January 12, 2011

1. Do you believe Airbus could have become a viable competitor without subsidies?

Making note of the hefty investments, substantial experience curve effects, long break-even times, and unpredictable demands, it is implausible that an organization like Airbus could have effectively come into the industry without subsidies. While Airbus obviously established new technology and had an excellent product strategy, either the governments or the parent organizations would have had to offer subsidies for fairly some time for Airbus to be able to manufacture its new aircraft and develop their sales volume in order to reach a break-even level. It is highly unlikely that an aircraft construction company could subsist without subsidies, and most all chief commercial aircraft companies accept government subsidies. For example, Boeing received direct government subsidies on the 787 aircraft from the state of Washington ($3.2 billion equates to $3.2 million per production worker) and $1.6 billion indirect Japanese government subsidies from its Japanese partners. And Canada and Russia have stated publicly that they are funding their national champions, Bombardier and Sukhoi (Wheeldon & Pritchard, 2007).

2. Why do you think the four European governments agreed to subsidize the establishment of Airbus?

The four European governments have a direct tie to the European airlines so it is easy to understand why they might be interested in protecting any perceived threat to the market. The governments in Europe (France, Germany, and England) own domestic airlines, including British Airways, Lufthansa, and Iberia airlines. Also, the industry as a whole provides a large number of jobs, both directly for the aircraft manufacturer but also indirectly, such as through suppliers. Add to that the technology from the aircraft industry that can be used by other industries (Hill, 2011). From a free-market economy standpoint, it looks unreasonable for several European governments to finance the development of airliners which go on to compete with products self-financed by Boeing, who have to incorporate the development costs in their overheads, making their products more expensive and therefore less competitive. One could argue that both companies are being directly supported by government capital, but only one of the companies is being honest about that support. The WTO will ultimately make the decision and take the appropriate action.

3. Is Airbus’s position with regard to the long-running dispute over subsidies reasonable?

The Airbus subsidy case is considered the largest and most complicated trade dispute ever. While there is no denial regarding the receipt of subsidies, Airbus takes the position and points out that the U.S. is providing a substantial amount of subsidies through defense spending and through NASA. There is also the fact that the U.S. government, (for the first fifty plus years of the century), provided funding for U.S. companies to develop new aircraft. It would appear that the U.S. companies were provided a jump start through subsidies. Conversely it would appear that Airbus was merely trying to catch up with their U.S. counterparts. Airbus contends that another reason for its own success is the use of clever product strategy as well as the availability of the latest technology. If you look at this from a

free-market economy perspective, it would appear unreasonable for the European governments to provide subsidies for research and development of new airplanes that would be directly competing with Boeing’s airplanes that are self-funded, causing their planes to be more expensive and potentially less competitive in the market ("Trade in Large ", n.d.).

4. Do you think that the 1992 trade agreement was reasonable?

On the surface, the agreement appears to be reasonable. Obviously both companies along with the governmental influences felt that it was reasonable at the time the agreement was put into place. Pressures to perform and reach development goals placed pressure on both companies to implement and to prepare evidence that the other is being dishonest only aids to provide more customer support for one company over the other, allowing one to stand at the top as the most viable candidate. It would be wise to have not taken action against the agreement and to have simply monitored compliance or deviance from the agreement (Ahearn, 2006). At this time it does not appear that there would be much reason to take action other than monitor compliance with the 1992 agreement and take action only to address deviance from the agreement. Trade disputes are normal actions in a world of highly competitive global economic systems. Any disputes are said to be not only useful but to be expected as well. The market success of each firm is highly dependent on the price and output decisions of its competitor.

5. Why do you think that the U.S. industry reacted with caution to attempts by politicians to reopen the trade dispute in 1993?

The industry responded with caution for quite a few reasons. To begin with, the growth of business reduced the importance of the trade dispute; a short time had passed since the agreement had actually been in place and the U.S. industry felt it needed more time to determine how the agreement worked before changes were suggested; oftentimes politicians will become a part of the problem and not the solution thus making a situation worse merely from their involvement; the international business that this industry is involved in is vastly significant and there is a great degree of collaboration with suppliers which was seen as potential bad news on the international relations front and Airbus was not in a position to change course in the middle of the game. Having a competitor who is healthy and acts in a rational manner is far better than dealing with one who is struggling to survive and does everything it can to hurt the industry.

6. In an era of global competition, what is the case for antitrust authorities to permit the formation of large domestic firms through mergers and acquisitions?

Foreign competition that can utilize foreign markets to achieve cost advantages can threaten smaller domestic companies who do not have the size to obtain the same cost advantages and attack splinter markets across the globe. Antitrust authorities should not only consider competitive dynamics and market share, but they should look at what is required by local companies in order to compete in a global marketplace. The Airbus/Boeing presence is stereotypical of a duopoly market. The market success of each firm is highly dependent on the price and output decisions of its competitor. Fair market rules apply for optimum market

performance.

7. Was the threat by EU authorities to declare the Boeing–McDonnell Douglas merger illegal a violation of U.S. national sovereignty?

In this argument, you will find two varying sides. On one side of the argument, it should be entirely up to the U.S. government to say whether a merger of two U.S. companies is appropriate or not. The EU intervening would be considered a violation of U.S. national sovereignty. On the opposite side of the argument, because these two companies do business globally, the merger would in turn affect other global companies. For this reason, the EU could have a justifiable point in wanting to police companies that do business in their backyard (Callum & Guay, 1999). In 2001, the EU struck down the merger between Honeywell and General Electric because they felt the newly formed company would not benefit the consumers in Europe (Ahearn, 2006). This action taken by the EU lessens the validity of their control.

8. Do you think the EU Commission had a strong case in its attempts to wring concessions from Boeing regarding the merger with McDonnell Douglas? Was Boeing right to make significant concessions to the EU? What might have occurred if the concessions were not made?

The EU did not have a strong case in respect to the merger. If the U.S. government affirmed the merger as acceptable that should have been the end of it. If two European firms were to merge, it would be highly unlikely that the U.S. government would have acted in the same fashion as the EU did in this case. Boeing’s concessions to the EU were inappropriate because the EU had no authority to force the concessions. By Boeing agreeing to the concessions, it only made the EU appear stronger and they received support from the European consumer (Andrews, 1997). If the concessions had not been made, it would have made it very difficult for the EU to move forward on the Honeywell and General Electric merger and the European consumer would have lost confidence in the EU as a whole (Ahearn, 2006).

9. Why did the U.S. government decide to reopen the long-running trade dispute between Boeing and Airbus in 2004? Do you think the U.S. position is reasonable? What about the EU’s countercharges? Are they reasonable?

The U.S. government decided to re-open the trade agreement dispute because the government felt that Airbus was receiving subsidies to build the A350 and the amount they were receiving was too much (Hill, 2011). While one could argue that when Airbus was formed over 40 years ago that it needed the subsidies in order to stand on its own two feet. Today, that is not that case when you look at the market share that the company has achieved. The U.S. governments’ position does appear to be reasonable based on that information alone. The EU made countercharges against Boeing that they too were receiving lavish indirect subsidies. These subsidies come in the form of defense contracts and NASA for military research (Hill, 2011). The EU misunderstands the benefits that the commercial aircraft side of the business receives from these agreements. The EU’s case is a poor excuse of an

argument against the U.S. claims, holds no merit, and will only end with causing both sides certain humiliation.

10. Now that the dispute has gone to the World Trade Organization, what do you think would be a fair and equitable outcome?

A fair and equitable outcome from the World Trade Organization would be to put a stop to illegal subsidies. It appears that both Boeing and Airbus receive subsidies from their individual governments but Airbus is being offered below market rates for their loans and this should be resolved so that both organizations are on an even playing field when it comes to support in order for them to remain competitive. Given the political nature of the decisions involved, the WTO seems poorly suited to resolving this case. I think of WTO as being a forum for resolving technical disputes about whether each side has met its obligations. It is a political dispute in that it is difficult to find an economic rationale for future subsidies. But they accomplished their mission and settled the dispute finding in favor of Boeing.

According to Les Blumenthal’s article, in September 2009, a judgment against the United States found nothing comparable to European launch aid. Instead, it uncovered a hodgepodge of federal, state and local provisions that cumulatively gave Boeing unfair assistance in the range of $3 billion to $5 billion; which is only a fraction of the $24 billion in improper aid Europe was alleging (Blumenthal, 2010).

This final ruling puts any doubts to rest – launch aid is an illegal subsidy that has cost America jobs, hurt our ability to compete and damaged our overall economy,” Sen. Patty Murray, D-Wash., said in a statement after being briefed.

The ruling is apparently a victory for Boeing, with the WTO finding that the U.S. aerospace company had been harmed over the years. How Airbus could be punished remained unclear, though, along with what it would need to do to rectify that financial advantage. If it fails to take action, however, the U.S. eventually could impose billions of dollars in punitive tariffs or other sanctions (Blumenthal, 2010).

References

Ahearn, R. (2006). U.S.-European union trade relations: Issues and policy challenges. Retreived

from http://fpc.state.gov/documents/organization/64460.pdf.

Andrews, E. (1997). Boeing concession averts trade war with europe. New York Times, July 24.

Retrieved from www.nytimes.com.

Bennani, D., Salazar, J., & Boniakowski, M. (2009). The unfriendly skies: Boeing vs airbus.

Blumenthal, L. (2010, March 24). WTO rules airbus unfairly subsidized. McClatchy

Newspapers. Retrieved from www.spokesman.com

Callum, R. & Guay, T. (1999). Soverignty in transition: The european commission’s influence

on U.S. policy. Paper presented at ECSA Sixth Biennal International Conference, June 2-5.

Retrieved from http://aei.pitt.edu/2234/01/002649_1.pdf.

Hill, C. W. (2011). International business: Competing in the global marketplace (8th ed.). New

York NY: McGraw-Hill/Irwin.