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The spectre of Trade War looms large for aerospace manufacturers

The spectre of Trade War looms large for aerospace manufacturers

  • United Kingdom
  • Aerospace, defence and security

19-04-2018

Tit-for-tat tariffs announced by the US and China have sparked fears of a damaging trade war between the world’s two largest economies.

Christine Lagarde, the Managing Director of the IMF, warned last week that the rules underpinning global trade were “in danger of being torn apart” by protectionist forces.

The latest threat from China – a 25% levy on aircraft manufactured in America - could have a significant impact on US manufacturers, such as Boeing whose 737 jetliner falls within this category.

The tariff comes as China is heavily investing in its own aeroplane manufacturer, the Commercial Aircraft Corporation of China (COMAC), in an effort to disrupt the strength of Boeing and Airbus. Any increased tariffs from China could not be timed worse for American aircraft manufacturers, who are already worried about the growth of Chinese aircraft manufacturing.

The Chinese aviation market is predicted to grow rapidly – Boeing has predicted that China will need more than 7,000 new airplanes, valued at almost $1.1tn, in the next two decades, and American manufacturers could be placed at a significant disadvantage when bidding for these contracts (the proposed tariffs would affect planes weighing between 15,000kg and 45,000kg).

What does this mean for aerospace clients?

We expect to see an increase in US manufacturers engaging in more joint venture agreements with COMAC, as well as a potential increase in direct discounts to Chinese airlines. For Boeing, the spectre of European aircraft manufacturers (particularly Airbus) exploiting the political situation to cement their position in the Chinese market and undercut their American competitors looms large. Institutional investors seem to agree – Xi Jinping’s announcement of tariffs hit Boeing’s share price by more than 5%.

Meanwhile, measures debated in Russia’s parliament over the past week (in part response to tensions over Syria) include Russia banning US companies from working with Russia’s aerospace and nuclear energy industries, again potentially affecting major US aerospace manufacturers.

We can choose from a set of measures depending on the situation, depending on what actions our detractors are taking,” Arkady Dvorkovich, Russia’s deputy prime minister, said of the proposal put to parliament late last week. “Among other things, we will use separate restrictive measures against those countries that imposed sanctions against us to reduce supplies from them . . . Of course, we will do everything so that domestic production does not decrease, but grows.

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