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Cablegate: Treasury Discussions with Canada Regarding Export Credits

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PP RUEHGA RUEHHA RUEHMT RUEHQU RUEHVC
DE RUEHOT #0748/01 2681953
ZNR UUUUU ZZH
P 251953Z SEP 09
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC PRIORITY 9882
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RHEHAAA/WHITE HOUSE WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC
RUCNCAN/ALL CANADIAN POSTS COLLECTIVE

UNCLAS SECTION 01 OF 04 OTTAWA 000748

SENSITIVE
SIPDIS

STATE FOR E, EEB/TRA, EEB/BTA, WHA/CAN

STATE PASS USTR (SULLIVAN AND MELLE)


TREASURY FOR YUAN AND TVARDEK

E.O. 12958: N/A
TAGS: EIND EFIN EAIR ECON EINV PREL CA
SUBJECT: Treasury Discussions with Canada Regarding Export Credits
for Bombardier C-Series Aircraft

SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY

1. (SBU) SUMMARY: On September 2, Treasury DAS for Trade and
Investment Sharon Yuan, Treasury Director for Trade Finance Steve
Tvardek, Embassy EMIN, Embassy Commercial MC and Senior ECON FSN met
with officials from key GOC departments and representatives from
Canada's export financing agency to discuss the issue of Canadian
export financing in U.S. markets for Bombardier C-Series aircraft.
The central USG message, based on interagency talking points, was
that export financing for Bombardier's new larger aircraft would
almost certainly trigger pressure for matching domestic financing
for Boeing aircraft in the U.S. Canada was urged to adopt the Home
Market Understanding (HMU) utilized by the U.S. and European Union
for more than 25 years, which prohibits the use of export credits
into the markets of producers of competing aircraft or "home
markets". The Canadian officials seemed to appreciate the
opportunity to explore the broad implications of Bombardier's entry
into a new market area but their immediate willingness to adopt the
Home Market Rule or similar measure seems unlikely. A key potential
issue for Canada was their wish to see Brazil and other
aircraft-producing nations similarly bound.

Joint Meeting with Finance, DFAIT and PCO
-----------------------------------------

2. (SBU) On September 2, Treasury, Embassy EMIN, CMIN and ECON FSN
held a joint meeting with GOC officials from the Departments of
Finance, Foreign Affairs and International Trade (DFAIT), and the
Privy Council Office(PCO). Treasury outlined concerns based on
interagency talking points regarding possible export credit to
Bombardier C-Series (BCS) aircraft via Export Development Canada
(EDC). In particular, if EDC were to support BCS exports to the
U.S. market, it would create an uneven playing field because there
is no domestic financing available for Boeing. Within the current
economic climate, Canadian export credits would create a competitive
disadvantage for Boeing in its home market (and similarly for Airbus
in the U.S. market as well as in its own home markets). Both U.S.
and the European Airbus consortium countries are fully implementing
the OECD Aircraft Sector Understanding (ASU) including its "Purpose"
section which: "avoids distortion of competition among
Participants..." by adhering to the HMU which proscribes export
financing into producer or "home" markets for competing aircraft.
Treasury urged that Canada, as a new producer of a competing
aircraft, adopt the HMU as well.

3. (SBU) Of secondary importance is the issue of classification for
BCS - Category 1 or Category 2 - to be discussed again at the ASU
technical meeting in Paris on October 1, 2009. While the U.S.
expects to have a final position on classification for the October
meeting, Treasury stressed that the primary concern is that the BCS
is, and is being marketed as, a direct competitor to Boeing's 737
family of aircraft, as well as the Airbus 318, 319, and 320 series,
regardless of classification.

4. (SBU) Canada responded that the ASU provides a satisfactory
process for new aircraft financing for Canada and their current
position was to wait and see how the classification process unfolded
Qposition was to wait and see how the classification process unfolded
in October before considering additional actions.

5. (SBU) Treasury stressed that the uneven playing field would force
the USG to explore a variety of options, including possibly
providing domestic countervailing financing to Boeing. This could
trigger a contagion effect in which the USG and the Europeans could
be forced to become significantly involved in domestic aviation
financing and Canada could find itself in a race to the bottom.

