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The 25 percent tariff on imports proposed by China on new U.S.-built aircraft with empty weights from 15,000 kg (33,069 pounds) to 45,000 kg (99,208 pounds) as part of an escalating potential trade war with the Trump Administration could prove more problematic for Boeing than most aerospace industry observers believe, according to UK aviation technical consulting firm IBA Group.
While various U.S. OEMs and aviation trade associations have pointed out that U.S.-China bilateral trade negotiations on the tariffs each side has proposed remain at an embryonic stage, most industry analysts have assumed that China will not levy the tariff on imports of the strong-selling Boeing 737 Max 8. Analysts have pointed to the fact that Boeing’s specified empty weight for the 737 Max 8 totals 45,070 kg (99,362 pounds), at first glance a weight that would put the new model just above the aircraft empty-weight limit covered by China’s proposed tariff.
That specification has led to assumptions that the only Boeing commercial aircraft to definitely feel the effects of the tariff would be the 737NG family (up to and including the 737-900ER) and the 737-700-based BBJ business jet. Since Chinese customers await delivery of only a relatively small number of 737NGs and BBJs, many have assumed that the potential effect of the tariffs on Boeing and on the Chinese customers themselves would prove relatively small.
But Phil Seymour, CEO of IBA Group, noted to AIN that China’s proposed tariff does not specify whether the upper empty-weight limit refers to the manufacturer’s specified empty weight of the aircraft or the aircraft’s actual empty weight in the operator’s seat configuration. Although the manufacturer empty weight (MEW) is usually lower than the operator empty weight (OEW), any given operator’s OEW for an aircraft can be lower than its specified MEW, particularly if the operator installs low-weight, single-class seating.
As a result, said Seymour, the 737 Max 8’s MEW is “quite marginal” in terms of potentially being affected by China’s proposed tariff, because in any given operator’s configuration a Max 8’s OEW could be slightly below 45,000 kg. The initial uncertainty has led Seymour to suspect that the Chinese government announced the tariff-affected aircraft weight limits without fully analyzing them.
“Most regulators choose an arbitrary number” when announcing limits affecting aircraft and aviation, such as age restrictions for aircraft that can be imported,” said Seymour. “I don’t think the Chinese government did a hell of a lot of analysis—someone just came up with a figure that would be generally inconvenient for all 737s. If the intent of China was to put a [more exact] number on that, it would have a big impact. I don’t think we should be looking at this positively.”
The Chinese government might move the tariff goalposts at any time by re-specifying the weight limits for affected aircraft, said Seymour. He cautions U.S. aircraft manufacturers such as Boeing not to assume they could circumvent China’s proposed tariff easily by adjusting aircraft weight slightly, as regional-jet manufacturers managed to do to mitigate the effects of U.S. pilot-union scope clauses.
A decision by China to levy tariffs on 737 Max 8 imports could have profound implications for Boeing and the Chinese airline industry. IBA Group’s IBA.iQ database of forthcoming commercial aircraft deliveries shows that Chinese airlines, banks, and leasing companies hold outstanding firm orders for about 270 Boeing 737s—including 188 Max 8s, thirty-seven 737-800s, one 737-700-based Boeing BBJ, and more than forty 737s of unspecified model. The net delivery prices of those aircraft would total some $18 billion and their list prices about $36 billion, said Seymour. Furthermore, IBA Group’s database shows another 160 Boeing 737s that the manufacturer lists as ordered but for which it hasn’t yet identified model or customer. Many or all of those aircraft could be going to Chinese customers, though Seymour pointed out that Chinese banks and leasing companies might lease many of their 737s to airlines outside China.
Manufacturers of aircraft in the 15,000- to 45,000-kg (33,069- to99,207-pound) empty-weight range specified by China as potentially being subject to a 25 percent import tariff await the results of negotiations between the two nations’ official trade bodies to find out if and when their sales and deliveries to China might be affected.
When China announced the proposed tariff on April 4, financial analysts quickly identified the Boeing 737NG series (including the 737-700-based BBJ) and the Gulfstream G550, G650, and G650ER as the only U.S.-made aircraft types affected. However, while at first glance Boeing would be most affected and Gulfstream Aerospace also impacted by China’s proposed tariff (Textron Aviation could also be affected depending on the Cessna Citation Hemisphere’s design empty weight), some industry observers believe other OEMs could also see aircraft imports to China impacted.
