Donald Trump seems not to have noticed yet but the Boeing aircraft company has just handed him a perfect opportunity to target the middle ground in American politics. Boeing has for decades been perhaps the most egregious corporate exemplar of what Trump rightly denounces as the stupidity and spinelessness of U.S. trade policy. That policy is based on David Ricardo’s two-hundred-year-old theory of comparative advantage, which is generally upheld not only by policymakers and media pundits but by almost the entire American business elite. While the wider American public has long sensed that there is something desperately wrong with U.S. trade policy, remarkably few American opinion leaders have hitherto realized that the assumptions underlying Ricardo’s venerable argument are now obsolete. In far too many cases moreover, such people have their own private reasons for tuning out the case against Ricardo. The result is that, in abiding by untrammelled free trade, the United States has condemned itself to a pattern not only of historically unheard-of trade deficits but massive layoffs throughout its once world-leading industrial base.
In the aerospace industry, one of the most obvious problems is that foreign purchases of American airplanes and jet engines are increasingly determined not on a free-market basis but rather are conceived as gambits in aggressive foreign-government-driven economic development programs. Companies like Boeing are asked to transfer key industrial secrets in return for airplane orders. Japan has become particularly skilled in this regard with the result that, almost entirely overlooked in the American media, it now boasts one of the world’s most advanced aerospace industries. Mitsubishi is even planning to launch its own passenger jet in 2017. Think of this as the Toyota Corolla of the air.
What we know for sure is that with each new Boeing, the Tokyo government has insisted that the Japanese industrial system gets not only an increased share of the manufacturing work but the advanced production technology to handle such work. Tokyo has bargained so effectively that Japan’s share of Boeing’s latest plane, the 787, is fully 35 percent. Meanwhile Boeing has retained 35 percent in-house while the rest has been widely allocated around the world. Japan moreover accounts for the plane’s Unique Selling Proposition, its weight-saving carbon-fiber wings which are considered an extraordinary achievement in that carbon fiber is a particularly difficult material to work. In effect the 787, the most advanced passenger jet ever flown, is more a Japanese plane than an American one.
Now, in an initiative announced during Chinese leader Xi Jinping’s U.S. visit in mid-September, Boeing has agreed to set up a manufacturing plant in China.
This represents a remarkable departure for a company that has hitherto always shrunk from manufacturing abroad. Although the new initiative has caused consternation among Boeing’s workers, it has received surprisingly little attention elsewhere. The mainstream media seem to have bought into Boeing’s story that the plant poses no threat to U.S. jobs. Supposedly the Chinese will be confined indefinitely to working on only one family of jets, the 737s, and even then will merely do the last stages of production (so-called “finishing,” most notably installing seats and painting interiors).
Not for the first time where Sino-American trade is concerned, the public relations story makes no sense. For a start Boeing is unlikely to have committed itself to all the trouble and expense of establishing a brand-new plant to do merely its least consequential tasks. As for the Chinese, they have no plans forever to play the back end of a pantomime horse in any industry, least of all such a strategically and economically important one as aerospace. If experience in other industries is any guide, they will increasingly turn the screws on Boeing to transfer ever more sophisticated technology.
There is a scandal here and the key to it is stock options. In return for transferring key technologies, Boeing can expect the Chinese to pay way above the odds for its planes. Thus its short-term profits will be powerfully boosted and so will be the value of top executives’ stock options. Meanwhile it will be years or even decades before the full cost to the American economy will be felt. By then today’s crop of Boeing executives will have long since passed from the stage.
Ultimately the solution is some serious saber rattling by U.S. policymakers. All they need to do is impress on America’s more aggressive partners that access to the American market is not a God-given right. It can be withdrawn if such partners do not play fair.
Chinese exporters in particular need the American market more than the American market needs Chinese exporters. Few American leaders are in a better position to make that point than Donald Trump. He already has the broad mass of the American public behind him on trade. And unlike virtually all his opponents, he is not beholden to Boeing or any of the other multinationals that have been selling America short.