Each piece of news concerning the Airbus-Boeing tariffs conflict comes up as a new episode of a never-ending movie saga. As you probably know, in these films sometimes things are not usually as they seem to be at first glance. However, every now and then things are exactly what they seem to be. Can we expect the same plot twists in this tariff conflict between aircraft manufacturers? Let’s try to answer this and other questions through this article.
Current context:
The most recent and last episode of this conflict, which could be titled “Airbus strikes back”, happened a few days ago: the imposition of $4 billion in tariffs on United States goods by the European Union.
WTO (World Trade Organization) ruling issued last month entitled the EU to impose these tariffs based on the fact that Boeing had benefited unfairly from government support. People familiar with the matter stated that it had been an expected decision, but it is also true that it has been perceived for some sectors as an action only contributing to add more drawbacks in the path to finally get the conflict solved.
In the end, it is undeniable that this is a response in line with the first action taken by President Trump last year, who referred to the EU as a “foe” and complained about “what they do to us in trade” to finally impose tariffs on EU goods. Although this action was legitimately taken based on the WTO ruling issued last year, many stakeholders on both sides of the conflict would have chosen a negotiated settlement as a better approach.
Proof of the above mentioned was the disappointment expressed by the US-based airlines arguing that these measures put them into a difficult situation:
United Airlines, American Airlines, and Southwest Airlines (Boeing operators) were already struggling due to the mandatory grounding of the 737 MAX, and the stock market was not merciful with them after the tariffs announcement.
JetBlue and Delta (Airbus operators) stated that these tariffs would have an impact somehow on travelers due to the airline fleet strategy is not able to be changed overnight.
On the other hand, and as expected, Boeing totally supported these measures as illustrates in the following statement:
“Europe is facing tariffs today because Airbus has refused for years to comply with WTO rulings.” “Unfortunately, Airbus’s noncompliance will negatively impact European member states, industries, and businesses completely unrelated to Airbus’s actions, as well as Airbus’s airline customers.”
Boeing’s written statement
In addition, before any tariff was imposed and right after WTO ruling, Airbus called for a settlement trying to avoid tariffs.
“Tariffs would be a barrier against free trade and would have a negative impact on not only the US airlines but also US jobs, suppliers, and air travelers.”
Guillaume Faury (Airbus CEO)
Even with the US tariffs imposition, there were some European leaders who had preferred a more conciliatory approach. Nevertheless, there was a clear motivation in the fact of imposing tariffs on US goods right after a new-elected US president arises (what is highly probable according to current predictions). This imposition results to be the most effective reminder of the fact that this conflict has to be addressed the sooner the better, and no matter who is in charge of US executive decisions.
Despite tariffs approval by the EU, it was clearly and intensely stated that this is not a matter of measures escalation:
“We are not escalating anything. We are exercising our rights as awarded by the WTO. We are just here mirroring the US approach. Removing these tariffs would be a win-win for both sides.”
Valdis Dombrovskis (EU’s top trade official)
“We are ready to withdraw or suspend our tariffs at any time when the US is ready to do so on their side, whether it is the current or future US administration.”
Peter Altmaier (German Economy Minister)
Worth to mention as well Donald Trump’s last month statement in which threatened with a quick retaliation if the EU responded to US tariffs.
“If they strike back, then we’ll strike much harder than they’ll strike.”
Donald Trump (US President)
Additionally, there has been news in the last few days that will have an impact somehow on Airbus and Boeing’s interests and decisions in the mid-term. They will hardly imply differences concerning the main strategies followed by each side to face a 16 years-long conflict, but they can lead to changes concerning the urgency or the character (more or less aggressive) of the actions to be taken. Some of them are listed below:
- US election results: Trump sues as path to victory over Biden narrows
- Pfizer and BioNTech Announce Vaccine Candidate Against COVID-19 Achieved Success in First Interim Analysis from Phase 3 Study
- Airlines will struggle long after passengers feel safe to fly again
- Airbus and Boeing Report September 2020 Commercial Aircraft Orders and Deliveries
Timeline and highlights:
The origin of this conflict dates back to October 2004 when the George W. Bush administration complained about the fact that Airbus was receiving subsidies from EU governments to design and develop large civil aircraft. These subsidies would have been covered up as loans whose interest rates were below market and being even forgiven.
