27 September 2017

Steve McGuire is Professor of Business and Public Policy and Head of the School of Business, Management and Economics at the University of Sussex. He is a Fellow of the UKTPO.

As Bombardier is bombarded with a 220% tariff increase on exports to the US, the UK needs to wise up. There are two key points from the Boeing-Bombardier dispute that have implications for Brexit. First, leaving the European Union will not affect the sovereignty that national governments already have to dish out state aid for key industries. This will not change. Second, and this is the critical point, trade is bound up in broader political calculations.

Until last week, very few UK citizens knew that a Canadian aerospace company had extensive commercial interests here, let alone that those interests could become caught up in a large-scale trade dispute.  Bombardier employs about 1,000 people at its plant in east Belfast – linked to the production of the wings for its C-series aircraft – and about 4,000 people in total across the Northern Ireland. The production in Northern Ireland is also crucial to smaller aerospace companies that supply components for the wings. A defeat in a trade dispute against Boeing would mean a large fine for Bombardier that would imperil thousands of jobs across Northern Ireland.

The Boeing-Bombardier dispute also offers some points to consider as the UK edges closer to the exit door of the EU. A singular feature of the arguments put forward by advocates of the UK’s withdrawal from the EU has been the freedom this will give the UK to pursue free trade deals around the globe.  The sense of nostalgia conveyed by leading Brexiters has already been extensively criticised.  Contemporary trade agreements are much more about regulatory convergence and thorny issues relating to services trade than they are about goods trade.  Moreover, the way they are negotiated is also more complicated than implied by many Brexit advocates.

The first is that concerns about EU state aid rules restricting the ability of national governments to craft support policies for key industries are off the mark.  Jeremy Corbyn cited this constraint as a reason for leaving the Single Market. Bombardier’s Belfast plant is named by Boeing because the UK government – note, not the EU – developed a launch aid package for the company to secure wing production for the new C-Series jet. Bombardier’s involvement in Northern Ireland goes back decades when the Canadian company acquired Short Brothers.  Government support – both of the soft diplomatic variety and hard cash – have long been central to the relationship.  EU and international disciplines on subsidies are not particularly constraining, as states like the UK are able to write the support packages to meet at least one of the two main criteria: that support should be for pre-commercial research; and/or reflect a prioritisation of regional economic development.  Assistance to a company based in Northern Ireland certainly meets the latter.   So, lesson one is that leaving the EU will not matter much for state aid.  The UK could offer firms support as an EU member, and even as a sovereign state will still face potential litigation.

Panorama fuselage assembly at Bombardier.  Credit: BEIS – https://www.flickr.com/photos/bisgovuk/

Boeing has been involved in trade disputes before and so that the point isn’t so much who wins in the end, but the signal it sends.  So why do it?  Here is lesson two.  Trade is not merely an economic activity but also intensely political.  Boeing – which is the US’ largest exporter and also the largest beneficiary of the United States Export-Import Bank that subsidizes US companies that send goods abroad – is merely the latest large US corporation to seek to reassure President Trump and his voter base that they care about American workers.  Ford and Walmart have also made very public pledges to do more for the US economy and US workers.  Most of Boeing’s production is still based in the US, so being seen to stick up for its workforce makes perfect political sense.  A key Trump objective of the NAFTA renegotiation is a better deal (however defined) for American workers.  Democratic politicians, who need to win back working-class Americans who voted for Trump, are becoming more sympathetic to the nationalist appeal of Trump. Boeing’s largest foreign market is China – which President Trump blames for many of America’s economic ills – so the company has to ensure that access to the Chinese market is maintained.  Picking a fight with a Canadian rival helps build political capital.

The intertwining of politics and economics shouldn’t surprise anyone, but it is a reminder that when a newly sovereign UK emerges from the EU it will need both diplomatic and trade negotiating skills to navigate the international economy.  Prospective trade partners will link issues in complex ways and will be prepared to turn up the political and economic heat to secure their objectives.

In the Bombardier case, the United States has picked a fight with Canada, one of its closest allies and major trade partners.  This, along with the nationalist tone of so much of Trump’s pronouncements on trade, should disabuse the UK from any belief that the special relationship will insulate it from US action in the post-Brexit world.

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory. 

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