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Flying in the Face of Airbus Tariffs: An Analysis of the World Trade Organization Ruling

January 20, 2020
President Donald Trump has shifted American trade policy since entering office, most famously starting a trade war with China. The president, however, has also started trade disputes with other nations, including long-time American allies. In particular, the United States and the European Union have faced increased trade tension. For example, the president revived a long-running disagreement between Boeing and Airbus by placing tariffs on Airbus. This dispute represents a case study into the origins and consequences of Trump’s trade policy.

President Donald Trump has shifted American trade policy since entering office, most famously starting a trade war with China. The president, however, has also started trade disputes with other nations, including long-time American allies. In particular, the United States and the European Union have faced increased trade tension [1]. For example, the president revived a long-running disagreement between Boeing and Airbus by placing tariffs on Airbus [2]. This dispute represents a case study into the origins and consequences of Trump’s trade policy.

The aircraft industry is a duopoly between Boeing, the only American manufacturer of large civil aircraft, and Airbus, its European rival [3]. The Boeing Company is currently the world’s largest aerospace company and the US’s largest manufacturing exporter [4]. It employs 153,000 people worldwide [5] and earned $101.1 billion in revenue in 2018 [6]. The French, German, and British governments pooled the assets of smaller aviation companies in 1970 to create Airbus, which was intended to compete against American manufacturers [7]. Currently, Airbus employs approximately 133,000 employees worldwide [8] and earned €64 billion, approximately $70 billion, in revenue in 2018 [9].

Boeing-Airbus Trade Disputes:

British, German, French, and Spanish subsidies to Airbus have long been an area of disagreement between the European Union and the United States. In October 2004, the US filed a World Trade Organization complaint against the EU, arguing that cheap loans to Airbus amounted to illegal state subsidies [10]. The US alleged that the European Union and in particular, the United Kingdom, Germany, France, and Spain, conferred $18 billion in subsidized financing to Airbus which caused Boeing to lose sales across the world [11]. As compensation for Boeing’s lost revenue, the case sought tariffs on $11 billion of European goods [12]. The amount was based on WTO findings that European support for Airbus causes Boeing lost sales in large civil aircraft in European, Australian, Chinese, Korean, Singaporean, and Emirati markets [13].

On October 18, 2019, the WTO allowed the United States to impose $7.5 billion in tariffs on EU aircraft, along with other products such as cheese and wine [14]. It was the largest arbitration award in WTO history [15]. The ruling allowed the US to impose a 10% tariff on large civil aircraft [16] and a 25% tariff on other items [17]. However, the retaliatory tariff schedule could change at any time. The Trump administration, for example, has raised the idea of imposing duties on European automakers [18].

A similar case is making its way through the WTO about illegal American subsidies to Boeing [19]. The EU has won a preliminary ruling in this case, which will likely allow it to eventually impose its own retaliatory tariffs [20]. The outcome of the case will be decided in the first half of 2020 [21].

General Effects:

The WTO ruling comes amongst other trade tensions between the EU and the US. In 2018, the US imposed steel and aluminum tariffs on the EU [22]. In turn, the EU imposed retaliatory tariffs on €2.8 billion of American goods [23]. Retaliatory tariffs may contribute to further deterioration of the EU-US relationship.

This ruling also affects other countries. In particular, upstart aircraft manufacturers from China and Russia may take advantage of the tension to increase their own market share. The China-Russia Commercial Aircraft International Company (Craic) is a Russian and Chinese subsidized company that was established in 2016 [24]. Craic was started to compete with Airbus and Boeing. In addition to Craic, China’s Commercial Aircraft Corporation (Comac) and Russia’s United Aircraft Corporation  also aim to break Boeing and Airbus’s duopoly [25]. French Finance Minister Bruno Le Maire warned that tariffs will leave an opening for these companies to gain a larger market share [26]. Although Comac’s planes are not yet approved by the Federal Aviation Agency, the company is beginning to target carriers in emerging countries like Ghana [27]. Some economists, however, doubt that a third company could successfully break the duopoly [28].

Effects on the United States:

The effects of the tariffs on American aircraft part suppliers and workers are minimal. Airbus claims that import duties will disrupt industry, raise costs, and hurt the broader US economy [29]. As evidence, they cite that 40% of their procurement comes from American suppliers and their spending supports 275,000 jobs in 40 states [30]. However, the ruling spared Airbus manufacturing plants in the US, since the 10% tariff only applies to fully manufactured planes imported to the US, not airplane parts [31]. Both local and federal Alabama politicians, for example, have expressed support for the deal, since the Airbus plant in Mobile will not be affected by the tariffs [32].

