  {"id":24460,"date":"2017-11-15T17:41:42","date_gmt":"2017-11-15T22:41:42","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/fight-or-flight-boeing-and-the-intensifying-risk-of-a-global-trade-war\/"},"modified":"2017-11-15T17:41:42","modified_gmt":"2017-11-15T22:41:42","slug":"fight-or-flight-boeing-and-the-intensifying-risk-of-a-global-trade-war","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/fight-or-flight-boeing-and-the-intensifying-risk-of-a-global-trade-war\/","title":{"rendered":"Fight or Flight? Boeing and the Intensifying Risk of a Global Trade War"},"content":{"rendered":"<p><strong>Urgency<\/strong><\/p>\n<p>Commercial aircrafts are the backbone of the American economy. Amounting to $121 billion dollars, or 23% of total U.S. outbound trade, civilian aircrafts are manufactured by the Boeing Corporation<a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a>. Boeing controls nearly one hundred percent of U.S. civil aviation manufacturing and is the largest aircraft manufacturer in the world<a href=\"#_ftn2\" name=\"_ftnref2\">[2]<\/a>. It is estimated that nearly 80% of the U.S. economy is in some way affected by the civilian aircraft sector, through manufacturing, supplies, subcontractors, and by-products of aircraft production<a href=\"#_ftn3\" name=\"_ftnref3\">[3]<\/a>.<\/p>\n<p>The United States economy is at extreme risk of trade collapse due to its heavy Boeing exposure. Boeing aircrafts are front-and-center targets in a contentious debate over export subsidies and trade policy adherence. Given the long life of aircrafts, which can remain in service for over 20 years, and the lengthy training needed upon purchase, there is a strong incentive to stick with one aircraft type and brand over time<a href=\"#_ftn4\" name=\"_ftnref4\">[4]<\/a>. Accordingly, competition for customers is severe.<\/p>\n<p><strong>Historical Context<\/strong><\/p>\n<p>Despite fierce competition, the U.S. aircraft industry initially supported free trade<a href=\"#_ftn5\" name=\"_ftnref5\">[5]<\/a>. By the 1980s, this position began to change with U.S. aircraft manufacturers inching towards protectionism. This shift is attributable to two reasons: 1) an increase in the cost of designing large aircrafts, and 2) deregulation of American and European airlines impacting airline demand<a href=\"#_ftn6\" name=\"_ftnref6\">[6]<\/a>. The former increased the scale of manufacturing needed for breakeven profitability. The latter changed consumer demand behavior, principally increasing demand for smaller planes that offered wider range. This behavioral shift prompted all manufacturers to produce more of the same type of aircraft to win over marginal customers, breaking into competitor\u2019s longstanding niches.<\/p>\n<p>By the 1990s, both European Union and the United States implemented aircraft subsidies, prompting international ire. Through a series of trade negotiations, the international community agreed to ban export subsidies. Since the 1994 signing of the Global Agreement on Tariffs and Trade, however, both the U.S. and E.U. have claimed malfeasance<a href=\"#_ftn7\" name=\"_ftnref7\">[7]<\/a><a href=\"#_ftn8\" name=\"_ftnref8\">[8]<\/a>.<\/p>\n<p>Another crucial element of aircraft trade wars is the role of export financing. In the United States, the Export Import Bank, for example, provides loans to customers of U.S. businesses. Some executives have referred to this lending as a \u201cpredatory export financing war,\u201d as it inhibits global competition, claiming that the Ex-Im Bank is in effect \u201cBoeing\u2019s Bank\u201d<a href=\"#_ftn9\" name=\"_ftnref9\">[9]<\/a>.<\/p>\n<p><strong>Short &amp; Medium-Term Solutions<\/strong><\/p>\n<p>Boeing has spent too much time disputing trade. Just this past October, Boeing filed a complaint with the U.S. Commerce Department, arguing that Canadian plane manufacturer Bombardier \u201cdumped\u201d planes into the United States. Boeing alleges that Bombardier was able to sell the planes to Delta below list price due to $2.8bn of subsidies and direct investments from the Canadian government. The irony is that Boeing too benefits from U.S. government support\u2014upwards of $5bn in annual subsidies<a href=\"#_ftn10\" name=\"_ftnref10\">[10]<\/a>\u2014not to mention outright Defense Department purchases of Boeing planes which comprise 23% of the company\u2019s revenue<a href=\"#_ftn11\" name=\"_ftnref11\">[11]<\/a>. Boeing is also the largest beneficiary from the Ex-Im Bank, which has provided $12 billion annually in loans to Boeing customers<a href=\"#_ftn12\" name=\"_ftnref12\">[12]<\/a>.