America’s Protectionist Stance Could Usher in Global Economic Recession
It’s begun. Among the relatively quiet NAFTA talks between Mexico and Canada, the first trade war salvos are being delivered. The latest one was quite a hellraiser, setting off a firestorm north of the border. If global trade continues along this path during Trump’s presidency, a global economic recession could result.
The latest shockwaves to collide with usually friendly trade partners occurred when the Commerce Department imposed 220% import duties on the Bombardier Inc (OTCMKTS: BDRBF) “C Series” plane, siding with Boeing Co‘s (NYSE: BA) assertion that “improper” government subsidies were granted. (Source: “Premier Warns “Quebec Is Attacked, Quebec Will Resist” As US Slaps Massive Tariff On Bombardier Jets,” Zero Hedge, September 27, 2017.)
For those unfamiliar with Canadian industry, Bombardier is one of Canada’s largest and most accomplished aerospace and transportation companies. It designs and manufactures airplanes, railways, buses, and personal transport vehicles. It also has revenues exceeding $16.0-billion annually and employs 66,000 people. That makes Bombardier one of Canada’s biggest employers.
Predictably, the Premier of Quebec (the province most affected), Philippe Couillard, came out swinging. He accused Boeing Co of trying to destroy the company, while asking Prime Minister Justin Trudeau to take a “hard line” against Boeing. Couillard vowed “Quebec would resist” the moves, which could literally destroy the aerospace industry in Canada. (Source: Ibid.)
The latter point is not hyperbole. The Commerce Department decision throws the 75-plane, $5.0-billion “C-Series” order from Delta Air Lines, Inc. (NYSE: DAL) in jeopardy; a critical order for a company with uneven revenues competing in a cutthroat global aerospace market and with $2.0-billion cost overruns in the C-Series model.
Investors didn’t wait around to view what “hard line” measures would be taken. Bombardier’s class A stock finished down about eight percent, while its 2010 euro-denominated bonds fell around the same amount.
Ultimately, it was a reminder of the carnage big corporations face in the murky waters of global trade.
Will the Trade Wars Spread?
Avoiding a global economic recession depends on this very fact. Global Trade accounts for 28% of America’s GDP (2015 numbers), and to emerging market countries, much more. Keeping the gears of trade well-oiled is critical for most economies to keep functioning normally.
But that’s going to be hard to do with an American president who campaigned on Make America Great Again (MAGA) and has rallied against “unfair” trade deals for the past 30 years. We’ve already seen a more aggressive stance between knocking out foreign competitors to American multinationals.
It was only a month ago that Canada was hit with a 20% tariff on lumber, and launched an investigation into some of China’s trade practices. The fact that one of Trump’s first agenda items was to renegotiate NAFTA speaks volumes about Trump’s seriousness towards trade. He’s out to benefit American business—period.
And why not? America has the biggest and broadest consumer market in the world. In Trump’s mind, Washington should be leveraging this advantage rather than getting played by it. With America hemorrhaging tens of billions of dollars annually to Mexico, it’s hard to argue that America isn’t being soft on the global stage.
In the end, we believe this latest salvo to the heart of the Canadian aerospace industry isn’t just a political one-off. It’s the start of a concerted campaign to put American business first, even if the administration has to break a few eggs. This wasn’t some sort of wishy-washy unimportant industry they just targeted. It was a forceful gut-punch to the stomach of a scrawny ally.
But if things go too far, a global economic recession could result—even if American manufacturing gets its desired renaissance.