The tariffs, however, are not without cost. American airlines will directly pay tariffs, which they will pass on to consumers. Since contracts are set years in advance, airlines cannot easily back out of deals they have already made; instead, they will be forced to buy the planes and incur tariff costs [33]. Airlines’ increased costs will likely be passed along to consumers [34]. Delta Air Lines, for example, has 246 Airbus planes on order, for which they will have to pay the tariff to import [35]. To recoup losses, Delta will pass the cost of the tariff on to passengers [36]. However, airlines may ask Airbus to pay the tariffs, since the company has been directly involved in the subsidy dispute [37].

While the tariffs are intended to give Boeing a pricing advantage in the domestic US market, their long-term benefit is limited. Because the US imposed tariffs, the EU will likely impose retaliatory tariffs in the Boeing subsidy case [38]. After both cases are resolved, Boeing will gain market power in the US, while losing it in Europe [39]. While the US is not poised to lose jobs due to the tariffs, as shown by Delta, American consumers may pay more for airline tickets [40] without giving Boeing any real long-term advantages.

Effects on the European Union:

Airbus will suffer most from the tariffs as it will lose profits in the American market. Tariffs will require American importers of Airbus planes to pay a 10% trade duty [41], which will make Airbus planes relatively more expensive than Boeing planes. To recoup lost business, Airbus could reimburse American airlines for some of the trade duties. Regardless of whether they reimburse airlines or lose business, Airbus’s profit in the American market will shrink.

More broadly, WTO tariffs are intended to punish the countries that subsidized Airbus: France, Germany, Spain, and the United Kingdom [42]. To that end, American tariffs also target industries beyond aviation, such as Spanish olives, British sweaters and woolens, and German tools and coffee [43]. Some products will lose a large portion of their sales, since tariffs target products for which Americans are sensitive to price. The French wine industry will lose customers, for example, since the US is the world’s top wine importer [44] and buys more than $1 billion of French wine each year [45]. Studies have shown, however, that although Americans consume lots of wine, they are sensitive to its price [46]. Facing higher prices, American consumers will choose to buy less of the targeted European products, leading producers to lose business.

The tariffs will also hurt other European countries. The WTO authorized tariffs on the whole EU, not just the countries that subsidized Airbus [47]. For example, American importers of Italian Parmigiano-Reggiano and Pecorino Romano will pay approximately $200 more per wheel [48]. Beyond lost sales in industries producing the newly targeted products, these tariffs may also increase political tension within the EU; countries that did not subsidize Airbus are paying for the mistakes of France, Germany, Spain, and the UK [49].

Conclusion:

After the US won its case alleging illegal European subsidies to Airbus, they rushed to impose tariffs on $7.5 billion worth of European products. Although the tariffs are intended to protect Boeing, they will likely provoke retaliatory tariffs against Boeing once a similar WTO case is resolved. While the US will not lose jobs due to the tariffs, American air passengers will pay more for air travel.

As for the European Union, tariffs primarily harm Airbus, since their American customers must pay trade duties on Airbus planes. Producers of other exports targeted by tariffs, such as French winemakers and Italian cheesemakers, will also lose business. American consumers will face 25% higher prices on targeted products, leading them to buy less. Tariffs also harm countries that do not subsidize Airbus, which will also increase tensions within the European Union. These tariffs, while seemingly a justified way to compensate Boeing, will reduce trade between the European Union and the United States in the aircraft industry and other areas. Any short-term gain will be offset by long term trade tensions.

Sources:

  1.   https://www.reuters.com/article/us-g7-summit-trade/eu-hopes-to-ease-trade-tension-with-u-s-at-g7-summit-official-says-idUSKCN1VC226
  2.   https://www.reuters.com/article/us-g7-summit-trade/eu-hopes-to-ease-trade-tension-with-u-s-at-g7-summit-official-says-idUSKCN1VC226
  3.   https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/october/us-wins-75-billion-award-airbus
  4.   https://www.boeing.com/company/general-info/
  5.   Ibid.
  6.   https://www.aviationtoday.com/2019/01/30/boeing-brings-in-100-billion-in-2018-revenue/
  7.   https://pdfs.semanticscholar.org/6827/4782eeda64ba84636ff24cfa7a7fe42260b2.pdf
  8.   https://www.statista.com/statistics/264361/eads-worldwide-number-of-employees-since-2006/
  9.   https://samchui.com/2019/02/14/airbus-posted-2018-financial-results/#.Xch2pUXYrOQ
  10.   https://www.bbc.com/news/business-49906815
  11.   https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/october/us-wins-75-billion-award-airbus
  12.   https://www.bbc.com/news/business-49906815
  13.   https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/october/us-wins-75-billion-award-airbus
  14.   https://www.bbc.com/news/business-49906815
  15.   https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/october/us-wins-75-billion-award-airbus
  16.   https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/october/us-wins-75-billion-award-airbus
  17.   https://www.al.com/business/2019/10/really-big-deal-for-mobile-reaction-of-praise-relief-over-trumps-tariff-plan-for-airbus.html
  18.   https://www.wsj.com/articles/eu-pledges-restraint-as-u-s-moves-to-add-tariffs-11570130666?mod=searchresults&page=1&pos=5
  19.   https://www.cnbc.com/2019/10/31/us-and-europe-speak-airbus-and-boeing-for-the-first-time-after-trump-tariffs.html
  20.   http://trade.ec.europa.eu/doclib/press/index.cfm?id=1999
  21.   https://www.cnbc.com/2019/10/31/us-and-europe-speak-airbus-and-boeing-for-the-first-time-after-trump-tariffs.html
  22.   https://www.vox.com/world/2018/5/31/17413172/trump-tariff-steel-aluminum-eu-canada-mexico
  23.   https://www.cnbc.com/2019/10/31/us-and-europe-speak-airbus-and-boeing-for-the-first-time-after-trump-tariffs.html
  24.   https://money.cnn.com/2017/05/23/news/companies/china-russia-airplane-partnership/index.html
  25.   Ibid.
  26.   https://fortune.com/2019/04/17/us-eu-tariff-boeing-airbus-comac/
  27.   Ibid.
  28.   https://knowledge.wharton.upenn.edu/article/boeing-airbus-tariffs/
  29.   https://www.bbc.com/news/business-49906815
  30.   Ibid.
  31.   https://www.reuters.com/article/us-wto-aircraft/u-s-widens-trade-war-with-tariffs-on-european-planes-cheese-whisky-to-punish-subsidies-idUSKBN1WH0SI
  32.   https://www.al.com/business/2019/10/really-big-deal-for-mobile-reaction-of-praise-relief-over-trumps-tariff-plan-for-airbus.html
  33.   https://www.cnbc.com/2019/10/02/us-to-issue-tariffs-on-airbus-planes-but-travelers-will-pay.html
  34.   Ibid.
  35.   https://knowledge.wharton.upenn.edu/article/boeing-airbus-tariffs/
  36.   Ibid.
  37.   https://www.cnbc.com/2019/10/02/us-to-issue-tariffs-on-airbus-planes-but-travelers-will-pay.html
  38.   https://www.ft.com/content/9a2c5af6-e51c-11e9-9743-db5a370481bc
  39.   https://knowledge.wharton.upenn.edu/article/boeing-airbus-tariffs/
  40.   Ibid.
  41.   https://www.dw.com/en/us-imposes-record-75-billion-tariffs-on-european-goods/a-50880622
  42.   https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/october/us-wins-75-billion-award-airbus
  43.   https://www.reuters.com/article/us-wto-aircraft/u-s-widens-trade-war-with-tariffs-on-european-planes-cheese-whisky-to-punish-subsidies-idUSKBN1WH0SI
  44.   https://www.wsj.com/articles/eu-pledges-restraint-as-u-s-moves-to-add-tariffs-11570130666?mod=searchresults&page=1&pos=5
  45.   http://www.worldstopexports.com/top-wine-importing-countries/
  46.   https://www.wsj.com/articles/eu-pledges-restraint-as-u-s-moves-to-add-tariffs-11570130666?mod=searchresults&page=1&pos=5
  47.    http://www.library.uwa.edu.au/__data/assets/pdf_file/0018/102528/04_01_Fogarty.pdf
  48.   https://www.vox.com/2019/10/3/20896811/trump-tariffs-wto-airbus-european-union-wine-cheese
  49.   https://www.cnbc.com/2019/10/18/italian-cheese-producers-us-consumers-brace-for-eu-tariffs.htm

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>