the Prime Minister risks provoking a tit-for-tat fight.

The Canadians are "trying to head off that outcome, trying to make clear 'We'd both be better off not doing this to each other,'" he said. "It's certainly risky. I'm not sure that escalating this is the right way to go."

The fight could harden Canada's position in NAFTA talks: Ottawa has promised to protect the Chapter 19 dispute-resolution system, which Canada could use to challenge the duties on Bombardier. Canada doesn't trust the United States to make fair anti-dumping and countervailing duty decisions, and sees Chapter 19's binational panels as a safeguard.

"The smartest thing the United States could do is not impose duties, then they could say 'justice is blind,'" Dunniela Kaufman, a Washington-based trade lawyer who specializes in U.S.-Canada business, said in an interview.

Mr. Lighthizer tried to play down the effect the fight would have on NAFTA. "I'm not saying it doesn't have an effect on relationships, it does – but not on this negotiation," he said on Wednesday.

The United States' anti-dumping and countervailing duties system is meant to protect American companies from unfair competition by punishing foreign firms that benefit from unfair advantages. The preliminary countervailing duties announced Tuesday are only the first step. Mr. Ross must next decide whether to also levy preliminary anti-dumping duties as well. Then, the U.S. International Trade Commission will decide whether to make these penalties permanent.

Punishing duties would almost certainly close the U.S. market to sales of Bombardier's C Series, putting at risk thousands of aerospace jobs in Canada, Britain and the United States if alternatives aren't found.

One possibility would be for the United States and Canada to negotiate a so-called suspension agreement, similar to the ones that cover tomatoes and sugar imported from Mexico by the United States. Under such a deal, Washington would lift the duties in exchange for C Series jets being sold above a specified price or limits on the number of jets sold in the United States.

Daniel Ikenson, director of trade-policy studies at Washington's free-market Cato Institute think tank, said it is hard to find a parallel for this standoff. The closest comparison, he said, is how China deals with other countries by using public procurement to mete out punishments or rewards.

"It is unusual for market economies and friendly neighbours to engage in this kind of leverage," he said. "Trudeau would probably have been a little bit embarrassed to deal with [former president Barack] Obama this way. But leaders think this is how you have to deal with Trump."

With a report from Reuters