For Company and For Country: Boeing and US-China Relations

When Henry Kissinger embarked on his secret mission in 1971 to lay the groundwork for President Richard Nixon’s historic trip to China, he was shuttled from Islamabad to Beijing in a Boeing 707. When Chinese President Xi Jinping arrived in Washington, DC in 2015 for a state visit, he stepped off a retrofitted Boeing 747 emblazoned with Air China insignia.

In those intervening 44 years, Boeing had been the preferred aircraft for every American and Chinese head of state between Nixon and Xi. In fact, every Chinese leader since Deng Xiaoping has visited Boeing’s factories outside of Seattle.

Boeing is hardly a nation-state, but perhaps no company exemplifies the complex and nuanced layers of the US-China relationship as much as this American multinational, the world’s largest aerospace company. From hiring a Chinese student as its first engineer in 1916 and co-founding China’s first aircraft manufacturer in the 1930s, to the latest debates on trade and technology transfer, Boeing’s story is a unique window onto the forces that have both fortified the bilateral relationship and might now pull it apart.

As the Cold War ended, Boeing became a leading advocate of economic globalization. After all, the company has long been the United State’s largest exporter by dollar value, has built supply chains around the world, and makes a product whose very purpose is to link distant corners of the globe. It was only natural that Boeing would be fully invested in this international system that the United States was seen to lead—its business depended on globalization.

A significant part of globalization was integrating China into that international system. Boeing, as one of the earliest beneficiaries of the US-China rapprochement under Nixon, played a starring role both in prying open markets in China and in American debates on China’s eventual accession to the World Trade Organization (WTO).

Assuming an outsized role in bilateral relations meant the company has both reaped rewards and suffered consequences. Beijing has regularly played Boeing against Airbus, its European rival, translating its market power into bargaining power during political negotiations.

Figure 1. China Revenues Now Equate to Almost 20% of Boeing’s Commercial Aircraft Revenues

Note: Boeing’s revenue from China is derived predominantly from sales of commercial airplanes.
Source: Company Reports.

Four decades since the formalization of US-China relations, China has grown to become Boeing’s most important national market except the United States (see Figure 1). But with plans for its own commercial jetliner, China is also the only country that can upset the global aviation duopoly that Boeing and Airbus have long enjoyed. This development is forcing Boeing to balance Chinese demands for technology transfer with protecting its bottom line and future prospects.

Yet Boeing’s increased dependence on China is reciprocated by the country’s continued dependence on its planes to fly not just its leaders but also hundreds of millions of Chinese citizens. Even as Beijing aspires to build a world-class commercial aviation industry, Boeing’s star in the China market has not dimmed.

Irony would have it that for a company whose China market entry was made possible by an American strategic pivot during the Cold War, Boeing’s fortunes in China may now depend on whether the specter of a new economic winter becomes a reality.

Indeed, Boeing’s place in US-China relations shows how structural changes in the international system over the past five decades have affected the commercial calculus of a powerful multinational firm. Of course, Boeing was not the only one affected by these sweeping changes. But understanding how this single company sought to adapt to the evolving environment yields valuable insights into commercial diplomacy, US-China politics, and how the future dynamics of globalization might be shaped.

The First Sale: Boeing and Cold War Strategy

When Nixon went to China in 1972, the American president “personally approved” a request from Chinese leaders to buy ten B707s, according to his interpreter Chas Freeman. The White House’s decision was motivated not simply by commercial considerations but also by Cold War maneuvering against the Soviet Union. This would not be the last time that Boeing had a hand in broader geopolitical machinations.

In the administration’s view, the Boeing sale would weaken China’s dependence on Soviet planes. Such a deal would signal to Moscow that Washington could help Beijing “become a strong, modern industrial state—on Russia’s flank—much faster than she could without American aid.” Aligning Washington and Beijing against Moscow was a strategic imperative shared by Nixon and Mao, and it superseded US concerns over technology transfers.

While the Nixon administration hoarded business opportunities as bargaining chips with the Soviet Union, China became the only Communist country except Yugoslavia to have US jetliners in its civilian fleet. Perhaps the New York Times captured this sentiment best when its editorial board argued “the Chinese are entitled to buy products of advanced American technology even when…these products could have ancillary military significance.”

At the same time, the United States found an eager customer in China, whose civil aviation industry was in total disrepair. It was estimated that China’s civil aviation fleet included only 350-500 planes, mostly based on Soviet designs and many of which were “obsolete and inefficient.” It was no surprise that American airline executives saw China as “one of the biggest untapped markets in the world for commercial aircraft.”

Sensing that international competitors were ready to pounce on the China market, Boeing hastily dispatched a delegation to Beijing just two weeks after Nixon’s visit. On September 9, 1972, two months after the White House granted Boeing an export permit, the company closed the deal with the Civil Aviation Administration of China (CAAC).

The 125-page contract, which took five months of the “most arduous” negotiations, stipulated that China would buy ten B707s, along with 40 Pratt & Whitney jet engines, for $150 million. As part of that deal, Boeing agreed to train Chinese flight crews in Seattle and operate a flight training facility in Shanghai. At the time, China suffered from severe shortages of qualified pilots, air-traffic controllers, and maintenance technicians. An observer wrote presciently that China’s need for jets, parts, and technology meant this sale was “the beginning of what could be long-time dependence on the United States in this field.”

The first Boeing 707 delivered to China, May 1973.
Source.

Boeing’s first sale to the People’s Republic of China came at a pivotal time for the US aviation industry. Military contracts were trailing off as the Vietnam War drew to a close, while commercial exports to developing countries began to flourish. Aviation industry exports more than doubled between 1970 and 1974 to $6.8 billion, and the superior efficiency of Boeing aircraft saw the company establish itself as the global industry leader. from the 1970s onwards, Boeing gradually outcompeted other industry players and hastened the market exits of once iconic plane-makers such as Fokker, Lockheed, Hawker-Siddeley, and later McDonnell Douglas.

Its rising dominance in commercial aircraft meant that Boeing was well-placed to capitalize on the opportunities that Nixon’s opening to China afforded. Even before the normalization of diplomatic relations in 1979, China’s enormous market and competitive exports created “a significant amount” of bilateral trade, which swelled from a mere $4.9 million in 1971 to $900 million in 1973. Moreover, business contacts kept expanding through successive administrations, particularly after Deng Xiaoping initiated “reform and opening” in 1978.

Aviation was a key pillar of this burgeoning trade. In December 1978, Boeing signed a second $156 million contract with China to deliver three B747 jumbo jets, which could fly nonstop between the United States and China. By December 1980, Pan Am had started the first commercial flight service between the two countries since 1949.

Businesses were more or less left to their own devices as they began forging ties with China. Although Nixon administration officials helped establish the US-China Business Council, of which Boeing was a founding member, and which today remains a prominent advocate for commercial engagement, the US government at the time largely stood in the background when it came to commercial relations.

That’s because Presidents Nixon, Ford, and (eventually) Carter mainly viewed relations with China through a strategic lens and took little interest in its internal governance. Nixon had told Mao in 1972, “What brings us together is a recognition of a new situation in the world and a recognition on our part that what is important is not a nation’s internal political philosophy. What is important is its policy toward the rest of the world and toward us.” Kissinger, too, confessed to Mao that “Our interest in trade with China is not commercial. It is to establish a relationship that is necessary for the political relations we both have.”

Indeed, at this crucial turning point in bilateral relations, leading voices in US academia, business, and the media generally saw trade as an economic benefit and non-military technology transfer as a good idea.

Flying High: Boeing and Chinese Reforms in the 1980s

Boeing established its first one-person China office in 1980, and as economic growth took off that decade, the country emerged as “one of the last great frontiers for air travel.” Rising demand for aircraft seemed to validate Boeing’s enthusiasm for China, whose large population and expansive geography made it especially suited to air travel (see Figure 2). But two other major factors also reinforced the company’s focus on China: 1) a congenial US political environment and 2) rising competition from Airbus.

Figure 2. China Air Passenger Volume Has Grown at More Than 3x the Global Average Since 1975

Source: International Civil Aviation Organization.

As Cold War competition escalated at times under President Ronald Reagan, countering the Soviet Union dominated US strategic priorities. So, when it came to China policy, the Reagan administration basically continued the strategic approach adopted by Nixon. Like his predecessors, Reagan thought of China as a bulwark against Soviet power and therefore broadly supported China’s economic modernization. Reagan apparently admired the “free market spirit” of “so-called Communist China,” and said that it was unnecessary “for us to impose our form of governments on some other country.”

In addition, Reagan granted China full Foreign Military Sales status, incorporated Chinese assistance into war plans against the Soviet Union, and more than doubled China’s export credits. When fielding complaints from US executives in Beijing in 1983, Reagan’s Secretary of State George Shultz dismissively told them to “move to Japan or Western Europe.”

Part of the Solution

In this disobliging yet benign political environment, Boeing sought to deepen its ties in China. But that was easier said than done. China wanted more than simply imported aircraft—a prerequisite for continued market access was for the company to help China modernize its own aviation industry.

In the 1980s, China’s aerospace sector was in shambles, as detailed in James Fallows’ China Airborne. The aviation regulator CAAC (the equivalent of the FAA)—which also operated the national aviation monopoly—had enjoyed “a solidly built reputation for rudeness, inefficiency, and passenger discomfort.” Its dysfunctional supervision of China’s skies had grave consequences: Chinese airlines had appalling safety records well into the 1990s and many planes were hijacked by Chinese who sought asylum in Taiwan, Japan, or South Korea.

China had little experience running modern airlines, training commercial pilots, maintaining aircraft, or managing air-traffic control. Beijing recognized these deficiencies as threats to its development and began a series of reforms. In 1988, it dissolved the CAAC’s airliner monopoly and created quasi-commercial state-owned airlines like Air China, China Eastern, and China Southern to introduce competition and improve performance.

Boeing supported these efforts by providing industry training, regulatory advice, and hundreds of millions of dollars in assistance to upgrade the safety of China’s commercial aviation. The results were remarkable: China transformed from having one of the worst safety records to having one of the best today (see Figure 3).

Figure 3. Fatalities Involving Chinese Commercial Airlines

Source: Aviation Safety Network, ASN Aviation Safety Database.

A Rising Threat

The competitive landscape fundamentally changed for Boeing, particularly in the China market, with the rise of Airbus in the 1980s. The European aviation consortium delivered its first jetliner to China in 1985, as part of a $150 million order for three A310 wide-body aircraft. That same year, an Airbus subsidiary signed the group’s first sub-contracting agreement with the Xi’an Aviation Industrial Company to manufacture access doors for A300 and A310 planes.

Although Boeing had first-mover advantage in China, it was insufficient for dealing with the advent of Airbus as a serious rival. That’s because the creation of a global duopoly in passenger jetliners meant that Beijing now had choices, which allowed the Chinese government to use its monopsony power to pit Boeing against Airbus in order to bargain for better prices, domestic production agreements, and limited technology transfer. That’s because Beijing effectively retained final approval powers for aircraft purchases by domestic carriers.

With this newfound leverage, Beijing was happy to let foreign companies access its market, but only if an effort was made to impart their manufacturing knowledge. Deng was clear early on that China could not remain backward in technology if it hoped to become powerful. And few sectors demand as much technological mastery as an “apex” industry like aviation, which involves not only assembling planes but also building engines, avionics, supply chains, and maintenance ecosystems. It is a highly complex operation that few have attempted, let alone conquered—meaning the economic rewards are enormous.  

Indeed, industry observers noticed early that China “always preferred to build rather than buy.” As CAAC was busy spending over $2 billion on dozens of B737s, B757s, and B767s to upgrade a civilian fleet that still flew propeller planes on provincial routes, Beijing persuaded the American company to outsource production and transfer technology to state-owned factories. But Boeing never gave the game away, transferring only modest, non-core technologies. Starting in 1980, the company signed contracts with Chinese suppliers for parts like vertical fins, horizontal stabilizers, trailing-edge ribs, and cargo doors.

Beijing ultimately wanted to build a “Chinese Boeing”—an intention hidden in plain sight. In May 1980, for example, a group of US industry representatives discovered the Yun-10 project while visiting a Shanghai factory. Built by the Shanghai Aviation Industrial Company, the 178-seater Y-10 was a “virtual clone” of the B707s that China bought in 1972 and was powered by Pratt & Whitney engines that were ordered as “spare parts” for these planes.

The reverse-engineered Y-10 made its maiden flight in September 1980 and flew as far as Urumqi in Xinjiang in November 1983 before funding was cut in 1984. Beijing sunk 537.7 million yuan into the plane’s development, but only three prototypes were built. The project failed because Chinese engineers did not really know how to make a commercially viable jetliner. For example, they struggled to pinpoint the Y-10’s center of gravity and built it out of steel not aluminum, making the plane far too heavy to be fuel efficient. (Today, the only surviving Y-10 sits outside a state aviation facility in Shanghai.)

A Yun-10 plane in Tibet, January 1984.
Source.

The hard lesson that Beijing took from the Y-10 fiasco was that developing an indigenous aircraft industry would take a long time and a lot of experience. So, it doubled down on its strategy of leveraging competition to access its huge market to extract concessions from foreign producers.

None of this would have surprised Boeing, as it had encountered a similar aspirant to join the global aviation industry in Japan. Like China, Japan wanted its own passenger jets but, unlike China, it actually had the technological base to make such a goal seem feasible. But the fear in the 1980s that “Asian money” would turn the United States into a “techno-colony” led Congress to pass “extraordinary restrictions” on technology transfer to Japan and South Korea to protect domestic industry.

But Japan was also a future growth market for Boeing, so the company sought to bolster its competitive advantage without alienating potential customers. What Boeing did was to integrate Japanese manufacturers into its supply chain, so that powerful industries with considerable political influence in Japan had a stake in Boeing’s success.

In 1990, Boeing even made the Japan Aircraft Development Corporation a minority risk-sharing partner in the production of the Boeing 777, a twin engine, wide-body jetliner that would become an industry standard. While this strategy sapped momentum from the march of Japan’s industrial policy, it also heralded a new era of truly globalized supply chains for Boeing—an issue that would later feature prominently as US-China politics heated up after 1989.

Boeing and a “Long Decade” in US-China Relations from 1989–2001

Before global supply chains and indigenous innovation became leading issues, bilateral economic relations in the 1990s were often dominated by contentious debates in Washington over Beijing’s “most favored nation” (MFN) status, an issue that thrust Boeing into the limelight as a major force in US-China relations.

MFN status meant that the United States would give China trade advantages equal to the best that it gave any of its other trading partners—the vast majority of which already had MFN status. In practice, this approval meant that a country avoided the punitive Smoot-Hawley tariffs imposed during the Great Depression.

President Carter first granted MFN status to China in 1980, supported by Congress and lobbying from Boeing. But a kicker for China was that the US president had to renew MFN status each year for any “nonmarket economy” that restricted emigration, as stipulated in the Jackson-Vanik amendment to the 1974 Trade Act. While the president’s decision could be overturned by Congress, Reagan renewed China’s MFN status without controversy in the 1980s, despite the fact that China’s cheap imports were accused of “killing the mushroom farmer” as early as 1982.

But China’s MFN status became a political lightning rod after the Tiananmen crackdown in June 1989. This tragedy was a watershed moment in American perceptions of China, and public opinion reversed almost overnight. China’s profile in American politics rose sharply, particularly with regard to democracy and human rights, and Congress assumed a greater voice in bilateral relations to pressure Beijing on political reforms.

Due to Tiananmen, Washington embargoed $700 million in arms sales to China, ended joint military planning and weapons development, and suspended trade and development assistance. These new frictions drew Boeing deeper into the domestic politics of US foreign policy as the company had to work delicately with the administration to exempt a scheduled $200 million delivery of four B757s to China from military sanctions.

The need for the US president to renew China’s MFN status each year provided another means for Congress to punish China. Proponents argued that the United States should use denial of MFN status as “leverage” against Beijing because China wanted access to US markets, foreign investment, and “prestige meetings” with American officials.

The George H.W. Bush administration, however, renewed China’s MFN status every year and vetoed bills that attempted to revoke MFN or link it to human rights. Even though Democratic leaders in Congress and an “eclectic alliance of anti-Communists, human rights advocates, and protectionists” believed Bush’s approach was wrong, they could never override his veto.

Despite pushback, Bush adopted a policy of “engagement” with China that centered on strengthening linkages across the state, society, and economy. He justified this approach to China on the belief that “…to influence China,” it was not productive to isolate it. Rather than seeking to limit bilateral trade and commercial linkages with China, which would hurt US companies and consumers, his administration saw Chinese entrepreneurs and private business as “the best long-term hope for political change.”

Bush also gave prominence to an argument that deeper economic ties with China would improve democracy and human rights. “No nation on Earth has discovered a way to import the world’s goods and services while stopping foreign ideas at the border,” he claimed. It was an attractive argument that would help inform a bipartisan consensus on China policy for two decades.

New Era, New Paradigm

The growth of commercial ties with China had created business constituencies in the United States and other advanced economies that were invested in China’s economic success. For Boeing in particular, fierce competition from Airbus meant that it had to work overtime to preserve ties with its largest potential customer. But the American company saw its commercial horizons expand with the new global politics of the 1990s.

The fall of the Soviet Union and the dissipation of Japan’s economic threat ushered in a sense of euphoria in the United States, perhaps best captured in Francis Fukuyama’s famous proclamation of the “End of History.” An executive at the US Chamber of Commerce aptly summarized the spirit of the times: “Now that the Cold War is over, it’s economic policy that’s most important. We won the war. Let’s reap the benefits.”

Indeed, to the victor go the spoils, and superpower geopolitics yielded to the triumph of US-led economic globalization, which replaced anti-communism as a justification for America’s outsized role in world affairs (see Figure 4). Free trade agreements, emerging markets, and corporate interests naturally became more prominent in US foreign policy, as the international system was increasingly reorganized to promote transnational trade, finance, and investment.

Figure 4. Global Trade Expanded Dramatically as % of GDP from 1992 to 2007

Source: World Bank.

As commercial linkages took center stage, multinationals like Boeing stood to benefit, particularly as a wave of democratization in Asia, Eastern Europe, and Latin America brought economic openings and business opportunities. But China was the most enticing emerging market, eyed by multinationals everywhere—especially after Deng rebooted the country’s reform process with his famed “Southern Tour” of early 1992.

The China market became even more strategically important to Boeing as a global economic recession in the early 1990s forced the company to slash production and reduce its workforce. Amid the economic gloom, business held up in China, as Boeing received an aircraft order worth $9 billion in 1990 and delivered its 100th plane to China in 1992 and its 200th just two years later. By 1993, China bought one-sixth of the planes Boeing sold.

From “Coddling Dictators…”

Yet as Boeing’s market share was expanding in China, domestic US politics was shifting with the arrival of Bill Clinton, the first post-Cold War president. While the fall of European communism turned American attention to economic globalization, it also ended the strategic rationale for engaging China as a counterbalance to the Soviet Union.

Democracy promotion and human rights dominated the China policy discourse during the 1992 presidential election campaign. Clinton embodied this change in approach when he criticized Bush for “coddling dictators from Beijing to Baghdad.” He took office in 1993 promising to link approval of China’s MFN status to its human rights record.

Thus, when China’s MFN renewal came up in May 1993, Clinton issued Executive Order 12850 stipulating that renewal in 1994 would be conditional on China’s promotion of free emigration, ending of prison-labor exports, and “overall, significant progress” on various human rights concerns. This action also appeared to be taken in part to appease Senator George Mitchell and Representative Nancy Pelosi—the most prominent proponents of “linkage” between MFN status and human rights—so that they would shelve more punitive legislation.

That Clinton did not immediately revoke China’s MFN status already reflected the immense pressure the business community would bring to bear on China policy. In what the New York Times described as “the most united display of corporate-lobbying muscle on a trade issue” since NAFTA debates in 1992, nearly 300 large firms and 40 trade bodies wrote Clinton to urge him to maintain MFN.

Beijing also understood this political dynamic in Washington and sought to buy US goods before the MFN deadline, including an $800 million purchase of 21 Boeing planes. Lawrence Clarkson, Boeing’s vice president for international development, said that “We will lose orders and people will lose jobs” if Clinton ended China’s MFN status. That same year Clinton told Boeing employees that Asian countries “have gone from dominoes to dynamos.”

The battle over linking trade to human rights culminated before MFN was up for renewal in mid-1994. Boeing was reported to have “led the charge” in rallying multinationals to unite against linkage, making the case that, in addition to the danger of lost jobs and higher prices, economic engagement was the best long-term strategy for political and economic liberalization in China.

Clinton came to agree, particularly after China made it clear that it did not take his MFN threat seriously. Consequently, in May 1994, Clinton decided to renew China’s MFN status and end his support for linkage despite no “overall, significant progress” on human rights—although Beijing granted exit visas to some families of dissidents and made gestures to curb prison labor. At the same time, Clinton announced a new human rights policy for China that included increased funding for Chinese NGOs and more resources for Voice of America and Radio Free Asia.

Clinton echoed the previous Bush administration when he argued that isolating China would do more harm than good to the US economy and multilateral security cooperation. He embraced and expanded his forerunner’s policy of “engagement” with China, which Clinton defined as “expanding our areas of cooperation with China while confronting our differences openly and respectfully.”

…To Selling America Inc. Around the World

Clinton may have abandoned the linkage policy, but MFN status remained a “focal point” in China policy debates of the 1990s. The ballooning bilateral trade deficit, the 1995-1996 Taiwan Strait Crisis, the 1996 campaign finance controversy, China’s intellectual property (IP) theft, and Chinese arms sales to Iran and Pakistan continued to feed opposition to MFN renewal.

Throughout this period, as anti-engagement constituencies consolidated, Boeing and numerous other US firms played a key role in persuading Congress to uphold MFN. Boeing was notable for being the vanguard of “corporate foreign policy” and was considered by some as the “most China-savvy” company in the country and “the quarterback” for these efforts. A Senate staffer remarked that Boeing “put out the full-court press” for MFN on Capitol Hill.

Aided by US businesses, the White House consistently defeated legislation to revoke MFN. Clinton’s foreign policy had already reflected his domestic mantra of “It’s the economy, stupid”—he had established the National Economic Council to balance the influence of the National Security Council in the White House—but with the end of MFN linkage he now had more political space to champion business with China.

So Clinton empowered his Commerce Department, starting under the leadership of Ron Brown from 1993 to 1996, to spearhead an aggressive “commercial diplomacy” that was seen to markedly increase the US government’s advocacy for American businesses abroad. Brown even reportedly built a “war room” to identify international business opportunities that he wanted to win for US firms. China was the centerpiece of this commercial diplomacy, as Commerce advocated on behalf of US firms, including Boeing, in meetings with top Chinese leaders.

Fending off a Rival

A supportive position from the US government was important to Boeing as it faced off against its archrival Airbus in China. The European firm, dismissed for years by Boeing executives, became a peer competitor in the 1990s as it began to make aircraft of comparable quality that were more cost-effective than Boeing models (see Figure 5). Today the Boeing-Airbus duopoly accounts for 99% of orders for large jetliners and 90% of the global aircraft market by value.

Figure 5. Airbus Closed the Gap on Boeing in Global Jetliner Deliveries

Source: Company Reports.

Airbus recorded more global orders than Boeing for the first time in 1995, and just five years later had achieved its ambitious goal of 50% market share by the year 2000. When it came to China, Boeing still accounted for over 70% of the country’s commercial fleet in 1997, but it was starting to lose sales to Airbus. In a post-ideological world, Boeing’s competition with Airbus gained geopolitical significance.

From Beijing’s vantage point, a duopoly is better than relying on a price-setting monopolist. And the central government made no secret about using its powers of final approval to play one company against the other in order to gain concessions on price and technology transfers. The Boeing-Airbus competition became “downright bloody” because each deal had an enormous price tag and increased the chance that an airline would develop a long-term supplier dependence (see Figure 6).

Figure 6. Airbus Supplies an Increasing Share of China’s Airplanes

Note: Planes are often delivered several months or years after an order is placed. The Boeing 737 family of jetliners was introduced in 1968 and the Airbus A320 family in 1988.
Source: National Bureau of Statistics.

Beijing also ramped up its demands for the two companies to set up local production facilities. So both firms outsourced more production to China, which incurred political backlash for Boeing as it contributed to layoffs and sparked US union action. Boeing defended its actions by arguing that even more jobs would be lost to Airbus if it did not agree to such outsourcing. A Boeing executive lamented that “We don’t do it to save money. We do it for the business.”

Finally, Boeing’s rivalry with Airbus could be deployed by Beijing as diplomatic leverage. For example, Wu Yi, China’s minister of foreign trade and economic cooperation, cancelled a planned US visit in 1996 because Washington had sanctioned China for IP theft and the White House refused to grant her an audience with Clinton. Boeing had pushed for Wu’s visit because she was expected to confirm $4 billion of aircraft purchases.

Instead, the next month, Premier Li Peng announced a $1.5 billion order for 30 Airbus jets on a state visit to France, a defeat for Boeing and a major breakthrough for the European consortium in China. This was followed by the signing of a preliminary agreement between a Chinese state firm and an Airbus unit to co-develop a 100-seat regional jet for Asian markets.

Boeing CEO Philip Condit described his company that year as “the designated hostage” in US-China relations: it was being used as a punching bag for diplomatic disputes. Another company executive claimed that a high-level Chinese official told him: “Because your Government constantly chooses to kick us and harass us, many, many business opportunities that should go to the US have gone elsewhere.” Premier Li basically admitted as much in public.

The increasingly fierce competition between Boeing and Airbus, and China’s ability to exploit this competition, had spillover effects for US foreign policy objectives. When the US co-sponsored an annual UN Human Rights Conference resolution condemning China, the Clinton administration struggled to assemble a “unified position” with allies like Japan and the European Union that sought the same economic gains US multinationals had achieved in China.

France’s opposition to this 1997 resolution, which ultimately failed, prompted a Boeing vice president to quip, “When President Chirac arrives in Beijing in a few weeks, I am sure that he will be rewarded for that stance.” True to form, two weeks later, Airbus beat out Boeing on another $1.5 billion contract for 30 planes to China. Beijing subsequently confirmed that such deals “show a good relationship…between China and Europe.”

The WTO Accession

With intensifying global competition, combined with Beijing’s ability to capitalize on commercial fissures for economic advantage, Boeing and other American businesses with a stake in China hoped to change the game dramatically. That game-changer was to get China into the WTO.

WTO membership would embed China in the global trade regime and provide a unifying theme for a Clinton administration that had been criticized for its “cacophony” of priorities on China policy. From Boeing’s perspective, this move would kill two birds with one stone. It would end the annual political brinksmanship over MFN renewal because the WTO requires members to grant MFN status to each other. And it would support China’s economic growth, propelling demand for air travel and jetliners.

Chinese Premier Zhu Rongji led the charge in Beijing. As a staunch reformer and unabashed champion of China’s WTO entry, Zhu thought that WTO rules could serve as a cudgel to force through stalled reforms and transform China’s decaying state sector into a more market-based system. As far as Zhu was concerned, the WTO was the external pressure that China needed to defeat hardliners opposed to market liberalization. For instance, to meet WTO requirements, China had to reduce over 7,000 trade barriers and end formal demands for tech transfer.

American and Chinese negotiators reach agreement on US support for China’s WTO accession, November 1999.
Source.

In November 1999, after years of bilateral negotiations, Clinton reached agreement with Beijing to support China’s entry into the WTO in exchange for lower tariffs and reduced barriers to trade and investment. But now the White House had to sell the deal in Washington.

China did not need American approval to join the WTO, just a two-thirds vote of WTO members. But if the United States did not grant China unconditional MFN status—often referred to as “permanent normal trade relations” (PNTR)—then China could still join the WTO but not give the United States the trade concessions it would offer to other WTO members. In other words, the United States would shoot itself in the foot if it denied China PNTR status.

To grant PNTR to China, Clinton needed Congress to repeal the Jackson-Vanik amendment, a vote that many thought would be a “close contest.” Not only did Congress show rising concern at Chinese military power and trade deficits, early signs of a globalization backlash had appeared when protestors descended on Seattle during a WTO summit in November 1999.

So the White House enlisted the business community, pro-trade Republicans, and loyal Democrats to launch “the most aggressive pro-trade lobbying effort” since NAFTA. By this time China had become the US’s eleventh-largest export market and the second-largest recipient of foreign direct investment in the world.

Boeing and other multinationals swung into action to argue for accession, leading pro-trade advocacies like the Business Coalition for US-China Trade, which boasted 1,200 members. The aviation giant ran another “all-out campaign”—modeled after its previous NAFTA campaigns—to mobilize its 10,000 suppliers in 420 House districts (including a hot dog caterer) to persuade their local representatives to support China’s WTO bid.

The arguments for PNTR were captured in Clinton’s major speech on China policy in March 2000. Clinton argued that a vote against PNTR would cost American exports and jobs, would make US firms less competitive in China, would push China away from the US-led order, and would reduce America’s ability to press China toward more responsible international actions. American resistance would also have undermined efforts to build a “global” trading regime.

Though perhaps Clinton’s best remembered argument was that growth, trade, and economic freedom would foster political reform in China, as “The genie of freedom will not go back into the bottle.” Such arguments, rooted in influential studies from the post-war heyday of modernization theory, resonated with pundits and policymakers in the 1990s. After the democratization of South Korea and Taiwan, many concluded that “prosperity breaks down old controls and generates demands for improved political and social conditions.”

During debates about PNTR, versions of this argument were endorsed by voices as diverse as George W. Bush, Silicon Valley, House Republicans, Chinese dissidents, Hong Kong democrats, and Taiwan’s president Chen Shui-bian. Some activists were skeptical, but even Human Rights Watch praised Clinton’s deal as “good for trade but also for human rights and the rule of law.”

The various arguments for PNTR worked—US businesses had emphasized economic benefits for Americans at least as much as political freedoms for Chinese—and Clinton’s China bill was passed in the House in May 2000 and in the Senate by September. The president signed the bill into law on October 10, paving the way for China to officially join the WTO on December 11, 2001. This legislative victory was viewed as a “crowning foreign policy triumph” and a key aspect of Clinton’s legacy.

Boeing, too, considers this moment as part of its own legacy. Indeed, in its press releases, still the company touts that it “successfully promoted US approval of China’s WTO accession and congressional approval of normal trade relations between the United States and China.”

Flying Solo: China Dreams of Its Own Jetliner in the 2000s

China’s accession to the WTO proved to be a landmark event that catalyzed extraordinary economic growth, which averaged over 10% in the 2000s. That growth was propelled by increased investment and robust exports, as China became the largest trading nation in the world. Enormous demand for air travel followed rising incomes, and the number of Chinese passengers rose from 61.9 million in 2000 to more than half a billion in 2017 (see Figure 7). China’s global share of air passengers increased from 3.7% to 13.9% over the same period, while the US share dropped from 39.7% to 21.3%. 

Figure 7. As Chinese Grew Wealthier, They Flew More

Source: World Bank, International Civil Aviation Organization.

Growth in China helped cushion Boeing during downturns as the country began to fulfill its potential as the company’s single most important market. The 9/11 terrorist attacks depressed air travel, and Boeing saw its profits contract 80% from 2001 to 2002, forcing it to layoff tens of thousands of workers. When demand picked up and Boeing moved lost jobs overseas, including work on the Boeing 787 to China, it only narrowly survived a major union strike vote.

During the global downturn from 2007-2010, which caused a dip in aircraft demand, China stood out as the world’s only “dynamic aviation market,” according to one Boeing executive. The firm’s China market revenue grew ten-fold from $1.2 billion in 1993 to $11.9 billion in 2017, or from 5.7% to 21% of Boeing’s total revenue from commercial planes (see Figure 8).

Figure 8. Boeing’s China Revenue Grew Ten-Fold in 25 Years
Source: Company Reports.

In the mid-2000s, Boeing still accounted for two-thirds of China’s commercial aircraft, worth a total of $37 billion. The firm even renamed its 7E7 the 787 because “in many Asian cultures the number eight represents good luck and prosperity.” Yet Boeing was still losing market share to Airbus. The European giant beat Boeing in global sales in eight of the ten years from 2001 to 2010, and in 2003, Airbus delivered more planes globally than Boeing for the first time.

But Boeing’s increasing dependence on China, alongside continued competition from Airbus, saw Beijing maintain if not strengthen its leverage in negotiating for aircraft purchases. Boeing had little choice but to remain a high-profile participant in US commercial diplomacy to help fight its global “sales war” with Airbus, which was playing a similar game.

Beijing, however, was gradually trying to change the game altogether. It never abandoned its dream of making a “Chinese Boeing” and decided it was time to up the pressure on foreign aerospace companies to help it realize this ambition.

Disrupting the Duopoly?

China announced plans for its own commercial jetliner in 2006 and this goal has featured in Five-Year Plans ever since. In 2008 Beijing reorganized the domestic aerospace industry to create the Commercial Aircraft Corporation of China (COMAC), a Shanghai-based state-owned behemoth with assets of 54.4 billion yuan ($7.9 billion) as of 2016. Its founding also coincided with the Global Financial Crisis, which made China more confident in its state-backed economic model.

COMAC was tasked with leading a commercial aviation program that centers around two main products: the ARJ21, a 75-90 seat regional jet similar to those produced by Brazil’s Embraer or Canada’s Bombardier, and the flagship C919, a 156-168 seat narrow-body jetliner intended to compete with the B737 and A320—the “workhorses” of air travel.

Boeing and Airbus were asked to partner with COMAC and its subsidiaries to transfer some of their know-how. For each company, the calculus is basically a modified Prisoner’s Dilemma: either resist Beijing and forfeit the Chinese market to the other firm, or both help COMAC become a more competitive player, when cartel-like cooperative resistance would be in the firms’ best interests. Such difficult situations are not exclusive to Boeing or Airbus—many American high-tech companies face the same dilemma. (For example, General Electric agreed in 2011 to share advanced avionics technology for the C919 with a Chinese SOE.)

