Think The Trade Surplus With China Right Now Is Huge? Just Wait.

What do Boeing’s troubles with its newest 737, and Ghana have to do with it?

The Commercial Aircraft Corporation of China links most prominently to its Boeing 737 competitor on its home page

Part of the reason China is running more than a $600-billion annual trade surplus with the U.S. (Trump tends to use a bigger number because he only includes goods, not services), is that it makes a lot of the things Americans buy, so it exports a lot. Part of the reason is also because it makes a lot of the things its own consumers buy, so it doesn’t import much. (Part of is also that China consistently cheats, especially when it comes to intellectual property.)

But there are a few things China doesn’t build itself. At least not well, at least not yet. And one of those things is passenger airplanes. And there’s a reason it hasn’t prioritized that as an industry even though clearly the demand is there. For years, the purchase of U.S. (and European) made jets was one of the only ways China was able to even things out at least a little. American made passenger planes are by far the biggest U.S. export to China, knocking more than $16-billion off the U.S. deficit. (soybeans are second). And get this: according to estimates by Boeing, China will need to buy $1.2-trillion of new aircraft between now and 2037. That’s not a typo. That’s trillion.

So one might expect increased purchases of U.S. made jets to be a big part of any trade deal with China. And it probably will be.

But what if Boeing has a looming competitor in the form of Chinese plane maker Comac?

So that even if Trump cuts a really good trade deal, at least in this one area it might not matter so much in the long run because China is determinedly pursuing building its own passenger aircraft. The Commercial Aircraft Corporation of China is building shorter range commuter type jets, which wouldn’t compete directly with Boeing. But it’s already out selling narrow body longer range jets. And those could compete with Boeing’s workhorse in the category: the 737. At least domestically within China. And now maybe elsewhere too in light the disastrous events surrounding Boeing’s newest generation of 737, where two recent crashes have resulted in the deaths of hundreds of people.

China would still probably have to rely for a while on Boeing and Airbus for wide body long haul aircraft, although Comac says it’s developing a “long-range dual-aisle widebody” in cooperation with Russia, mostly also for domestic use.

Some aviation experts say not so fast: they don’t believe China can really create a disruptive product in the commercial aerospace industry because either for safety or political reasons, they won’t be able to obtain airworthiness certificates from the FAA or European Aviation Safety Agency. So their planes won’t be able to land in the U.S. or Europe. But we think that’s missing the point. They don’t have to right now and can still be successful. There’s a lot of the rest of the world that’s under-served, has rising demand, and is serviced by cash-strapped airlines that would be happy to get “sweeteners” to buy Chinese made planes that they wouldn’t get from Airbus or Boeing.

Based on Boeing’s own projections about 75% of demand in China’s domestic aviation market will be for those shorter-haul planes, which soon it might be able to make itself.

At least at first, this wouldn’t entirely be a loss for U.S. companies: they’ll be providing a lot of the systems, technologies, and components for those Chinese-made planes. But China has a pretty consistent record on a huge range of things of partnering at first, until it has the know-how to build the same stuff itself. And then as soon as it can, it does.

And Boeing has always recovered when it’s had major problems before, which has a lot to do with the fact that it currently has only one viable competitor in Airbus. And airline execs obviously want safe planes, but are also always looking for a good deal. It could take a while, in that context, for the Chinese planes to prove themselves.

But China’s holding another card: money. This fascinating story from Bloomberg points out the Chinese plane maker just made a cross-border sale, to Ghana’s Africa World Airlines.

Of course, most of the reason AWA is committing to buying those planes is that the Chinese government is helping them finance the deal.

That butts up against another issue we’ve talked about a lot: the U.S. used to be Africa’s biggest trading partner. Now, far and away it’s China. While Africa is still a small market in terms of financial value, economies are growing fast. And China is eating our lunch there.

Add to it the fact that Chinese-made cars could be hitting U.S. showrooms relatively soon. All of which could threaten new and bigger trade imbalances, even if an immediate deal is hammered out.

Quick Update To Our Story: Going Over The Barr Summary Once More

Update: The New York Times says the Mueller report is over 300 pages long. Which we believe lends more credence to our initial concerns, as stated here.

The Chaos Report is on the road, so for the rest of this week and some of next, the content and format of the report might be a little different, and the time we publish every morning might be a bit off.

We ask for your understanding: we are a very lean operation and because we have so few people, we rely on a lot of coordination. Thank you for your understanding, and continued support.