US and Boeing also state that without this substantial financial support, Airbus would never have been able to become a serious competitor for Boeing. A380 was the aircraft under major scrutiny at the beginning, but further investigations were extended to the rest of the Airbus commercial family including even the A350 in a future stage.
Finally, the figures claimed by the US to WTO in 2006 were $22 billion (€19.4 billion) which US officials estimated that had resulted in a benefit of more than $200 billion.
In the meantime, the EU counteracted alleging that Boeing had received $23 billion in US subsidies. These subsidies in form of specific regulations, grants, tax breaks, tax deferrals, etc. would have impacted not only in large civil aircraft manufacturing but also in R&D (Research & Development) projects and contracts for the Department of Defence and NASA.
Airbus and EU claimed to WTO for these aids as its competitor did and in the same way, the investigations were extended to the design and development of a future Boeing aircraft: the 777X.
All the stated above was only the beginning of a trade conflict which has been estimated to reach up to $100 million in costs, and whose end will lead apparently to nobody’s victory.
Find below a summary of the most relevant events of this conflict as a timeline:
- 2005: WTO initiates investigations of state support for Boeing and Airbus after failed bilateral negotiations.
- 2006: New Airbus A350 is announced and further government loans from EU are sought.
- 2009: WTO issues an interim ruling and states that some European aid provided to Airbus violated a ban on export subsidies.
- 2010: WTO demands to stop immediately the government loans for Airbus commercial aircraft including the A380. These loans are categorized as prohibited export subsidies. However, it rejects including the loans for the A350 as requested by US.
- 2011: A separate WTO panel partially supports the EU claims alleging $19 billion aid for Boeing from the US, ruling against it, and estimating its value in at least $5.3 billion.
- 2012: WTO restates the ruling against US support for Boeing. Both sides accuse each other of failing to comply with the WTO’s rulings while stating its own compliance.
- 2013: New Boeing 777X is announced and agreed to be manufactured in Washington state shortly after an $8.7 billion tax break for the aerospace industry was stated by the local administration.
- 2014: EU launches a separate complaint against the 777X tax breaks.
- 2016: WTO states that EU failed to comply with its earlier rulings on Airbus. It also agrees to rule against aid for the new A350 but not putting it in the prohibited category. Tax breaks of the Boeing 777X are categorized as prohibited.
- 2017: After US appealing, the WTO reverses the ruling concerning 777X tax breaks giving clearance to US in maintaining support for Boeing. Further EU appeals in this regard are dismissed.
- 2018: WTO states again that EU failed to remove all subsidies to Airbus. US threatens with billions of dollars tariffs on EU goods. Arbitration comes into play to determine the scope of tariffs.
- 2019: WTO states US failed to remove subsidized tax breaks to Boeing in Washington state. Both sides disagree widely in public, accusing the other of refusing to negotiate any settlement. WTO arbitrators entitled US to impose tariffs on EU goods. US imposes tariffs on most Airbus aircraft and on other EU products. WTO also rejects EU claims that it no longer provides subsidies to Airbus, granting US to increase tariffs on a wider range of EU goods.
- 2020: US announces an increase in tariffs on Airbus aircraft imported from EU. Washington state votes to remove tax break that had benefited Boeing. Following delays due to the COVID19 crisis, WTO grants EU to impose tariffs on US goods. EU offers not to impose tariffs if US withdraws its existing tariffs on EU goods, but the US refuses arguing that EU has no legal basis to impose tariffs due to tax break were already removed.
In addition, and if you feel like to deep inside in more detail, you can take a look at the official disputes on the official WTO site:
- DS316: European Communities and Certain Member States — Measures Affecting Trade in Large Civil Aircraft
- DS317: United States — Measures Affecting Trade in Large Civil Aircraft
Tariffs imposed in a nutshell:
US tariffs on EU goods:
WTO in October 2019 granted the US to impose tariffs on $7.5 billion of annual EU goods. Therefore, right after the ruling US imposed 10% tariffs on Airbus aircraft made in Europe and 25% duties on several EU products. These products include French wine, Italian cheese, British cashmere, and Spanish olive oil among others.
EU claimed that it no longer subsidized Airbus but WTO rejected the appeal. It allowed then US to increase tariffs on a wider range of goods to press up for EU compliance. So from March 2020 US announced an increase in tariffs on EU aircraft from the initial 10% to 15%.