In general, Boeing has taken a more cautious approach than Airbus—which had to make up ground on its American rival—but both companies seem to have concluded that it is better to provide limited support to China’s commercial aviation ambitions.

Airbus has moved quicker on this front, building an Engineering Center in Beijing to work with Chinese engineers on A350 models, opening its first A320 assembly plant outside Europe in Tianjin, and offering China an “industrial partnership” on its new double decker A380.

Boeing, meanwhile, has awarded supply contracts worth billions of dollars to Chinese companies, established Manufacturing Innovation Centers in Beijing, Shenyang, and Xi’an, and just opened a finishing plant for B737s near Shanghai.

However, like most aviation manufacturers, Boeing is acutely aware of the risks of technology transfer and has “jealously guarded” its competitive edge since it first awarded supplier contracts to China in the early 1980s. Boeing’s strategy for self-protection was put succinctly by a former Boeing CEO in the 1990s: “Obviously you don’t tell someone everything you know…the trick is to give something away just as you are developing something better.” The firm transferred relatively dated technology and outsourced only simple parts like aircraft doors, aluminum structures, and cabin fittings.

It is hard to assess the extent to which Boeing has helped COMAC. But the C919 had its maiden flight in May 2017 and is expected to enter commercial production in 2021. COMAC claims it already has 785 orders, although these are non-binding and over 90% are from domestic airlines. The estimated price of a C919 is $50 million—just half that of the B737 and A320—but its inferior efficiency and lack of global support networks for fueling and maintenance mean it is far costlier to operate over the multi-decade lifecycle of a typical jetliner.

A C919 jetliner on a test flight, December 2017.
Source.

Indeed, it is uncertain whether the C919 will ever become commercially viable on the scale of a Boeing or Airbus. COMAC still lacks safety certifications from global aviation standards bodies and still relies on foreign suppliers for vital parts such as engines, avionics, and specialized materials. The unhappy reality for China is that the C919 is already one generation behind jetliner technology under development at Boeing and Airbus.

Yet, while China has thus far failed to break into the jetliner market, the C919 is the most serious threat to the Boeing-Airbus duopoly in decades. COMAC benefits from generous subsidies, favorable procurement policies, technology transfer rules, decades of basic research, and a growing pool of STEM talent. State support was important to the success of both Boeing and Airbus. Successive US administrations doled out generous R&D grants, lucrative military contracts, and tax breaks to Boeing. European governments played an even greater role in Airbus, showering the plane-maker with $22 billion in “illegal” subsidies and concessional launch loans. Such lessons are not lost on China’s economic planners.

In 2010 Boeing’s then CEO said the company has “opted to accept the reality of both partnering and competing with China.” This tension was on display when Chinese President Xi Jinping visited a Boeing factory outside Seattle in September 2015. Xi witnessed the signing of both a deal by Chinese airliners to buy $38 billion worth of planes and a joint venture between Boeing and COMAC to establish a B737 finishing center in China.

Many countries in Asia have tried and failed to foster a domestic aerospace industry, including Japan and South Korea. When “Japan-bashing” peaked in the 1980s, many Americans predicted they would now be flying in jetliners made by Mitsubishi (which has struggled to launch even a regional jet). Boeing and Airbus seem to think that COMAC will be the Mitsubishi of its time.

This seems a fairly safe bet, as the aviation industry has enormous barriers to entry—not just in technical knowledge but also the management systems that many industry observers believe are difficult to achieve in a non-market economy. And even if COMAC masters today’s technology, Boeing and Airbus may already be commercializing the technologies of tomorrow.

Yet, if any country can beat the odds, it’s probably China. While past performance is no guarantee of future success, especially in aviation, China has a track record of leveraging foreign cooperation to establish domestic industries in high-end manufacturing. Moreover, China’s capacity for domestic innovation is rising, and if Boeing and Airbus are to maintain their edge, they will need to keep pushing the innovation frontier beyond China’s reach.

Back to the Future: Boeing and the US-China Trade War

Rising competition from China is a long-term concern for the United States. In the here and now, however, the most pressing bilateral issue for Boeing is the rapidly deteriorating economic relationship that it had worked hard to build in the 1990s. A seemingly dramatic shift of views among US policy elites and segments of the businesses community has rocked the bipartisan consensus on China that held since the Nixon administration.

Rather than doubling down on engagement, an increasing number of policymaking elites argue that economic linkages with China have done more harm than good to the US economy, particularly with regard to manufacturing employment. In addition, certain manufacturing and technology firms see formidable competition from Chinese companies, IP violations, and regulatory barriers that make market entry challenging.

These groups and voices have found kindred spirits in the White House, which has embraced something of an anti-globalization agenda. The current US administration is even relitigating China’s WTO accession, arguing that Beijing has not liberalized its economy or society as much as was expected.

In this contentious environment, China’s aviation ambitions, too, have become an irritant in the bilateral relationship. The Section 301 report that the US Trade Representative issued to justify the ongoing US-China trade war raised concerns about forced technology transfer in the aerospace industry. The administration has also charged Chinese entities with stealing industrial secrets from US aerospace manufacturers. More important, China shows no sign of backing down from its commercial aviation program, as Beijing’s industrial policy has clearly articulated a goal for the C919 to constitute 10% of the domestic market by 2025.

A $1 Trillion Market

Boeing “is probably the American company with the most riding on a healthy relationship with Beijing,” caught between its need to sell planes to China and its need to cooperate with the US government on commercial diplomacy. The company now sends one-quarter of its planes to China, while Chinese suppliers are involved in every model in its commercial fleet. Boeing projects that China will soon become its “largest commercial airplane customer” as the country is set to buy 7,960 planes worth $1.2 trillion between 2018 and 2037.

