Trump thy neighbour

opinion

by Alasdair Whyte

December 2, 2024

Donald Trump plans to impose tariffs on all goods from Mexico, Canada and China. (Photocredit. donaldjtrump.com).

“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”

President-elect Donald Trump’s post on Truth Social last Monday, which was followed by one adding 10% tariffs to Chinese exports, shocked leaders across the border. Justin Trudeau, Canada’s Prime Minister, had a call with Trump within a few hours. Claudia Sheinbaum, President of Mexico, responded by saying that her country would retaliate. Sheinbaum later spoke to Trump and said that it was a “very kind” conversation.

Shares in carmakers fell significantly as soon as the post went live – GM alone is set to import 750,000 vehicles from Mexico and Canada in 2024. But if the tariffs happen, it would be a major hit to aircraft sales and the profits of all aircraft manufacturers.

Tariffs would be a big issue for US buyers taking delivery of Bombardier aircraft. If enacted, a Texas buyer of a $75m Bombardier Global 7500 could – at least in theory – be hit with a $18m tariff bill on delivery. But this is a long way from being certain.

“Proposed tariffs that could have a broad impact are clearly a concern for all companies who participate in a global economy and supply chain,” said Bombardier in a statement. “At this point, it is simply too early to speculate on what will be imposed, and we are confident that governments will be able to mitigate this risk through constructive and collaborative discussions that place economic prosperity on both sides of the border above all else.”

Bombardier added: “A key example of this is our aircraft bill of materials – it is important to highlight that the majority originates from suppliers in the US on most of our programmes. On top of this, we directly manufacture a variety of components in multiple states. These activities, multiplied across our industry, contribute to sustaining tens of thousands of high-value jobs in the US as well as tens of thousands in Canada. All ongoing discussions must focus on preserving them.”

The company makes an important point. Aircraft supply chains are global. Even US-based aircraft manufacturers would be hit hard. Canada and Mexico are key suppliers to aerospace companies.

Take Pratt & Whitney Canada, for example. Engines account for a significant part of a new aircraft’s value – typically at least a quarter. Pratt & Whitney Canada powers many business jets, including Embraer Phenoms, Cessna Latitudes, Longitudes and Ascend aircraft, Dassault Falcons and Gulfstream G500 and G600s. And this ignores piston aircraft, turboprops and helicopters.

All these manufacturers would need to pay 25% more for engines – this could work out as $3m in extra costs on a large aircraft.

The state of Quebec alone exported product and parts worth $8.7bn to the US in 2023. This includes Pratt & Whitney Canada, CAE and companies like Thales which exports fly-by-wire flight controls from Montreal.

Mexico is also a key supplier. The Mexican Aerospace Industry Federation says that its members exported $9.4bn of aviation products and services to the US in 2023 (it also imported $4.8bn). The association says that there are more than 290 aerospace manufacturers in the country. This includes Collins, GE, GKN Fokker and Safran, which are key suppliers to aircraft builders. Collins, alone, has more than 1,000 employees in the country.

Bombardier, Gulfstream and Textron have facilities in Mexico. Bombardier has been making components in Querétaro since 2006 – this now includes Global aircraft rear fuselages. Textron Aviation makes wiring harnesses and fabricates fuselages in Chihuahua. In September Gulfstream announced a $370m new facility in Mexicali, Baja California. This would create 1,550 jobs bringing the total number of Gulfstream employees in Mexico to more than 5,000.

If OEMs had to pay tariffs on engines and components, it would really affect their margins. A leading lawyer reviewed two large aircraft contracts for us and does not believe that manufacturers could pass these costs on for aircraft they have already sold. Manufacturers have committed to a fixed price.

Some manufacturers (but not all) have escalation clauses that pass on increased costs between aircraft order and deliveries. But escalation is typically calculated based on consumer price or Bureau of Labor indexes so would make little contribution. At least one business jet OEM has recently introduced escalation for new orders for its most popular aircraft.

Another lawyer says that some OEMs have clauses that allow them to cancel contracts if production becomes uneconomical – effectively giving customers the chance to pay more or get their deposit and progress payments back. We may see tariff clauses added to aircraft contracts soon.

Of course, the threatened tariffs may not even happen. This whole email is based on a 38-word sentence and not a fully formed policy. Even if they are enacted they may only last for a short period.

Trudeau, Sheinbaum and OEMs are hoping that Trump’s post is just a warning shot and that they can avoid a trade war. Everyone will be keeping an eye on Truth Social.

Last week, he posted a message saying: “Make Thanksgiving Great Again.” If you celebrated, we also hope you had a great day.