l“America First” is the mantra of the Trump administration, which is promising “free and fair” trade by renegotiating trade agreements (including the North American Free Trade Agreement) and imposing tariffs on imports to level the playing field and create U.S. jobs.
Several of these current proposals could be very damaging to the aerospace industry, one of the undisputed bright spots in the U.S. economy. In 2016, the U.S. exported $146 billion in aerospace and defense goods and boasted a record positive trade balance of $90 billion. This makes it the largest net exporting industry. Moreover, the U.S. is a hot spot for new aerospace investment, as noted in a previous column (AW&ST Feb. 24, 2014, p. 15). 
One of President Donald Trump’s favorite targets is China, and he is floating the idea of a 45% tariff on Chinese imports. Surely China has used cheap labor to tilt the aerospace playing field to its advantage, right? Think again. If anything, China has underperformed as an aerospace supplier. Chinese imports totaled just $1.1 billion in 2015, placing it behind South Korea, Italy and even Singapore in country rankings. Exports to China totaled $15.9 billion—a 14.5:1 export/import ratio. One-quarter of the nearly 500 Boeing 737 jets delivered in 2015 went to Chinese airlines, a market that is forecast to be worth a $1 trillion over the next 20 years.

2015 U.S. Aerospace Trade Balance graph

 
 
 
 
 
 
 
 
 
 
A unilateral tariff on Chinese imports would likely prompt retaliation, which could come in the form of canceled Boeing orders. This would be a gift to Airbus and an opportunity to push more volume through its Tianjin production facility. A trade war might also shift domestic airline demand to Comac, when it finally brings the C919 to market. This may be why Boeing CEO Dennis Muilenburg has spent so much time with President Trump since the election, including at the recent rollout of the 787-10.
Trump also has discussed imposing a 20% tariff on goods from Mexico to pay for a border wall. Mexico is a vital element of the aerospace supply chain, particularly for labor-intensive products. A tariff on these imports would likely result in higher costs and shrinking margins, as the prospects for raising prices are nil. This could result in layoffs, the opposite of the intended consequence. U.S. aerospace imports from Mexico last year totaled $2.4 billion, yet exports to Mexico amounted to $5.6 billion. The country is an important market for everything from jetliners to business jets and helicopters. Combined, China and Mexico soak up $21.5 billion in U.S. aerospace exports, which means these two countries alone support more than 120,000 well-paying American jobs.
An interesting twist on tariffs recently emerged: the Border Adjustment Tax (BAT), under which all imports would be taxed at 20%, but companies could exclude all exports from taxation. The BAT would also feature a one-year capital expenditure deduction (eliminating depreciation) and would exempt interest-rate deductions. House Speaker Paul Ryan (R-Wis.) and some other leading Republicans support the BAT, which could offset the revenue impact of cutting U.S. corporate tax rates, the third highest in the world. 
More than 25 major corporations recently formed the Made in America Coalition to support the BAT, including export-oriented companies such as Pfizer, Eli Lilly and Dow Chemical, as well as aerospace giants Boeing, General Electric and United Technologies. Supporters believe the benefits of untaxed exports and a corporate income tax reduction will more than offset the negative consequences of tariffs. 
The BAT is predictably opposed by companies dependent on imports, including Walmart, Target and Best Buy. Republican stalwarts Steve Forbes and the Koch brothers also oppose it. Trump appears to be undecided. And it is not clear how U.S. aerospace trading partners such as China would respond. Some anticipate that the BAT would lead to an appreciation in the U.S. dollar, which would harm competitiveness.
Globalization has underpinned the success of commercial aerospace in recent years, with improved productivity and new markets. Subcontracting from Japan, for example, helped Boeing sell airplanes there. The same is true in China. The risks from tariffs therefore outweigh the positives. Tariffs would destroy jobs and poison the well for aerospace exports. American suppliers would need to absorb higher input costs. And it would not be long until other countries respond to this protectionism in kind.
Many consequential decisions hang in the balance of the early days of the Trump administration. None is more important to aerospace than tariffs.
Contributing columnist Kevin Michaels is president of AeroDynamic Advisory in Ann Arbor, Michigan. The views expressed are not necessarily shared by Aviation Week.