Airbus and China: Less than meets
the eye? By Duncan Freeman
BRUSSELS - European Union-China trade may
be denominated in euros, but it often seems as if
the currency of Chinese political influence is
Airbuses (or Boeings, if it is the US being
influenced). When Wen Jiabao signed an
agreement for the purchase of 150 of the
jetliners, worth close to US$10 billion, during
his recent visit to Paris, it seemed at first
glance that this was a case of China
using its huge demand for
civil aircraft to buy off pressure to reduce its
surplus in trade with the EU, or at least with
France.
The EU has a large and growing
trade deficit with China, and the first half of
the year was dominated by the dispute over surging
Chinese textile exports to Europe. France has been
among the most vociferous EU members in calling
for the EU to adopt protectionist measures against
Chinese imports supposedly flooding the market in
Europe. The necessity of protecting French
industry from external threats, including cheap
Chinese goods, was a central theme of the debate
over the EU Constitutional Treaty in France
earlier this year.
France has shown itself
to be protectionist on a number of issues, the
latest being the reduction of agriculture
subsidies under the World Trade Organization Doha
development round. And even though France's trade
deficit with China is far from being the largest
in the EU, public opinion in France is suspicious
of trade with China. Thus, the Airbus agreement
would appear to be a well-timed attempt to give a
positive gloss on the relationship between China
and France, and by extension the rest of Europe.
Of course, everyone involved would deny
that there was a political or commercial quid pro
quo involved in the agreement that was signed.
But, even if commercial logic requires that China
satisfies part of its demand for aircraft by
buying Airbuses, the timing of the signing at
least appears far from being a coincidence. A
contract can be signed anywhere at any time, but
agreements like these are signed at a deliberately
chosen time and place.
In November,
Chinese President Hu Jintao visited the UK,
Germany and Spain, all of which, along with
France, are partners in Airbus. The Airbus
agreement far outweighs any of the deals signed
during Hu's trip, but the Chinese government
evidently thought it more appropriate for it to be
signed by Wen in Paris. Apart from the fact that
Airbus has its headquarters in France, it was
obviously considered symbolically important that
the deal be signed in Paris.
Even if the
decision to sign the deal in Paris has political
implications, it is unclear whether China will
really gain that much. Despite all the "bra wars"
publicity earlier in the year, the pressure on
China from the EU on trade-related issues is
nothing compared to that from the US. In November,
China signed an order for 70 Boeings and an option
for 80 more to coincide with the visit of
President George W Bush to Beijing. If they are
intended as political bargaining chips, then the
size of the orders does not seem related to the
problem at hand, given the much greater degree of
political pressure over trade issues from the US
and the much bigger Chinese trade surplus with
America.
The EU has mostly avoided the
US's hectoring of China over the valuation of the
yuan. As for the textile issue, it may have had
political resonance in a few countries like France
and Italy, but for much of the rest of Europe
trade with China generates only limited public
discussion. Even in the case of France, it is
unclear whether such an agreement is really
necessary. Despite all the noise from Paris, its
ability to protect French industries from
competition is limited, since trade policy is
largely in the hands of the European Commission in
Brussels, which is not very sympathetic to the
protectionist view of the world.
Even if
other issues of interest to China are taken into
account, the order may have little impact. While
fighting against imports of Chinese textiles, the
French government has been one of the most eager
to lift the EU embargo on arms sales to China; it
does not really need persuading with commercial
carrots. So why would China apparently give much
more than it really needs?
The reality is
that France is probably getting much less than the
publicity might indicate. Airbus is headquartered
in France, and many of the aircraft are assembled
there, but the parts for the aircraft come from
facilities in partner countries in Europe and even
further afield. If the political kudos for the
signing of the contract goes to France, the
commercial benefits will flow much more widely.
Interestingly enough, it is not certain
that France will be the major beneficiary of the
deal, or that the country's final trade balance
with China would improve much when the aircraft
are delivered. The agreement signed is for
purchase of A320 family aircraft, but this family
includes the A318, A319, A320 and A321, all of
which are actually assembled in Germany except for
the A320. The potential benefits are shown by the
trade figures for aircraft sales to China.
