Bombardier Dispute: Downside Risks to Canadian Dollar Likely to be Temporary

Image (C) Bombardier.

The Canadian Dollar might be at risk in the short-term from an aerospace trade dispute but longer-term it is seen as unlikely to weaken, as the US will probably find it harder-than-expected to withdraw from NAFTA.

The recent trade dispute between US-owned Boeing and Canadian-owned Bombardier over the latter's c-series aircraft has potential near-term implications for the Canadian Dollar should the US Commerce Department impose a 219% import tariff on the model.

The threat to the Canadian currency from this particular move is negligible, rather it is the bigger wider implications of the move that might have more impact.

The fear now is the move may be followed by further anti-NAFTA levies from the US, especially on October 5 when the Commerce Department announces a decision on whether to make similar tariffs more wide-ranging.

Is it time to get cautious on the Canadian Dollar then?

Despite causing a short-term sell-off in CAD the dispute is not expected to pose a threat to the Canadian Dollar in the long-term says Credit Suisse Research Analyst, Shahab Jalinoos.

"We would expect any negative near-term impact on sentiment to be short-lived," said Jalinoos, since the endgame for such an escalation in trade relations would be for the US to unilaterally leave NAFTA, however, such a move would be highly unlikely as it would, "be met with aggressive resistance from Congress," says Jalinoos in a note dated October 5.

And given the government's negative track record on getting Congressional approval a unilateral withdrawal from NAFTA would be unlikely to succeed.

"We therefore acknowledge the increase in risks, but retain a bullish outlook on both CAD and MXN," added the analyst.

To those who argue the President has the authority to decide on whether to withdraw from NAFTA without Congressional authority, it appears that whilst that view was common during the election, in the light of further investigation it may be a lot more difficult for Trump to withdraw the US from NAFTA on his own.

”Trump might not have the lawful authority to yank the United States out of the agreement—it’s a matter of debate. Many experts believe that, under Section 125 of the Trade Act of 1974, the president possesses the authority to unilaterally withdraw from trade agreements, including NAFTA. But it’s somewhat uncharted legal territory, and not all agree,” says The Atlantic’s, Matt Ford.

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'Aircraft for Sale'

The original dispute came about when Boeing complained to the Commerce Department back in April that Bombardier had 'dumped' the price of its 75 CS 100 C-series medium range civilian jets to only 19.1m in order to secure a contract with US Delta airlines.

Boeing argued that this was well below the catalogue price of 71m and even below the cost price of 33m, because Bombardier was 'unfairly' subsidized by the government of Quebec, which recently bailed the company to the tune of 1bn.

The Commerce Department upheld the complaint and decided to slap a 219% tariff on the Bombardier jets, despite universal consternation and calls of Trumpism gone mad.

Not only the Canadian aerospace company at the centre of the scandal made its annoyance clear by calling the decision, "absurd and divorced from the reality about the financing of multibillion-dollar aircraft programmes”, but also the UK government who were drawn into the dispute due to their alliance with the Ulster Unionist party for whom the fate of Bombardier's Belfast factory may be at issue.

The US Dollar rose versus the Canadian Dollar after the announcement.

The dispute comes as a sensitive times for trade talks between the members of NAFTA which are about to enter their 4th round with little agreement so far, and reignites the previously high profile Trump protectionist trade agenda, which had gone quiet since the election.

"The announcement came at an awkward time for US-Canada trade relationship, as it fell in between round 3 and the upcoming round 4 (Oct 11-15) of trilateral NAFTA renegotiation talks," says Jalinoos.

"The aerospace industry is still relatively unexplored territory in terms of NAFTA trade disputes, which have historically been concentrated in the dairy and lumber sectors," added the analyst.

The massive potential scope of recently introduced aerospace tariff is seen by markets as an unexpected departure from the otherwise benign tone of NAFTA negotiations so far, and contributed to the USD rallying against both CAD and MXN, however, as mentioned talks are not expected to breakdown meaningfully so longer-term damage to CAD is unlikely.