The World Trade Organization (WTO) recently gave the European Union (EU) the green signal to impose tariffs worth $4 billion on U.S. exports in retaliation to the U.S. government’s unlawful aid to Boeing BA. No doubt, the latest ruling added fuel to the long-standing trade feud prevalent between these two nations, with jet giants Boeing and Airbus EADSY at the center of the conflict.
Background of the Feud
In 2004, the U.S. Trade Representative (USTR) filed a formal complaint with the WTO against European governments for the subsidies they provided to Airbus. The complaint mentioned that interest rates charged for the loans that the government gave Airbus were much lower than what commercial lenders charged. In addition, Airbus repaid the money, only after it delivered the aircraft to customers. That, according to Boeing, gave Airbus a significant competitive advantage, considering the capital-intensive nature of the commercial airplane business.
In retaliation, the EU filed a counter-complaint alleging that the U.S. government subsidized Boeing’s commercial airplane business through defense and NASA pacts. This was probably the start of the trade war between America and EU that has only expanded over time.
What Led to the Tariff Imposition?
The conflict rekindled in October 2019, when, following a WTO ruling, Washington slapped 10% tariffs on Airbus planes and 25% duties on French wine, Scotch and Irish whiskies, and cheese from across EU. The tariff worth $7.5 billion, however excluded EU-made aircraft parts used in Airbus' Alabama assembly operations or those used by rival U.S. planemaker Boeing, for safeguarding U.S. manufacturing jobs.
Naturally, this antagonized the EU government and since then it has been petitioning for levying a similar tariff on U.S. exports. Notably, the latest ruling is only one-third of the EU’s request for imposition of a $12 billion tariff on U.S. goods. However it was much more than $300 million anticipated by the U.S. government.
Who Will be Affected?
Per major media sources, the EU is aiming its tariffs at coal producers, farmers and fisheries, wine, cheese, whiskey, in addition to aircraft makers.
Within Aerospace, while aircraft manufacturers are anticipated to directly feel the heat of the conflict, parts-makers like Teledyne Technologies and Hexcel Corp. HXL are also expected to suffer, albeit to a lesser extent. This is because the global aircraft supply chain is spread across various nations and no one country possesses everything to manufacture planes without depending on global supply. For instance, although based in Connecticut, Hexcel Corp. has production facilities in EU. May be that’s why the U.S.-imposed tariff on EU goods exempted aircraft parts. However, the back-to-back trade war is going to have an impact on them as well.
Airlines, consumers of aircraft manufacturers, will also get affected. Since such high tariffs tend to push up the cost of aircraft, be it U.S.-made or European, jet carriers will have to bear the same. This will add to the perils of the airline industry, which has been the worst affected due to the travel restriction across the globe caused by the coronavirus outbreak, since mid-March. In particular, with American Airlines AAL and Delta Air Lines DAL operating maximum Airbus fleets among U.S. carriers, once the recent WTO ruling is imposed, these airlines will face operational loss.
Following the October ruling, Wine & Spirits Wholesalers of America (WSWA) estimated that the 25% tariffs implemented might result in the loss of nearly 36,000 jobs in the beverage alcohol industry. In 2019, as stated by the Distilled Spirits Council of the United States, the U.S. spirit industry’s exports to the EU, its largest export market, fell 27% year over year. No doubt, the latest WTO ruling will cause the U.S. export figures to the EU to fall further, thereby adding to the concerns of wine stocks like Constellation Brands STZ and Diageo DEO.
Tit-for-tat tariffs imposed are hurting companies and consumers on both sides of the Atlantic. So, both the United States and EU, as urged by experts, should come to a negotiation for a sustainable trade deal so that both the economies, which have just started to recover from the pandemic-led turmoil, can survive over the long term.
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The Boeing Company (BA) : Free Stock Analysis Report
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