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More Harm than Good? The Economic Assessment Clause and Canadian Defence Procurement

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Image credit: Master Corporal Gary Calvé, Canadian Armed Forces photo

POLICY PERSPECTIVE

by Iris Liu
October 2021

The author would like to thank her supervisor, Dr. David Perry, and colleague, Charlotte Duval-Lantoine, for their patient guidance and advice. Also, a special thanks to Marcia Mills, who kindly provided professional knowledge on the topic.

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Table of Contents


Introduction

In 2017, the trade dispute between Boeing and Bombardier generated much attention in the aerospace industry. The Canadian government’s involvement in the process increased the widespread dissemination of the story among the public. At the core of the federal government’s involvement was that “[Canada] do[es]n’t do business with a company that is busy trying to sue us and trying to put our aerospace workers out of business,” to quote one of Prime Minister Justin Trudeau’s public speeches on the matter. As the story continued to heat up, the Canadian government decided to issue a policy to assess the bidders’ impact on Canada’s economic interests, as an addition to the technological and financial criteria for evaluating the bid to replace the aging fighter aircraft. Many speculated that the move was an attempt to pressure Boeing to drop its complaint. Although it was proposed as an informal rule at the time, the 2021 federal budget reintroduced the policy. The explanation of this policy was done over a few lines, which are too little to explain the policy in detail. The original text is:

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.

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

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

This new evaluation criterion is problematic in different ways; despite clearly stating that its goal is to protect and benefit Canada’s economic interests, it could in fact have the opposite effects.

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The Boeing vs. Bombardier Dispute

Boeing and Bombardier were in a trade dispute over the competition to sell passenger jets to Delta Airlines. Boeing accused Bombardier of receiving illegal subsidies from the Canadian government to offer the C Series airliners at a price below the production cost. The case was eventually brought to the U.S. International Trade Commission (ITC). Boeing claimed that Bombardier’s unfair practices had violated the anti-dumping rule, which would essentially harm the U.S. aerospace industry. As a remedial solution, Boeing asked that tariffs be imposed on Bombardier’s C Series commercial jets in the U.S. In time, it became international news and intensified the conflict of Canada-U.S. interests on the issue.

Trudeau responded firmly, arguing that Boeing was putting both Canadian jobs and the economy at risk and that Canada should not be in business with a company that engages in such actions. Canadian government officials also stated that Canada would refuse to sign the C$6 billion procurement contract for Boeing Super Hornets as a stop-gap measure during the replacement of Canada’s aging jets “as long as Boeing pursues its complaint against Bombardier.”  In order to increase the pressure on the American company, Canada sought opportunities with Australia to buy second-hand fighter jets to fill the Canadian Armed Forces’ (CAF) capability gap. The move aimed to satisfy the need for additional fighter jets and to press Boeing to drop its complaint to the ITC. After the U.S. Commerce Department proposed to impose a nearly 300 per cent tariff against Bombardier products, Canada cancelled the deal to buy Boeing’s 18 Super Hornets and purchased Australia’s used fighter jets as an interim solution.

According to news reports at the time, Canada viewed Boeing as pursuing unfair and aggressive trade actions against the Canadian aerospace sector, arguing that Boeing winning the contract would mean Canadian workers losing their jobs. The Canadian government also alleged that Boeing’s complaint against Bombardier hindered the growth of a competitor, thereby betraying the promise of openness to trade and disrupting the public order of free trade. Among Canada’s responses to the dispute, the economic impact assessment is the one that could have a long-lasting effect on the bidders — as the budget statement reads: “any bidder that had harmed Canada’s economic interests would be disadvantaged.” 

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What’s the Problem?

In practice, procurements under trade agreements should be carried out in transparent, fair and non-discriminatory manners that do not create trade barriers. Procurement projects not covered by trade agreements are expected to follow the principle of fairness that is the foundation of all contractual relationships. To uphold these principles, evaluators must disclose the evaluation criteria clearly to bidders prior to submission. However, the budget statement does not explain or define the economic impact clause, connect it to the procedure or indicate how it factors into the overall evaluation. The only elements mentioned are the 2017 incident, the confirmation of the policy’s application in the future and how evaluators can take into account historical disputes. This statement about the policy’s implementation is far from sufficient. The prohibition on using undisclosed criteria during a bid evaluation requires the government to define and explain what elements will determine the bidder’s impact on the economy.

Speaking to the media, Christyn Cianfarani, the president and CEO of the Canadian Association of Defence and Security Industries (CADSI), an industry association which provides its members with access to policy insights and business opportunities, said it is “unusual to see” this kind of clause in a budget. She went on to explain that most countries do not have an official economic test that is not included in procurement rules and requirements. In a press release in 2017, Public Services and Procurement Canada (PSPC) declared it would develop the new economic assessment criterion as an ongoing procurement tool “through appropriate consultations.” However, four years later, consultations have yet to occur1 and the department has yet to provide clarifications and procedural details. In addition to the absence of a definition, the feasibility of measuring the economic effect of a company’s bid on Canada remains vague. The fact that the evaluation depends on research and publicly available statistics also requires scrutiny. 

