Beijing Sanctions Over Arms Sales Could Backfire

Imposing trade sanctions on foreign arms contractors to punish them for supplying weapons to Taiwan could backfire on China, hurting domestic industry, putting it in contravention of international trade rules and undercutting its ability to buy equipment at competitive prices.

Over the weekend China threatened to impose sanctions on US weapons suppliers, including aircraft manufacturer Boeing, following the Obama administration’s announcement on Friday of its first arms package to Taiwan.

China’s aviation industry is dominated by the state, and procurement has always been heavily tinged by politics. But imposing outright sanctions on Boeing would have a “massively detrimental effect on China’s existing fleet of commercial aircraft”, according to one industry insider.

That would seem to be a large price to pay just to punish the company for selling 12 missiles to Taiwan.

While Airbus has won slightly more orders from China than Boeing in recent years, Boeing aircraft still make up about 53 per cent of China’s total commercial fleet, compared with 36 per cent for Airbus.

“I don’t think they’d discard Boeing completely because they want to have something to wield over the Europeans,” said Peter K.N. Lok, Hong Kong’s former director of civil aviation and a former board member of Air China and China Eastern, two of the country’s largest state-owned airlines. “What could happen is what they’ve done before – tilting the sales of aircraft slightly more in favour of Airbus.”

Still, any windfall for Airbus could be shortlived, say analysts. The company was a target of Chinese anger when the French government sympathised with the Dalai Lama ahead of the 2008 Beijing Olympics.

Pure-play defence companies involved with the Taiwan sale – including Lockheed Martin and Raytheon – are less likely to worry about Beijing curbs as they have limited operations in China, according to a senior industry executive. Lockheed’s entire Beijing staff amounts to one part-time receptionist.

More exposed is Sikorsky Aircraft, a subsidiary of United Technologies Corp, which has a huge market in China for its Otis elevators and Carrier brand heating and air-conditioning systems. UTC also employs 16,000 people in China, says its website. Sikorsky plans to sell 60 Black Hawk helicopters to Taiwan under the deal presented to the US Congress on Friday.

But trying to block those products from the Chinese market would quickly expose Beijing to a US legal challenge under World Trade Organisation rules, which forbid open discrimination against foreign suppliers of civilian equipment.

If such a challenge succeeded, Beijing could face sanctions against its own exports that would be equivalent in value to the estimated loss of business to US companies.

Boeing estimates China’s total commercial aviation market at about $400bn (€288bn, £251bn) over the next 20 years. However, trade experts say that Chinese officials are well aware of the WTO rules, and retain trade lawyers in Brussels and Washington to advise them. Ministers will therefore be aware that sanctions against Boeing or other companies could be risky and lead to a further deterioration in commercial relations with the US.

Over the longer term, China has openly said it intends to replace both Boeing and Airbus by unveiling its own homegrown jumbo jet by 2020. Unfortunately for Beijing that ambition relies partly on support, co-operation and technology sharing from the world’s two big makers of jumbo jets – Boeing and Airbus.

Most analysts agree China is unlikely to jeopardise its own interests by imposing meaningful sanctions on Boeing or other US arms suppliers.

“They’ll probably rap [Boeing’s] knuckles for six months, order 20 Airbuses and then let it all die down,” said one aviation executive.