Investment bank Jefferies noted in a Sept. 20 equity research report on the Boeing Co. (NYSE:BA) that, although the U.S. recently won the right to subject European Union (EU) goods to billions of dollars of tariffs in a longstanding dispute over government subsidies to Airbus, there may be unexpected consequences, including tariffs levied on aircraft parts imported for the assembly of Airbus narrowbody aircraft in the European aircraft maker's Alabama factory.

In terms of tariffs tied to Airbus, the U.S. could place taxes on fuselages, wings and other components that come into the U.S. for production of the A320 family of aircraft in Mobile, AL, in addition to the A220. The Airbus A220, previously known as the Bombardier CSeries, is a family of narrowbody, twin-engine, medium-range jet airliners originally designed and built by the Canadian manufacturer Bombardier Aerospace, now marketed by Airbus and built by joint venture Airbus Canada LP.

There have been some warnings from U.S. airlines that tariffs against Airbus could have a negative impact on those carriers. American Airlines Group Inc (NASDAQ:AAL), Delta Air Lines, Inc. (NYSE:DAL), Hawaiian Airlines (NASDAQ:HA), and JetBlue Airways Corporation (NASDAQ:JBLU), among others, are expected to take Airbus aircraft, with tariffs potentially harming those carriers and making them less competitive in international markets. There is also some concern from the U.S. supply chain about higher costs, given the imports of certain subassemblies and materials.

As background, the World Trade Organization (WTO) recently ruled in favor of the U.S. The dispute has been ongoing for over a decade and has revolved around launch aid for Airbus jet aircraft. The EU has launched a countersuit charging that Boeing has received subsidies that could be decided on within months. Trade war escalation is clearly negative for the aviation space and not priced-in in any way, the Jefferies report stressed.

In 2006, the U.S. filed a complaint in Geneva against the EU over alleged illegal subsidies to Airbus. Similarly in 2014, the EU filed a complaint with the WTO accusing Boeing of similar behavior, with the U.S. aircraft maker being the recipient of subsidies, including Washington state tax breaks. The EU is claiming $20 billion in illegal subsidies and has drawn up a list of potential U.S. imports to tax. The September decision finding the EU guilty of subsidies to Airbus was the most recent event in the decades-long dispute. The decision over the EU complaint is expected to be decided over the coming months.

The EU has tried to settle the dispute with the U.S. without any resolution. The EU believes "the mutual imposition of sanctions is counterproductive and damaging to our respective economies." Although the two complaints revolve around aircraft subsidies, the potential fallout from tariffs stretches to food, clothing and luxury goods. Any action against Airbus products potentially could be returned in kind following the decision around the EU complaint. Potential counter tariffs are exacerbated given that approximately 16% of Boeing Commercial Airplane revenues are from European customers.

On Sept. 13 the WTO sent the European Commission (EC) and the U.S. trade representative a confidential ruling on the U.S. complaint against the EU. By ruling in favor of the U.S., the WTO is reportedly granting authority for the U.S. to impose between $5 billion and $10 billion in tariffs, with the final amount yet to be decided. The aviation subsidies are independent of any larger discussion around a trade deal with the EU. Following the ruling, the U.S. and EU have a short time to add comments, with the final scope to be announced during the week of Sept. 30. The WTO must still authorize a specific dollar amount that the U.S. can recoup through tariffs. The U.S. has prepared two lists of up to $25 billion, with a wide range of products including aircraft, fish, wine, cheese, handbags, carpets and clocks. Once a dollar value is finalized, products and tariff rates can be fixed.

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