<\/p>\n<p>The Commerce Department responded to Boeing\u2019s complain by levying a 300% duty on the Bombardier planes \u2013 a 220% tariff to compensate for tariffs and an additional 80% as a punishment for \u201cundercharging\u201d Delta. This has backfired against Boeing, with Bombardier deciding to sell its C series business to Airbus, which will now manufacture the planes in Alabama, dodging the tariff entirely. This saga demonstrates the extent to which companies will be creative to circumvent trade regulations, increasing competitive pressures against Boeing<a href=\"#_ftn13\" name=\"_ftnref13\">[13]<\/a>.<\/p>\n<p><a href=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/1-3.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-24384 aligncenter\" src=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/1-3-300x115.jpg\" alt=\"\" width=\"300\" height=\"115\" srcset=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/1-3-300x115.jpg 300w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/1-3-600x230.jpg 600w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/1-3.jpg 700w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a><\/p>\n<p style=\"text-align: center\"><em>Airbus Head of Communications Opines on Boeing\u2019s Complaint to the U.S. Department of Commerce, Source: Twitter<\/em><\/p>\n<p><em>\u00a0\u00a0<a href=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/2-2.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\" wp-image-24418 aligncenter\" src=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/2-2-300x169.jpg\" alt=\"\" width=\"339\" height=\"191\" srcset=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/2-2-300x169.jpg 300w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/2-2-600x338.jpg 600w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/2-2.jpg 751w\" sizes=\"auto, (max-width: 339px) 100vw, 339px\" \/><\/a><\/em><\/p>\n<p style=\"text-align: center\"><em>Competition Across Short-Haul Jets, Source: Financial Times<\/em><\/p>\n<p>Boeing is, nonetheless, making small strides to address protectionism. Boeing is working with foreign customers to assemble and manufacture planes in foreign countries. In 2017, it is projected that a quarter of Boeing\u2019s revenue will come from Chinese purchases<a href=\"#_ftn14\" name=\"_ftnref14\">[14]<\/a>. Boeing leaders have realized that a shift in trade policy towards or coming from China could have \u201ccatastrophic effects\u201d on Boeing\u2019s profitability<a href=\"#_ftn15\" name=\"_ftnref15\">[15]<\/a>. In turn, Boeing has announced that it will manufacture Chinese-airline planes in a facility near Shanghai.<\/p>\n<p>Over the medium term, Boeing will need to continue to think strategically about the placement of its finishing centers. Further, Boeing needs to grow the diversity of its client relationships<a href=\"#_ftn16\" name=\"_ftnref16\">[16]<\/a>. This would address geopolitical concentration risks, shielding the company from any specific bilateral trade spats. A diversifying customer base also addresses counterparty financing risks, particularly important as the fate of the Ex-Im Bank is very much in question with the current U.S. administration<a href=\"#_ftn17\" name=\"_ftnref17\">[17]<\/a>. If this bank is no longer able to provide financing to Boeing customers, Boeing needs to be able to pull from a deep bench of global partners, from the developed and developing world, to maintain profitability.<\/p>\n<p><strong>Suggestions<\/strong><\/p>\n<p>Over the long term, Boeing needs to lead the U.S. aviation industry in upholding free-trade, leading by example. Instead of rallying against competitors for using subsidies, Boeing should urge the U.S. government to return to WTO talks to support free trade. So long as the U.S. favors Boeing, competitors will continue to find creative ways to restore their competitiveness; protectionism makes those shut out fight harder<a href=\"#_ftn18\" name=\"_ftnref18\">[18]<\/a>. Boeing should recognize that it is very much the pot calling the kettle black and should think dynamically about engaging with international customers and their governments.<\/p>\n<p>To that end, Boeing should anticipate increased competition from areas besides Europe, namely the emerging world. In 2016, China and Russia established the China-Russia Commercial Aircraft Company, which will develop a twin-aisle airliner to compete with Boeing\u2019s 747 and Airbus\u2019 A350<a href=\"#_ftn19\" name=\"_ftnref19\">[19]<\/a>. Given the ascendance of emerging markets, it is inevitable that there will be increased competition. Boeing should accept this fact and conceive creative ways to engage with new entrants in the space. This could include licensing technologies to competitors or identifying a niche product where Boeing\u2019s technological innovation will sustain a competitive moat.<\/p>\n<p><a href=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/3-4.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\" wp-image-24386 aligncenter\" src=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/3-4-300x169.jpg\" alt=\"\" width=\"366\" height=\"206\" srcset=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/3-4-300x169.jpg 300w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/3-4-768x432.jpg 768w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/3-4-600x338.jpg 600w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/3-4.jpg 780w\" sizes=\"auto, (max-width: 366px) 100vw, 366px\" \/><\/a><\/p>\n<p style=\"text-align: center\"><em>Prototype of China-Russia Commercial Aircraft Company Airliner, Source: COMAC<\/em><\/p>\n<p><strong>Open Questions<\/strong><\/p>\n<p>Many strategic questions still loom for Boeing. On the marketing front, does it make sense for Boeing to align itself with the U.S. government when opining on trade policy? Should Boeing crystallize its own, independent trade policy? To send a message to global customers, should Boeing look to shrink its revenue exposure to the U.S. Department of Defense? How can Boeing incorporate global markets and labor into its manufacturing process to promote good will across nations? Should Boeing carry this burden, or should it pressure the U.S. government to reject protectionist policies?<\/p>\n<p>(Word Count: 1000)<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> United States Census Bureau, \u201cU.S. International Trade in Goods and Services,\u201d September 2017, U.S. Department of Commerce. <a href=\"https:\/\/www.census.gov\/foreign-trade\/Press-Release\/current_press_release\/ft900.pdf\">https:\/\/www.census.gov\/foreign-trade\/Press-Release\/current_press_release\/ft900.pdf<\/a><\/p>\n<p><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> Daniel I. Fisher, \u201cSuper Jumbo Problem: Boeing, Airbus, and the Battle for the Geopolitical Future\u201d, pp.865, <em>Vanderbilt Journal of Transnational Law (2002)<\/em><\/p>\n<p><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a> United States International Trade Commission, \u201cGlobal Competitiveness of United States Advanced Technology Manufacturing Industries: Large Civil Aircraft,\u201d 1993<\/p>\n<p><a href=\"#_ftnref4\" name=\"_ftn4\">[4]<\/a> David B. Yoffie, Helen V. Milner, \u201cAn Alternative to Free Trade or Protectionism: Why Corporations Seek Strategic Trade Policy\u201d, <em>California Management Review<\/em> , pp. 119, Vol 31, Issue 4, pp. 111 &#8211; 131, First Published July 1, 1989. <a href=\"https:\/\/doi.org\/10.2307\/41166585\">https:\/\/doi.org\/10.2307\/41166585<\/a><\/p>\n<p><a href=\"#_ftnref5\" name=\"_ftn5\">[5]<\/a> Ibid, Yoffe &amp; Milner, pp. 120.<\/p>\n<p><a href=\"#_ftnref6\" name=\"_ftn6\">[6]<\/a> Ibid, Yoff &amp; Milner, pp. 121.<\/p>\n<p><a href=\"#_ftnref7\" name=\"_ftn7\">[7]<\/a> World Trade Organization, DS316 \u201cEuropean Communities \u2013 Measures Affecting Trade in Large Civil Aircraft\u201d. <a href=\"https:\/\/www.wto.org\/english\/tratop_e\/dispu_e\/cases_e\/ds316_e.htm\">https:\/\/www.wto.org\/english\/tratop_e\/dispu_e\/cases_e\/ds316_e.htm<\/a><\/p>\n<p><a href=\"#_ftnref8\" name=\"_ftn8\">[8]<\/a> World Trade Organization, DS353, \u201cUnited States \u2014 Measures Affecting Trade in Large Civil Aircraft \u2014 Second Complaint\u201d. <a href=\"https:\/\/www.wto.org\/english\/tratop_e\/dispu_e\/cases_e\/ds353_e.htm\">https:\/\/www.wto.org\/english\/tratop_e\/dispu_e\/cases_e\/ds353_e.htm<\/a><\/p>\n<p><a href=\"#_ftnref9\" name=\"_ftn9\">[9]<\/a> Jack Pierce, (Boeing Treasurer), Testimony at Hearing before the Senate Subcommittee on Export-Import Bank Extension, 97th Congress, March-April 1978, p. 551; James McMillan, (V.P, McDonnell Douglas), Testimony at Hearings on Export Policy, Part 4, before the Senate Subcommittee on International Finance and Commerce, on &#8220;Banking, Housing, and Urban Affairs,&#8221; 95th Congress, March-April 1978.