China’s C919 faces new hurdle after US-Europe aviation deal, but accord unlikely to be a ‘game changer’

·5-min read

China’s efforts to carve out global market share for its narrow body C919 passenger plane face a fresh hurdle after the United States and the European Union (EU) agreed to a truce in their near 17-year conflict over aircraft subsidies, analysts say.

The US and EU announced on Tuesday a five-year suspension of tariffs and plan to establish a working group to address “non-market practices” in other countries, most notably China.

China has spent tens of billions of dollars to develop the C919 jet, which is designed to compete with the Boeing 737 and Airbus A320. The C919, built by the state-owned Commercial Aircraft Corporation of China (Comac), is expected to be certified domestically by the end of this year.

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“This was an explicitly political compromise, framed very much in the context of China’s generally growing threat, and more specifically in the context of subsidised aircraft production as China nears completion of its own, subsidised, production,” said Peter Harbison, chairman emeritus at the CAPA Centre for Aviation.

An agreement for the US and EU to share information or conduct joint analysis will not be a game changer

Stephen Olson

However, even acknowledging the new challenge facing China’s aircraft industry, Harbison added it was “unlikely the C919 could take a large market share outside its own sphere of influence”.

While the EU statement issued after the deal did not name China, the White House said explicitly that Beijing’s “unfair and coercive economic practices” were a shared concern between Washington and Brussels.

The US-EU truce came after a long battle over subsidies to US planemaker Boeing and Europe’s Airbus. The World Trade Organization (WTO) found the world’s two largest aircraft manufacturers received billions of dollars of support in two cases dating back to 2004, ultimately allowing both sides to impose billions of dollars in punitive tariffs.

Tuesday’s agreement is a step-up in joint efforts to tackle China’s trade policy, but Stephen Olson, a former US trade negotiator who is now a senior fellow at the Hinrich Foundation, a pro-trade group, said there might be limitations on what can actually be accomplished.

“An agreement for the US and EU to share information or conduct joint analyses will not be a game changer,” said Olson.

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“What’s really needed is a substantially more stringent WTO subsidies agreement that can address the unique features of China’s economic system, but that’s not going to happen anytime in the foreseeable future and perhaps ever.

“That leaves the possibility of enhanced unilateral actions, and the US’ trade strike force will be looking into developing tougher trade enforcement tools.”

Both Brussels and Washington joined Japan in January 2020 to issue a ministerial statement on strengthening WTO rules concerning industrial subsidies.

However, there are still differences in opinion among EU member nations on how to deal with China’s trade policy, even though the US is ready for a much tougher stance, Olson added.

“Many of the US’ partners, especially in Europe, are far more comfortable with industrial policy than the US is,” said Olson. “They will not be able to get on board with any effort that would challenge China on policies that might be similar to those in place in Europe.

“This is further complicated by the fact that the Biden administration has made a number of domestic proposals which arguably look a lot like industrial policy.”

A source close to Comac, who is unauthorised to speak publicly, said the agreement would not have a big influence on the company, calling the actions from the US and EU “excessive”.

“The problem is that on the one hand, the US has imposed various sanctions on China [over a range of issues], but on the other hand they also want China to buy more Boeing aircraft,” the source said.

“For China, it just has to stick to its own business and develop mutually beneficial cooperation with countries that are willing to cooperate in trade.”

Shi Yinhong, an adviser to the State Council, the country’s cabinet, said that China “can’t fully boycott Boeing”, despite growing tensions with the US, and that tackling Beijing’s state subsidy policy was a “very complex issue”.

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He did not expect the US to sanction Chinese companies over state subsidies “in the foreseeable future”.

“The US has been pressuring China on the issue of state subsidies since the Trump administration,” said Shi. “Airbus and Boeing have basically balanced China’s purchases over the years. Unless US-China relations become much worse than they are now, there will probably be no changes.”

Harbison said issues over commercial plane subsidies are unlikely to influence airlines when it comes to buying behaviour, but in an increasingly competitive industry, the stakes are high.

“As well as winding back some subsidies, the suspension of any likely tariffs for five years does aim to keep the pressure on at a working level,” Harbison said. “It also signals that they will each be alert to further subsidies, their own or anyone else’s.

“But as the US manufacturers learned to their detriment over the past 30 years or so, as Airbus grew to be the dominant commercial manufacturer, it’s dangerous to be complacent,” he said.

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