Trump shot the tariff, but it did not spook President Xi

The sudden breakdown in trade talks between the US and China this week has surprised many and spooked stock markets.

Today the US has raised tariffs on $200 billion of Chinese imports after accusing China of backing down on earlier promises. Nearly 6,000 imports will be hit by the doubling of tariffs to 20% these include products as diverse as live eels, rat poison, motion picture film, rabbit hair, bovine semen and parking meters.

Research, from the Netherlands Bureau of Economic Analysis, shows that after the first round of tariff increases, US exports to China fell 30% in the first quarter of 2019, compared to the first three months of 2018. Chinese exports to the US were down 9%.

But how will it hit business aviation?

The two are very different business jet markets. There are more business jets at Van Nuys Airport today than in China and more business jet airports in Alaska than in the Middle Kingdom. So, they are worth looking at separately.

For the US, the effects of the trade war have not been too harsh. The World Bank says that so far tariffs have had little effect on the US economy. It estimates that the total cost to the US economy is $7.8 billion – far less than the stimulus it received from the tax cuts in 2017.

Retaliatory Chinese tariffs have mainly hit agricultural states, although the World Bank says that the tariffs on imports have also hurt the rust-belt around the Great Lakes.

But outside these areas, most US buyers will not be overly concerned by the trade war.

It is a different story for Chinese buyers. So far, China’s economy may have lost 0.5% of its GDP. The Chinese government is trying to stimulate the economy to make up for this, but many exporters are struggling. They include large Chinese companies that may have bought aircraft.

Aircraft exports to China from the US have been included – and are an easy target for the Chinese government. But it is relatively easy to circumvent restrictions on business aircraft. The bigger issue is confidence.

Research by Asian Sky Group shows that 46 business jets were acquired by Chinese buyers in 2018 – 33 new and 13 pre-owned. But existing Chinese owners sold 47 aircraft to buyers outside the country. Asian Sky Group says that Gulfstream led new aircraft sales, exporting 17 G650s, five G550s and two G280s to China in 2018.

As long as US buyers keep buying aircraft, aircraft manufacturers can cope with a fall in demand from China (many are just grateful that purchases by Chinese buyers helped keep production going in 2012). They may be more concerned by 20% tariffs on processed aluminium from China.

But no one wants to see this as a start of a fall in world trade. The Netherlands Bureau of Economic Analysis says global trade fell 1.1% in the 12 months to February 2019. There is no hard correlation between global trade and orders, but it is a factor.

Still be grateful you are not in the rabbit fur, parking meter or rat poison business. As for live eel buyers, they can be slippery customers at the best of times.

Alasdair Whyte
By Alasdair Whyte May 11, 2019 10:56

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