Tuesday, December 13, 2011

Airbus-Boeing dispute set for mid air collision

Reportage about the Airbus Boeing trade dispute after the Airbus reported compliance to WTO obligations is rather minimal considering the fact that the dispute itself is decades old.

In a press release European aircraft manufacturer averred,

"Europe has implemented the WTO findings and thus brought the parties into full conformity with WTO obligations. In May this year, the World Trade Organization (WTO) report resulted in a decisive victory for Europe, confirming that European partnership with Airbus is legal and that government support to Airbus did not cause material injury to Boeing. Whilst pleased with the WTO’s substantial affirmation of the European position in the decision, Airbus respects that the decision did contain limited findings of subsidy effects requiring action within six months of the decision.

“We only needed to make limited changes in European policies and practices to comply with the Appellate Body’s report; we did what we needed to do and we did it in the agreed timeframe,” said Rainer Ohler, Airbus’ Head of Public Affairs and Communications. “Today, we call on the US and Boeing to do the same next year. We realize that this will mean substantial sacrifice for Boeing due to the far broader scope and scale of WTO findings of US subsidy to Boeing."
The trade imbroglio between the two giant manufacturers has a long, chequered history of decades, if not years. In an article in the Global Economy Journal in 2004, Robert J. Carbaugh and John Olienyk traced the history of the dispute between the two.
"In the late 1980s, the U.S. government and the European Union initiated negotiations centering on  the limitation of subsidies to producers of commercial jetliners.  This process culminated with the implementation of a bilateral agreement in 1992, the provisions of which were more limiting than other rules of the World Trade Organization regarding subsidies.  The agreement called for a ceiling on the amount of direct government support for new aircraft programs (launch-aid subsidies) at 33 percent of  the total development costs.  It also established that such support would be repaid at an interest rate no less than the government cost of borrowing and within no more than 17 years.  In addition, the agreement established limits on indirect subsidies that result from civilian applications of programs financed by the military or entities such as the National Aeronautics and Space Administration.  Such support was capped at 4 percent of the total revenue from the sale of a firms large commercial jetliners.  In contrast to the system of repayable launch-aid support, there was no requirement for reimbursement of indirect support (Lynn, 1997).
 Like any compromise, the 1992 agreement forced each side to give up something that it coveted.  Prior to the agreement, European governments had been providing launch-aid subsidies that amounted to as much as an estimated 75 percent of development costs for a new  aircraft.  This amount would now be substantially reduced.  While Boeing has not been the recipient of this of launch aid support from the U.S. government, it has been the recipient of indirect support in the form of technological benefits resulting from government sponsored R&D programs and plentiful military contracts.  The 1992 agreement was thus an attempt to restrain the subsidy programs in both Europe and the United States.  It produced a tenuous truce, and over the ensuing decade the issue of subsidies was pushed to the back burner. 
 In the years since the agreement was signed, however, Airbus has steadily captured larger and larger market share.  While the majority of large commercial airliners currently in service worldwide were produced by Boeing, the share of new orders going to Airbus has been steadily on the rise.  The market share of new orders for Airbus planes was just 30 percent in 1992.  That number exceeded 50 percent for each year from 2000 through 2004, and in 2003 Airbus actually delivered more new aircraft than Boeing for the first time.    This dramatic growth has been a major concern for Boeing and for U.S. policy makers concerned about a growing current account deficit and sluggish recovery from recession (McGuire, 1997). 
Trade representatives from the EU and the United States engaged in negotiations in the fall of 2004 in an attempt to modify the agreement, but those negotiations failed, and in October, 2004,  the United States withdrew from the  1992 agreement and filed a complaint with the WTO alleging that the Europeans had violated the agreement by providing illegal subsidies to Airbus.  The EU responded quickly by filing its own complaint, charging that Boeing had received Amassive subsidies in violation of the 1992 agreement.  In what may become the biggest dispute in the history of the WTO, Boeing complained that Airbus has received a total of $15 billion in subsidies since 1992, and $40 billion in aid since its inception.  The European Union countered that Boeing has received $23 billion in support from the U.S. government (U.S. International Trade Commission, 1998)."
