Canada and Brazil: The Trade War

The aerospace industry in general has a history of being subsidized by their home governments, be it Airbus or Boeing for large jets and Bombardier and Embraer for regional jets. The US-EU dispute over the subsidies given to Airbus and Boeing is a similar case in that it involved the aerospace industry, however, they came to an agreement that was WTO compliant and at the same time allowed for a certain amount of subsidies. Canada and Brazil, on the other hand, are in the middle of a trade war, with Canada having recently banned the importing of Brazilian beef on the ostensible grounds of preventing mad-cow disease.

The Brazil-Canada dispute has its genesis in a new segment of the civilian aircraft market - regional jets flying routes less than 1,000 km in an average travel time of an hour. Regional jets are relatively new and have been driving the smaller propeller-driven aircraft out. This is largely due to two reasons: As airlines expanded using the hub and spoke system, they came to rely on regional jets to feed traffic to the hubs. Another reason is consumer demand for quieter, faster and versatile airplanes, which fits the regional jets perfectly.

Bombardier, based in Montreal, has emerged as a global player and national champion, ably assisted by the Government of Canada as well as the Province of Quebec. The government of Canada has taken a keen interest in developing a domestic aerospace sector. It has set up various programs such as TPC to help fund the hi-tech sector, including aerospace. Embraer has emerged from being a state-owned company that is governed by private law into the leader in regional jet sales. It has had some bad times in the past, but is now firmly in the black.

The basic dispute between Canada and Brazil is over the various subsidies and guarantees given to these manufacturers. Canada supports Bombardier with various guarantees and subsidies and Brazil had a program called PROEX, to encourage exports of Embraer products. After much hand wringing, Canada asked the WTO to set up a panel to examine PROEX, calling it an export subsidy, in 1998. Brazil immediately responded by filing cases against various Canadian programs including export assistance and R&D funding. After deliberations and appeals, the WTO panel decided that both Canada and Brazil were in violation of trade rules. In 2003 Brazil was allowed to impose $US 248 million in trade sanctions. However, according to Professors Abdelal and Alfaro of the Harvard Business School, it is unlikely such sanctions would actually be imposed. They believe that a deal would be worked out to the benefit of both.

As far as the WTO is concerned, in the beginning, rulings were treated with a great deal of respect by national governments. In the past several years, however, we have seen a number of high-profile cases in which rulings have been essentially ignored, despite retaliatory sanctions. As a result, there is mounting concern that a potentially very useful organization is being undermined by the declining commitments of governments. Still, the organization is very young, and the promise of its management of international trade disputes, as well as the gradual creation of an international common law, is still very much alive.

From the perspective of firms, four key themes emerge from an analysis of this struggle between two firms and their governments. The first is how managers can use international organizations, in this case the World Trade Organization, as leverage in competition with rival firms. A second theme is the importance of the relationship between a firm and the government of the country in which it is based, particularly in the context of the WTO, where the unflagging support of the government is essential to success. A third issue is for managers to understand more systematically how the WTO is reshaping the international business environment.

Finally, managers need to think creatively and analytically about different kinds of government support, both direct and indirect. Although it is assumed that it is always obvious when governments "subsidize" firms, there is a wide variety of both direct and indirect subsidies in industries throughout the world, and careful attention must be paid to the advantages that might accrue to competitors in very subtle ways.

The question that arises from the analysis is, why hasn't there been a negotiated settlement or bilateral agreement of some sorts in this case? In the 1980's, Strategic Trade Policy emerged as a key concept in the revival of Industrial Policy as an instrument of state action. Busch (1999) evaluated