A 15-year trade dispute between the US and EU is set to get a lot more animated with the enforcement of increased levies. This week, Airbus had a 10% tariff imposed by the US government to pressurize the termination of the age-old trade discord. Such a decision is likely to have a large impact on the two largest airframers and its customers.
This week, on 14 February, the United States Trade Representative (USTR) revised its levy on imported European aircraft in order to motivate a settlement of a 15-year-old trade dispute. In a statement released on the day, the USTR said that an additional 5% tax increase would be implemented on European Aircraft. The USTR stated:
“…the United States won the largest award in WTO history[…]when it was authorized to take countermeasures on $7.5 billion in goods after a victory in its unfair trade practices case against the European Union, France, Germany, Spain, and the United Kingdom…The United States is increasing the additional duty rate imposed on aircraft imported from the EU to 15% from 10%, effective March 18, 2020, and making certain other minor modifications.”
Under its suggestion of “certain other minor modifications” the US will place an additional tax on EU imported food. This tax will sit at 25%, so on a certain level, it might seem as though aircraft taxation has gotten off lightly. Not quite.
This new regulation will have particularly costly implications if it goes ahead before the dispute can be solved. In a month’s time, Airbus and Boeing are likely to experience the effects of increased importation duty but not everything will be bad.
What’s at stake?
For European-based airframer Airbus a lot is a stake right now. At present, the airframer has benefitted from subsidies imposed by the European Union which means that it could affordably import its aircraft and parts into the United States. The United States believes that this is unfair. It put American company Boeing at a disadvantage since it was able to offer its aircraft cheaper.
For Airbus, what’s at stake is the future of its economic operations. The 15% tax duty presents additional costs that need to be recovered if it is to remain profitable. There are two options: Airbus can either recover its costs directly from the airline or the airline will pass the cost onto its customers.
For passengers, that will mean higher airfares which of course poses a threat to airlines’ business. Depending on how much of the tax will be recovered through inflated airfares, some passengers may choose not to fly.
Airlines fronting the costs
However, there’s also a lot more at stake for airlines. Many have already been hampered by recent aviation developments such as the Boeing MAX grounding. As a result, some airlines have turned to Airbus to supply a deficit of aircraft. However, if those airlines are in the United States, siding with Airbus could be a more expensive investment in the future.
Moreover, if Airbus spreads its costs, all Airbus customers might even have to front the bill from increased US levies. Ergo, geographical location will not matter in the decision to choose Airbus or Boeing. Airbus will be more expensive no matter what.
The immediate future does not look bright. Airbus told Simple Flying that the new tax rates complicate the ongoing disagreement. Airbus told us:
“USTR’s decision to impose tariffs further escalates trade tensions between the US and the EU, thereby creating more instability for US airlines that are already suffering from a shortage of aircraft. USTR’s decision ignores the many submissions made by US airlines, highlighting the fact that they – and the US flying public – will ultimately have to pay these tariffs. Airbus will continue its discussions with its US customers and work with them to mitigate effects of tariffs insofar as possible.”
It’s clear that the situation doesn’t look so good for Airbus. So what about Boeing? Its story could be slightly rosier.
Boeing to profit from USTR tax inflation
Could this new development be the silver lining for Boeing? Just last month, Boeing had the worst order form for over 50 years. The airframer did not receive a single order in January 2020, a figure indicative of a changing aerospace climate.
That said, an increased levy on EU imported aircraft could see Boeing profit. Its aircraft are likely to be cheaper than imported Airbus aircraft. This news could see airlines reexamine Boeing’s catalog when it comes to ordering their next aircraft.
It could be said that Airbus has recently, up until this point, been an easier option for airlines seeking aircraft to replace grounded MAX planes. However, Airbus aircraft could be more expensive allowing Boeing to grow attractively and showcase its portfolio. When the MAX is back up and running, trust issues might fall at the wayside. That might be even more beneficial for Boeing.
However, the future is still uncertain. In this game of cat and mouse, what goes around will surely come back around. It is thought that the World Trade Organization will soon permit the EU to deal similar tax increases on US goods. For that reason, Boeing may also be hit by increased importation duties. An Airbus representative told us that this could happen “in the May/June timeframe.”
Will the tax come to a head?
The tax increase from 18 March certainly does not give a lot of time for such a long and complex dispute to be resolved. But how much longer will be needed to settle it before the annual $7.5 billion tax claim is a recurring trend?
Airbus expects the new tax to complicate negotiations. If the EU retaliates with a similar increased tax then it’s going to take a lot for one side to back down. In the event that that doesn’t happen however, the ideal solution would be for the swift settlement of the deal with minor cost to airlines or passengers. But just how likely is that?
What do you make of this story? Let us know your thoughts in the comments.