(Bloomberg) -- After reading the fine print on China's proposed aircraft tariffs, Boeing Co. investors grew less alarmed about the prospect of a trade war.
The threatened 25 percent levy, which is based on an aircraft's weight, targets a generation of Boeing's 737 jetliners that are nearing the end of their production run. All but one model of Boeing's newer 737 Max family would be exempt, according to a company document.
“It appears to us that the specific proposals from China this morning are calibrated carefully to avoid a major impact on Boeing and are therefore intended more as a message to the U.S. administration,” Seth Seifman, an analyst at JPMorgan Chase & Co., said Wednesday in a note to clients.
Even the prospect that China's tariffs would give an edge to Airbus SE at Boeing's expense is by no means assured, in part because the country typically balances orders between the rivals. But there's still a risk for both companies from policy uncertainty -- and the potential for an escalating trade fracas to hamper global economic growth.
Boeing fell 1 percent to $327.44 at the close in New York, paring losses substantially after a decline of as much as 5.7 percent, the biggest intraday drop in two months. Airbus fell less than 1 percent to 92.81 euros at the close in Paris.
“While both governments have outlined positions that could do harm to the global aerospace industry, neither has yet imposed these drastic measures,” Boeing said in a statement. “We will continue in our own efforts to proactively engage both governments.”
China couldn't easily scrap its Boeing orders without hurting the country's three biggest airlines, said Douglas Harned, an analyst at Sanford C. Bernstein. In the near term, the government-controlled carriers couldn't easily shift narrow-body orders, which are favored for shorter domestic routes, to Airbus since the European planemaker's A320neo family effectively is sold out through 2022.
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“This is a bad sector for China to apply tariffs,” he said in a note. The greater threat to Boeing from the tariffs is that the ensuing trade war would spiral into a global recession, he said.
Robert Stallard, an analyst at Vertical Research Partners, agreed.
“Today's Chinese tariff announcement is likely to be part of a broader trade campaign, and probably a negotiated ‘cease fire' that is less draconian than either the U.S. or Chinese terms,” he said in a note. “Boeing is caught in the trade-war cross-fire and is thus vulnerable to unpredictable changes in sentiment.”
Beijing's Ambitions
China's proposed tariffs would affect planes weighing between 15,000 kilograms (33,000 pounds) and 45,000 kilograms. If an additional levy is approved by the state, Boeing customers would face a total tariff of as much as 30 percent. The 737 and the A320neo have list prices of about $100 million, before the discounts that are customary in the industry.
Beijing's aircraft tariff comes as China aims to build its own planemaker to disrupt the Boeing-Airbus duopoly. State-owned Commercial Aircraft Corp. of China Ltd. is testing a new narrow-body jet. Both Airbus and Boeing have had to contend with government pressure to establish local production facilities while at the same time navigating China's lax intellectual-property laws, a trigger for Trump's initial tariffs.
“It's not in the interest of Boeing or the U.S. to cede market share to rivals in one of the biggest markets,” said Jin Wei, an aviation researcher at the China Center for Information Industry Development, a state-backed think tank in Beijing.
Joint Venture
The outlook for rapid growth in the Chinese aviation market prompted Boeing to set up a joint venture in Zhoushan, China, to paint and install interiors on 737 jetliners bound for the country's airlines. The facility, with the potential to roll out between eight and ten 737 Max aircraft a month, is expected to start operations this year. Airbus has its own A330 completion center in Tianjin and assembles the A320 family aircraft locally.
Last year, Boeing raised its long-term forecast for aircraft demand in China as economic growth and an expanding middle class spur travel in the world's most-populous nation. China will need more than 7,000 new planes valued at almost $1.1 trillion in the next two decades, the planemaker said in September.
--With assistance from Benjamin Katz
To contact Bloomberg News staff for this story: Dong Lyu in Beijing at dlyu3@bloomberg.net, Kyunghee Park in Singapore at kpark3@bloomberg.net, Julie Johnsson in Chicago at jjohnsson@bloomberg.net.
To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Brendan Case at bcase4@bloomberg.net, Susan Warren, Margot Habiby
©2018 Bloomberg L.P.
With assistance from Dong Lyu, Kyunghee Park, Julie Johnsson
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