Could Trump's trade war cripple the U.S. defence industry's dominance of the Canadian market?
The Defence department sees trouble ahead. The Europeans see opportunity.
If you read Defence Minister Harjit Sajjan's briefing notes, and all of the internal warnings he has received over the last year, you'd know that the current trade fight with the U.S. over steel and aluminum is his nightmare come true.
For European defence contractors, long frustrated with Canada's penchant for buying American, it could be a dream come true.
Multi-billion dollar defence procurement programs — building everything from fighter jets to warships to armoured vehicles — are all heavily dependent on the price of steel.
Canada's military has a long list of equipment needs, which the Liberal government set down in writing this week at the annual Ottawa arms expo known as CANSEC.
Higher prices on already sky-high equipment are a given, in light of the fact the U.S. is imposing tariffs of 25 per cent on steel and 10 per cent on aluminum — and Canada is countering them with tariffs of its own.
Procurement Minister Carla Qualtrough said the federal government has "contingency plans" in place to absorb the impact.
"We prepare for this kind of thing," she said. "So, there is money set aside, whether it be for tariffs or for interest rate fluctuations, so we can proceed with our defence procurement should there be additional costs associated because of tariffs or other unexpected circumstances."
Europe as the affordable alternative
What Qualtrough is talking about is the standard financial contingency that is built into every defence contract.
Whether it will be enough to offset short-term increases in the cost of procurement programs — such as the one for maritime helicopters — which are in the process of delivery over the next few years remains to be seen.
Defence officials warned Sajjan last year that the kind of action we saw Thursday would endanger the U.S.share of the defence market in Canada.
"The Government of Canada buys more military hardware from the U.S. than anywhere else, promoting interoperability and security of supply," said the May 12, 2017 assessment.
"The Canadian government purchases significant defence goods and services from the U.S. ($1.44 billion annual average). Accordingly, any significant cost increase on U.S. defence end products could limit imports to Canada."
European arms makers at CANSEC made a special point this year of emphasizing the affordability of their products compared with those from the U.S.
As recently as three years ago, Europe's fighter jet manufacturers — Airbus, Saab and Dassault — were privately and quietly weighing whether it was worth it for them to bid on Canada's full CF-18 replacement given the former Conservative government's fondness for the F-35 and the Liberal government's courting of Boeing for interim Super Hornets.
Now, some of those European manufacturers are saying privately that it's a whole new ball game in Canada.
Boeing, which had its own bruising trade fight with the Trudeau government over Bombardier, said time will tell whether the trade fight drives Canadian defence dollars to Europe.
"It's hard to say at this point," said Scott Day, Boeing's international vice-president of communications. "We're going to watch the impacts, how it affects our business. Boeing stands behind free and fair trade."
The company's top brass, however, moved quickly Thursday night to dispel the notion the tariffs would result in an automatic price increase.
"Boeing relies on U.S. suppliers for approximately ninety per cent of our end-use aluminum," said an email statement.
"Because of the way we manage that portion of our supply chain, we do not see these steel and aluminum tariffs as having a material impact on our business, though we continue to evaluate the broader impact of these actions on our suppliers and global trading relationships."
A defence relationship on the ropes
With billions of dollars in contracts at stake, both in the short and long term, Innovation Minister Navdeep Bains said the government is also going to study "the intended and unintended consequences" of the tariff fight on the defence industry.
It will be hard to avoid the bottom line, however, and companies bidding for Canadian work will want raw materials and supplies at the best price.
"Businesses are going to go where they think they're going to find the best cost-effective solution. They're going to go where they can be competitive," said Bains.
It is entirely possible the Trudeau government and the Trump administration will be able to negotiate an end to their trade war before the bills on the really big ticket items — fighter jets and frigate replacements — start to come due in the early 2020s.
What is more significant — and what the Europeans have their eyes on — is the damage being done to the special defence relationship that Canada and the U.S. have each nurtured since the early days of the Second World War.
"Let me be clear: These tariffs are totally unacceptable," said Prime Minister Justin Trudeau.
"Canadians have served alongside Americans in two world wars and in Korea. From the beaches of Normandy to the mountains of Afghanistan, we have fought and died together."
Foreign Affairs Minister Chrystia Freeland was even more blunt: "It's insulting."
For the Europeans, dreams are made of that kind of rhetoric.