6. (SBU) Canada responded that it is an experienced player in export
credit financing and is not trying to carve out a position of
competitive advantage outside of existing international rules.
Furthermore, competition in regional jets from Brazil/Embraer has
been a key factor guiding Canadian decision making (including
adherence to the ASU because Brazil was also bound by the
agreement). At several points in the exchange, Canadian
interlocutors stated that Canada would be strongly opposed to tying
its hands on export financing for the BCS if Brazil were not
similarly constrained. Canada considers the Embraer 195 to be a
competitor to the BCS, especially in the U.S. market. Treasury
reasserted its understanding that Bombardier was marketing the

OTTAWA 00000748 002 OF 004


C-Series to U.S. airlines as an alternative to Boeing 737s, and that
this was supported by the plane's technical characteristics.

7. (SBU) When asked, GOC officials confirmed that since Canada had
previously given domestic financing to Bombardier to match Brazil's
Embraer financing for Canadian buyers, it would be prepared, without
major concern, to do so again if Ex-Im financed Boeing sales to
Canada in competing aircraft.

8. (SBU) Canada noted that the HMU was precipitated by problems with
the disequilibrium between Boeing and Airbus and that a similar
disequilibrium exists for Canada vis-`-vis Brazil and Embraer.

9. (SBU) Canada expressed concerns that the HMU was unwritten - an
opaque agreement among governments that could foster protectionism
and anti-competitive behavior and might be susceptible to anti-trust
actions. Treasury responded that the spirit of the HMU was to
foster a more competitive environment among developed economies by
requiring market financing, in accordance with the principles of the
ASU preamble. While a legal regime would be optimal it was not
possible given the EU's regulatory considerations. Furthermore,
despite its unwritten status, the obligations were clearly
understood by participants and the HMU has been in operation for
over 25 years. Although Canada questioned how it was possible to
uphold the spirit of the ASU by going outside of it. Treasury
offered a clarification that the HMU did not contradict the ASU and
was fully in line with it, including its "Purpose" preamble.

10. (SBU) Canada asked a number of follow-up questions:
-- Was there was any pressure from U.S. airlines to retain foreign
export credit? Treasury responded that the USG's concern was
competition in aircraft financing, not airline operations.
-- Does any new U.S. legislative action have to be taken in order to
authorize domestic Ex-Im financing? Treasury responded in the
negative. A legal structure already exists to allow immediate
action.
-- Are Boeing and Airbus engaged in self-financing activities?
Treasury affirmed that this was probably the case. Canada noted that
the larger U.S. producers have more self-financing options than does
Bombardier.
-- What is the US content in the BCS? Estimates around the table
suggested that American content exceeds 60 percent.

11. (SBU) The Canadians were asked to outline the nature of the
relationship between EDC and GOC and also the procedures for
financing. They responded that EDC was an arm's-length Crown
Corporation but that the GOC would occasionally consult regarding
particular transactions. This point was clarified during the
subsequent meeting with EDC where it was revealed that on Corporate
Account transactions (source of Bombardier financing), EDC operates
with a great deal of autonomy. There is also a "Canada Account"
where high-risk projects of a national interest may be funded. GOC
provides funds and decision-making for Canada Account transactions
and EDC operates as a conduit.

Concluding Messages
-------------------

12. (SBU) Comment: Canadian participants in the inter-ministerial
meeting seemed divided between those willing to consider broader
economic and foreign policy interests and those narrowly-focused on
Bombardier's interests. End comment.
QBombardier's interests. End comment.

13. (SBU) Treasury underscored the importance of acting quickly
because of aggressive Bombardier sales campaigns unrolling in the
U.S. If Bombardier were promising to secure EDC financing , GOC
might find itself in the position of having to either support or
repudiate these offers before having carefully considered the
policy issue. Similarly, once USG interventions were set in motion
in response to Canadian financing, it would be very difficult to
return to the status quo because aggressive manufacturers might
capture the process. To this, a Finance official responded,
"Message received." Canada proposed to continue a dialogue on the
issue with U.S., while Treasury emphasized that such a dialogue
should lead to a fruitful conclusion.

