The freeze on the production of the Boeing 737 MAX could have unintended consequences for Donald Trump and his trade agenda.
President Trump has constantly attacked other countries by accusing them of ripping off the U.S. by running trade surpluses against the world’s largest economy. His proposed remedy? Tariffs!
So far this has had mixed results. The most recent report from the U.S. Census Bureau shows the goods deficit in international trade fell from $70.5 billion in September to $66.5 billion in October. That could count as “winning” if sustained, but now America’s largest exporter Boeing (NYSE: BA) has thrown a wrench into the works by placing a production freeze on its most popular commercial aircraft, the 737 MAX.
All other factors remaining constant, this could widen the U.S. trade deficit since aircraft exports constitute a significant percentage of exports.
Here are three reasons why.
With the production freeze, some of Boeing’s customers eyeing the 737 MAX series will be tempted to switch to its chief competitor, Airbus. This would further dent Donald Trump’s efforts to reduce the goods trade deficit. Currently, civilian aircraft exports comprise a significant percentage of U.S. exports. In the second quarter of 2019 aerospace exports in the top 20 U.S. export markets were worth over $36 billion.
The best choice for airlines is, of course, the A320neo, which is the direct competitor to the 737 MAX 8. The latter seats a maximum of 210 while the MAX 8 has a passenger capacity of 194. In November, Airbus delivered 55 A320neo planes to its customers as the 737 MAX lay grounded indefinitely.
Even after all the problems involving the 737 MAX have been resolved, Boeing will have suffered reputational damage. This could hit its market share and by extension U.S. goods exports.
Already, the negative press related to the 737 Max crashes seems to have cost the giant plane maker the leading position with regards to its popular 737 series.
As of November, the A320 series had notched 15,193 orders against the 737’s 15,136 orders. Consequently, the A320 is now the world’s most popular commercial aircraft.
So far this year Boeing has suffered 84 commercial plane order cancellations.
Boeing’s production freeze will mean that the backlog of orders of the 737 MAX will be pushed even further down the line. But even after regulators give the green light for the model to fly again, it could take months or years for customers to have their orders delivered.
This is bound to be reflected in lower civilian aircraft exports in the interim period, hurting Donald Trump’s agenda to reduce the trade deficit. According to Boeing, 107 customers have ordered around 5,000 units of the 737 MAX. By February, only a little over 370 units had been delivered.
Additionally, Boeing’s attempts to win back market share when regulators allow the 737 MAX to fly again could be complicated by EU tariffs. This could potentially reduce Boeing’s European competitiveness even further.
Commanding more than a fifth of its aerospace markets, the EU tariffs will without a doubt make Boeing planes and parts more expensive relative to Airbus’. In the air travel business where margins are sometimes razor-thin, customers will vote with their wallets.
Last modified: September 23, 2020 1:24 PM