{"id":22159,"date":"2017-11-14T01:56:17","date_gmt":"2017-11-14T06:56:17","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/bombardiered-by-tariffs-the-challenges-of-protectionism-in-the-age-of-trump\/"},"modified":"2017-11-14T02:19:12","modified_gmt":"2017-11-14T07:19:12","slug":"bombardiered-by-tariffs-the-challenges-of-protectionism-in-the-age-of-trump","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/bombardiered-by-tariffs-the-challenges-of-protectionism-in-the-age-of-trump\/","title":{"rendered":"Bombard(ier)ed by Tariffs: The Challenges of Protectionism in the Age of Trump"},"content":{"rendered":"

Setting the Scene<\/strong><\/p>\n

This September\u2019s ruling by the U.S. Department of Commerce, on the ethicality of Delta\u2019s recent order of jets from Bombardier (a Canadian aerospace manufacturing competitor of U.S.-based Boeing), has highlighted the impact that the current environment of heightened protectionism is having on foreign companies with international supply chains attempting to sell into America.<\/span><\/p>\n

Some background: Delta, historically a large Boeing customer, recently placed an order for 125 of Bombardier\u2019s new C-Series 110-seat jets. In response, Boeing argued that Delta only placed said order because Bombardier priced the jets well below expected market value in an attempt to buy U.S. market share. <\/span>The U.S. Commerce Department, \u201cwith the support of U.S. President Donald Trump,\u201d took up Boeing\u2019s complaint [1]. In its report, the Commerce Department recommended a 300% tariff be applied to the import of each Bombardier jet, reflecting Boeing’s assertion that its Canadian rival sold jets at \u201cabsurdly low prices to undercut Boeing and win its business\u201d [2]. On the news, Bombardier\u2019s stock plunged <\/span>16 percent \u201cfor its biggest intraday decline in two years\u201d [3]. <\/span>The slide was reflective of the numerous reasons why the prospect of a 300% import tariff is of huge concern to the company. With respect to this order specifically, Delta has indicated it will not bear the burden of the tariff and would likely not complete the order at the additional cost, increasing the likelihood of the sizable order – on Bombardier’s most costly project to date – being rescinded [4]. On a broader scale, the precedent set by this ruling makes it considerably harder for Bombardier to pitch other American airlines on importing aircraft built through international supply chains at competitive prices, which imperils its hopes of growing share in the consolidated, two-player U.S. market.<\/span><\/p>\n

Bombardier Reacts<\/strong><\/p>\n

Directly following the shock, Bombardier\u2019s management team enacted a number of strategic moves to constrain the impact of the ruling. A month after the decision, Bombardier agreed to sell 50.01% interest in the C-Series program to Boeing\u2019s main competitor Airbus, a move that limits upside in a program that Bombardier invested $6 billion in but also grants the program a much better chance of survival by providing it with access to Airbus\u2019 \u201cimproved economies of scale and better sales network” [5]. Most importantly, Airbus will be moving production of the C-Series from Montreal to Mobile, Alabama, with the hopes of avoiding the recommended import tariff by moving the final stage of the supply chain to the States. Such a move could also curry favor with the Trump Administration by giv<\/span>ing it the ability to cite job creation numbers, a statistic the president frequently touts as a metric of political success. To further highlight the C-Series\u2019 U.S. ties, Bombardier President Fred Cromer has publicly noted that compared to \u201d<\/span>Boeing’s globally distributed supply chain for aircraft…more than half of a U.S.-assembled C-Series will come from U.S. sources\u201d in the hopes that this will bolster the company’s argument to fight off the tariffs [6].\u00a0<\/span><\/p>\n

What Next?<\/strong><\/p>\n

While these strategies seem to be an effective way for Bombardier to de-risk the liability of the international nature of its supply chain and operations in the short-term, it is not clear whether there is merit in adopting significant mid- and long-term strategies to protect against the business risks of U.S. isolationism. The danger in currently creating any mid- or long-term strategies with respect to trade is that U.S. politics have proven over the past century to be both cyclical and reactive. Since the 1947 adoption of the 22nd Amendment limiting presidential terms, only one party has held the presidency for more than eight consecutive years (the Republican Party from 1980-92) [7]. Additionally, the current president\u2019s approval rating sits at 37% – the lowest approval ratings a president has held in this point in his presidency. It thus stands fairly likely that the next election could usher in a president with starkly different views on economic isolationism [8]. Thus, Bombardier has to walk the fine line between maximizing current shareholder value (as they are currently doing through the Airbus stake and Mobile final assembly) and investing in long-term technology to create best-in-class products while avoiding long-term deals that could disadvantage the company in 10 years\u2019 time if the country’s protectionist fever breaks.<\/span><\/p>\n

The questions I leave my classmates with are: <\/span><\/p>\n