Earlier this week, the U.S. unveiled a list of more than 1,000 Chinese products that will face tariffs of 25%, as the Trump Administration tries to punish China for what it sees as unfair trade practices. Shortly thereafter, China hit back, announcing plans to impose 25% tariffs on more than 100 American products.
The products singled out by China for new tariffs include aircraft with empty weights between 15,000 kg and 45,000 kg. At first glance, this provision may appear to aim directly at Boeing (NYSE:BA) — China is one of the aerospace giant’s most important markets. However, the tariffs actually seem to be calibrated to avoid any major impact on Boeing aircraft deliveries to China.
A category that is becoming irrelevant
The tariffs announced by China would hit Boeing’s highest-volume model, the 737-800, which has an operating empty weight of 42,901 kg, according to the company. Its siblings, the 737-700 and 737-900ER, also have operating empty weights in the range targeted by China.
However, Boeing is in the midst of phasing out all of these models. They will be replaced by the 737 MAX. Like the competing Airbus (NASDAQOTH:EADSY) A320neo family, the 737 MAX family features state-of-the-art engines, which are heavier than the engines used for older models.
As a result, the 737 MAX 8 — the successor to the 737-800 — has an operating empty weight of 45,070 kg. This would be just enough to put it outside the reach of China’s proposed tariffs. (However, a Reuters story noted that China may instead base its tariffs on manufacturer’s empty weight, a slightly different metric that would put the 737 MAX 8 below 45,000 kg.)
The larger 737 MAX 9 and 737 MAX 10 models will naturally have operating empty weights above 45,000 kg as well. (Meanwhile, all of Boeing’s wide-body models have significantly higher empty weights.) Of Boeing’s post-2020 products, only the smaller, slow-selling 737 MAX 7 falls squarely within the weight range outlined by China.
There could be other loopholes
While China appears to have set the weight criterion for its tariffs to avoid hitting the 737 MAX, there are other loopholes that could also prevent harm to Boeing. For one thing, some analysts believe that the tariffs would only apply to new orders, not Boeing’s existing backlog in China.
Additionally, it’s not clear when the tariffs would go into effect — if at all. For now, the U.S. and China are positioning themselves for a return to the negotiating table.
Most importantly, Boeing began construction of a 737 completion center in Zhoushan last year. This factory will install interiors and paint about 100 aircraft annually before they are delivered to Chinese customers. Completing aircraft in China might be sufficient to circumvent any tariffs, even if most of the manufacturing was done in the U.S.
China needs Boeing planes
It’s not surprising that China’s proposed tariffs carry more bark than bite for Boeing. In the very long run, China could potentially reduce its reliance on Boeing aircraft. But for now, there are only two major aircraft manufacturers, and Airbus’ popular A320/A320neo family of planes has a backlog of more than 6,000 unfilled orders. That’s equivalent to nine years of output, even at the stepped-up production rates currently planned.
In theory, Airbus would love to gain market share in China at Boeing’s expense. However, the A320neo family is completely sold out until around 2022. Even beyond then, Airbus would probably be unable to meet all of China’s aircraft demand without shortchanging its own loyal customers elsewhere in the world.
Boeing is still worried about the growing U.S.-China trade tensions. That’s understandable, because in the long run, the commercial aviation business depends on robust global trade. But the direct impact of China’s aircraft tariffs on Boeing is likely to be minuscule.