<\/p>\n<p><a href=\"#_ftnref10\" name=\"_ftn10\">[10]<\/a> Albert Otti, Alexandra Mayer-Hohdahl, \u201cLEAD: Boeing Loses Latest WTO Round in Subsidy Dispute with Airbus\u201d, McClatchy \u2013 Tribune Business News, March 12, 2012. <a href=\"http:\/\/search.proquest.com.ezp-prod1.hul.harvard.edu\/docview\/927590756?accountid=11311\">http:\/\/search.proquest.com.ezp-prod1.hul.harvard.edu\/docview\/927590756?accountid=11311<\/a><\/p>\n<p><a href=\"#_ftnref11\" name=\"_ftn11\">[11]<\/a> George Will, \u201cThe Radiating Mischief of Protectionism,\u201d <em>Washington Post<\/em>, October 27, 2017. <a href=\"https:\/\/www.washingtonpost.com\/opinions\/the-radiating-mischief-of-protectionism\/2017\/10\/27\/a07243ec-ba7d-11e7-be94-fabb0f1e9ffb_story.html?utm_term=.918b07d14afc\">https:\/\/www.washingtonpost.com\/opinions\/the-radiating-mischief-of-protectionism\/2017\/10\/27\/a07243ec-ba7d-11e7-be94-fabb0f1e9ffb_story.html?utm_term=.918b07d14afc<\/a><\/p>\n<p><a href=\"#_ftnref12\" name=\"_ftn12\">[12]<\/a> George Will, \u201cExport-Import Bank\u2019s Damage to American Firms,\u201d <em>Washington Post<\/em>, March 16, 2012. <a href=\"https:\/\/www.washingtonpost.com\/opinions\/export-import-banks-damage-to-american-firms\/2012\/03\/15\/gIQAFDSNHS_story.html?utm_term=.d7609d712414\">https:\/\/www.washingtonpost.com\/opinions\/export-import-banks-damage-to-american-firms\/2012\/03\/15\/gIQAFDSNHS_story.html?utm_term=.d7609d712414<\/a><\/p>\n<p><a href=\"#_ftnref13\" name=\"_ftn13\">[13]<\/a> Peggy Hollinger, \u201cAirbus Bets on Demand for Bombardier\u2019s \u2018Cute Little Plane\u2019,\u201d <em>Financial Times<\/em>, October 17, 2017. <a href=\"https:\/\/www.ft.com\/content\/201bf186-b350-11e7-a398-73d59db9e399\">https:\/\/www.ft.com\/content\/201bf186-b350-11e7-a398-73d59db9e399<\/a><\/p>\n<p><a href=\"#_ftnref14\" name=\"_ftn14\">[14]<\/a> Jon Ostrower, \u201cBoeing Pitches China Facility As Trump-Friendly\u201d, <em>CNN<\/em>, January 25, 2017. <a href=\"http:\/\/money.cnn.com\/2017\/01\/25\/news\/companies\/boeing-backs-china-plans-as-trump-friendly\/index.html\">http:\/\/money.cnn.com\/2017\/01\/25\/news\/companies\/boeing-backs-china-plans-as-trump-friendly\/index.html<\/a><\/p>\n<p><a href=\"#_ftnref15\" name=\"_ftn15\">[15]<\/a> Ibid, Ostrower.<\/p>\n<p><a href=\"#_ftnref16\" name=\"_ftn16\">[16]<\/a> Boeing, <a href=\"http:\/\/www.boeing.com\/commercial\/customers\/\">http:\/\/www.boeing.com\/commercial\/customers\/<\/a><\/p>\n<p><a href=\"#_ftnref17\" name=\"_ftn17\">[17]<\/a> Karen Walker, \u201cPlanes, Politics, and Protectionism,\u201d <em>Air Transport World<\/em>, October 18, 2017. <a href=\"http:\/\/atwonline.com\/blog\/editorial-planes-politics-protectionism\">http:\/\/atwonline.com\/blog\/editorial-planes-politics-protectionism<\/a><\/p>\n<p><a href=\"#_ftnref18\" name=\"_ftn18\">[18]<\/a> Peggy Hollinger, \u201cAirbus Bets on Demand for Bombardier\u2019s \u2018Cute Little Plane\u2019,\u201d <em>Financial Times<\/em>, October 17, 2017. <a href=\"https:\/\/www.ft.com\/content\/201bf186-b350-11e7-a398-73d59db9e399\">https:\/\/www.ft.com\/content\/201bf186-b350-11e7-a398-73d59db9e399<\/a><\/p>\n<p><a href=\"#_ftnref19\" name=\"_ftn19\">[19]<\/a> Jon Ostrower, \u201cChina and Russia are Coming for Boeing and Airbus,\u201d <em>CNN<\/em>, May 23, 2017. <a href=\"http:\/\/money.cnn.com\/2017\/05\/23\/news\/companies\/china-russia-airplane-partnership\/index.html\">http:\/\/money.cnn.com\/2017\/05\/23\/news\/companies\/china-russia-airplane-partnership\/index.html<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The United States is at extreme risk from a global trade war due to its heavy Boeing exposure. Boeing planes are front-and-center targets in a contentious debate over protectionism.<\/p>\n","protected":false},"author":10230,"featured_media":24461,"comment_status":"open","ping_status":"closed","template":"","categories":[1900,1287,944,154,397,1591,3816,3818,3815,3549,3814,3240,1817,3817,1708,3813],"class_list":["post-24460","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-airbus","category-boeing","category-bombardier","category-china","category-delta","category-economy","category-export","category-export-finance","category-export-import-bank","category-free-trade","category-gatt","category-protectionism","category-russia","category-subsidies","category-trade","category-world-trade-organization","hck-taxonomy-organization-boeing","hck-taxonomy-industry-air-transportation","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Fight or Flight? 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