Boeing supports the idea of a border adjustment tax, though the impact on its supply chain is unclear and it risks a trade war with regions like China that are vital to future jet sales.
Boeing has joined the push for a sweeping, Republican-backed reform of the U.S. corporate tax system that would reduce the tax rate substantially while imposing a tax on imports and exempting exports.
CEO Dennis Muilenburg and the 330-company Aerospace Industries Association that he leads are lobbying hard for a comprehensive overhaul that would include what’s known as a “Border Adjustment Tax.”
Championed by some in President Donald Trump’s administration and by House Speaker Paul Ryan, the idea has drawn stiff opposition not only from companies like Wal-Mart that import a lot of the goods they sell but also from free-trade hawks on the right such as billionaires Charles and David Koch, longtime funders of the Republican Party and conservative causes.
With the global aviation business critically dependent on free trade, this makes Boeing and Trump “pretty strange bedfellows,” noted Alan Tonelson, a fierce critic of U.S. trade policy and supporter of the tax proposal who blogs about economics and politics.
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Officials at the state’s Department of Commerce, normally in sync with Boeing, are alarmed at the proposal, which many see as imposing a tariff on imported goods.
“This kind of thing could start a trade war. It’s very unpredictable,” said Brian Bonlender, the Commerce Department’s director. “We, as the most trade-dependent state in the country, are likely to be the most impacted by unintended consequences.”
American auto dealers and the country’s largest retailers, fearing higher consumer prices, are also opposed to the idea. So is Boeing’s archrival, Airbus, which calls it protectionism.
So what’s in it for the nation’s largest exporter, which last year sold 68 percent of its commercial jets to foreign companies? Wouldn’t this radical reshaping of federal business taxes risk retaliation from the corners of the globe that provide most of its customers — China and Europe?
And how would an import tax affect Boeing’s global supply chain, which features foreign partners building major pieces of planes such as the 787?
Plan a sharp shift
The proposed Border Adjustment Tax was being discussed only in the most esoteric academic circles before Trump won the presidential race.
Yet now a plan to implement it is being championed in Congress by Ryan and the chairman of the House Ways and Means Committee, Kevin Brady. Reportedly, it has won the support of Trump’s chief strategist, Stephen Bannon.
The proposal represents a sharp structural shift in how companies are taxed — from taxing bottom-line corporate profits, to assessing taxes on revenue generated exclusively in the U.S.
If the Ryan plan becomes law, every time an item is sold to an end user within the U.S., the sales revenue would be taxable at 20 percent, with deductions allowed for domestic labor and inventory costs.
Besides the lower tax rate — down from 35 percent today — there’s another attraction for a company like Boeing that spends billions of dollars on factory buildings and manufacturing equipment. Capital investment would be immediately deductible in the year the money is spent, instead of being accounted for through depreciation over many years.
The “border adjustment” element of the plan works like this:
A company’s sales of products exported from the U.S. are exempt from the tax entirely.
By contrast, because the cost of imported goods is not deductible from a company’s revenues (unlike domestic inventory costs), the company would pay 20 cents in tax for every dollar in sales of imported goods.
The tax on imports would apply to both finished goods and component parts, such as the wings of the 787 that Boeing imports from Mitsubishi Heavy Industries in Japan.
For a smaller-scale example, consider Everett-based aerospace company AvtechTyee, which supplies Boeing with parts called tie rods that are used to support overhead stow bins and other fixtures on the 787 Dreamliner. The tie rods are finished in Everett, but the shaft is a long, carbon-composite tube fabricated in Tijuana, Mexico.
That’s not an unusual situation. In 2012, Boeing even invited smaller suppliers to attend a workshop in Chicago to learn how to shave costs by outsourcing work to Mexico.
When AvtechtTyee sells the tie rods to Boeing, it will pay a 20 percent tax and won’t be able to deduct the cost of the composite tubes. (AvtechTyee declined to comment.)
Proponent of change
The tax’s most prominent academic advocate, Alan Auerbach, a professor of economics and law at the University of California, Berkeley, rejects the notion that the tax is protectionist or will cause prices to rise.
Auerbach, who has consulted with Ryan and Brady on their proposal, insisted in an interview that the import tax ultimately won’t make a difference to either Boeing or AvtechTyee or the U.S. consumer.
The theory goes like this: When this system is introduced, foreign consumers or companies will want to buy more of the tax-free exports while Americans will want to buy fewer of the imports with the tax added to the price. Both these factors will cause the dollar to rise in value against foreign currencies.
Auerbach and other proponents of the system contend that the dollar will appreciate 20 percent in tandem with the tax, so Boeing or AvtechTyee would be buying their imports with a stronger dollar, exactly offsetting the impact of the import charge.
He says the same will apply to U.S. consumers buying items from China at Wal-Mart: The dollar’s rise will exactly counter the import tax and those imported goods won’t be more expensive, he contends.
“They’ll pay the border tax, but with dollars that are more valuable,” Auerbach said.
Then consider the implications if Boeing sells a 777 jet to Gulf airline Emirates with no tax to pay, and another 777 to American Airlines with a 20 percent tax added.
Auerbach said that with no tax, Boeing will likely sell the plane 20 percent cheaper to Emirates than to American.
However, his assumed parallel 20 percent rise in the value of the dollar would mean Emirates will have to pay that much more for the dollars it uses to buy the planes — which will effectively extinguish the price differential, he said.
Overall, Auerbach insisted the expected rise of the dollar means the tax, counterintuitively, won’t create an increase in exports or a decline in imports — though he said Trump’s talk about imposing tariffs “hasn’t helped” get that message across.
