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Dec. 5, 2019, © Leeham News: The Trump Administration Tuesday threatened to increase the tariffs on European goods after a World Trade Organization (WTO) compliance panel concluded Airbus and the European Union have not fully cured illegal subsidies on the A350 and some residual “harm” to Boeing remains as the A380 program winds down.
The EU and Airbus criticized the conclusions as faulty. The EU is expected to appeal by next Wednesday.
The Administration already imposed a 10% tax on the A320 family, the A330neo and A350 imported into the US. So far, the A320 family assembled at Airbus’ Mobile (AL) plant are exempt.
US airlines and lessors whose lessees are US carriers are required to pay the tax. Airbus and its customers are working the problem behind the scenes.
Citi Research last month hosted a series of Airbus meetings in Asia with investors in which the subject of tariffs came up—the only topic to be raised in every meeting. Dominik Asam, the Airbus CFO, provided the most transparent company view LNA has seen, which was reported by Citi in its post-meeting research note.
Because Airbus has the Mobile Final Assembly Line (FAL), which has the capacity to produce eight airplanes a month (it’s currently trending toward six), and Mobile is a Free Trade Zone, this puts Airbus in a better position than Boeing once the EU imposes tariffs next year, Citi recounted in its Nov. 22 note.
But a trade war, with the US and EU imposing tariffs on Airbus and Boeing airplanes, is the least welcome outcome, Citi reports, citing Asam.
“If tariffs were to stay in place and the Europeans are allowed to impose counter tariffs from Q2 2020 (when the counter-ruling is expected) it is possible to see an Airbus monopoly in Europe and a similar counter-monopoly in the US.
“Under this scenario, in theory, both OEMs could make more money due to lack of competition. However, Airbus brought competition to the marketplace and fundamentally believes that competition is a good thing and that tariffs make no sense,” Citi wrote.
Asam told investors that the airlines, not Airbus are liable for paying the tariffs on European built planes, Citi reported.
“Contractually Airbus could force the airlines to pay the tariff or could keep the pre-delivery payments. Those European built aircraft that have entered that are bound for US carriers are being produced and Airbus is entering negotiations with the US airlines to find some agreement or compromise on ‘sharing the pain,’” Citi wrote.
Reconfiguring and remarketing the aircraft might cost more than the 10% tariff, Citi wrote. Also, “Airbus believes in building a long-term partnership with the airlines and believes that ‘doing the right thing’ will hold them in good stead in the future.”
For airplanes not already in production, Citi reports that Airbus insists the customers pay the tax or defer deliveries.
Deferrals are acceptable to Airbus, as it opens sales possibilities elsewhere. Although Citi didn’t address this issue, LNA has been told this presents an opportunity to make further inroads into the single-aisle airplane sector while Boeing is crippled by the MAX grounding. A321XLR sales could also benefit with its new long-range capabilities of up to nine hours of flight.
The Mobile facility was exempted after the Alabama Congressional delegation and local politicians lobbied the Trump Administration to forego tariffs on A320s assembled there. However, in the original list of goods and industrial products the Administration listed as potential targets for taxes, fuselages, wings and components built in EU countries, including the UK despite its pending exit from the EU, could be subject to taxes.
All of these are imported into Mobile for final assembly into the finished airplanes.
Wings for the A220 are manufactured in Northern Ireland, which is part of the UK. An A220 FAL is being constructed in Mobile. A literal reading of the list does not distinguish between A220 and A320 components.
Between 60%-70% of the US demand for A320s may be fulfilled by the Mobile plant.
An additional threat: the WTO authorized the US to impose a 100% tax on imported Airbuses. The Trump Administration could boost the tax from 10% at any time.
The EU threatened to impose retaliatory tariffs on Boeing as soon as the Trump Administration levied taxes on Airbus Oct. 19. The EU cited previous, unused authority granted in unrelated trade cases.
But when the time came, the EU folded. It didn’t want to “escalate” trade tensions, said a person familiar with the thinking.
The fear was not an idle one. Donald Trump, visiting Europe this week, threatened new tariffs on French goods in retaliation for a French tariff on US digital services.
The EU’s tolerance may end next May or June, when the WTO’s arbitration panel issues its finding of just how much in the way of tariffs the EU may impose on US goods—including Boeing airplanes—for illegal subsidies from the US and Washington State that benefitted Boeing.