This scenario could even be worse for Airbus if, as Boeing expected, the tariffs also had impacted aircraft parts coming from Europe. These parts are needed to feed its factory opened in Mobile, Alabama in 2015. However, it seems that US administration declined to move that way due to local employment reasons.
EU tariffs on US goods:
In October 2020, WTO entitled EU to impose tariffs on $4 billion of US goods, so they did it this November 2020. These tariffs are 15% on Boeing aircraft and 25% on several goods including spirits, dried fruit, tobacco, frozen fish and shellfish, handbags and suitcases, motorcycle parts and tractors, video game consoles, cotton, and so on.
As stated before, EU offered a common tariff withdrawal offer which was dismissed by US.
Conclusion:
It is clear that this conflict is having an impact and negative consequences not only on Airbus and Boeing as large commercial aircraft manufacturers.
Many small producers in EU and now in US are suffering because the export level of its products is drastically lowering due to tariffs. This is affecting directly their business bottom line making them even impossible to survive in some cases. The situation impacts also the end consumers who have to pay more for the same goods. All the above combined with the COVID19 crisis is unsettling the social and economic environment, which benefits nobody.
Stock markets registered strong rises after Biden seemed to be confirmed as elected President of the United States. This indicates that many socio-economic sectors have good expectations about Biden and it is undeniable that Donald Trump and Joe Biden are opposite from each other as night and day in several aspects. However, that is not the case concerning economic matters and with the huge impact of the COVID19 crisis in US, the shadow of protectionism is still present.
Do not forget that with the Obama administration the negotiations of a free-trade agreement with the EU never led to a deal, and Biden’s approach to tariffs is not yet clear.
Moreover, Trump is not going to make things easy if he finally leaves the White House which is expected not to lead precisely to a smooth transition. If he finally remains as official President thanks to his army of lawyers, which seems increasingly improbable as time goes by, the hopes of solving the tariffs issue in a quick and clean way will be almost completely diluted.
Taking into account all these facts, with regards to US administration and its future actions concerning the tariffs issue, maybe the best approach is to lower or at least moderate the level of expectations. Actually, this seems to be the EU way of acting. “Hope the best and prepare for the worst” could be a good summary of the following statements made by the German Economy Minister Peter Altmaier, who led the discussions among the 27 EU nations which ended with the imposition of tariffs on US goods:
“Biden administration will contribute to world trade relations being more rules-based, being more multilateral, being less protectionist in the future.”
Peter Altmaier (German Economy Minister)
Therefore, and even being the negotiated settlement the most probable, hopeful, and expected way of putting end to the conflict by many of the stakeholders the path to follow and the end of this conflict is far from being clear yet.
Worth mentioning that this is not the only tariffs issue involving US and EU, and affecting the Aerospace Industry. In March 2018, Trump administration imposed tariffs on steel (25%) and aluminum (10%) from most countries, extending them to EU as well. The negative effects of tariffs imposition were extended even to Boeing in this case, which saw how its raw materials needed to build aircraft were limited and become more expensive due to tariffs.
It seems that this will be neither the only nor the last legal issue between Airbus and Boeing. Wingtips design conflict, or Sharklets vs. Winglets (both known by increasing the efficiency and avoid turbulences at the end of the wings), can be named as other of the most recent ones.
Hopefully not, but who knows if the agreements reached to help Boeing with the 737 MAX grounding issue, or the ones reached in US and EU to help both aircraft manufacturers against the COVID19 crisis could lead to future legal disputes.
I truly think that it is high time US/Boeing and Airbus/EU stop to consider the large aircraft manufacturing industry as a chess match between them. While they are fighting against each other, the China/COMAC team is getting stronger and consistently achieving milestones to become a serious medium-large commercial aircraft manufacturer.
Furthermore, the COVID19 crisis has reinforced China in its path to get the title of world’s leading power, and the prospects of air traffic also position China as the area with most domestic flights and passengers in 2030. These facts should be enough to lead to a change of mindset and strategy of Boeing and Airbus. Maybe not today or tomorrow, but the trends are telling us that the status quo is going to change both: world and aerospace industry.
If you want to know more about COMAC the two following videos will give you a big picture:
