Strained U.S.-Beijing Ties Could Cripple Boeing's China Strategy

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You might think that with China owning at least $1.3 trillion of the U.S.'s $12 trillion in national debt that Washington would tread carefully when making moves that annoy Beijing. That's hardly the case. Cases in point: The U.S. is selling $6.4 billion in military equipment to Taiwan, and President Obama is planning a meeting with the Dalai Lama.These moves upset China, and it's threatening to retaliate -- in part by possibly sanctioning companies like Boeing (BA) -- which is selling some of those arms to Taiwan, according to China Daily. The details of such sanctions have yet to be announced -- but China's threat could prompt Boeing executives to fly to Washington and Beijing to try calming things down.

Boeing needs China badly. According to China Daily, the planemaker sells over half the aircraft that Chinese airlines fly. And Boeing is purchasing hundreds of millions worth of parts from China for its new aircraft, the 787 Dreamliner. Moreover, over a third of Boeing's total aircraft parts come from China. As I've posted, some observers think Boeing CEO Jim McNerney would even like to move Boeing to China to save money.

But that won't happen if China gets serious about retaliating against the U.S. This calls into question the whole logic behind Washington's latest moves -- which China appears to be interpreting as a shiny red cape waved in front of a stampede of bulls.

Major Macroeconomic Consequences

China could make things hard for America. With a $3.8 trillion budget proposal featuring a $1.5 trillion deficit, U.S. debt could rise, and Washington would need China more than ever to finance it. Just at the moment of greatest need, China could quietly and massively decide to shift its holdings away from dollar-denominated instruments -- where 65% of them are estimated to reside -- and into others, like euros.

That would mean the U.S. would need to pay higher interest rates to finance its debt.

Long before that happens, though, China could cut Boeing off -- which would take a big chunk out of its backlog and throw a monkey wrench into the 787's development, which depends quite heavily on its Chinese suppliers. And if China doesn't let Boeing sell in the country, odds are pretty low that it will welcome Boeing's headquarters there.

Of course, this could all be saber-rattling political theater. Nevertheless, if China follows through, the costs to Boeing -- and to the U.S. economy -- could be big.
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