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Why are Boeing and the U.S. in a trade war with Canada and the U.K.?

A Bombardier C Series jet sits in a Montreal hanger. (AP)

In a fierce trade dispute that involves three governments, U.S.-based aerospace manufacturer Boeing Co. and its Canadian rival Bombardier Inc. are facing off. Boeing has accused Bombardier of accepting billions in “unfair” Canadian subsidies that allowed the company to undercut its rivals on price. The Trump administration recently sided with Boeing, slapping Bombardier with a hefty fine. Commerce Secretary Wilbur Ross hailed it as an affirmation of Trump’s “America First” policy. Bombardier calls it “divorced from the reality about the financing of multibillion-dollar aircraft programs.” And the United Kingdom — which has a Bombardier manufacturing site — has gotten into the fray.

1. What’s the story behind this dispute?

In the early 2000s, Bombardier began developing a new type of airplane. The company’s goal was to serve a niche travel market — one that demands a seating range of 100 to 140 seats, which is smaller than many commercial jets. The result was the C series — a generation of airplanes that was also more technologically advanced and fuel efficient that its larger competitors.

However, building a new plane isn’t cheap. Bombardier spent more than $6 billion to develop the C series. The Canadian government initially backed its development with $340 million. Then production delays and cost overruns forced the Canadians to pony up more. Bombardier eventually received another $1.3 billion more in investment and repayable loans and guarantees from the Canadian government.

2. How is Boeing involved?

Bombardier assured the government that its airplanes would sell. Production delays, falling fuel prices and weariness from typically conservative airline executives made this challenging. But in 2016, Delta Air Lines agreed to buy to 135 of these C series jets. It was the largest order ever placed for the C series, which Bombardier execs called a “watershed moment for [its] game-changing aircraft.”

Boeing argues that Delta got these airplanes for $19.6 million each. The problem? That’s 75 percent lower than the plane’s list price — and according to Boeing, some 40 percent lower than Bombardier’s true production costs, which it estimates at $33.2 million each.

Boeing eventually filed a trade complaint, made possible by the U.S. Anti-Dumping Act of 1916, with the Commerce Department and the U.S. International Trade Commission. The complaint accuses Bombardier of using subsidies to “dump” its product into the U.S. market.

3. How has the Trump administration responded?

Trump’s Commerce Department has come down hard on Bombardier. After reviewing Boeing’s complaint, it slapped Bombardier with a 300 percent anti-dumping duty, to be collected when the airplanes are imported into the United States. This effectively raises the price of each airplane to close to its list price. Although Delta Air Lines is meant to pay the tariffs, the airline has indicated it is unwilling to do so.

However, Commerce’s decision only takes effect if the U.S. International Trade Commission — a U.S. government agency that can act against unfair trade practices — also agrees that Canada did unfairly subsidize the planes. Such a decision would require Boeing to prove that it was harmed by Bombardier’s receipt of subsidies or its below-cost sales. That decision is expected in 2018.

4. Was Boeing harmed?

Bombardier argues that Boeing had long abandoned the market served by the C series and that therefore the Chicago-based company could not have been harmed. Delta Air Lines and many industry analysts agree.

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The reality is more complicated. Boeing and Bombardier do produce different types of airplanes. But production purpose often takes a back seat to sales price. For example, United Airlines was previously interested in buying Bombardier’s jets. These airplanes would have helped the carrier better serve smaller passenger markets. Yet United ultimately chose Boeing airplanes because of price — even though the planes it bought were larger than the airline needed. Put simply, price matters. Therefore, Boeing’s claim that it lost business owing to subsidies may have merit.

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Critics of the U.S. aerospace giant see a double standard. Boeing, they argue, has long benefited from direct and indirect state support. One U.K. lawmaker recently called Boeing the “king of corporate welfare” and a “subsidy junkie.”

The feud has fueled tensions among the United States, Canada and the United Kingdom. Both Canada and the United Kingdom have threatened to not purchase military aircraft from Boeing until the dispute is resolved. Both countries stand to lose thousands of jobs should the C series deal fall through. The United States isn’t in the clear either. Bombardier’s supply chains extend deep into the United States and the company employs over 23,000 Americans. A diplomatic resolution is important than ever.

 Ashley Nunes is a research scientist at MIT’s Center for Transportation and Logistics.