14. (SBU) A number of the Canadian officials stated that any
arrangement that involved denying access to export credits would be

OTTAWA 00000748 003 OF 004


a "non-starter," especially in the context of a global credit
crisis. One official attempted to frame the issue from the Canadian
perspective during a period when governments around the world were
taking extraordinary steps to save domestic economies and opening up
new sources of credit. He opined that the Minister of Finance would
"go ballistic" if they told him that the US was asking Canada to
stop making lawful interventions in the aviation credit market at a
time when the US is "intervening everywhere else to Canada's
detriment". (Comment: Canada has been particularly hard hit
recently by Buy American provisions for sub-federal spending, Black
Liquor credits and softwood disputes in the forest sector, and
Country of Origin Labeling in the meat sector. In addition, the
large domestic financing programs in the U.S. in response to the
recession are seen by Canada as in some cases providing effective
subsidization to U.S. domestic industries. End comment)

14. (SBU) Some of the Canadians present expressed a preference for
'tweaking' the ASU rather than adopt the HMU in order to find an
acceptable solution. While there seemed to be good will on both
sides, Canada expected that other aircraft-producing states would
have to be brought to the table before the issue was resolvable.

Meeting with Export Development Canada
--------------------------------------

15. (SBU) Similar to earlier presentation to the GOC
inter-ministerial group, Treasury set out concerns regarding BCS
export credits in the U.S. market. Canada was encouraged to let
aircraft compete on their own merits in a competitive environment.


16. (SBU) EDC made assurances that no commitments had been made to
Bombardier regarding C-Series financing and none will be made until
the aircraft is classified. However, a comfort letter has been sent
to a potential BCS buyer outlining an ASU-compliant financing
process in general terms. After classification, EDC will look at
potential sales on a case-by-case basis using current risk
assessment and transaction evaluation tools. EDC noted that the ASU
provides certainty of credit but not its price.

17. (SBU) When asked, EDC said it did not have an opinion regarding
the possibility of Ex-Im financing for competing Boeing aircraft
into Canada. EDC confirmed that it had supplied funds to Bombardier
for aircraft other than the BCS to counter Embraer sales in Canada.

18. (SBU) EDC asked whether potential U.S. domestic financing for
Boeing would match EDC financing for Bombardier. Treasury affirmed
that this would likely be the case.

19. (SBU) EDC echoed GoC concerns about Canada's vulnerability if
Brazil were not similarly bound by HMU and the plausibility of
Embraer 195 as a substitute for BCS. Treasury responded that in the
Southwest Airlines case, the airline was looking to replace 737s,
not regional jets. Treasury made that point that there would
inevitably be overlaps at the margins between Category 1 and
Category 2 aircraft- breaking points would be contentious but that
the BCS's main competitors were Category 1 aircraft.

20. (SBU) The meeting concluded with EDC speculation on future
prospects for Bombardier. In the past, Bombardier had received EDC
financing for around 40 percent of its sales but now it is up around
Qfinancing for around 40 percent of its sales but now it is up around
75 percent. EDC estimated that the financial strength of Bombardier
was not sufficient for them to finance C-Series purchases on their
own. Also, Bombardier's business jet business would soon be
eclipsed by the C-Series - with United States and European Union as
key markets.

21. (U) Attending the meetings for USG Treasury: Sharon Yuan, Deputy
Assistant Secretary, Trade and Investment; and Steve Tvardek,
Director, Trade Finance. Embassy Ottawa: Eric Benjaminson, Minister
Counselor for Economic Affairs; Stephan Wasylko, Minister Counselor
for Commercial Affairs and Laura Dawson, Senior Economic Specialist.

22. (U) Attending for GOC Finance: Jim Haley, General Director,
International Trade and Finance; Lise Carrihre, Senior Chief,
International Trade and Finance; John Layton, Chief, Trade Rules,

OTTAWA 00000748 004 OF 004


International Trade and Finance; and Kim McIntyre, Economist,
International Trade and Finance. GOC DFAIT: Ian Burney, Assistant
Deputy Minister, International Business Development, Investment and
Innovation; Julie Insley, Director, International Trade Portfolio
and Strategic Analysis (including international financing); Nadine
Mawle, Senior Policy Analyst, International Trade Portfolio and
Strategic Analysis; and Peter McLachlan, Commercial Policy Analyst.
GOC Privy Council Office: Kathleen Cooper, Policy Analyst, Economic
and Regional Development Policy. EDC: Glen Simpson, Senior Advisor,
Financing Centre of Expertise and International Relations Team; Taso
Georgiou, Director, Aerospace Team; and Caroline Dabrus, Director,
Financing Centre of Expertise and International Relations Team.

23. (U) This cable was cleared by Treasury DAS Yuan and Director
Tvardek.

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