Federal budget resurrects 'economic harm' warning as fighter jet contract nears

Defence contractors, perhaps one in particular, were served notice in Monday's budget that the Liberal government will penalize companies that try to do the country economic harm. The policy was a feature of a nasty trade dispute between Ottawa and U.S.-based Boeing over three years ago. Its resurrection comes as Boeing is one of the bidders for the replacement of the RCAF's fighters.

Liberal government threatens to penalize companies that try to do economic harm to Canada

A Royal Australian Air Force (RAAF) F/A-18F Super Hornet drops two flares as it performs during the T150 Defence Force Air Show on October 15, 2016, in Townsville, Australia. Boeing's military division was on track to sell the Royal Canadian Air Force a handful of Super Hornet jet fighters in 2017, but the deal went sideways. (Ian Hitchcock/Getty Images)

The federal budget fired what appears to be a warning shot at defence contractors — perhaps one in particular — by resurrecting an old policy statement in a move that may well signal where Canada's fighter jet replacement competition is headed.

A little more than three years ago, in the thick of a trade dispute involving Montreal-based Bombardier, the Liberal government laid down a marker that became known informally in procurement circles as the "Boeing clause."

Under the sub-headline of "Ensuring Procurement Partners Respect Canada's Economic Interests," the policy was reanimated and restated in Monday's fiscal plan, much to observers' surprise.

"In December 2017, the government announced that the evaluation of bids for the competition to replace Canada's fighter aircraft would include an assessment of bidders' impact on Canada's economic interests, and that any bidder that had harmed Canada's economic interests would be disadvantaged," said the budget.

"Budget 2021 confirms the government will apply this policy to major military and Coast Guard procurements going forward." 

Boeing vs. Bombardier

Boeing, with its corporate headquarters in Chicago, is one of the biggest military and civilian aircraft-makers in the world. The company filed a trade complaint with the U.S. Commerce Department in April 2017 alleging its business was being harmed because Bombardier's C Series passenger jet was unfairly subsidized by the Canadian government.

Bombardier's CSeries commercial jet takes off on its first flight in Montreal on Sept. 16, 2013. Rival Boeing filed a trade complaint with the U.S. Commerce Department in April 2017 alleging its business was being harmed because Bombardier's jet was unfairly subsidized by the Canadian government. (Ryan Remiorz/The Canadian Press)

At the time, Boeing's military division had been on track to sell the Royal Canadian Air Force a handful of Super Hornet jet fighters — a deal that went sideways and was eventually cancelled as the trade dispute deepened. 

At the height of the bitter feud and after a 300 per cent duty was imposed on Bombardier jets, the Liberal government produced a policy that stated companies that harmed Canada's economic interest would be at a disadvantage.

The dispute was eventually resolved when Boeing's European rival Airbus stepped in and agreed to buy a stake in the C Series jet, eventually taking a controlling ownership share in the project. 

The so-called Boeing clause faded into the woodwork — until Monday's budget.

WATCH | Finance minister introduces Liberal budget:

Finance Minister Chrystia Freeland delivers the federal Budget speech

2 years ago
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Here is the complete budget speech as delivered in the House of Commons on Monday, April 19.

"Companies found to have prejudiced Canada's economic interests through trade challenges will have points deducted from their procurement bid score at a level proportional to the severity of the economic impact, to a maximum penalty," the budget says.

"This policy will protect Canada's economic interests and make sure the government does business with trusted partners who value doing business with Canada."

The policy revival comes at an interesting time.

A US Air Force F-35A is one-of-three competitors in the bid to replace Canada's CF-18s. (Murray Brewster/CBC)

Boeing, with its Super Hornet, is one of three aerospace companies bidding on $19-billion full replacement of all of the air force's aging fighter jets — a competition in which the bids are currently being evaluated with an eye to signing a contract next year.

Industry surprised

The country's defence industry association is taking notice.

"It's unusual to see this kind of thing in a budget," said Christyn Cianfarani, president and chief executive officer of the Canadian Association of Defence and Security Industries (CADSI), a national business association.

"Most countries don't have such a formal economic interest test, and if they do, it would be part of their procurement rules, strategy, or requirements on a particular acquisition."

Public Services and Procurement Canada was asked to clarify the reasons for resurrecting the policy. No one from the department was immediately available for comment late Monday.

"We're going to be seeking more clarity on this in the coming days," said Cianfarani.

"We're not aware of this test having changed any procurement outcomes in Canada since it was announced in 2017. Since CADSI doesn't get involved in specific procurements, we can't assess whether this policy would penalize one bidder over another on any given project."

Softening the political ground?

Defence procurement expert Elinor Sloan, a political science professor at Carleton University, was just as surprised to see the statement in the budget. She wonders whether the Liberal government is softening the political ground for its impending contract award.

There is a lot of political baggage associated with the fighter jet purchase. During the 2015 federal election, the governing Liberals promised to ditch a Conservative-era plan to buy Lockheed Martin built F-35 stealth fighters and purchase something cheaper, such as the Boeing Super Hornet, and plow the savings back into a revitalized navy. 

"My guess is they are having to walk back that clear policy statement," said Sloan, who was also searching for more clarity from the government. "I can only read into this that [F-35 Joint Strike Fighter] will be chosen. They need to find a way, a political way, to justify this about-face."

Gripen, a Swedish fighter aircraft, performs on the second day of Aero India 2017 at Yelahanka air base in Bangalore, India, Wednesday, Feb. 15, 2017. Saab offered the latest version of the fighter as part of its pitch to sell Canada a new fleet of fighter jets. (The Associated Press)

Aside from Boeing and Lockheed Martin, the Swedish aircraft-maker Saab is also in the competition, with the latest model of its Gripen jet fighter.



Murray Brewster

Senior reporter, defence and security

Murray Brewster is senior defence writer for CBC News, based in Ottawa. He has covered the Canadian military and foreign policy from Parliament Hill for over a decade. Among other assignments, he spent a total of 15 months on the ground covering the Afghan war for The Canadian Press. Prior to that, he covered defence issues and politics for CP in Nova Scotia for 11 years and was bureau chief for Standard Broadcast News in Ottawa.

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