The U.S. aerospace industry exists within a complex web of global trade, where manufacturers routinely source essential components from various corners of the world. This intricate international supply chain, while necessary for producing cutting-edge aircraft, engines, and specialized parts, is dealing with the impact of massive changes to the existing U.S. tariff system imposed by the Trump Administration.
Boeing CEO Kelly Ortberg recently said the company is paying the base 10% tariffs on components sourced from Japanese and Italian vendors, but he expects to recover a portion of those tariffs when Boeing delivers the finished aircraft by relying on a rule known as “duty drawback.” Boeing expects to export more than 70 percent of its aircraft to foreign airlines in coming years, and Ortberg noted that tariffs have a more limited impact on its business outlook than it would if it was primarily supplying U.S. customers.
Duty drawback is a refund of certain duties, taxes, or fees collected on imported goods when those goods are later exported or destroyed. It’s a mechanism used in international trade to encourage exports and help domestic companies compete in the global market.
Here’s how it generally works:
- Import Duties: When goods are imported into a country, the importer typically pays duties on those goods.
- Export or Destruction: If those imported goods are subsequently exported to another country, or destroyed under customs supervision, the original duties paid may be refunded.
The purpose of duty drawback is to alleviate the cost burden of import duties on businesses that use imported materials in the production of goods for export, or that re-export imported goods in the same condition. This mechanism maintains the competitiveness of export-oriented manufacturers like Boeing and aerospace suppliers, including engine makers like GE Aerospace and Pratt & Whitney, among many others.
The Duty Drawback system acknowledges a fundamental principle: imported materials incorporated into products destined for foreign markets do not truly enter the domestic economy and, therefore, should not bear the burden of domestic tariffs. This provision is designed to remove the extra taxation designed to be paid by U.S. customers on imported goods. Most importantly, U.S. Customs and Border Protection has affirmed that duty drawback is available for reciprocal tariffs imposed under the Trump administration, including tariffs on goods from China.
Duty drawback will be critical to reducing the impact of the Trump Administration’s broad new tariffs on the U.S. aerospace industry. The intricate nature of aerospace manufacturing often necessitates the importation of specialized alloys, advanced avionics systems, and critical engine components from various international suppliers. Without duty drawback, the duties paid on these imported materials can substantially inflate the final cost of the aircraft or part, making U.S. manufacturers less competitive in the international arena.
The availability of duty drawback also provides an incentive for aerospace manufacturers to maintain or even expand their production facilities within the country. By reducing the financial burden associated with importing essential components, this provision encourages domestic production, helping to sustain valuable jobs and preserve critical expertise within the nation’s borders.
