• 17 Nov 2003
  • Research & Ideas

Lessons from a Nasty Trade Dispute

Even if the World Trade Organization rules in favor of your country’s government, it may not mean the end of a business dispute. HBS professors Rawi Abdelal and Laura Alfaro explain why.
by Cynthia Churchwell

It was in the late 1990s that the finger pointing began between Canadian aircraft manufacturer Bombardier and its Brazilian competitor, Embraer. Each company alleged that the other was receiving government support that provided an unfair competitive advantage. Although Canada first brought the case to the World Trade Organization, the WTO later ruled that both Canada and Brazil needed to make changes to comply with international trade rules. Finally, in March 2003, the WTO gave Brazil permission to impose $248 million in trade sanctions against Canada. But instead of accepting the ruling, it seems likely that Brazil will work with Canada to arrive at mutually agreeable financing packages to be used by each country.

HBS professors Rawi Abdelal and Laura Alfaro recently co-wrote a business case with Brett Laschinger on the volatile subject, titled Bombardier: Canada vs. Brazil at the WTO. To discuss the case's lessons for managers, Abdelal and Alfaro joined forces on an e-mail interview with HBS Working Knowledge's Cynthia D. Churchwell.

Cynthia D. Churchwell: What are the key issues that managers should know about the Canada/Bombardier vs. Brazil/Embraer government subsidy dispute?

Rawi Abdelal and Laura Alfaro: Four key themes emerge from an analysis of this struggle between two firms and their governments. The first is how managers can use international organizations, in this case the World Trade Organization, as leverage in competition with rival firms. A second theme is the importance of the relationship between a firm and the government of the country in which it is based, particularly in the context of the WTO, where the unflagging support of the government is essential to success. A third issue is for managers to understand more systematically how the WTO is reshaping the international business environment.

Finally, managers need to think creatively and analytically about different kinds of government support, both direct and indirect. Although many of us assume that it is always obvious when governments "subsidize" firms, there are a wide variety of both direct and indirect subsidies in industries throughout the world, and careful attention must be paid to the advantages that might accrue to competitors in very subtle ways.

Q: To what extent do you think managers can benefit from seeking assistance from governments and international organizations and in what cases is it warranted to seek such assistance?

A: One crucial, but often overlooked, issue is that managers cannot seek the support of international organizations like the WTO directly. Firms do not have standing at the WTO; only countries do. It is therefore always up to governments to bring cases to the WTO. And that is why it is so important that managers understand that government support for their firm and industry is essential to their success in international legal disputes. We think it is warranted for firms to ask their governments to bring a case before the WTO when all other options have been exhausted, for it will always be a drawn-out, distracting, and financially draining process. But sometimes it is simply absolutely necessary. [A WTO appeals panel ruled last week that U.S. duties on imported steel are illegal, and the EU threatened to impose $2.2 billion in sanctions.—Ed.]

Q: What course of action should managers take before seeking the involvement of the government or international organizations?

A: First, managers should try everything else first, including bilateral, and possibly mediated, talks with their rival firms.

But assuming that these have already failed, the next most important step is to present a fully articulated case to their government. Vague complaints about "unfair" practices will not mobilize the resources of the government. But presenting a compelling, fully researched case might convince the government that it can win. This means hiring the proper consultants and legal advisors, particularly those who are well versed in the workings of the WTO.

The last piece of advice is not really an action plan, rather an issue to recognize and keep in one's mind: Managers must always remember that government leaders have their own agendas and a fixed amount of political capital to allocate to them. If you recognize that your firm or your industry is not one that matters much to the government, then you should not count on much support. WTO rulings are not like domestic court decisions, which are then enforced. If the government that loses a WTO case refused to comply, the only thing a complaining government can do is ask for permission from the WTO to introduce retaliatory trade sanctions in the amount of the damages recognized by the WTO.

Not only does this mean that other industries will get drawn into the dispute, it also implies that the government must be willing to risk an escalation of the struggle. Managers should think carefully about whether their firm is in the government's conception of the national interest; if not, then even a favorable WTO ruling is unlikely to resolve their dispute fully.

Q: What trends to help resolve the situation have you seen developing with market/industry disputes between companies and the involvement of governments and/or international organizations? Have you seen changes over the last five, ten, and fifteen years?

A: In the first years of the WTO, rulings were treated with a great deal of respect by national governments. In the past several years, however, we have seen a number of high-profile cases in which rulings have been essentially ignored, despite retaliatory sanctions. As a result, there is mounting concern that a potentially very useful organization is being undermined by the declining commitments of governments. Still, the organization is very young, and the promise of its management of international trade disputes, as well as the gradual creation of an international common law, is still very much alive.

Q: Can you identify any potential long-term consequences for a company that gets involved in international disputes?

A: Absolutely. Disputes at the WTO take a long time to resolve, and managers must avoid the temptation to focus their energy and strategic thinking on the development of their case, as opposed to their core business concerns. Also, it is a serious step to ask the government to bring one's case before the WTO, and in many cases the rivalry between two firms ends up even more intense.

Q: Considering the March 2003 ruling of the WTO that gives permission for Brazil to impose trade sanctions on Canada, what can managers learn from the outcome of the Canada/Bombardier vs. Brazil/Embraer dispute about the most effective way to handle these types of situations?

A: The dollar value of the Brazilian sanctions authorized by the WTO was far lower than the value of the Canadian sanctions. Thus, although the WTO also issued a ruling against Canadian practices, the balance of its judgment was that the Brazilian government had been doing a great deal more to subsidize Embraer indirectly.

Still, one lesson is that shining a spotlight on the practices of another country's business-government relations inevitably results in the same spotlight on oneself. The Brazilians may well think, as Hamlet did when turning the tables on his adversaries, "For 'tis the sport to have the engineer hoist with his own petard."

About the Author

Cynthia Churchwell is a business information librarian at Baker Library, Harvard Business School, with a specialty in the international economy.