Boeing’s woes will complicate US-China trade talks
New plane purchases are crucial to Beijing’s proffered buying list
The grounding of Boeing's 737 Max 8 threatens to complicate US-China trade talks by making it more difficult for Beijing to present US president Donald Trump with a headline-grabbing boost to the value of goods it buys from the US.
Chinese airlines and financial leasing companies have the largest order book outside the US for the 737 Max, which is under scrutiny from regulators worldwide after two deadly crashes within the last six months. The model is also central to Boeing’s plans, accounting for 80 per cent of the undelivered aircraft in its pipeline.
Boeing has suspended delivery of the 737 Max after regulators grounded the plane in the wake of an Ethiopian Airlines crash last Sunday, which led to the deaths of all 157 people on board. An Indonesian Lion Air flight, involving the same type of aircraft, also crashed soon after take-off in October killing 189 people.
The uncertainty over the 737 Max creates a quandary for China’s trade negotiators, who have responded to the Trump administration’s pressure over industrial policies by offering to buy an additional $1.2tn in US exports over six years. Boeing aircraft feature heavily on Beijing’s shopping list, which also includes more purchases of soyabeans, corn, natural gas and crude oil.
China is already struggling to reach that $1.2tn target, Washington-based sources say. A weak number on purchases could heighten perception of a bad deal and reduce political support for it in the US, even though most of the difficulty in reaching an agreement has centred on more intractable structural issues.
The crashes, and China’s swift move in grounding the model, make it hard for Beijing to offer to buy more 737 Max aircraft.
“We certainly cannot buy this model. It's an issue of safety, not trade,” said He Weiwen, a former Chinese diplomat and now a senior researcher at the Center for China and Globalization in Beijing. “Other Boeing models do not have such issues, especially those that have been proven to have great quality after operating for years. We can still purchase those, but without any doubt there should be stricter quality checks before acceptance.”
A meeting between President Donald Trump and his Chinese counterpart Xi Jinping has been pushed back to April — with the US president saying he was in “no rush” to strike a trade deal. Major issues have still not been ironed out, US trade representative Robert Lighthizer said last week, as the sides haggle over the enforcement mechanism, the fate of existing tariffs, and the scope of Chinese concessions on industrial subsidies and intellectual property. The delay offers Boeing some breathing room for it to introduce improvements to the 737 Max that could reduce concerns about possible purchases.
The Ethiopian Airlines crash has come at a particularly bad time for Boeing, which was hoping to benefit from the US-China trade deal. Just days before the disaster, Dennis Muilenburg, chief executive of Boeing said: “I think there’s an economic opportunity here for aeroplanes to be part of the ultimate deal and help further close the trade deficit gap.”
Chinese airlines or Chinese-owned leasing companies account for about 10 per cent of Boeing’s unfilled orders for the 737 Max series. Almost a quarter of the pipeline comes from unidentified buyers, some of whom are also mainland buyers. And it will not be easy to change the order for a different plane.
The biggest order book of more than 100 737 Max aircraft is with subsidiaries of Avolon, the Irish leasing company owned by Chinese aviation-to-financing conglomerate HNA and Japanese financial services company Orix. BOC Aviation, a leasing company under Bank of China, has 90 of the 737 Max family planes on order, while China Development Bank’s finance arm, has 77 on order.
Airbus could try to take advantage of any immediate loss of appetite in China for Boeing aircraft purchases. An aide to Emmanuel Macron, the French president, told Reuters this week there were “positive” signs in talks for Airbus to clinch a big new order of narrow-body jets when Mr Xi travels to France later this month. For Beijing, a big flashy purchase of the Boeing 737 Max would simply be excessive under these circumstances, analysts said.
But Boeing is also central to China’s industrial policy. Boeing has recently opened a new facility on an island in the Chinese archipelago of Zhoushan, to paint and fit out planes flown in from the US. That provides Beijing a strong incentive to keep buying American planes as it develops its own aircraft industry. Beijing likes to ensure that it does not rely too heavily on one aircraft supplier, and will probably wish to maintain a limit on orders of Airbus, the other major global supplier of passenger aircraft. A homegrown Chinese plane is not yet ready for commercial use.
“If Boeing Max aircraft were in the mix of planned Chinese purchases of American goods as part of a trade deal, the Chinese will probably look to substitute something else,” said Bonnie Glaser, senior adviser for Asia at the Center for Strategic and International Studies, a Washington-based think-tank. “Until the aircraft gets a clean bill of health, the Chinese won’t take such risks. Party legitimacy is at stake.”