Boeing 737 MAX first victim of US-China tariff wars

The first major fallout of the tariff war set off by US President Donald Trump, and the retaliatory tariffs by countries like China, was played out. A Boeing 737 MAX, the latest model favoured by airlines, had returned from China to the factory centre in eastern United States.

Both Boeing officials and the Xiamen Airlines did not speak to the media. But it was evident that the plane and many like it which are ready to be delivered to the customers – the airlines – are caught up in the crossfire of tariffs declared by each country.

President Trump had raised tariffs on Chinese imports to 145 per cent. China hit back with tariffs of 125 per cent. This means that Xiamen Airlines would have had to pay 125 per cent import duty on the basic price of the passenger plane which is $55 million. That would have a crippling impact on the airline’s finances.

And unable to dispose of the plane fitted specially for the private Chinese airline, Boeing would be incurring a huge loss. It can be said that Boeing could sell the 737 MAX to another airline. But this is not easily done. It is not the case of a single plane because an airliner places the order for a fleet.

And with varying degrees of tariffs, this will have a ripple affect across the board in global trade. President Trump would ideally want a Boeing plane to be purchased by foreign airliners without any import duty, and he will say that he would reciprocate with zero import duties for products from foreign countries.

But his argument is that America cannot have zero import duties because that would benefit exporters from other countries. Americans buy more than they sell, and import duties are legitimate charges that an American government can levy on foreign traders. The earnings of exporters to America will be greater because of the dollar’s valuation, and it cannot be said of the American goods sold in foreign markets because their currency value is always much less than that of the dollar.

Now this will create more problems than it would solve. That is why, fair rules are what are required and there cannot be currency equivalence. It is generally the case that Americans who earn relatively much higher salaries can buy more than their counterparts in other countries with smaller size of economies.

And it has also to be the case that other countries with their smaller size economies and smaller currency exchange rates compared to the dollar will not be able to buy American goods. American manufacturers may have to make goods which many people in other countries can afford to buy.

Now this is what China has done. It has managed to make goods which can be sold at cheaper rates and therefore affordable to millions of buyers in various countries. China has managed to evolve economies of scale which enables it to sell far and wide with greater flexibility. American and European manufacturers have not been able to show the price flexibility to the sellers in other countries.

Of course, the West blames China for this unfair advantage – China’s ability to manufacture goods at lower costs. But it is not the case that the West is at a permanent disadvantage. While China produces mass goods at lower prices, the Western manufactures are marked by quality and brand, and the rich elites in the world prefer to buy the Western goods. So, the two – China and the West – exist at two ends of the price spectrum, and each of them command their own market segment. What seems to have happened is that the West has not been able to innovate and create a niche of its own in the global markets.