By David Ljunggren and Andrea Hopkins
OTTAWA (Reuters) - Canada on Tuesday scrapped plans to buy 18 Boeing Co (:BA - News) jets and made clear the company had little chance of winning a much larger contract unless it dropped a trade challenge against Canadian planemaker Bombardier Inc (BBDb.TO).
The announcement marks a new low in relations between the Liberal government and Boeing and casts into doubt the future of defense cooperation with the U.S. aerospace company, which says it supports more than 17,500 jobs in Canada.
Ottawa announced last year it wanted to buy the Boeing jets as a stopgap measure while Canada runs a competition for 88 jets to replace its aging 77 CF-18s fighters.
Instead Ottawa will buy a second-hand fleet of 18 Australian F-18s, the same planes Canada already operates. The value of the deal will be around C$500 million ($388 million).
In a clear reference to Boeing, Carla Qualtrough, public works and procurement minister, told a news conference that "bidders responsible for harming Canada's economic interests will be at a distinct disadvantage" compared to other companies participating in the competition for the 88 jets.
Reuters reported last week that the Liberals would walk away from the 18 Boeing jets after Boeing opened a trade challenge against Bombardier, accusing Bombardier of dumping airliners on the American market.
Qualtrough said the competition would be open and no companies would be excluded.
Innovation Minister Navdeep Bains did not respond directly when asked at the news conference whether Boeing could improve its chances of winning the order for 88 jets by bowing to a Canadian government demand to drop the trade challenge.
Bains and other ministers said they wanted to deal with "a trusted partner". In recent months, Canadian officials have said they do not consider Boeing a trusted partner.
In a statement, Boeing said it would decide at the appropriate time whether to take part in the competition. Rival Lockheed Martin Corp (:LMT - News) issued a statement describing itself as "a trusted partner".
The issue has become a political problem for Prime Minister Justin Trudeau. Andrew Scheer, leader of the official opposition Conservative Party, on Tuesday mocked him for buying old jets.
"If the Prime Minister is so keen on buying fixer-uppers, will he come over, because I have an old minivan I would love to show him," Scheer said to laughter in the House of Commons.
The cost of the 88 jets is estimated at C$15 billion to C$19 billion.
The air force has long preferred a U.S. jet, according to Canadian defense sources. Canada is part of the consortium that helped develop Lockheed Martin's F-35 stealth fighter and the previous Conservative government announced in 2010 it would buy 65 of the planes.
It later backtracked and during the 2015 election campaign Trudeau vowed not to buy the fighter on the grounds it was too expensive. After he took power, the government subsequently softened its tone.
($1 = 1.2873 Canadian dollars)
(Reporting by David Ljunggren and Andrea Hopkins; Editing by Susan Thomas, Jeffrey Benkoe and Grant McCool)