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bombardier-boeing trade feud

The Bombardier C Series 300 performs its demonstration flight during the Paris Air Show, at Le Bourget airport, north of Paris on June 15, 2015.Francois Mori/The Canadian Press

The U.S. government has imposed duties of nearly 220 per cent on imports of Bombardier's C Series planes into the United States, a move that threatens to exacerbate trade tensions between the two countries and undermine sales prospects for the Canadian company's most important aircraft.

In a preliminary decision issued Tuesday, the U.S. Department of Commerce ruled to put in place the countervailing duties on C Series airliners, siding with Chicago-based Boeing Co. in its complaint against Montreal-based Bombardier Inc. Duties would be payable when Bombardier begins its first C Series deliveries to the United States.

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"The U.S. values its relationship with Canada but even our closest allies must play by the rules," Commerce Secretary Wilbur Ross said in a statement.

"The subsidization of goods by foreign governments is something that the Trump administration takes very seriously and we will continue to evaluate and verify the accuracy of this preliminary determination," Mr. Ross said.

The development was one of two on Tuesday that increased pressure on Bombardier's turnaround effort.

In the other, German train maker Siemens AG announced plans to merge with France's Alstom SA to create a pan-European rail juggernaut, setting aside a separate merger proposal from Bombardier.

In Ottawa, Foreign Affairs Minister Chrystia Freeland said the U.S. duties are "clearly aimed at eliminating Bombardier's C Series aircraft from the U.S. market." She said the C Series directly supports 23,000 U.S. jobs and that the federal government would continue to raise the issue "at the highest levels" in the United States. "We will always defend Canadian companies and Canadian workers against unfair and costly protectionism," Ms. Freeland said.

Bombardier said it disagreed with the ruling. The duties imposed are even higher than those Boeing demanded. Boeing had initially demanded 80 per cent.

"The magnitude of the proposed duty is absurd and divorced from the reality about the financing of multibillion-dollar aircraft programs," Bombardier said. "This result underscores what we have been saying for months: The U.S. trade laws were never intended to be used in this manner and Boeing is seeking to use a skewed process to stifle competition and prevent U.S. airlines and their passengers from benefiting from the C Series."

Commerce's decision immediately throws into question whether Delta will move forward with its deal to buy 75 C Series planes. The Atlanta-based airline's order, which would have the first of those C Series planes delivered next spring, was a key sale to a marquee customer that cemented the airliner's viability internationally. Delta said late Tuesday it was confident that Boeing's complaint will be rejected at a later stage.

The ruling could also hurt Bombardier in its ability to secure further orders for the C Series, not only in the United States but elsewhere. The flagship aircraft is the company's big bet to drive future revenue in its commercial aerospace business and getting it to market at a cost of $6-billion (U.S.) nearly bankrupted it. Although the plane is widely considered a technical achievement and has earned praise from early operators, winning new C Series sales has been difficult for Bombardier as rivals move aggressively to stop the 100– to 150-seat airliner before it grabs a solid toehold.

"The really critical issue here is what pricing and profitability are they going to be able to achieve on [the C Series] program" if rivals are using whatever tools they can to prevent Bombardier from making major sales, said David Tyerman, an analyst at Cormark Securities.

The C Series is essentially sold out through 2020 based on orders received so far from carriers including Swiss and Korean Air. Bombardier is in talks with China's three biggest airlines and leasing businesses on buying the C Series and aims to close deals ahead of a trip to China next month by Prime Minister Justin Trudeau, a company official told Reuters.

U.S. airlines may be unwilling to strike a deal for C Series planes as long as the threat of duties looms, analysts say. Non-U.S. carriers may stall for the same reason or try to squeeze Bombardier for steeper pricing discounts if they sense the plane maker is more desperate for orders given the impediments selling into the United States. Bombardier hasn't booked a major order for the C Series since the Delta deal in April, 2016.

"You take the U.S. market out of the demand side because of expensive duties and it becomes hard to get the right price elsewhere," said Fadi Chamoun, an analyst with Bank of Montreal. For the C Series business case to work, Bombardier needs to supply 100 planes a year, he said. Analysts have estimated the United States would account for about 35 per cent of that demand.

Commerce's decision stems from a petition filed earlier this year by Boeing. In it, the U.S. plane maker alleges that the Canadian company sold the 75 C Series planes to Delta at "absurdly low prices" while benefiting from unfair subsidies from the Canadian, Quebec and British governments. It asked the U.S. government to impose countervailing and anti-dumping duties on C Series planes imported into the United States.

Ottawa earlier this year pledged $372.5-million in "repayable contributions" to Bombardier to help finance two aerospace development programs, including the C Series. Quebec separately invested $1-billion (U.S.) for a 49.5-per-cent equity stake in the C Series program.

Bombardier denies it did anything wrong, saying the financing it received adheres to global trade rules. It argues Boeing wasn't even in the running on the Delta sales competition, doesn't make a plane of that size and is now is trying to stifle the technological innovation the C Series brings to the industry.

The Trudeau government has threatened to cancel a $6.4-billion contract to buy 18 Boeing-built Super Hornet jets in an attempt to force Boeing to back off. The British and Quebec governments are flexing their political muscle to try to win a settlement with the American plane maker to protect thousands of Bombardier jobs in their jurisdictions. Some U.S. lawmakers have also joined the fray, noting that about half the parts content of the C Series jet is produced in the United States.

Tuesday's decision is just one step in a lengthy process. After this preliminary ruling on countervailing duties, a separate Commerce decision is expected around Oct. 4 on anti-dumping duties. Final determinations by the U.S. International Trade Commission and the issuance of orders to impose the duties are not expected to be concluded until next year.

To win its case, Boeing will have to prove that it suffered "material injury" from Delta's decision to pick C Series planes. That might be a tough sell given Boeing enjoys an enviable backlog of 4,400 737s and is set to hike production to meet soaring demand. It chose deliberately to abandon the market for the smaller planes Delta wanted to focus on larger jets.

"Boeing wasn't injured by Bombardier, they were injured by their decision not to serve this market," said Gerard Scimeca, an attorney and vice-president of Consumer Action for a Strong Economy, a free market consumer advocacy group. "The fact that this is the basis of their trade complaint makes about as much sense as Birkenstock suing an Italian fashion designer."

With reports from Adrian Morrow, Paul Waldie and Barrie McKenna

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