Boeing’s 737 Max Woes Make It an Easy Trade-War Pawn

(Bloomberg Opinion) -- Boeing Co.'s 737 Max woes make it a prime target for China's trade-war retaliations. 

China, responding to increased tariffs imposed by the U.S. last week, said Monday that it will boost levies on nearly 2,500 American products to 25%, while several thousand other items will be subject to taxes ranging from 5% to 20%. Soon after, Hu Xijin, the editor-in-chief of China's Global Times, tweeted that China also may stop purchasing U.S. agricultural and energy products, explore dumping U.S. Treasuries and reduce orders for Boeing jets, in what would mark a more painful escalation of tensions.

There's reason to be skeptical about this; for one, the Global Times isn't an official government mouthpiece. Halting agricultural orders would seem to come at an impossible cost to China's food supply, particularly given the deadly swine flu outbreak that's wiping out much of its domestic hog production. And abandoning U.S. bonds en masse is much easier said than done, as my colleague Brian Chappatta has written. As for curtailing Boeing orders, such a move would likely squeeze travel growth in China — and yet, of all of these measures, it's the most plausible, at least on a temporary basis. So it's worth thinking through what the implications would be. 

Boeing is the U.S.'s biggest exporter and something of a national treasure, a status which alone would seem to qualify it to eventually end up in the cross hairs of escalated trade tensions. But two fatal crashes of its Max jet in just five months and a global grounding that's now lasted two months make Boeing particularly vulnerable right now to any sort of order slowdown. 

It wouldn't be completely unprecedented for China to try to leverage its position as a big Boeing customer to its advantage. Bloomberg News reported that Chinese officials sought in 2017 to use approval of the Max as a way to negotiate more favorable regulatory treatment for home-grown jets being developed by Commercial Aircraft Corp. of China Ltd., or Comac. In the end, after the Federal Aviation Administration reportedly rebuffed inquiries from U.S. trade officials seeking to bolster American exports and refused to deviate from its typical procedures, China certified the Max anyway. I'm not so sure China will resist the opportunity to use Boeing as a pawn this time around.

Any threat to restrict Boeing orders could be interpreted as another attempt to smooth the way for Comac's C919, which is currently in development and being pitched as a competitor to the Max and Airbus SE's A320neo. It's unlikely regulators would change their stance on the plane, but China has the ability to drag its heels on re-certifying the Max and any knock on Boeing's global standing probably works in its favor.

China can't stop buying Boeing planes altogether. While China is targeting a rollout of the C919 in 2021, certification testing is moving slowly and it wouldn't be unreasonable to see that timeline delayed until 2025, as my colleague David Fickling has written. A domestic launch could come sooner, but the fact is there's no immediately available national champion to fill the Boeing void. China could, however, abandon its longstanding preference to equal weight orders between the U.S. planemaker and Airbus. There's been some signs that may already be happening: French President Emmanuel Macron helped broker a $35 billion order for Airbus jets from China in March, while Xiamen Airlines has reportedly mulled breaking with Boeing in favor of Airbus. Too big a shift in demand risks giving Airbus too much pricing power, however.

The biggest risk for Boeing is that China cancels some of its existing orders, eroding a backlog whose ongoing expansion is in question amid the uncertainty surrounding the Max and fare pressures in some overseas routes that could hurt demand for other models. An aggressive move by China on Boeing orders could give other carriers — particularly those in emerging markets that may have bit off more than they could chew — cover to follow suit with their own cancellations. Again, China likely couldn't do this without paying some sort of penalty in its airlines' growth plans, as Bloomberg Intelligence's George Ferguson and Francois Duflot have noted.

A possible Chinese exclusion of the Max from purchase commitments was broadly dismissed as posturing, and odds are this latest talk of curtailing orders is just a negotiating tactic as well. But the escalation of trade tensions and the U.S.'s zeal to extend tariffs to virtually everything imported from China increases the risk that the country more seriously considers all options at its disposal. 

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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