Triumph of Trump the Tariffman Sep/Oct 2024

So how much of his radical agenda will actually be implemented? Of course, no one knows, but Trump can never again be underestimated.

His new trade policy is based on tariffs — proposed at 60% for imports from China and probably 20% for Europe. Implementing this policy would be much easier than deporting millions of illegal immigrants.

The 19^th century English economist David Ricardo developed the Theory of Comparative Advantage, which postulated that both global and national welfare would be maximised under a regime of free trade in a world without tariffs or other barriers to trade. In practical terms, the theory recommended that countries concentrate on economic activities where they have an efficiency advantage relative to others, trade goods and services in the interest of consumers, and ignore politicians. Among free market economists it has proved to be a robust theory. Its validity becomes particularly clear when extreme isolationist policies are pursued; in the 1930s the 40-60% tariffs imposed on imports to the USA were a major contributor to the Great Depression.

President Trump obviously does not care about Ricardo. His view seems to be that trade is a zero-sum game; if the USA has a trade deficit with a foreign country, that country must have been unfairly under-cutting the USA. Tariffs will protect American industry and American workers. And in trade negotiations (a kernel of truth here), the USA has a huge advantage because of its size and the fact that its domestic sector is much larger than its international one.

What does a 20% tariff mean for aircraft manufacturing?

Probably, a much more vicious version of the pre-2019 US/EU trade war when the US imposed 10% tariffs on Airbus products to compensate for unfair launch aid, and the EU retaliated by placing taxes on Boeing products, citing unfair subsidies to Boeing from NASA, the US DoD and others.

The commercial truce agreed between the US and the EU is now again threatened by a double-edged tariff war. A quick look at the orderbook tables on page … reveals some of the unintended consequences of simplistic tariff laws.

Our estimate of the values (actual rather than list) of Airbus’s current orderbook destined for US customers is $48bn; the value of Boeing’s orders by European entities is $53bn. So who pays the 20% tariff, potentially about $10bn for Airbus and, assuming European retaliation, also about $10bn for Boeing? The answer is: some combination of the OEMs, the airline/lessor purchasers and ultimately the passengers.

Is Boeing going to jeopardise its fragile recovery plan by alienating customers like Ryanair and Lufthansa? If not, it will have to absorb additionals costs. What is the position of the leasing companies, based in Ireland, but backed with American capital?

Are the leading US network airlines — United, Delta and American — going to have to accept additional billions in import taxes on their Airbus orders? What about the airlines like Frontier, JetBlue and Spirit which have recently suffered financial difficulties?

There is also the question of the international ownership of the aeroengine manufacturers whose engines come attached to US imports. IAE is 50% Pratt & Whitney, 25% MTU, 25% Japanese Aeroengine Consortium; CFM is 50% GE, 50% Safran.

Punitive tariffs on China will further isolate it from the USA. They could even threaten the projected long-term global traffic growth which is supposed to be led by China. Very probably, they would reinforce Airbus’s advantage in this market — Airbus’s Chinese orderbook is currently double that of Boeing.