Aerospace Industry Divided on Retaliatory Tariffs Against EU Imports

As the Office of the U.S. Trade Representative considers which European products to target in retaliation for launch subsidies to Airbus aircraft, it's getting divergent messages from U.S. aerospace interests. Boeing says it's not a time for half-measures or gradual steps, after 15 years of negotiations and legal action at the World Trade Organization. Instead, USTR should put 100 percent tariffs on Airbus planes, wings, tails and fuselages, said the aircraft maker's chief executive for regulatory and legislative affairs, Theodore Austell. He argued that if it's not at 100 percent, "we're unlikely to get their attention."

"Large tariffs on those items will finally force Airbus and the EU to make the choice they should have made years ago to come into compliance," he said at a public hearing on the retaliatory tariffs held May 15 in Washington.

The USTR is considering $11 billion worth of tariffs on more than 300 tariff lines. Only nine of those target airplanes and helicopters and airframe parts, while others seem to be responding to trade irritants, such as dairy and olives, or to previous European retaliatory tariffs on U.S. motorcycles. The World Trade Organization is evaluating whether the U.S. estimate of $11 billion in damages is too high. The total in tariffs, therefore, could end up being lower.

But even the tariffs narrowly targeting Airbus could affect American jobs. Airbus assembles single-aisle planes -- the biggest segment of the commercial aviation market -- in Alabama, and representatives from that state said their jobs should be just as valued as those at Boeing.

Mobile, Alabama, Mayor Sandy Stimpson said his city is on pace to be the fourth-largest center of aerospace manufacturing, behind Seattle, Toulouse, France, and Hamburg, Germany, he said. He asked USTR not to take any action that would reduce that growth. According to the Alabama plant's general manager, there are more than 700 contractors and employees onsite in Mobile, and a planned additional line would add 650 more.

But even Austell said the tariffs proposed by USTR create collateral damage for U.S. firms, as Boeing imports undercarriages from Europe. While USTR is only targeting certain items under the 8803.20.0030 code, undercarriages are one of those items.

The Aerospace Industries Association, the largest trade group for aerospace, also asked USTR to be cautious in tailoring the list. Tariffs on aftermarket parts would make maintaining airplanes more expensive. The witness was asked how CBP could distinguish between parts used in assembly and parts used for maintenance.

Tariffs on the fuselages, wings and tails would hurt Airbus's bottom line quickly, because the prices for the planes that are assembled in Alabama and sold to U.S. companies are already agreed to.

But Scott McClain, associate general counsel at Delta Air Lines, said tariffs on the finished planes would only hurt U.S. airlines that have contracted to buy Airbus planes. McClain said that as of April 1, Delta has 200 Airbus aircraft on firm order, which means they cannot cancel the orders, and the price is fixed. While many of those planes will be produced in Alabama, that facility doesn't have enough capacity to produce all the U.S. orders. So Delta expects to continue taking delivery from Toulouse and Hamburg. McClain said that even a small percentage duty on finished planes would cost Delta dearly, as wide-body planes -- which are not assembled in the U.S. -- cost more than $100 million each, and narrow-body planes cost tens of millions.

Even though aircraft engines are not part of the WTO case, they could be hit with tariffs through a number of indirect paths.

Nicholas Camody, who represents a company that imports a chromium alloy used in jet engine manufacturing, told officials that 80 percent of the global supply of the alloy is from Germany, and putting a tariff on that product would increase the costs to Boeing, since both of its engine manufacturers -- GE and Pratt & Whitney -- rely on the alloy.

The National Association of Foreign-Trade Zones said that if USTR continues to take the approach it has thus far on Section 301 tariffs, GE/Safran joint venture engines imported for either Boeing or Airbus aircraft could be taxed, even though they're not on the list. Engines destined for Boeing are mostly assembled in the U.S., but half of all the joint venture's engines are assembled in France.

How could items not on the list get hit with tariffs? Airbus uses the FTZ program, and the way USTR has been applying Section 301 tariffs has meant that all foreign content in goods manufactured inside FTZs is being taxed if the end product is on a Section 301 list, and if China is the country that accounts for the largest percentage by value of foreign inputs. In this case, it would be that all foreign content from France or Germany would be taxed if one of those countries is the source of the highest value input.

NAFTZ President Erik Autor told officials that NAFTZ doesn't have a position on what's on the list, but wants this anomaly corrected. "This unbalanced tariff treatment is contrary to law and undermines the integrity of the trade remedy system," he said. And it makes assembly in an FTZ less advantageous than assembling outside one if the manufacturer is affected by these tariffs.