Boeing May Not See Much Turbulence In A Potential Trump Trade War

| About: The Boeing (BA)

Summary

Despite Boeing's heavy reliance on global markets, China in particular, for its commercial airplanes, the company could well dodge the bullet in a potential Trump trade war.

It's not in the interest of China to block Boeing sales, and any increased tariffs on plane-making materials imported from China could be absorbed by Boeing.

The Boeing business can make do without the Ex-Im Bank, which could lose its charter under President Trump.

Boeing Co. (NYSE:BA), dependent largely on global markets for its commercial airplanes, has had some people worried about its becoming collateral damage in a potential Trump trade war. Only about 11% of Boeing's contractual backlog for commercial airplanes is with U.S. airlines, including cargo carriers. This makes Boeing, America's number one exporter, a visible target for potential retaliation by other countries if President Trump hikes tariffs on their imports to the U.S.

The concern is particularly in relation to China, which took 164 deliveries from Boeing in 2016, compared to the company's total plane deliveries of 762 the year earlier. According to a Chinese government newspaper, Global Times, "China will take a tit-for-tat approach," and "a batch of Boeing orders will be replaced by Airbus."

Consisting of possibly over 20% of Boeing's annual deliveries, orders from China represent a vital part of the company's commercial airplanes business. Any remote prospect of losing that exporting market would be a major cause of concern for Boeing.

However, trade barriers often are selectively targeted on foreign imports that are in direct competition with domestically produced goods. The U.S. could impose tariffs on, say, steel imported from China to help American steel companies better compete. Meanwhile, it would probably not set barriers on many of the imported consumer products that American companies are no longer making.

On the other hand, China might in response, for example, make it more costly for American farmers to export certain agricultural products that China could produce itself. It's highly unlikely that China would make it more expensive for Chinese airlines to buy airplanes from Boeing, letting alone stop ordering from Boeing altogether. One reason is that China doe not yet have a competitive commercial aircraft manufacturing industry to serve as a counterplay.

As to China's remark on replacing Boeing orders with those from Airbus, it would be difficult to actually carry out the action, at least not in the near term. Boeing covers about half of the aviation market in China, which is too big a market share for another one company to fill on a moment's notice.

Moreover, China has built up an industry that supplies Boeing with certain plane-making parts and materials, from composite rudder to interior decorative components and even seats installed in China following a plane's delivery. Any blockage of Boeing sales to China by the Chinese government would hurt its own aviation companies that have supply agreements with Boeing.

Boeing's outsourcing to China includes a joint venture for a parts-manufacturing factory that ships locally made parts for commercial aircraft back to a Boeing's facility in the U.S. for final assembly. This fits right into Trump's unfair-trade narrative and could lead to tariffs levied on Chinese-made materials coming to the U.S., increasing Boeing's production costs.

However, the amount of Boeing's imported parts from Chinese suppliers may seem a lot but is relatively small. At about one billion dollars a year, it's only around one percent of Boeing's most recent annual sales. Thus, the resulting tariff impact could be somewhat limited. If Boeing is compelled to source parts from domestic suppliers, it may also see increased production costs, similar to the rising-tariff situation. By leveraging its larger scale of productions, the company could probably absorb the cost increase the same way.

Aside from potential trade tariffs imposed by both the U.S. and other countries, China in particular, the talk of doing away with the Export and Import Bank also concerns some as to what impact there could be on sales of Boeing airplanes to foreign buyers that use the Ex-Im Bank for financial guarantees when financing their purchases.

If the Ex-Im Bank loses its charter under President Trump, some Boeing customers would have to try to find other means of financing in the market, and Boeing would have no reason not to accept such customer financing arrangements, even without a government guarantee.

Furthermore, Boeing Capital, with a total customer financing and investment portfolio of $3.459 billion as of Dec. 31, 2015, could step in to effectively reallocate some of the financial resources toward its manufacturing operations by extending credit to additional Boeing customers. The Ex-Im Bank can be useful but is not necessary for Boeing to secure international sales.

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