LIKE Kaiser Wilhelm's army in the summer of 1914, the United States Trade Representative's office is rumbling inexorably down the track to war: it seems too late to stop the conflict that looms. Immediately after America filed its complaint to the World Trade Organisation (WTO) at the end of May about European subsidies to Airbus, the European Union (EU) followed with a counter complaint about federal and state subsidies to Boeing in America. It seems that the Europeans too had been mobilising as the storm clouds gathered last autumn. The Americans accuse Airbus of receiving subsidies worth $17 billion in launch loans alone over the past 35 years. The Europeans counter that Boeing has enjoyed R&D subsidies worth $23 billion in the past 13 years.
The current 30-day pause in proceedings is merely an opening salvo, as each side squabbles about the membership of the panels that will review the respective claims. The European side likes to characterise the postponement of the launch of a new Airbus model (the A350) as a conciliatory gesture to gain time for further direct bilateral negotiations. In fact, the delay is really because of the British government's refusal to be rushed into handing over the lion's share (£379m) of the £600m ($1.1 billion) subsidy Airbus wants. (Britain makes the expensive wings, hence its high share.)
The origins of this long-running dispute lie in the economics of the development and manufacture of large commercial aircraft. Modern planes sell for between $50m and $250m, depending on whether they are 120-seaters or jumbos. Each new model contains huge technical risks. Will it fly as safely and efficiently as the engineers calculate? Can it be built to the required price? A new plane also requires huge upfront R&D spending before the first test flight. The latest Airbus, the A380 double-decker to carry 555 passengers, had cost around $12 billion even before its first test flight a couple of months ago. The new Boeing 787 will probably cost at least $10 billion to develop.
Once production starts, the learning curve is steep and difficult. Each doubling of production generally yields a cut of one-fifth in unit cost per plane. Consequently, it takes production of about 500-600 aircraft before a model starts to earn a profit. That would typically amount to around ten years of production. Total industry demand in good years runs around 700-800 planes but is spread across a wide range from short-haul, single-aisle models to long-range and jumbo aircraft. The combination of these factors explains why the industry has a tendency towards natural monopoly. It also explains why a company such as Boeing, which has enjoyed over two-thirds of the market since the launch of the 747 over 30 years ago, does not rush to bring new models to market—it wants to milk its incumbent dominance.
This is the background to the re-emergence of a bitter trade dispute that has been around, on and off, since the French and German governments first created the Airbus consortium in 1970. In the early years they poured billions into the project in straightforward production subsidies and debt write-offs, as a fledgling Airbus tried to get aloft and win credibility with the world's airlines.
They did this for several reasons: they wanted to preserve their tiny aircraft industries and thought the only way to do this was by combining forces to create a single European producer (the British and Spanish joined later). The civil aircraft industry is seen by governments as strategic: it helps sustain a military aerospace capability by giving the aircraft producers more volume; it creates large numbers of high-technology, well-paid jobs; and it produces high returns.
The Europeans defended their early subsidies as those appropriate to an “infant industry”. The subsidies were also justified on the grounds that they prevented the Americans, and Boeing in particular, from enjoying a monopoly that was emerging as civil aviation grew dramatically in the 1960s and 1970s. One estimate, quoted in a study of the trade dispute by Britain's Royal Aeronautical Society, claims that the price of big commercial jets (those over 100 seats, as made by Boeing and Airbus) would have been 40% higher today if Boeing had managed to obtain a monopoly. But, as the study's author Keith Hayward acknowledges, the emergence of Airbus stopped that from happening.
It also led, ironically, to the exit of Boeing's two domestic rivals, Lockheed Martin and McDonnell Douglas, from the civil jet market. These two companies accelerated their departure by making disastrous choices to compete head on with “me-too” tri-jets in response to Boeing's game-changing jumbo, just as Airbus was developing the competing idea of a more economical twin-engined widebody (the A300). Interestingly, Airbus's original idea, the twin-engined big plane, is now the core of Boeing's product strategy, while Airbus's hopes are partly pinned on its imitation of the jumbo, its large A380.
The infant-industry justification for European subsidies began to wear thin towards the end of the 1980s as Airbus gradually built market share, setting itself the aim of winning 50% by 2000. Boeing and the American government were convinced that subsidies were allowing Airbus to buy market share on price alone. This was patently not true since Airbus had newer technology and greater production efficiency from about 1996. And yet the subsidies had helped Airbus rapidly develop a competitive product range.
After four years of public sniping, the European Commission and America's trade officials agreed a deal in 1992 that ruled out production subsidies (the British and German governments wanted that too) and limited refundable launch aid to Airbus to 33% of the development cost of a new model. The Europeans agreed that support would go only to projects likely to repay the money within 17 years; and that the interest rate for the first 25% of refundable loans would be at government rates, but the rest would be at one percentage point above that. Furthermore, repayments would be by a royalty on sales (to continue even after full repayment), rather than only at the end of the loan period.
The Americans, for their part, pledged to limit indirect aid to Boeing through Department of Defence and NASA development contracts, to 4% of the company's civil-aircraft turnover. The Europeans agreed to a similar limit on their indirect aid. The preamble to the 1992 deal refers to the aim of reducing launch aid, but the wording is somewhat ambiguous. The Americans interpreted it, quite reasonably, as meaning this was only a start towards eventual elimination, while the Europeans regarded the deal as validating launch aid within limits. Alan Mulally, chief executive of Boeing Commercial Airplane Group, says, “instead of abolishing launch aid, the Europeans institutionalised it.”
So there was scope for further strife, even after the two sides signed that truce. But the scene was also set for things to get much worse. Barely a year later, the precursor of the WTO (known as GATT) concluded a general agreement on subsidies and countervailing measures. Basically, this prohibited subsidies to specific firms from the public purse. However, it did not deal with the issue of large commercial aircraft—an oversight the Americans came to regret as they eyed Airbus's rampant market-share growth and the firm's plans to expand its widebody product range to challenge, with its A330s and A340s, Boeing's forthcoming 777 models.
Quicker off the chocks
As Harry Stonecipher, former chief executive of Boeing, put it last year, the launch-aid subsidies allowed Airbus to develop five new planes in ten years, while Boeing could afford only one (the 777, before the new 787 got under way). He complained that Airbus could take big bets because launch aid shifted much of the risk to the taxpayer. As Airbus prepared to launch its A380 super-jumbo, Boeing won support from the Clinton administration to go after the Europeans at the WTO, only to have second thoughts about a trade war that might rebound on its sales in Europe.
But once Airbus launched the A380 in 2000 and started to out-sell Boeing, winning more orders year after year and becoming ever more efficient in its manufacturing, the gloves were bound to come off, the more so since America lost a WTO case on tax breaks for export sales of which Boeing was a big beneficiary. After failing to win orders for an advanced middle-sized plane called the Sonic Cruiser and for an enlarged version of the 747, Boeing eventually settled for the 787, an economical aircraft with attractive big windows and pleasantly lower cabin pressure. Then last spring Airbus let it be known that it was developing an instant riposte with a new version of its middle-sized A330, to be called the A350. Boeing attributed this instant ability to challenge its darling to the availability of subsidies, and immediately junked the 1992 accord and declared it was preparing to file suit at the WTO.
Peter Mandelson, the EU's new trade commissioner, at first adopted a conciliatory tone. By January 10th this year both sides had an eight-point framework for bilateral negotiations, while both held off from filing suits at the WTO. By the middle of May, however, the Americans were convinced that negotiations were going nowhere. According to an internal Boeing document, “the [European Commission] (helped by Airbus) has spent the past four months trying to divert attention from its apparent determination to provide additional launch aid for a new Airbus plane by repeating over and over again the list of subsidies it alleges that Boeing receives.” There is indeed some evidence that Mr Mandelson has had his hands firmly tied by the French and German governments, which are unwilling to allow him any scope to trade away their beloved launch aid without being sure of a quid pro quo.