A Congressional Research Study on US-EU trade relations in 2008 highlights the tension between the US and EU in view of this conflict as one of the areas of conflict. It aptly summarises the dispute,
"Claims and counter-claims concerning government support for the aviation industry have been a major source of friction in U.S.-EU relations over the past several decades.  The disputes have focused primarily on EU member-state support for Airbus Industrie, now a part of Europe’s largest aerospace firm, EADS (European Aeronautic Defense and Space Company).  According to the Office of the U.S. Trade Representative (USTR), several European governments (France, U.K., Germany and Spain) have provided massive subsidies since 1967 to their aerospace firms to aid in the development, production,  and marketing of the Airbus family of large civil aircraft.  The U.S. has also accused the EU of providing other forms of support to gain an unfair advantage in this key  sector, including equity infusions, debt forgiveness, debt rollovers, marketing assistance, and favored access to EU airports and airspace.
For its part, the EU has long resisted U.S. charges and argued that for strategic and economic purposes it could not cede the entire passenger market to the Americans, particularly in the wake of the 1997 Boeing-McDonnell Douglas merger and the pressing need to maintain sufficient global competition.  The Europeans have also counter-charged that their actions are justified because U.S. aircraft producers have benefitted from huge indirect governmental subsidies in the form of military and space contracts and government-sponsored aerospace research and development."
Terming it as one of the forces for conflict between the US and EU trade relations, a negotiated settlement was not conceived. It is interesting to see how member countries actively engage in disputes involving large private corporations. In the case of the US, the CRS study opined that in US trade policy discourse " private sector concerns are formally considered in the trade policy making process.  As a result, denial of market  access opportunities is a priority concern for U.S. trade policymakers." It is also not surprising to find that Germany's state owned development bank, Kreditanstalt für Wiederaufbau (KfW), will buy a 7.5 percent stake in the European Aeronautic Defence and Space Company  from Stuttgart-based carmaker Daimler in 2012. 
Airbus model in front of an EADS logo
I wonder if that would be a similar trend with Indian trade policy makers when the interests of large, Indian corporations are effected worldwide? Would the Indian Government intervene aggressively in the WTO when Indian private sector interests are involved in international trade disputes?
Perhaps the significance of the airline industry dispute to the economies of the two trading partners and hence aggressive involvement has been explained by Robert J. Carbaugh and John Olienyk.
In this battle over subsidies, the stakes are extremely high.  Both Airbus and Boeing are sizable contributors to economic activity in Europe and the United States.  Their contributions to technological progress and employment are significant, and the economies of both the EU and the United States reap substantial benefits from their presence.  These aerospace firms also provide large spillover benefits for the world economy at large, since each producer is increasingly engaged in outsourcing worldwide.  In addition, there are the geopolitical issues.  The national security argument for nurturing and protecting aerospace companies has a long tradition in both regions.
In light of these considerations, one view is that if left alone, both the United States and the EU would probably  be content to support their respective aerospace firms through financing, tax breaks, loan guarantees, and support for  research and development.  Given the huge costs of developing and manufacturing a new jetliner, neither Boeing nor Airbus can afford to get it wrong.  If either Boeing or Airbus manufactures a jetliner that no one wants to buy, while its competitor is producing one that airlines will purchase, the firm might not be around to make up that error, unless government is there to save the firm from itself."
The current dispute also exemplifies the trend of large private trade interests being fought under the prism of national interest at the WTO.One view is that in a free, global, market economy the most efficient player must survive and the Government should stay out of the scene. The other view is that the larger interests of the economy are at stake.Well it is not as simple as that I guess. Globalised, free trade policies are not as simple as they sound. Whether the Airbus-Boeing dispute will result in a mid air collision or a safe landing to both the airline manufacturers, only time will tell.

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