Richard Aboulafia: April 2017 Letter

Dear Fellow Northern Border Watchers,

One easy mistake to make, in war or business, is emphasizing tactics over strategy. Broadly, Tactics are the Hows: plans and execution; Strategy is the Whys: the long-term goals and agendas. They are very different. The best illustration of this mistake is Boeing’s Canada trade complaint, recently filed against Bombardier’s CSeries. I understand why Boeing thinks its tactics will work; I’m completely baffled about the strategy behind it.

Boeing maintains that Bombardier is selling the CSeries in the US at a price that’s lower than the cost of its production. That, of course, is standard procedure for the first 50-400 jets built for any jet program (400 in the case of the 787, thanks to program accounting), so it’s easy to poke fun at this complaint. Still, I understand Boeing’s frustration. The CSeries is the Western world’s most government-supported jetliner, and Boeing thinks Bombardier is using this government support to enable a product that wouldn’t otherwise happen (see my May 2016 letter).

And again, the tactics behind Boeing’s complaint are sound, because of the political climate. Trump Administration is eager to fight trade wars with just about anyone, especially the US’s best friends. The complaint also fits as part of Boeing’s understandable desire to stay on Trump’s good side (which, to be fair, is a strategy, if a problematic one; see my February 2017 letter).

What’s far less certain is Boeing’s strategy with this Canada complaint. Consider a few important strategic principles which imply that this complaint is seriously ill-advised:

First, strategy involves considering Second Order Effects. Or, what happens next because of the tactical move? One consequence of Boeing’s complaint: the Canadian Government gets mad at them. Canada decided to start negotiations this year for 18 Super Hornets, which would make them only the third export customer after 20+ years of trying. Since Canada only needs 65 fighters, the odds are that they’ll stick with the Super Hornet for the other 47. Unless, that is, they decide to re-think because of this complaint, and look again at an F-35 buy. Canada is also a natural customer for P-8 maritime patrol aircraft and many other Boeing military products. Unless, that is, they start looking to anybody but Boeing for their defense needs.

Another second order effect from Boeing’s complaint: Delta will get mad at them. Boeing has effectively just told the world’s second largest airline (and therefore one of their biggest customers) that the price they’ve negotiated for a new jet is somehow improper. If Bombardier loses this complaint, then either Delta needs to pay more for its jets, or it will need to cancel its contract. Two weeks after Boeing filed its complaint, Delta signed for 30 A321ceos instead of 737-900ERs. Delta will also buy ~70 single aisle jets later this year. Likely result: Airbus wins.

Second, strategy involves seeing the bigger picture. Right after Boeing filed the trade complaint it placed full-page ads in major newspapers with a picture of Trump at their South Carolina plant, and the line “Thank you, President Trump, for your commitment to US manufacturing and to making American businesses more globally competitive.” The bigger picture here is that Boeing’s adversaries are going to see cronyism at work. It’s hard not to see

this. Until Trump, Boeing was losing the important battle for Ex-Im bank restoration, in large part because the Tea Party thought it was “cronyism.” If Trump falls from power the original Tea Party will be back, without a Trump filter. And they’ll have plenty of reason to see cronyism.

The Canadians will have no problem seeing cronyism. Again, look at the bigger picture. Boeing’s new best friend has been on a bizarre attack against Canada lately, putting the country on the same list as non-steam aircraft carrier catapults. Trump has attacked Canadian softwood lumber exports and dairy products (“Canada, what they’ve done to our dairy farm workers, it’s a disgrace,” Trump said in April). Boeing is now part of Trump’s anti-Canada jihad. This again means serious damage to Boeing’s efforts to sell anything to Canada.

Third, strategy involves considering Risk-Reward Ratios. That is, will the potential benefits of a move outweigh the real or possible negative consequences of that move? By this standard, Boeing’s complaint looks absurdly horrible. So far, Delta is the only US carrier scheduled to take any CSeries jets. They are buying the CS100, a 100-seat version against which Boeing does not compete. Even the larger CS300 only competes with the 737MAX7, which is primarily a Southwest plane, and Southwest isn’t abandoning the 737 anytime soon (the other MAX7 customer, by the way, is Canada’s Westjet). Also, a dumping complaint doesn’t create any kind of global precedent, so a win here would mean nothing against Airbus jets, or anyone else’s.

Those are the unimpressive (and hypothetical) rewards of Boeing’s trade complaint: protection for a completely marginal part of BCA’s product line, and only in the US market, which has not been particularly fruitful for the CSeries anyway. The value of these rewards is somewhere between nil and inconsequential. The risks: loss of 18-65 Super Hornet orders, loss of a P-8 customer, other Canadian military orders, and of course scores or even hundreds of lost Delta jetliner orders. That’s tens of billions of dollars at risk. I’d suggest that the folks at Boeing behind this complaint might want to do a little back-of-envelope math on this.

Consider, too, the risk of larger consequences. Trump may understand international business, but he has no experience with international trade. Every time Trump or another populist politician rolls back free trade, US export businesses, and the economy, suffer. Boeing Commercial depends (directly or indirectly) on export customers for 80-85% of its sales. Air transport (passengers and cargo) also depends on open borders. Open borders are good for Boeing. Trade barriers and a series of retaliatory trade actions are toxic. This, by the way, is another reason for Boeing to re-think its bizarre support of the Border Adjustment Tax.

One can sympathize with Boeing’s frustration in having to compete with massive government subsidies, but being right is not the issue. Rather, the issue is that Boeing has prioritized tactics over strategy; a single deal over their bigger market interests. If it wins this complaint, that would be a tactical victory. And a big strategic mistake.

May Aircraft Binder updates include the World Aircraft Overview, the Airline fleets appendix, Eurofighter, Mirage 2000, K-8, H135, and both Challenger reports. Have a great month.

Yours, ‘Til Tariffs Cause My Family’s Maple Syrup Bills To Skyrocket,

Richard Aboulafia