But a more impartial description of the current stand-off would be that the Americans are demanding the Europeans surrender their biggest card before anyone even sits down at the table. Europeans are prepared to discuss cutting or dropping launch aid only if the Americans will put on the table the subsidies the Europeans allege that Boeing enjoys. Their 14-page counter-suit to the WTO includes a long list, mainly consisting of NASA and Pentagon development contracts, which the Europeans claim confer special advantages on Boeing through preferential access to intellectual-property rights. According to the European camp, this aid is worth $23 billion to Boeing since 1992.
Boeing retorts that even Airbus benefits from fundamental research contracted out to Boeing (and other American aerospace firms) because the results are publicly available and that, in any case, Airbus's parent company EADS enjoys similar spill-over from European defence budgets. However this ignores the fact that the American defence development programmes are not only much larger than most in Europe, but are also cost-plus (ie, the risk is borne by the government customer). In Britain, defence companies such as BAE Systems (which owns one-fifth of Airbus) bear their own development risks and have to write off billions of pounds when things go awry.
In truth, both companies benefit from difficult-to-quantify defence spill-overs, thanks to their involvement in both military and civil aircraft. But this time around the subsidy row is breaking new ground. Both sides are trading accusations about financial assistance given by local governments in places where they have factories. The EU suit, for instance, cites 14 Wichita City Council Ordinances since 1992, allowing Boeing no less than $2.6 billion in tax breaks. There is some irony in the fact that the beneficiary of such breaks in future will be Onex, a Canadian private-equity firm that has bought Boeing's Wichita factory, which produces fuselages for such Boeing planes as its bestselling 737 and will make the nose of the new 787.
Calling a subsidy a subsidy
The Europeans also make much of recent legislation in the state of Washington, which houses Boeing's Seattle factories. The state's governor had amendments tacked on to some other legislation that have the effect of giving Boeing a tax break of $3.2 billion over 20 years in return for agreeing to house the final assembly of a 250-seater airliner in the state. Boeing disingenuously maintains such aid would be available to Airbus if it were itself to manufacture a “250-seater, economical aircraft” in Washington, as specifically described in the legislation. In response, Boeing calculates that Airbus received public investments worth $1.7 billion in facilities in Germany, France, Britain and Spain for the manufacture and assembly of the A380.
In a couple of papers reviewing Boeing's plans for the 787, David Pritchard and Alan MacPherson of the Canada-United States Trade Centre at the State University of New York, Buffalo, conclude that much of Boeing's aid for the 787 is either prohibited or actionable under the WTO rules on subsidies and countervailing measures. They do not concern themselves with aid to Airbus, perhaps because launch aid is so clearly at odds with the rules. After all, Airbus has taken 20% of the market away from Boeing and won the lead on orders for four out of the past five years, as well as beating Boeing on deliveries last year.
The nightmare for America and Europe is that both WTO suits succeed. That is what happened a decade ago when Canada and Brazil pursued each other over subsidies to Bombardier and Embraer, their regional-jet manufacturers. In the event, neither country invoked the huge penalties they could have inflicted on each other, for fear of the damage that would do to their wider mutual trade. But the threat of countervailing import duties being applied to new Airbus and Boeing planes would cast a pall over the aviation industry and could even ignite a disastrous transatlantic trade war.