Key to the OEMs’ full understanding of whether (and how) China will apply the tariff—which, for business-aircraft imports to the Chinese registry, JetNet iQ creator and business aviation analyst Rolland Vincent said would be added to an existing 5 percent import duty and 17 percent value-added tax—will be answers to various questions that to date remain unanswered.
One question is whether or not China’s proposed tariff would apply to aircraft assembled in the U.S. by OEMs—such as Airbus—headquartered in other countries, according to business aviation consultant Brian Foley. “It would appear this is all about the U.S., not other countries, but there is still not enough information to make a firm conclusion,” he said.
Another question is whether the tariff might affect aircraft assembled in other countries but that have substantial content such as engines and systems made in the U.S. While it seems unlikely, Foley noted “there still hasn’t been enough detail released to know for certain.” (United Technologies declined to provide a response to AIN regarding its view of China’s proposed tariff.)
A related question is whether China plans to impose its tariff on U.S.-made aircraft spare parts, said Phil Seymour, CEO of UK-based aviation technical consultancy IBA Group. “That would mean even operators continuing to operate Boeing aircraft they already operate” would be affected, he said. “I don’t think that would be the intention on the Chinese side.”
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A fourth question is whether the Boeing 737 Max 8—the manufacturer’s empty weight (MEW) of which lies just 70 kg (154 pounds) above the specified 45,000 kg limit—could be affected by the tariff, according to Seymour. He said that, while MEWs for aircraft are usually lower than operators’ empty weights (OEWs) for aircraft in operators’ seating configurations, a single-class configuration with low-weight seating can easily reduce an aircraft’s OEW by more than 70 kg.
The IBA iQ database of commercial aircraft shows that, in addition to 37 Boeing 737-800s (which would be affected by the tariff), Chinese customers have 188 Boeing 737 Max 8s on order, as well as dozens of 737 Maxs of unspecified model. The net delivery prices of all these aircraft will total $18 billion and their list-price total double that, according to Seymour.
The 737 Max 8 question is relevant for three reasons. One is that China could move the goalposts on its proposed specification for tariff-affected aircraft. Calling China’s initial tariff proposal “a piece of showmanship,” Foley said “it seems China is positioning, but it could add more [aircraft to its specification] if it wanted.” Seymour agrees.
Second is that some Chinese airlines that have ordered 737 Max 8s have aircraft on existing leases that they may be planning to replace with new Boeings. If the 737 Max 8 were subject to the tariff and Chinese airlines wished to avoid paying it, they could defer delivery of new Max 8s and extend their existing leases instead, said Seymour.
Third is that China hasn’t said whether the proposed tariff applies only to purchases—or leases—of new aircraft or also to imports of used aircraft. Were only new aircraft to be affected, Chinese airlines could defer 737 Max 8 deliveries and buy and/or lease used aircraft to help fuel their growth in the short term.
Two other important questions for Boeing and Gulfstream are whether China’s proposed tariff would affect aircraft that Chinese customers have already ordered, or just aircraft yet to be ordered; and whether the tariff will apply only to aircraft placed on China’s B-prefixed national registry. Were this the case, as Asian business aviation insiders believe it is, it would represent good news for Gulfstream—and to some extent Boeing.
Of the 20 G550s, G650s, and G650ERs Gulfstream delivered to Chinese customers in the 15 months to March 31 (representing 21 percent of its total deliveries of those types during the period), only 10 were placed on the Chinese registry; the other 10 were registered elsewhere, according to Vincent. While the Chinese Government requires all aircraft operated by Chinese airlines to be B-registered, Chinese customers can register their business jets offshore. China is important to Gulfstream: of 431 business jets operated in China today, 181 are Gulfstream types and 112 of those are G550s, G650s, and G650ERs, according to JetNet iQ.
Definitive answers to all these questions likely won’t be forthcoming until China learns what the U.S. Government’s own final plans are for levying tariffs on U.S. imports of Chinese goods. No one will know what those plans are until the U.S. International Trade Commission issues its findings following a May 15 hearing on the Trump Administration’s tariff proposals.
Meanwhile, continuing U.S.-China negotiations over the respective tariff proposals hold out the hope China won’t impose a tariff on U.S.-manufactured aircraft at all, according to Foley. Noting that the U.S. acted quickly to exclude key trading partners Canada and the European Union from its planned tariff on imported steel and aluminum, Foley said the move indicated “there is likely to be some back and forth” between the U.S. and China on what, if any, tariffs each might decide to impose.