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Aeronautics: Canada must avoid a subsidy race

Montreal, August 3, 2017 – The current tug of war between Bombardier and Boeing, with the American company accusing the Quebec aircraft manufacturer of being unduly subsidized, shows that Canada has a strong interest in proposing a new international agreement to avoid a ruinous subsidy race in the aeronautic sector, as suggested in a Viewpoint published today by the MEI.

Boeing has asked the U.S. Department of Commerce to impose tariffs on Canadian airplanes. A decision should be handed down at the end of September.

“Imagine if a country like China, with a much larger tax base, decides to emulate Ottawa’s recent support of the Canadian industry in assisting its own aeronautic sector. Or again Russia, which has a much larger workforce in the sector, and where the stakes are even higher than they are in Canada,” points out Mathieu Bédard, Economist at the MEI and author of the publication.

A country like Canada, whose economy is relatively smaller, would never be able to hold its own in a subsidy race. A large portion of the 55,724 jobs in the aerospace manufacturing industry would be put in danger. As for the “winners” of such a conflict, their taxpayers would pay a heavy price to finance all sorts of corporate support.

“To use a military analogy, a ceasefire would be better for all concerned, especially Canada. In contrast, an ‘arms race’ would be devastating,” says Mathieu Bédard.

International agreements to restrict governmental support have been concluded in the past, like the Aircraft Sector Understanding (ASU), its first version signed in 1986, which has been relatively effective in limiting the expansion of certain subsidies.

Governments have since imagined other measures to help their companies, but an improved version of this treaty, which would provide guidelines for these other types of support, would constitute a credible commitment to dissuade non-signatories like Russia and China from engaging in a subsidy race.

“It is perfectly understandable for aviation companies to try to obtain public funds if they think that their competitors have access to such funds. That’s why this publication constructively aims to encourage the adoption of an international framework that hopefully will put an end to the vicious cycle of subsidies and protectionist measures. Ultimately, this will protect companies like Bombardier in Quebec,” concludes Michel Kelly-Gagnon, President and CEO of the MEI.

The Viewpoint entitled “Avoiding the Aeronautics Subsidy Race Canada Is Sure to Lose” was prepared by Mathieu Bédard, Economist at the MEI, with the collaboration of Michel Kelly-Gagnon, President and CEO of the MEI. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

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Interview requests: Pascale Déry, Vice President, Communications and Development, MEI / Tel.: 514-273-0969 ext. 2233 / Cell.: 514-502-6757 / Email: pdery@iedm.org

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