Bombardier's stock drops as the U.S.-Canada trade war intensifies. Here's what Trump is targeting next.

By Victor Reklaitis

The trade battle escalates further as Trump bans Canadian goods from U.S. government contracts

Shares of Bombardier, known for its business jets, headed lower after a new trade move by President Donald Trump.

Shares in Bombardier lost altitude Tuesday after President Donald Trump threatened to ban the Canadian aircraft manufacturer unless it makes new commitments to build in the U.S., opening a new front in his trade war with America's northern neighbor.

Trump made the threat in a social-media post on Monday afternoon, just a few hours before new Canadian tariffs took effect on $20 billion worth of American goods.

The president didn't stop there, ratcheting up pressure on Canada by banning imports of Canadian dairy products, some alcoholic beverages and motorcycles, and banning U.S. government purchases of Canadian products.

Bombardier says it's already in 20 states

In trading on Tuesday, Bombardier's U.S.-listed stock (BDRBF) (BDRAF) dropped more than 2%. Its Toronto-listed shares (CA:BBD.A) (CA:BBD.B) were down as much as 8% but closed with smaller losses.

Trump's announcement is "a negative for sentiment" for Bombardier because it could "create near-term uncertainty around U.S. customer commitments," RBC Capital Markets analysts said in a note.

At the same time, RBC noted that Trump has targeted the company before. In January, he floated decertifying some Bombardier business jets and proposed a 50% tariff on all Canadian-built aircraft because Canada wasn't certifying some planes made by American manufacturer Gulfstream, a General Dynamics (GD) subsidiary. That situation was "ultimately defused when Canada moved to certify the relevant Gulfstream models," the analysts said.

In his post during the Labor Day holiday, Trump wrote: "NO MORE SELLING BOMBARDIER IN THE UNITED STATES! Their products aren't good enough! Over 50% of their revenue comes from the United States - They live off American Buyers, American Companies, American Airports, and American Service - All while Canada blocks our GREAT American Banks, and Companies, throughout the U.S.A. They even blocked Gulfstream Aerospace from doing business in Canada - Completely unjust and unfair! That Era is OVER! If they want our Market, they must build here, and stop treating America like a 'piggybank.' BUY AMERICAN. FLY ON AMERICAN AIRLINERS."

Bombardier said in a statement that its "plan is to continue to invest in our people, our customers and the communities in which we operate across the country." It noted that its aircraft "create tens of thousands of U.S. jobs through the company's growing American footprint as well as within its supply chain made up of approximately 2,800 American companies across 47 states." Bombardier also touted a "direct employment presence in more than 20 states," including a facility in Red Oak, Texas, and another in Los Angeles, plus plans for a new facility in Fort Wayne, Ind.

How the trade war could escalate further

Trump on Tuesday said in a social-media post that he was ordering Canadian goods to be removed from U.S. government contract lists "unless Canada restores full and fair reciprocity for American Farmers and Companies."

Canada's new tariffs on $20 billion worth of American goods - which went into effect early Tuesday - are that country's previously announced response to the new 50% tariffs on $20 billion worth of Canadian imports that Trump imposed last month. Trump is using Section 338 of the Tariff Act of 1930, after the Supreme Court in February ruled against his use of the International Emergency Economic Powers Act of 1977 to justify tariffs.

Late Tuesday, Trump moved to ban the import of dairy products, some alcoholic beverages and motorcycles from Canada, to go into effect Sept. 29.

The Trump administration could make further use of Section 338 authorities or increase its tariffs targeting Canada that rely on Section 232 of the Trade Expansion Act of 1962, said Chris Krueger, an analyst and managing director at TD Cowen's Washington Research Group.

The Trump administration's Section 338 tariffs on Canada could be expanded given they cover about 5% of Canadian imports so far, and officials have suggested entirely blocking some imports via Section 338, Krueger said.

"Courts may eventually intervene, but 338 gives Trump broad tariff leverage in the meantime," Krueger wrote.

Another possible move is doubling Section 232 auto tariffs to 50% by January and extending such import taxes to additional sectors, according to the TD Cowen analyst.

There is a risk of harm to American aircraft manufacturers, analysts at Capital Alpha Partners said in a note. They described Trump's announcement aimed at Bombardier as a "call for a U.S. boycott."

"Boycotts can beget other boycotts, so there could be global risk to sales of U.S. business jets depending on how sentiment and behaviors change," the Capital Alpha analysts wrote. In addition, Trump's move could further stiffen Canadian opposition to buying Lockheed Martin (LMT) F-35A fighter jets that are not on firm contracts, the analysts noted.

Impact on the midterm elections

Trump's Bombardier threat could make the U.S. Senate race in Kansas competitive, as the company has a significant presence in the state, TD Cowen's Krueger said.

The Democratic nominee in that contest, Adam Hamilton, criticized Trump's threat and his Republican opponent, incumbent Sen. Roger Marshall, in a social-media post on Monday evening.

"Bombardier supports 1,500 Kansas families, providing good-paying jobs that put food on the table and keep a roof over their heads during a cost of living crisis caused by Washington. And now, the president is trying to take that away," Hamilton said. "The decision to ban Bombardier from selling in the U.S. is a direct attack on Kansas workers and Kansas jobs - yet Roger Marshall is notably silent. We cannot allow this chaotic economic policy to continue to hurt Kansans; they deserve so much better."

Marshall offered a response around midday Tuesday, saying he's "going to fight to keep Bombardier's over 1,200 Kansas jobs" and adding that he's "already taken that concern inside the Oval Office." The senator also said more of Bombardier's planes should be built in the U.S., and he said the company is obligated to grow its footprint in Kansas.

Analysts at the Cook Political Report and Sabato's Crystal Ball view the Kansas Senate race as likely to be won by Trump's Republican Party, rather than among the five or six contests that they consider to be toss-ups, such as those in Maine and Michigan.

But Maine and Michigan, which both border Canada, are among the states most affected by a U.S. trade war with that country, TD Cowen's Krueger noted. If U.S. and Canadian officials don't find an off-ramp, the ongoing fight could "make the affordability narrative all the more powerful" for Democrats and help them take back control of the Senate, he said.

Democrats have a 53% chance of ending Republican control of the Senate in November's midterms, along with an 87% likelihood of flipping the House, according to figures from prediction market Polymarket, which has a data partnership with Dow Jones, the publisher of MarketWatch.

Related: Ford's $3 billion Canadian bet is getting caught in trade-war crosshairs

Robert Schroeder contributed.

-Victor Reklaitis

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09-08-26 2017ET

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