This article appeared in the Special report section of the print edition
Airbus vs. Boeing the case study Jimmy Jones University of Phoenix The case “Boeing vs. Airbus: Two Decades of Trade disputes” deals with the dispute that has existed between the US aircraft giant and the European Aircraft manufacturing giant. Boeing has 57,000 workers in Seattle and an additional 100,000 employees in the country. Boeing has also provided 600,000 employments nationally and it is considerd to be a big force in US economy. Boeing attained its main competitor McDonnell Douglas and merged as one in 1996. Airbus is a European manufacturer of commercial airline and its backed by four European countries. Airbus was originally a minor contestant in the airline market and was believed as improbable to face up to U. S. control. However, in early 2000 Airbus has tranfered itself to a major corporation from an association. And in 2003 the company exceeds Boeing in delivery of aircrafts. Legal issues: To understand the problems in this case it is important to mention 4 points about the airline manufacturing industry and why only few competitors can exist in this market: 1) High Development costs involved in manufacturing aircrafts 2) Levels of breakeven that amount to a considerable proportion of global demand 3) considerable familiarity of level curve necessary for corporations to reach point of breakeven levels and turnovers 4) Unstable demands due to factors like fuel pricing, inflation, etc. After the success of the Airbus, the US officials and government criticized the heavy subsidies that Airbus had gained from the four European countries: Germany, Spain, England, and France. Boeing argued that these funding were in loans form and at under interest rates received from these countries, as well as airbus gaining breaks in tax. In addition, Boeing argues this subsidy has helped Airbus to offer striking financing terms for Airbus’s clients. The Airbus camp responded by pointing out that Boeing had long been benefitting from US subsidiaries which weren’t shared with the public. In 1992 the two parties reached an agreement where Airbus was allowed to receive launch aids from EU government and Boeing was allowed to use up the US government’s R&D spending. The agreement listed that limited direct government subsidies to 33 percent of the total costs of developing a new aircraft would be allowed and specified that such subsidies had to be repaid with interest within 17 years. The agreement also limited indirect subsidies, such as government-supported military research that has applications to commercial aircraft, to 3 percent of a country’s annual total commercial aerospace revenues, or 4 percent of commercial aircraft revenues of any single company in that country. In 1996 Boeing made a bid to merge with its old rival McDonnell Douglas which caused a new problem between the US and the EU trade unions and the two companies. Boeing’s argument to the US Federal Trade Commission (FTC) and the EU competition commission was that the Boeing–McDonnell Douglas combination was necessary to create a strong U. S. competitor in a competitive global marketplace. The EU could not actually stop the merger but under EU competition law the commission could declare the merger illegal, restrict its business in Europe, and fine it up to 10 percent of its estimated $48 billion annual sales (Papendropoulos, Tajana, 2006). Meanwhile Boeing also made a deal with the top 3 US airline, Delta, American Airlines and Continental to be the exclusive provider of aircrafts for the next 20 years. The EU body argued that this agreement was anticompetitive and could cause a considerable increase in the market power of Boeing. The three main concerns for the EU were: restriction of market competition, funds received from U. S government in space programs could be used to built commercial aircrafts, and the unfair contract of Boeing which singly received to supply major American airlines for the next 20 years. The US FTC affirmed that McDonnell Douglas was no longer a practical challenger in the huge jet market and so, merging will not have a disadvantageous result on opposition. The FTC did raise a concern over the sole supplier agreements that Boeing had reached with the 3 airline carriers. Boeing changed the deal and said that it would not enforce provisions in the 20-year supplier contracts with American, Delta, and Continental. After the agreement Boeing went through a period of financial turmoil, the result of congestion in its production system as the company tried to rapidly ramp up deliveries during the late 1990s. By 2002, however, Boeing was back on track and in 2003 it decided to go ahead and build its first new aircraft model in a decade, the 787. By 2005 both the United States and EU agreed to freeze direct subsidies to the two aircraft makers but a new dispute broke through. The EU claimed Boeing was receiving lavish subsidies from federal, state, and local governments in the United States that will amount to $23. 