The UK-US trading relationship: Is a trade war on the horizon?

A trade dispute could escalate between the UK and the US as a result of a high import tax imposed by the US Government on Bombardier’s C-Series jet.

18 October 2017

Boeing and Bombardier have recently made headlines because in September the US Government, in response to Boeing’s complaints, imposed a 220% import tariff on Bombardier’s C-Series jet. Recently, a further 80% tariff has been added – taking the total import tariff to 300%. This places jobs at one of Northern Ireland’s biggest employers at risk – Bombardier’s 4000 strong workforce in Belfast. This week it was announced that Boeing’s rival, Airbus, will receive a majority stake for one dollar in the entity created by Bombardier to produce and market the C-Series jet. It is hoped, in turn, that this structure will avoid the tariff imposed by the US Government by assembling the final parts of the planes for US customers in Alabama. However this comes at a cost for Bombardier: underwriting $700 million of risks over the coming years.

Why is there a dispute?
The dispute originates from Boeing, a Chicago headquartered corporation that makes commercial planes, apache helicopters and space satellites, complaining that Bombardier, the Canadian plane and train manufacturer, received unfair state aid from Canada. Such a complaint originates from the provincial government in Quebec bailing out Bombardier in 2015, which in turn is believed to have helped finance Bombardier’s manufacturing of C-Series aeroplanes which are built in Belfast. An issue did not arise until Bombardier won a contract to supply an American airline with planes, which is when Boeing decided to take issue.

Why should this dispute be of interest to UK businesses?
In light of the Brexit vote in June last year, this dispute will be of particular interest to UK businesses given bi-lateral trade deals are likely to be the way the UK shapes its international trade after it leaves the EU. Companies are now becoming aware of the significance of international trading relationships and the impact that they can have on their profitability – or indeed viability. 

Currently, the US and the UK manages its trade through the bi-lateral trading relationship in place between the US and the EU. This is the world’s largest bi-lateral trade relationship, accounting for more than 30% of global trade in goods and 40% of global trade in services.  While over half of EU-US trade is not subject to customs tax, the half of trade that is has wide variations in taxation. For example, there is only a 3% import tax on raw materials imported into the US but a 30% import tax on clothes and shoes. While tThe 300% import tax on Bombardier’s jets is very high, however it is not the highest import tax that the US implements. High taxation is one way in which the US tries to protect its own industries. For example, it is the world’s fourth largest producer of raw tobacco, which has an import tax of 350%; and the third largest producer of peanuts, which have an import tax of over 130%. 

The UK’s aerospace sector is the biggest in Europe and second globally only to the US. It has a yearly turnover of £32 billion, directly employs 120,000 workers and trains thousands of apprentices. Any future trade deal between the UK and the US will have a significant impact on this industry.

What could this mean for your business?
The headlines indicate that this latest dispute may be the beginning of a trade dispute between the US and the UK. In the late 1990’s, a trade war erupted between the US and the EU caused by the EU allowing banana producers from certain commonwealth countries free access to European markets. Despite the US not exporting bananas to Europe, the US argued that this broke free trade rules and filed a complaint with the WTO. This was found in the US’s favour and the EU ultimately had to change its rules. However during this dispute, the US imposed an import tax of 100% on EU products, risking jobs across the EU. A similar impact may be felt by UK businesses if a trade dispute materialises and then escalates.

If the UK wants to start making its own trade deals with other countries, it will be of paramount importance that strong working relationships are maintained and formed, none more so than with the US. If countries can learn one thing from the ‘Banana Wars’, it is the importance of cooperation. This is particularly true in light of Brexit. However, like Brexit, the outcome of the Boeing Bombardier dispute is yet to be determined as the 300% tariff is a preliminary decision by the US Government, with a final decision to follow in December 2017. The separate International Trade Commission decision will be released in February 2018. In light of the Airbus development, the February ruling may now be of less concern to Bombardier.

This latest dispute is a stark reminder of the consequences of sudden import tariffs and indeed the uncertainty that may arise following sudden changes in trading relationships. As the Brexit negotiations progress, it is vital that businesses involved in importing or exporting goods or services to foreign countries take an active interest in trade developments and are prepared for whatever trade agreements are put in place.

If you would like advice about trading arrangements between the UK and other countries or protecting your business during the Brexit process, please contact Paul Carlyle, Alison Rochester, or your usual Shepherd and Wedderburn contact.