We all knew it was coming. It was just a question of when the first shot would be volleyed and who would fire it. It was fired this week, not so much by Boeing Co (NYSE:BA), but on behalf of it. Canada’s Prime Minister Justin Trudeau is willing to block the country’s business with the American aircraft maker as long as Boeing was prepping its lawsuit against Bombardier Inc (OTCMKTS:BDRBF).
The specifics: The U.S. defense and civilian aircraft manufacturer is claiming that Canadian rival Bombardier was unfairly subsidized by the Canadian government, making it more competitive than it would have been on its own when selling to U.S. air carrier Delta Air Lines, Inc. (NYSE:DAL). Muddying the waters is the fact that the United Kingdom is siding with Canada in its tiff with Boeing, cautioning that it too would pare back orders from the contractor if Boeing continued to press the matter.
In the meantime, owners of BA stock are caught in the middle of an argument they had nothing to do with.
Fair, or Unfair?
Just to stave off any politicization of what you’re about to read, I keep my political leanings to myself and they have nothing to do with any analysis I may offer. Presidents and political leaders from both sides of the aisle have contributed to as well as combated trade problems. While they should be addressed, I have no desire to second guess anyone’s tactics.
In other words, don’t make this something it isn’t. While there’s no denying President Trump may have fanned the flames with a strong “America first” bent, the stage may have been set long ago, boxing him into a corner.
That being said, it’s going to get ugly and heated in the meantime, but I’m also optimistic that these uncomfortable conversations have to happen sooner or later for the good of all.
The matter began coming to a head in May, when Boeing accused Bombardier of selling 75 C-series airplanes to Delta at “absurdly low prices.” The U.S. manufacturer specifically noted the cheap planes were only made available because of public-supplied funding. Boeing also pointed out—and this is where the United Kingdom’s interest takes shape—that the UK made a loan to Bombardier that was in effect an illegal subsidy.
Oh yeah, there also just happens to be a Bombardier factory in Ireland; the United Kingdom had something to gain as well from supporting Bombardier’s deal-making.
And yet, while BA shareholders have been and could continue to suffer from the impasse, this really isn’t about how airplanes get made.
It’s a Political Statement
Sure, on the surface this appears to be about Boeing and Bombardier. There’s far more to it than that though. Trudeau as well as the UK’s Prime Minister Theresa May are not only getting involved, they’re getting vocal. This is about Trump’s prioritization of American companies and protectionist policies that ultimately jeopardizes the $500 billion trade deficit the United States incurs every year by buying foreign-made goods without a complete reciprocation.
Hawks will argue that the nation would be better served by spending that money at home and growing our own economy, but the matter isn’t that simple. The reality is, by supporting other economies rather than our own, we’re still ultimately better off on a net basis. Plus, the U.S. can arguably afford to run a deficit; we’re still one of the wealthiest countries in the world.
That’s the long way of saying it may pay us more to support and subsidize the rest of the world even if it somehow doesn’t feel right.
Conversely, it would be naive to suggest that all $500 billion of our annual trade deficit has to be passed along to overseas trade partners. The fact that the national debt has now swollen to $20 trillion is hard evidence the country could most definitely use some more tax revenue, buying American goods and services would absolutely help on that front.
The question is, what’s the ideal number? What’s the optimal trade deficit to prevent a global recession but sidestep economic weakness in the United States? Nobody really knows. It’s somewhere above $0 and less than $500 billion, most likely. Trump is seeking to find that optimal number.
It’s going to be a messy discussion to be sure, maybe even downright ugly at times. But, it’s a discussion that has to happen. While the U.S. can continue to run a trade deficit, we can’t run one indiscriminately and in perpetuity. The White House sent that message a few months back. Canada and the UK fired back with one of their own. Now it’s time for all three countries, and all nations for that matter, to start telling one another the truth about what’s sustainable and what isn’t.
While I’m expecting torture in the short run, I’m optimistic about the long-term result. I’m also sympathetic to owners of BA stock, who’ve found themselves in the political crossfire.
Bottom Line for BA Stock
Truth be told, in the grand scheme of things the matter won’t make much of an impact either way.
While Bombardier certainly isn’t going to undo its deal with Delta, it’s unlikely to repeat such a deal now that it knows Boeing, and the world, is watching closely. For better or worse, litigation is a new normal business tactic. Boeing’s going to be fine either way. The real story here is how three of the world’s leading trade partners handle the inevitable impasse. Will they retreat into exclusive alliances like the one the United Kingdom and Canada seem to be laying the groundwork for? Only time will tell.
The impasse does raise one pressing question though: If not Canada, the UK (and obviously not Mexico, and probably not China), who might the U.S. partner up with?
This is getting real interesting, real fast. Let’s hope cool, wise heads ultimately prevail.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.