Boeing’s 737 Max woes make it a prime target for China’s trade-war retaliations.
China, responding to increased tariffs imposed by the US last week, said on Monday that it will boost levies on nearly 2,500 American products to 25 per cent, while several thousand other items will be subject to taxes ranging from 5 per cent to 20 per cent.
Soon after, an independent Chinese media organisation tweeted that China also may stop purchasing US agricultural and energy products, explore dumping US Treasuries and reduce orders for Boeing jets, in what would mark a more painful escalation of tensions.
There’s reason to be sceptical about this; for one, the organisation isn’t an official government mouthpiece and the tweet writer later told Bloomberg News that he was expressing his opinion, not an official stance. Halting agricultural orders would seem to come at an impossible cost to China’s food supply, particularly given the deadly swine flu outbreak that’s wiping out much of its domestic production.
And abandoning US bonds en masse is much easier said than done. As for curtailing Boeing orders, such a move would likely squeeze travel growth in China – and yet, of all of these measures, it’s the most plausible, at least on a temporary basis. So it’s worth thinking through what the implications would be.
Boeing is the US’ biggest exporter and something of a national treasure, a status which alone would seem to qualify it to eventually end up in the crosshairs of escalated trade tensions. But two fatal crashes of its Max jet in just five months and a global grounding that’s now lasted two months make Boeing particularly vulnerable right now to any sort of order slowdown. It wouldn’t be completely unprecedented for China to try to leverage its position as a big Boeing customer to its advantage.
Bloomberg News reported that Chinese officials sought in 2017 to use approval of the Max as a way to negotiate more favorable regulatory treatment for home-grown jets being developed by Commercial Aircraft Corp of China, or Comac.
In the end, after the Federal Aviation Administration reportedly rebuffed inquiries from US trade officials seeking to bolster American exports and refused to deviate from its typical procedures, China certified the Max anyway. I’m not so sure China will resist the opportunity to use Boeing as a pawn this time around.
Any threat to restrict Boeing orders could be interpreted as another attempt to smooth the way for Comac’s C919, which is currently in development and being pitched as a competitor to the Max and Airbus’ A320neo. It’s unlikely regulators would change their stance on the plane, but China has the ability to drag its heels on re-certifying the Max and any knock on Boeing’s global standing probably works in its favour.
China can’t stop buying Boeing planes altogether. While China is targeting a rollout of the C919 in 2021, certification testing is moving slowly and it wouldn’t be unreasonable to see that timeline delayed until 2025. A domestic launch could come sooner, but the fact is there’s no immediately available national champion to fill the Boeing void. China could, however, abandon its longstanding preference to equal weight orders between the US plane maker and Airbus.
There’s been some signs that may already be happening: French President Emmanuel Macron helped broker a $35 billion order for Airbus jets from China in March, while Xiamen Airlines has reportedly mulled breaking with Boeing in favour of Airbus. Too big a shift in demand risks giving Airbus too much pricing power, however.
The biggest risk for Boeing is that China cancels some of its existing orders, eroding a backlog whose ongoing expansion is in question amid the uncertainty surrounding the Max and fare pressures in some overseas routes that could hurt demand for other models.
An aggressive move by China on Boeing orders could give other carriers – particularly those in emerging markets that may have bit off more than they could chew – cover to follow suit with their own cancellations. Again, China likely couldn’t do this without paying some sort of penalty in its airlines’ growth plans.
A possible Chinese exclusion of the Max from purchase commitments was broadly dismissed as posturing, and odds are this latest talk of curtailing orders is just a negotiating tactic as well.
But the escalation of trade tensions and the US’ zeal to extend tariffs to virtually everything imported from China increases the risk that the country more seriously considers all options at its disposal.
Source The National