“It won’t affect the trade balance with other countries,” Auerbach said. “It’s not protectionist.”
Positives of new tax
This raises the question: If this tax won’t shift the trade balance, what’s it for? Auerbach says the new tax system would bring two big gains.
It would end a form of corporate-tax avoidance that happens when companies overstate costs and understate profits at overseas subsidiaries. Because only sales in the U.S. are taxed, overseas transactions are simply irrelevant to this tax system.
Secondly, it should make it more profitable for a company to manufacture in the U.S. rather than overseas.
That’s the counterintuitive theory. If it’s true, Boeing could be among the very biggest winners.
The tax on its imported parts would have minimal impact. And according to an analysis by former Treasury Secretary Lawrence Summers, now a professor at Harvard, a company like Boeing — able to deduct much of its costs for inventory and labor that create its bulging pipeline of tax-free exported aircraft — could end up with “annual multibillion-dollar refunds.”
“Businesses that invest heavily, hire extensively and export a large part of their product would have negative taxable income on a chronic basis,” Summers predicted in a Washington Post Op-Ed piece in January.
In contrast, he projected that for retailers that import a lot of their goods, “the taxes will substantially exceed 100 percent of profits, even if there is some offset from a stronger dollar.”
No wonder Boeing is gung-ho and Wal-Mart is worried.
Boeing spokesman Charles Bickers said the company considers the Border Adjustment Tax “the right approach” and that “the more competitive corporate rate will be beneficial to businesses.”
Impact on aerospace
But skeptics abound.
While the dollar is indeed likely to become more valuable relative to other currencies if the tax is implemented, many observers think it won’t necessarily rise enough. Many other factors besides tax policy may affect the currency rate.
Economist William Gale, in a Brookings Institution paper on the tax, cites the risk that if the exchange rate does not adjust fully, the rise in consumer prices would “hit low-income households disproportionately.”
And there is plenty of worry about the tax’s impact even within the aerospace world.
If the dollar fails to fully adjust, net exporters like Boeing would do extremely well, but importers including many aerospace suppliers could be hurt.
For tax purposes, Boeing wouldn’t be able to deduct the price it paid to Mitsubishi for the 787 wings, though that would likely be more than offset by the jet maker’s much lower overall tax rate.
But at a company such as AvtechTyee, the price it charges Boeing for its tie rods might have to rise as it pays the tax.
If a domestic producer could manufacture similar tie rods to AvtechTyee’s but with U.S.-made carbon tubes at the same cost, that rival would pay less tax and gain a pricing advantage.
Most worrying for the industry is that the tax may be seen overseas as antithetical to free trade and globalization, which is the bedrock of the sustained growth of aviation.
Gale’s paper, among others, points out a detail that could be the spark for a damaging trade war:
U.S. domestic producers of any item are allowed to deduct their labor costs when paying the tax, while a foreign firm selling the same item in the U.S. won’t be able to.
That difference is incompatible with World Trade Organization (WTO) rules, which require that taxes be applied the same to imports as to goods produced domestically.
Auerbach calls the WTO status of that provision “an open question.”
But Adam Pilarski, an economist and aviation expert with aircraft consultancy Avitas, said there’s no doubt: “Any way you call it, it’s a tariff.”
“Any time you mess with tariffs, you are risking a trade war,” he added. “This is very, very dangerous.”
At an aviation-finance conference of the International Society of Transport Aircraft Trading last month in San Diego, many of the U.S. bankers and jet-setting business people attending were positive about Trump’s push to lower corporate taxes and cut regulation.
But major players from overseas expressed concern about encroachments on free trade.
Aengus Kelly, chief executive of the world’s largest aircraft lessor, Aercap, pointed out that free trade and open-skies agreements — the ability to set up an airline and fly just about anywhere — created top Boeing customers like Europe’s discount carrier Ryanair.
He said the proposed tax revamp could have negative consequences for Boeing.
“You think China will keep buying Boeing airplanes if there’s a border adjustment tax?” Kelly said. “I’m not so sure.”
Airbus sales chief John Leahy said in an interview that Europeans in the globalized aviation business are “shocked” by the growing U.S. support for what they see as trade barriers.
“It’s a little disappointing that some U.S. manufacturers seem to think they’ll get a competitive advantage by getting on board with protectionism. It’s very shortsighted,” he said.
Bainbridge Island-based aviation-industry analyst Scott Hamilton said Airbus could be hit by the tax on imported parts that it assembles in Mobile, Alabama, and on the European-built jets it sells to U.S. carriers.
“You can bet if the border tax applies to Airbus in any form, the EU will retaliate,” Hamilton said.
Washington state commerce director Bonlender said that even if an outright trade war is averted, “Companies contemplating investing in the U.S. will hold off until they see how this whole thing plays out.”He said a manufacturer considering setting up a plant here to serve the Asian market will hesitate to go forward before knowing how Asian countries will respond to any import tax. He worries too that if other countries perceive the tax as protectionist and retaliate accordingly, the tax might perversely encourage companies to put their manufacturing plants outside the U.S.
That prospect was raised last summer by the chief executive of GE, Jeffrey Immelt, who told students at New York University that in an increasingly protectionist world it would be logical for multinational companies like his “to localize production in big end-use markets.”
In other words, if a country erects tariff barriers, a multinational can avoid them by producing in that country, provided the market is big enough.
The Chinese airplane market is huge. Boeing currently projects that over the next 20 years it will sell up to a third of its aircraft in China.
If China were to retaliate for the import tax by slapping tariffs on Boeing planes built in the U.S., it would give Airbus a big sales advantage — and Boeing an incentive to build planes for the Chinese market in China.