According to EU trade statistics, in the
first three quarters of 2005 sales of aircraft and
their parts by Germany to China rose by 86.5% over
the same period for 2004, while those by France
increased by a much smaller 38.5%, although French
exports at 1.29 billion euros were greater than
the 933 million euros total for Germany.
In addition, what was signed in Paris was
not a firm order for 150 aircraft, but a framework
agreement that may be varied by the buyer. Who
gets the final benefits in Europe will depend on
the mix of aircraft China decides to buy and their
exact number, which may be less than the 150
mentioned in the Paris agreement.
The
benefits of the deal, however many aircraft are
finally purchased, may spread all the way back to
China. A separate memorandum of understanding
signed with China's National Development and
Reform Commission during Wen Jiabao's visit was
intended to increase Airbus parts purchases in
China to $60 million in 2007 and $120 million in
2010. In addition, Airbus has offered China the
possibility of manufacturing up to 5% of the
airframe for the A350 aircraft.
The part
of the memorandum that caught most attention was a
proposal to study the possibility of Airbus
establishing a final assembly line in China.
Airbus established an engineering center in
Beijing earlier this year; it now has 54
engineers, and is expected to have 200 by 2008.
The proposed assembly plant would make cooperation
with China even closer, although just how close
remains far from clear since the memorandum does
no more than commit the two sides to study the
feasibility of the project.
If the
assembly line in China is realized, the potential
gains are obvious. For China it is an opportunity
to access European expertise in a strategic
industry, while for the Europeans it offers the
apparent guarantee of entry to the Chinese market.
It is the type of declaration of faith in China
that Boeing, for instance, has not made.
The commitment to study assembly in China
may have helped get the deal signed, but it leaves
many questions unanswered. For one, what will
happen if studies show that the project is not
feasible? Such a situation could engender the type
of recriminations that have destroyed many
business partnerships in China in the past. Also,
any such deal could create divisions in Europe,
since neither the Germans nor the French can be
expected to be happy if aircraft assembly work
currently done in their existing plants is shifted
to China.
The idea of Airbus moving
aircraft assembly in China challenges the
fundamental industrial strategy of France, and by
implication the one they believe the rest of
Europe should follow, which is to protect domestic
industries from foreign competition and
"delocalization". During Wen's visit, French Prime
Minister Dominique de Villepin said that he would
like to see a long-term industrial and
technological partnership with China, but many of
his countrymen view this with suspicion,
especially if it means dislocation leading to the
loss of French jobs.
Of course, the
European dimension is not the only one to this
deal. Airbus is fighting with Boeing in the
worldwide aircraft market, and China is a key part
of that competition. An agreement to set up an
assembly plant in China would hopefully be a way
to capture a strong foothold in the Chinese
market. In terms of aircraft operating, Boeing
dominates in China, with a share of about 70% to
less than 30% for Airbus. Airbus is a long way
from its declared aim of capturing 50% of the
market, but going by current deliveries, the two
rivals are almost in a dead heat; the latest
reported figures for confirmed orders in 2005
actually show Airbus in the lead with 67 aircraft
to 59 for Boeing.
The Chinese government
is well aware of this competition and is perfectly
capable of playing one manufacturer against the
other to its own strategic advantage; the promise
to consider assembly in China may be the latest
example.
The Airbus deal grabbed the
headlines, and is a great stroke of publicity, but
its commercial and political implications are far
from clear. Buying a few Boeings will not
fundamentally alter China's trade imbalance with
the US, and the same is true for Europe -
successful sales of Airbuses are unlikely to make
a fundamental difference to attitudes in France or
elsewhere in Europe. Nor is it yet clear where the
real commercial benefits will flow.
The
Airbus deal, and the company's developing
relationship with China, may be of great benefit
to both sides, but it also may have been oversold,
both in terms of its commercial and political
significance.
Duncan Freeman is
a writer and consultant based in Brussels. He can
be contacted at duncanfreeman@skynet.be.
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