7 billion. Boeing argued that Airbus had received over $100 billion of aid from European governments over its lifetime if the loans it received at below-market interest rates are recalculated at commercial rates. The United States formally filed a request with the World Trade Organization for the establishment of a dispute resolution panel to resolve the issues. The EU quickly responded, filing a countersuit with the WTO claiming that U. S. id to Boeing exceeded the terms set out in the 1992 agreement. The case is still pending. Ethical challenges that existed are as follows: 1) To have a level competitive field there has to be a competition in the market, but the strategies of both the companies was causing concerns regarding the competitive market. 2) Taking money from their respective governments at a highly subsidized rate to help the companies was another ethical issue that was faced in the case. Though both the companies had good arguments to do so, they blamed each other for the same reason. Roles of governments: The role of the governments is exceedingly obvious, and it was to prevent the interest of their personal economies. 1) EU: The European Union block was mostly concerned with the fact that the subsidiaries that The US government was providing Boeing was making it an unlevel playing field for Airbus. The mergers and deals that Boeing had managed to secure was further going to create problems to maintain a competitive market which in turn would create problems of pricing and controlling. The EU also supported the subsidiaries that were given to Airbus and argues that it was just making Airbus catch up and become as competitive as Boeing. ) FTC and the US government: The US officials were more concerned about the subsidiaries that Airbus was receiving at generous rates and conditions from the European government which was causing the US Boeing airlines to lose market share which in turn was affecting the US economy. The US side has given counter arguments about subsidiaries and justified their actions in this case. They have tried to support Boeing in its strategies and helped them in putting up a case in front of the EU. To conclude both the governments have been playing a blame game for a long time. They have been pointing out flaws in both the company’s financial and operational policies. But one of the main roles of both the unions is to protect their economy and to make sure the aircraft manufacturing industry runs without any bias and there is a fair competition in the market. Reference: Penelope Papandropolous, Alessandro Tajana, 2006: The Merger Remedies Study-In Divestiture We Trust? Retrieved from http://ec. europa. eu/dgs/competition/economist/divestiture. pdf on August 30, 2010 “Boeing versus Airbus: Two Decades of Trade Disputes”: Retrieved from https://ecampus. phoenix. edu/classroom/ic/classroom. aspx on august 30, 2010 Turnitin Originality Report * Processed on: 09-03-10 9:43 PM CDT * ID: 147163304 * Word Count: 1225 * Submitted: 1 bus By Gidion Adenew Similarity Index 06% Similarity by Source Internet Sources: 06% Publications: 0% Student Papers: N/A 1% match (Internet from 1/15/07) http://www. mancosa. co. za/academic_support/BOEINGversusAIRBUS. doc 5% match (Internet from 3/24/09) http://highered. mcgraw-hill. com/sites/dl/free/0072873957/121268/Hill4e_295_300. pdf The case "Boeing vs. Airbus: Two Decades of Trade disputes" deals with the dispute that has existed between the US aircraft giant and the European Aircraft manufacturing giant. Boeing has 57,000 workers in Seattle and an additional 100,000 employees in the country. Boeing has also provided 600,000 employments nationally and its consider to be a big force in US economy. Boeing attained its main competitor McDonnell Douglas and merged as one in 1996. Airbus is a European manufacturer of commercial airline and its backed by four European countries. Airbus was originally a minor contestant in the airline market and was believed as improbable to face up to U. S. control. However, in early 2000 Airbus has tranfered itself to a major corporation from an association. And in 2003 the company exceeds Boeing in delivery of aircrafts. Legal issues: To understand the problems in this case it is important to mention 4 points about the airline manufacturing industry and why only few competitors can exist in this market: 1) High Development costs involved in manufacturing aircrafts 2) Levels of breakeven that amount to a considerable proportion of global demand 3) considerable familiarity of level curve necessary for corporations to reach point of breakeven levels and turnovers 4) Unstable demands due to factors like fuel pricing, inflation, etc. After the success of the Airbus, the US officials and government criticized the heavy subsidies that Airbus had gained from the four European countries: Germany, Spain, England, and France. Boeing argued that these funding were in loans form and at under interest rates received from these countries, as well as airbus gaining breaks in tax. In addition, Boeing argues this subsidy has helped Airbus to offer striking financing terms for Airbus's clients. The Airbus camp responded by pointing out that Boeing had long been benefitting from US subsidiaries which weren't shared with the public. In 1992 the two parties reached an agreement where Airbus was allowed to receive launch aids from EU
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