Should the US-China trade war continue to escalate, Boeing is an obvious candidate for retaliation from Beijing. It is not hard to imagine that Chinese airlines could be instructed to buy more planes from Airbus. Boeing would also struggle to raise prices to absorb potential Chinese tariffs, because it would lose even more business to Airbus amid cutthroat price competition, putting both profits and jobs at risk (see Figure 9).

Figure 9. A320s and B737s Dominate China’s Commercial Fleet as of 2016

Source: National Bureau of Statistics.

With so much at stake, Boeing will not be an idle spectator to the unwinding of US-China relations. It has taken a leaf out of its old playbook and embarked on a diplomatic offensive to ease bilateral tensions. After an early disagreement with the Trump administration over the cost of an Air Force One contract, Boeing CEO Dennis Muilenburg accompanied the President on his state visit to China in November 2017, during which Boeing received a $37 billion order. Probably as a result, B737s also managed to be exempt from retaliatory tariffs imposed by Beijing in July 2018, since China would not want to raise prices on such a vital import.

The firm says it is working actively to persuade both governments of trade’s “mutual benefit,” since its stock price is affected by the volatility in the US-China relationship. Although Boeing saw its stock price triple from $130 in October 2016 to $390 in October 2018—thanks to its long-term bet on lighter, twin-engine jets over the jumbos favored by Airbus—it fell back to $290 in December 2018 when markets began pricing in the possibility of a full-blown trade war. Yet when signs of a deal emerged in January, the company’s stock price rebounded even higher.

Managing the political risk around feuding superpowers appears ever more important for Boeing, as its margin for error is getting smaller against Airbus, as well as against COMAC. As of August 2018, the two Western companies are neck-and-neck in China, with Boeing having 1,670 planes in operation there compared to 1,598 for Airbus (see Figure 10). Any number of political factors could cause Boeing to fall behind and cede market share. 

Figure 10. Airbus and Boeing Planes in China, August 2018
Source: CAPA Centre for Aviation.

Conclusion

China is now one of Boeing’s most lucrative markets—it earned more than $100 billion of revenue there from 1993 to 2017. This success contributed to a US aircraft industry that is now worth $90 billion annually and sustains 490,400 jobs with an $82,988 average salary.

As a company whose relationship with China began even before Washington and Beijing established official diplomatic relations, Boeing has steered its China operations through the end of the Cold War, the Tiananmen crackdown, and the long road to China’s WTO entry.

What the American multinational has to navigate now is how to pursue a deeper but more complicated relationship with a China whose capabilities have strengthened markedly. This precarious balance was reflected in Boeing’s move to work with COMAC to open its first finishing plant in December 2018. The light manufacturing facility, near Shanghai, will “finish” almost-ready planes that have been delivered to China.

From Boeing’s perspective, the strategic triangle between the United States, China, and the Soviet Union during the Cold War was replaced by a commercial triangle between Chinese authorities, American firms, and their competitors from other advanced economies. Global competition made it difficult for countries and companies to coordinate their approach to a China that acquired formidable market power and diplomatic leverage. To ensure that Boeing could compete in what has become a $1 trillion market, it had little choice but to work with Beijing. Because if it didn’t, its rivals would.

This commercial logic led Boeing to become increasingly involved in US-China relations after 1989, a time when international business was ascendant in American foreign policy priorities and when Congressional activism and public opinion forced the White House to devote greater attention to democracy and human rights in China.

To protect its bottom line, the company played a leading role in advocating for China’s MFN status and for WTO accession. This history suggests that the US business community was instrumental in helping successive White House administrations generate Congressional support to ensure that the basic premise of economic engagement with China held steady. But engagement was not an unalloyed success for all Americans. There were economic downsides and job losses that resulted from import substitution from China, although these were concentrated in specific manufacturing industries.

Whether economic globalization, with China being the centerpiece, was ultimately a net gain or loss for the United States is at the heart of the current “reckoning” in US policy toward China. Critics level the charge that China hoodwinked Washington into accepting it into the WTO, but failed to deliver on political reforms. They also tend to blame multinationals for their complicity in moving production overseas.

These criticisms are understandable but incomplete, and they credit the United States with inordinate power to shape Chinese economic and political behavior. Successive US administrations were over-optimistic about liberalization in China, but many China specialists also underestimated the resilience of the Chinese Party-state. American politicians at the time used lofty rhetoric about democracy, but engagement was also about more prosaic matters. It was often borne out of pragmatism and the pursuit of concrete interests to deliver economic benefits to Americans and to secure China’s cooperation on a host of critical global issues.

Simply blaming Beijing for America’s various economic maladies may be politically satisfying but can be intellectually disingenuous. China’s rise was just one, albeit significant, part of powerful secular trends globally. The United States, and firms like Boeing, partly shaped and participated in these trends, but did not themselves control overarching structural changes like economic globalization, transnational supply chains, and labor-displacing technological advances. The failure of domestic US policy to adapt to these forces, whether through better social policies or trade safeguards, also exacerbated the fallout and increased inequality.

But does Boeing’s role in US-China relations offer any lessons for how to approach the current bilateral impasse? For Beijing, it seems ever more important to keep the US and European business community on its side, which may entail compromises and concessions on market access and technology transfer. For Washington, to alter China’s behavior across a range of economic practices will likely require both new incentives and coordinated pressure from an alliance of governments and businesses that spans China’s main trade partners.

Boeing may owe part of its global success, including in China, to US commercial diplomacy. But ultimately, the company’s success rested on its own product and capacity for innovation, which was nurtured for nearly a century in an open and competitive environment but with a dose of smart support from the state.

Today, Boeing seems confident that it can still keep its secrets and stay ahead of its Chinese competition.