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World trade and commercial aircraft A dogfight no one can win Aug 13th 2009 From The Economist print edition Negotiation, not litigation, is the best way to limit the subsidies to Airbus and Boeing—and stop a trade war AFTER five years of litigation and almost 100 bound volumes of evidence, the World Trade Organisation (WTO) is about to deliver its preliminary ruling on America’s (for which read Boeing’s) complaint against the provision of prohibited subsidies to Europe’s commercial aircraft industry (for which read Airbus). The United States alleges that this support was worth $200 billion over 20 years. Whatever the outcome—and Boeing is confident of victory— this will be only the first stage of a lengthy process (see article). In a few months the WTO will rule on a counter-claim by the European Union that Boeing received about $24 billion in subsidies over the past two decades as well as large, non-repayable benefits from military and space contracts. Both rulings are subject to appeal. Peter Mandelson, Europe’s trade commissioner before becoming Gordon Brown’s minister for everything, described the dispute as the biggest, most difficult and most expensive in WTO history. This first ruling is a potential thunderbolt that could ignite a damaging trade dispute between America and Europe at a time when both economies need to present a united front on trade, to prevent a slide towards protectionism. The origins of the dispute lie in America’s decision, at Boeing’s prompting, to withdraw in 2004 from a 12- year-old bilateral agreement with Europe governing trade in large civil aircraft. The agreement banned direct production and sales subsidies, but let governments continue to funnel money into new aircraft projects. It permitted both repayable direct state aid (the European approach) covering up to a third of all development costs, known as launch aid, and indirect state aid (the American approach) if limited to 3% of the domestic industry’s sales volume. Boeing, however, says it expected the deal to lead to a gradual reduction in subsidies to Airbus. When this failed to materialise, it withdrew. What caused its patience to run out? Two things: the success of Airbus in achieving rough market-share parity at the end of the 1990s, and resentment over launch aid for the A380, the superjumbo designed to bring to an end the long reign of the 747. Boeing also wanted to shield its 777 and new 787 from “unfair” competition in the form of Airbus’s launch-aid-supported A350. A target-rich environment Boeing is right to argue that all subsidies distort competition. But although the subsidies that Airbus receives are different from Boeing’s, they are not necessarily much worse. At least they are transparent— and Europe claims that by 2007 Airbus had repaid 40% more than it had been given. Nor has the effect of the subsidies received by both firms been anti-competitive. Boeing and Airbus fight like rats in a sack for every sale, with the consequence that airlines have been able to buy cheaper and better aircraft than if one firm had been dominant. Two other points should be borne in mind. The first is that it is out of date to see either firm as a national champion. The size and riskiness of large commercial-aircraft projects has forced even Boeing to create extended international supply chains. Second, the aircraft-makers’ subsidies pale by comparison with those doled out by governments on both sides of the Atlantic in the past year. Leaving aside the trillions of dollars spent on preventing financial collapse, industrial subsidies of a kind almost certainly illegal under WTO rules have mushroomed. General Motors alone has been propped up to the tune of $55 billion. If America and Europe were to go to war over subsidies now they would find what military planners call a “target-rich environment”. Both sides should therefore hold their fire until the WTO rules on Europe’s complaint. Then, putting further litigation to one side, they should head for the negotiating table. The aim should be to secure a new deal along the lines of the old agreement, but this time with an explicit goal of phasing out the most egregious -11-
subsidies within a reasonable period. The alternative of an escalating tit-for-tat trade dispute between Europe and America does not bear thinking about. Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. -12-
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