News with headlines such as “Trudeau Threatens to Block Boeing from Federal Contracts over Bombardier Dispute,” referring to the cancelled contract to buy the Boeing Super Hornets in 2017-18, relates Boeing’s exercise of its legal rights to what Canada perceived as an action to harm Canadian interest. With the absence of a formal explanation and the mention of the 2017 dispute in the 2021 budget statement, it is easy for companies to infer that the government will equate economic harm with filing complaints to the international trade tribunal. Intentionally or not, companies could interpret this policy as preventing them from exercising their rights.

The economic impact assessment claims to protect Canadian bidders without considering its impacts on Canadian businesses more broadly. The policy was set up partially as a tool to force Boeing to drop its case against Bombardier, warning that similar behaviours would face negative consequences. It nevertheless worried smaller, Canadian suppliers. Prior to the official cancellation of Boeing’s 18 Super Hornet contract, 10 Canadian-based companies urged Trudeau to stop blocking the purchase of Boeing’s jets. As Canada was using the Super Hornet contract as a bargaining chip, companies who had business relationships with Boeing and members of the Canada Boeing team intended to warn the government that hurting Boeing might also damage Canada’s aerospace industry. Quebec-based Héroux-Devtek, a company of fewer than 2,000 employees and one of the most important global suppliers of landing gears for the aerospace market (one of its achievements is manufacturing the landing gear for the Apollo 11 mission), was one of those Canadian companies. Regardless of the government’s strong opposition to Boeing, on the ground companies saw promising opportunities for a successful and mutually beneficial win for Canada, Canadian companies and Boeing. As Boeing reminded Canada in 2017, cancelling the Super Hornet deal would affect 17,000 local jobs. The amount of benefits Canada received over the years from Boeing could outweigh the harm its dispute against Bombardier may have brought. Doyletech’s analysis based on 2015 and 2019 data has validated Boeing’s continued contribution to the Canadian economy through inputting investments and supporting jobs. It would be irrational to set up a clause that disadvantages companies who have a dependent relationship with certain bidding prime contractors because they had sought trade complaints. This policy blocks the prospect of future business development in the name of economic well-being.

Last, applying the economic assessment clause in future defence procurement projects directly contradicts Canada’s pro-trade policies. Canada had not only played a leading role in both the World Trade Organization (WTO) and trading blocs such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), but also ratified 15 free trade agreements in force with 49 countries. Global Affairs Canada’s State of Trade 2020 noted that “trade remains crucial to the prosperity of Canadians” since it is responsible for over 60 per cent of the economy and 3.3 million Canadian jobs. A serious consequence of this policy is that it will discourage bidders from pursuing their legal rights when encountering a trade dispute. This no doubt stands against the principles outlined in trade agreements. Further, the soon-to-be-applied economic assessment clause confuses the bidders because it is an unclear, undisclosed evaluation criterion. Thus, it deters some of them, and particularly smaller companies with limited resources, from bidding altogether. Countries are allowed to limit the acquisition of certain products to local resources when negotiating trade agreements – an example would be the Buy America Act exception – but governments are not expected to abuse security or economic reasons to act in contrast to what is agreed upon. This policy would clearly be an impediment to Canada’s trade-driven economy. According to Michael Byers, a Canadian legal scholar whose work focuses on Canadian foreign and defence policy and who is a contributor to the Globe and Mail, it is unwise to be tough on Boeing. The consequences will undermine the rules regulating fair, open and transparent procurement processes and Canada’s efforts and interest in the international legal system. This would ultimately damage Canada’s reputation as a reliable procurement and trade partner. By trying to take a tough approach on Boeing and other companies that would enter disputes with Canadian companies, the government is likely to hurt the Canadian economy in the long term.

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Conclusion

Applying the economic-assessment clause in future defence procurement projects runs counter to the values of international trade that Canada claims to champion. This new policy will be administered at the cost of impeding both Canadian and foreign businesses. Even though this policy has been made official, reconsidering or refining it needs to be a priority in the government’s procurement agenda if Ottawa wants to procure the best capabilities for the CAF and the defence of the country.

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End Notes

1 Discussion with defence industry member, August 20, 2021.

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About the Author

Iris Liu is currently pursuing a Master of Arts degree at the University of Ottawa in Public and International Affairs. Previously, she graduated from Carleton University with a Bachelor of Arts Honours degree in Law in 2020. Iris was a co-op student at the Canadian Global Affairs Institute and worked as a legal assistant in both a private firm and The Landlord and Tenant Board Tribunal during her undergraduate years. Her research interests are public policy developments, international trade, and Canada-China relations.

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