The dispute between the United States and the European Union over alleged subsidies to Boeing and Airbus for the development and construction of new commercial aircraft has been called the "third rail of U.S.-European trade relations." In the fall of 2004, the United States filed a case against the EU in the World Trade Organization; the EU responded with its own charges against the United States. In January, both sides agreed to attempt to settle the issues through diplomatic negotiations, slated to run through mid-April. A panel of experts will discuss the economic, political and legal issues surrounding the dispute.
|3:45 p.m.|| |
|Panelists:||Richard Aboulafia, Teal Group|
|Edward Graham, Institute for International Economics|
|Phillip Swagel, AEI|
|John Magnus, Tradewins, LLC|
|Moderator:||Claude E. Barfield, AEI|
On March 16, AEI continued its trade policy seminar series by analyzing the issues behind the Boeing and Airbus disagreement. The dispute between the United States and the European Union over alleged subsidies to Boeing and Airbus for the development and construction of new commercial aircraft has been called the "third rail of U.S.-European trade relations." In the fall of 2004, the United States filed a case against the EU in the World Trade Organization; the EU responded with its own charges against the United States. In January, both sides agreed to attempt to settle the issues through diplomatic negotiations, slated to run through mid-April. A panel of experts discussed the economic, political, and legal issues surrounding the dispute.
In the last decade, Airbus invested more in new products than Boeing--a primary cause of market share shift. Government Launch Aid, the formal loan program for Airbus, is a major factor, but not the only one. Beyond the subsidies, there are significant corporate differences between Boeing and Airbus. Boeing is vulnerable to equities, capital markets, and values profit, and shareholder returns first. Its short-term view is reluctant to make long-term investments and has extreme sensitivity to risk, especially with product launches. Airbus has some protection from markets and focuses more on business volume and market share. Its long-term view indicates a willingness to invest in future projects, especially since it is relatively insulated from risk. Airbus’s biggest investment, the A380, does not have a strong market. The 787 is Boeing’s last chance for a jetliner renaissance, but even with a strong market it has technical and funding risks. Airbus is responding with the A350, which is not as promising but is less costly. Boeing is under-funded but is taking steps to change that. Alternatively, Airbus has the wrong plane but is well-funded. The Boeing WTO objective is to stop Airbus from using public money. The Airbus objective is to complete privatization with a product line that is still superior.
Institute for International Economics
The main question of this dispute is whether there is a public benefit for subsidies, and the answer is no for two reasons: First, the total savings on tickets created by the subsidy must be greater than the amount of the subsidy which would not have been earned without it. This is not the case. Second, the subsidy must create positive externalities that are of greater value than the subsidies. However, this is unlikely to be achieved because the externalities are difficult to define. These conditions do not warrant a subsidy. This is an argument impartial to either Airbus or Boeing and applicable to both.
Let me first note that in everything I am about to say, I do not find “fault” with Airbus. One cannot blame Airbus for taking advantage of subsidies offered, or for seeking subsidies if they are available. Also, I see no problem with hard-nosed business tactics. Obviously we would want transparency and strictures to avoid illegal acts, like outright bribery, and this would apply to everyone.
Having said that, it is hard to see the economic rationale for future subsidies. From the point of view of the EU taxpayer, these subsidies do not look like great value for the money going forward. For job creation or spurring growth, the EU would do better to use its money to lower taxes or to buy off opponents of reforms like product and labor market regulations. Let me be clear on what I mean by subsidies, and in particular the Launch Aid. The Launch Aid loans are subsidies to the extent that Airbus could not obtain them on similar terms in an arms-length transaction. So there is a bit of a double-edged sword to arguments saying that Airbus does not need the subsidies, because the more that Airbus is a financially successful company, the more the implicit subsidy shrinks. There is still a subsidy, to be sure since commercial lenders would likely not offer the terms involved, but the subsidy is not the full amount of the loans. My overall point, though, is that the more successful Airbus is as a company, the lower is its cost of capital and thus the smaller is the implicit subsidy. For other countries that do not produce aircraft--for global consumers--the subsidies are a great deal. They get more choices, lower prices, and probably more competitive behavior by Boeing.
This is a political dispute in that it is difficult to find an economic rationale for future subsidies. Looking ahead, does Europe want to take the political decision to pursue a policy that does not seem to be to its benefit and therefore gives the unavoidable perception of being a political decision aimed at the United States? Given the political nature of the decisions involved, the WTO seems poorly suited to resolve this case. In a system designed to handle technical disputes, cases that are fundamentally about larger issues do not get easily resolved. It would be unfortunate to see that happen in this dispute.
AEI research assistant Jessica Browning prepared this summary.