Business

The trade war is coming at a terrible time for Boeing

Posted May 13, 2019 9:00 p.m. EDT

— Boeing is the largest American exporter, and China is its most important export market. The China-US trade war is not good news for the already troubled company.

The trade dispute between the United States and China worsened Monday with China imposing new tariffs on American goods in retaliation for the US decision to raise tariffs on Chinese goods last week. Boeing's orders from China had previously escaped the earlier Chinese tariffs. The immediate impact on Boeing planes from the new round of tariffs was not immediately clear early Monday.

Whether or not Boeing has to pay higher import taxes, it could be an important chip in the trade war negotiations.

Boeing can't afford to lose Chinese sales. But a member of China's state-run media on Monday suggested that might happen.

"China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China," tweeted Hu Xijin, editor-in-chief of the Chinese and English editions of the Global Times.

The $1,000,000,000,000 jet market

China, with its growing demand for travel, has become the key market for aircraft purchases. Boeing predicts that China will soon become the world's first $1 trillion market for jets. By 2037, Boeing estimates China will need 7,690 commercial jets to meet its travel demands.

Airbus and Comac, a Chinese jet maker, are vying with Boeing for the vast and rapidly growing Chinese market.

Comac's first plane, designed to compete with the single-aisle Boeing 737 Max and Airbus A320, made its first test flight in 2017. It is not yet ready for commercial service, but Boeing can't afford any missteps.

For its part, Boeing tried to keep a positive outlook about the growing trade war.

"We're confident the US and China will continue trade discussions and come to an agreement than benefits both US and Chinese manufacturers and consumers," said a company statement.

Boeing does not have a factory in China. But it did open a 737 completion center there last year to finish planes that had been built in the Seattle area.

Company executives had signaled earlier this year that there could be a lull in orders from China as the trade negotiation take place, but they weren't worried about the long-term demand for planes from Chinese customers.

"We expect China is a long-term growth market for us, but exactly how those efforts play out over the next quarter or two is still an open question as we proceed with trade discussions," CEO Dennis Muilenburg said in January.

Working in Boeing's favor: Chinese airlines that have bought from Boeing in the past would be hard pressed to switch to Airbus planes. The cost of both pilot training and spare parts would go higher if they had two different aircraft suppliers. And switching to Airbus would put Chinese airlines on the end of a waiting list for the planed they want to order.

Muilenburg said he's confident there is enough benefit to both China and the US to have Boeing products escape a trade war.

"China needs the airplanes for growth to fuel their economy and to meet their passenger growth and cargo growth needs," he said in January.

737 Max trouble

Even if China continues to buy Boeing planes unabated, it could still exercise leverage in the trade war by refusing to clear Boeing's troubled 737 Max jet for flight.

Boeing is struggling to get its bestselling plane, the 737 Max, recertified to fly again. The plane was grounded in the wake of an Ethiopian Airlines crash. China was among the first countries to ground the jet following the March 10 crash. Winning approval from the Civil Aviation Administration of China for the 737 Max to fly there again is an open question, even if Boeing comes up with a fix that meets the approval of the US Federal Aviation Administration.

The CAAC said at the time of the grounding that it was taking the action because of its "zero tolerance for safety hazards." But some experts believe the grounding was done at least partly with an eye towards trade talks between the world's two biggest economies.

"It's possible that China's actions were motivated purely by caution and the interest of public safety. Yet the CAAC is basically an arm of the government, with no political independence," said Richard Aboulafia, aerospace analyst for the Teal Group, in recent piece for Foreign Policy. "Therefore, the CAAC's move to ground the jet ... is best viewed as just another tactic in China's trade negotiations."