“May God bless the USA and God bless Boeing” was President Trump’s sign-off in his speech on Friday at Boeing’s South Carolina factory. Earlier he had told the workforce building the 787 Dreamliner:
“This is our mantra: Buy American and hire America. We want products made in America, made by American hands. Our goal as a nation must be to rely less on imports and more on products made here in the USA. We’re going to fight for every last American job.”
Clearly the Dreamliner is a great success, with over 500 aircraft already delivered to more than 60 major airlines since its 2011 launch. But the factory assembling the Dreamliner relies on parts from all around the world. As Business Insider describes, “The Dreamliner is like the United Nations of planes:
□ Its wings and batteries come from Japan. Its wing tips come from South Korea.
□ India is the source of its floor beams. The front fuselage is made in the USA and Japan.
□ The center fuselage and horizontal stabilizers are from Italy.
□ Landing gear and doors? France. Cargo access doors are built in Sweden.
□ The wing/body fairings, which cover gaps on the body, are from Canada.
□ The movable trailing edge of the wings are from Canada, except when they’re from the US or Australia.
□ Thrust reversers come from Mexico.
□ Its engines come from either General Electric in the US or Rolls-Royce in the UK”
Over the next 8 years, the President clearly has an opportunity to replace many of these imports with local parts. But he is unlikely to be able to do this without impacting Boeing’s business model, which is based on accessing the world’s best brains and factories to produce the best possible aircraft at the lowest possible cost.
This model also creates a “win-win” for countries when buying the Dreamliner, as they are able to share in the value being created. If Boeing changes its business model to a “win-lose” model – based on increasing US content at the expense of foreign suppliers -then its sales will inevitably suffer. Trade wars will replace today’s global supply chains.
It is a similar story in Europe as the UK prepares to exit the European Union (EU). Nissan’s auto factory in Sunderland is the UK’s largest, exporting 55% of its output to the EU. And it currently operates on the same global principles as Boeing, as the Wall Street Journal describes:
“□ Bridgestone, the Japanese tire maker, supplies the Qashqai with tires made in Poland and Spain. France’s Faurecia provides seats made in Portugal, Poland and France, as well as emissions-control systems made in the UK
□ Italy’s Sogefi supplies springs made in Britain and Spain, and air-intake systems from a UK plant. Denso, a Japanese supplier, provides compressors made in Germany and a crank sensor produced in Japan
□ Parts also can travel back and forth between countries before being bolted to the inside of a car. A spring, for example, might be produced in Britain, sent to Germany to be inserted into a gear box and then shipped back to the U.K. as part of the finished component.”
Yet UK Premier May has promised that the UK will begin the process of leaving the European Single Market next month. In exchange, the government has offered just 4 assurances to UK-based auto companies:
“To ensure more suppliers located in the UK; to commit Britain to research and development into electric and ultra-low emission vehicles; to support jobs and training; and to push for a deal with the EU that allowed automotive trade to continue ‘free and unencumbered’.”
In reality, of course, May has no control over whether auto suppliers choose to locate in the UK. Nor can she guarantee that UK car exports will continue to have free access to the EU. What therefore will happen to the UK’s critically important auto industry if she proves unable to deliver on her promises?
We already know that the EU plans to focus the Brexit negotiations for the rest of this year on finalising the UK’s exit bill (estimated at €60bn, $57bn) and the rights of expatriate citizens. This means the UK will have just a year to discuss longer-term trade deals before exiting the EU in March 2019. Almost inevitably, this means the UK will then be forced to use WTO terms for all its trade – with the EU and the rest of the world – until new deals can be finalised.
MOST MAJOR COMPANIES OPERATE WITHIN WITHIN GLOBAL SUPPLY CHAINS
It is also easy to forget that today’s global supply chains don’t just impact the aerospace and auto industries. These in turn rely on components sourced from a vast range of suppliers – including plastics, chemicals, textiles, paints, electronics, metals and many others. As today’s trade agreements disappear, all of these supply chains will be at risk:
□ A company that currently supplies a customer in Asia, Europe or N America probably doesn’t know that its end-use is in a Dreamliner or Nissan car, or one of the other millions of products that depend on global supply chains
□ They will only find out as as protectionism and trade wars spread, and their sales start to decline
□ Instead of today’s “win-win” relationships, they will find themselves forced to operate under World Trade Organisation rules, which are only designed to meet very basic needs
As the WSJ notes with regard to the UK auto industry:
“Tariffs stipulated by the World Trade Organization, used as benchmarks for countries with no trade pact, stand at 10% for cars and between 2.5% and 4.5% for components.”
History shows that nobody can control what happens next in any war, or trade war. Usually, the “winner” decides they can make further gains, and the “loser” tries to regain what they have lost. Today’s trade wars are following this pattern. They are starting slowly and locally, but will soon spread globally as the list of losers starts to multiply.