Boeing may get slammed if Trump sets off a full-blown trade war with China (BA)

Boeing 747 china

China and the US have levied countervailing tariffs against billions of dollars worth of export products.
Stuck in the middle of this trade dispute is Boeing, America's largest exporter.
China accounts for 20% of Boeing's order book.
This could result in lost future business and even canceled orders for Boeing.

There's a US-China trade war brewing and Boeing is stuck in the middle of it.

One day after the Trump administration proposed tariffs on more than 1,300 products exported to the US from China — including aviation-related items — the Chinese government announced retaliatory tariffs on more than 100 products from the US.

This includes a 25% tariff on aircraft weighing between 33,000 pounds and 99,000 pounds. In other words, it's a 25% tax on Boeing's best selling plane, the 737.

"Going after China for aerospace is like living in a crystal palace throwing pebbles and expecting the other guy to not throw rocks," Richard Aboulafia, Teal Group aviation industry analyst, told Business Insider.

China is arguably Boeing's most important market. According to Morningstar, the Middle Kingdom accounted 25% of Boeing's 2017 deliveries and a whopping 20% of its 5,800-plane order book.

Boeing 737 1000th boeing to China Over the next 20 years, Boeing expects Chinese demand for airliners to top 7,200 aircraft with a value of $1.1 trillion.

In a statement, the airplane maker expressed its concern that the tariffs proposed by both nations would harm not only Boeing but also the global aerospace industry.

"We will continue in our own efforts to proactively engage both governments and build on the recent assurances by US and Chinese leaders that productive talks are ongoing," the company said. "A strong and vibrant aerospace industry is important to the economic prosperity and national security of both countries."

China could cancel its Boeing orders

In many regards, orders for Boeing aircraft are as much about flying passengers around the world as they are about political posturing.

After all, there are few symbols of American industrial might more evocative than a shiny new airliner.

Visits to the US by heads of state often include an order for Boeing airplanes.

China Southern Boeing 787 Dreamliner As a result, "Boeing faces a massive risk of being used as a political pawn by the Chinese," Vinay Bhaskara, a senior business analyst for the trade publication Airways, told us.

For Boeing, the nuclear option in the short run would be for China to cancel its existing orders, which includes a monster 300 aircraft deal announced last November worth an eye-watering $38 billion.

This, along with the countless other orders placed by Chinese customers represent one-fifth of Boeing business. The loss of these orders could prove to be devastating not only for Boeing but the ancillary businesses such as parts manufacturers that support the production of aircraft.

According to Bhaskara, China is counting on its prominence in the market as leverage in Washington D.C.

However, both Aboulafia and Bhaskara said it is highly unlikely that China would go this route for several reasons. For starters, no other OEM has the capacity to pick up the slack.

Boeing 747 Airbus currently boasts a 7,000 plane backlog that would take it the better part of a decade to work through. So there's no way for it to simply absorb all of China's demand for new aircraft.

This dearth of production capacity would become a de facto cap on the growth of China's aviation industry, Bhaskara said.

Bhaskara said this is something the Trump administration is banking on as a counter to China's market power.

Another factor in Boeing's favor is China's woefully underdeveloped domestic aviation industry. According to Aboulafia, China's domestic commercial airplane program is decades behind the likes of Airbus and Boeing. As a result, COMAC, China's state-owned jet maker, has to depend on technology transfers from Western manufacturers to make up for lost ground. This trade dispute would only slow that process down.

But unlikely doesn't mean impossible.

Airbus A380 factory Tianjin China If China were to cancel its Boeing orders, it could turn to the second-hand market for planes. With leasing a popular option for even the world's wealthiest airlines, there are always hundreds of second-hand planes available. As Airbus and Boeing deliver new A320neo and 737MAX aircraft to customers, there will be older planes coming out of service that will be ripe for China's picking.

And with the increasingly prominent role China is playing in the financing of airliners around the world, it would have first dibs of many these off-lease aircraft, Aboulafia pointed out.

"We're dealing with a different China here," Aboulafia said. "It's a little more authoritarian than it was a couple of years ago. And a little more interventionist in the economy, so it could order its airlines to buy used planes instead."

Comac C919 So what's the most likely outcome from all of this?

Both analysts believe this trade dispute will likely result in the loss of orders for Boeing.

"I'd be surprised if we don't see a significant shift towards Airbus in orders this year," Aboulafia told us.

"A few months ago, Airbus signed an agreement with China to ramp up production rates at its Tianjin plant almost in anticipation of this," he added.

However, this shift shouldn't be permanent. After all, the world's political landscape is forever shifting. The same goes for the world commercial aviation.

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