Dear Fellow Former Gruyere and Chateau Petrus Consumers,
Even as a young boy, I knew that the original Lost in Space was unbelievably bad science fiction. But looking back, I do appreciate one aspect of it: the robot, who was easily stopped when he went haywire, by pulling out his external power pack, which appeared to hold 4 AA batteries. When designing a robot, or a monster of any kind, it’s important to install a kill switch, something that turns it off instantly, before it can do too much harm if it turns bad.
With the latest Airbus/Boeing WTO trade complaint developments, I’m wondering if Boeing shouldn’t have installed a kill switch. This complaint might be turning into a bad robot.
The final WTO ruling on the US complaint, announced in September (to be followed by a WTO ruling on the EU counter-complaint next year) is very much in Boeing’s favor. That’s the good news for the company. But as October began, the Trump administration announced its punitive tariffs (it is allowed to levy these on up to $7.5 billion of imports from the EU). The details of these tariffs are much less good for Boeing, and for everyone in the industry.
The problem for Boeing is that these tariffs have little to with Airbus jets – just a 10% hit (illustrating Airbus’s cleverness in building an assembly line in Alabama, the heart of Trump country). That’s really not what Boeing wanted. Quoth Bank of America/Merrill Lynch, “Given the lower-than-expected tariff, we expect Airbus to weather the 10% increase through its P&L rather than trying to pass this onto airlines or adjusting delivery schedules for 2019. The impact is relatively small in our view and means Airbus could still meet 2019 guidance.” The Trump announcement also spared imported A220 wings, which is important because that’s Airbus’s most US-focused product.
Instead of Airbus jets, the real hit (25%) to EU products affects a basket of luxury goods, including alcohol, cheese and other luxury foods, and clothing. From a Trump administration standpoint, this is pretty clever. They get to look tough on trade, but the red states (Alabama in particular) don’t really get hurt, so there’s no damage to Trump’s political base. Blue states, which are far bigger consumers of imported Bordeaux, Parmesan, and Scotch whiskey, feel far more of the pain (to retailers and consumers). These states weren’t going to vote for Trump anyway.
If Airbus won’t be hurt by this, then Boeing won’t gain from this ruling either. But that 25% luxury goods tariff guarantees EU retaliation. Previous Trump tariffs against the EU on Aluminum and steel, and coming tariffs on cars, further guarantee an aggressive EU response. And there’s a very good chance that the EU takes a very different tack, and retaliates directly with large tariffs on Boeing jets. And as numerous equities analyst reports have noted, Boeing is far more dependent on jet exports to Europe than Airbus is on exports to the US. The EU can also hit back with a delayed review of Boeing’s Embraer jetliner unit acquisition (it has already delayed approval into next year). Worst of all for Boeing, the EU can even hit back against 737MAX re-certification.
An aircraft trade war would clearly not be to Boeing’s advantage (nor to Airbus’s, for that matter). And it’s important to view this development with the backdrop of the past few years. Trump, Brexit, and other people and factors are trying to roll back globalization. Endless trade complaints are part of this process, and all of this is greatly increasing the risk of a global recession. De-globalization and slower economic growth aren’t in Boeing’s interest at all.
Does Boeing still have an interest in pursuing this case? Going back to the launch of this lawsuit, it’s easy to see why Boeing built this robot. After its perfectly ridiculous A380 launch decision, Airbus quickly realized that this move might have indeed been ridiculous, and that what they really needed was an A350XWB (see my November 2004 letter). Airbus also said it needed launch aid for the latter plane, after getting tons of launch aid for the former plane. This was a fairly outrageous set of events; Boeing’s subsidy sins may have been venal, but Airbus’s sins fell more under the heading of “mortal.” Overall, Boeing’s complaint seemed quite sensible.
Today, it’s a very different story. Airbus isn’t launching anything, and it won’t for some time (see my September 2019 letter). It’s a far more profitable company. The A380 program rests in a well-deserved grave. Airbus will always argue that it doesn’t need to pay anything back from old launch aid packages, and EU politicians will back them on this. Boeing’s primary interest today would instead be a negotiated settlement, one that prevented Airbus from returning to its old ways (unlikely in any event) and that prevented China and Russia from providing huge aid packages to their jetliner industries (good luck with that).
This gets to the question of the kill switch. The problem with this case is that both Airbus and Boeing agree on one thing: a negotiated settlement needs to be government-to-government, not company-to-company. The two companies can’t just sit down and negotiate something sensible. They need to go through politicians, who have their own agendas. Sometimes, those agendas include deliberately throwing wrenches into the gears of globalization.
That’s the problem. In 2004, the world was a very different place. The US president was a globalist, who didn’t think that “Trade wars are good, and easy to win.” Brexit was a non-word. People like Steve Bannon or Nigel Farage were fringe characters. Multilateral trade negotiations were taken seriously, and knee-jerk unilateral trade moves, like those aluminum and steel tariffs, were frowned upon. Today, it is much harder to imagine a calm, negotiated settlement, even if Boeing urges exactly that. We’re at the mercy of politicians, which is never where an industry wants to be.
If only this trade complaint had a battery pack we could pull out.
Yours, ‘Til Dr. Smith Is Appointed US Commerce Secretary,