What Does the Ongoing Trade War Mean for the Aviation Industry?

June 2019

Trump’s Tariff Proposal Could Impact Purchasing and Maintaining Aircraft

With trade talks breaking down between China and the U.S. in May, President Trump has recently proposed to impose 25% tariffs on another $300 billion in Chinese imports aimed primarily at consumer goods. This comes after the President has already imposed tariffs rate increase of 10%-25% on U.S. imports from China, like steel and aluminum.

The White House has cited Section 232 of the Trade Expansion Act of 1962 to impose the tariffs, which permits the President to adjust tariffs if the Department of Commerce finds that the quantity or circumstances surrounding imported goods threatens U.S. national security.

While the trade war is aimed at China, the implications for U.S. businesses and consumers generally are potentially significant. Tariffs are taxes paid by American companies who import the goods – not China. As a result, hundreds of American retailers and manufacturers, including Walmart, Costco and Target, have pleaded with the White House not to impose the tariffs by arguing that the tariffs will harm the U.S. economy by increasing the costs of goods, result in job loss, and reduce the overall value of the U.S. Gross Domestic Product (GDP).

Since the proposition, the White House has held hearings where company officials have testified against the tariffs. President Trump has told reporters that his decision on whether to impose the tariffs would come after meetings with Chinese President Xi Jinping on the sidelines of the G-20 summit in Japan held on June 28th and June 29th.

These U.S. companies generally are not wrong. If the tariffs are imposed, somebody in the marketplace has to absorb the increase. Manufacturers, retailers, and transporters will see the stress of the tariffs directly impact them in an almost chain-like reaction. Manufacturers may be forced to establish or exacerbate other foreign and domestic relationships in an effort to maintain costs and expenses. With the increase in manufacturing costs, retailers will be forced to pass this cost along to consumers leading to a reduction in overall sales. As demand then decreases, transportation companies will face a shortage in outputs resulting in greater competition for work.

The trade wars also extend beyond China and they add to the long list of burdens on the U.S. aviation market in several material ways. First, in 2018, President Trump’s tariffs on imported aluminum and steel increased the cost for U.S. companies to manufacture airframes and aircraft components which will increase the costs of new aircraft deliveries in the United States. Second, the Chinese immediately retaliated with a tariff on U.S. built aircraft, primarily targeting large aircraft, which puts U.S. manufacturers at a disadvantage for sales in the Chinese market.

Also, in April 2019 as a result of the Word Trade Organization’s dispute with The Boeing Company, the U.S. proposed tariffs on European Union (EU) imports that would include large commercial aircraft (from Airbus in particular) but also large business jets (such as the Dassault Falcon 7X and 8X). The EU has since released a preliminary list of hundreds of U.S. goods which additional tariffs could be imposed, including U.S. manufactured aircraft.

How is this likely to impact the U.S. aircraft market? In the airline world, low fuel prices in recent years have already caused carriers to operate less fuel efficient aircraft longer and defer new purchases. The tariffs add one more reason for that trend to continue. Boeing, with all of its current challenges, might also lose sales in its lucrative Chinese market. All in all, the impact could be very hard on the U.S. commercial aircraft market. The impact in the business jet market might be less, but Europe has been a significant market for U.S. buyers in recent years, and it too could be impacted. And the Chinese tariffs will also impact large business jets such as the Gulfstream G650. Vendors who can supply cost effective means of continued operations of used aircraft may see a boon, however, and buyers may find it may be a better deal to purchase used aircraft or maintain existing aircraft.

Watch this space.

If you have any questions about how the tariffs could impact you and your company, contact Jordanne Kissner (jordanne.kissner@fmjlaw.com) or Kevin Johnson (kevin.johnson@fmjlaw.com).