Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-27T23:07:02.594Z Has data issue: false hasContentIssue false
  • English
  • Français

Trade disputes in the commercial aircraft industry: A background note

Published online by Cambridge University Press:  03 February 2016

K. Hayward
K. Hayward*
Affiliation:
Royal Aeronautical Society, London, UK
Get access Rights & Permissions [Opens in a new window]

Abstract

The long-running debate between the US and the EU over government supports for large commercial aircraft has recently boiled over into a major dispute involving the World Trade Organisation (WTO). While the two sides have currently backed off from what could be a very damaging WTO outcome, there are still wide differences over the legitimacy of government supports (direct or indirect) for Airbus and Boeing airliners. This paper:

  1. • Describes the background to the current dispute.

  2. • Analyses the 1992 US–EU Agreement on Large Aircraft Subsidies.

  3. • Outlines the WTO Agreement on Subsidies and Countervailing Measures and the decision by the US to mount an action under the WTO complaints procedures against launch investment for Airbus and the EU’s counter claim against Boeing.

  4. • Considers the precedents set by the WTO rulings on the Brazilian–Canadian dispute over regional jet supports.

  5. • Summarises the US–EU complaints to the WTO.

  6. • Considers potential outcomes and the implications for the civil aerospace industry on both sides of the Atlantic.

  7. • Analyses the wider issues surrounding government intervention in the aerospace sector.

The paper views the dispute as a reflection of fundamental differences, based primarily on divergent economic doctrines and values, between the US and the EU states. There could be especially damaging consequences for the EU should the WTO rule against the systems of repayable launch investment used by the Airbus governments. But both sides could lose heavily from the affair and there is a good case for maintaining some form of direct government intervention in civil aerospace technology acquisition, even near market research, in support of environmental sustainability objectives.

Type
Research Article
Information
The Aeronautical Journal , Volume 109 , Issue 1094 , April 2005 , pp. 157 - 166
Copyright
Copyright © Royal Aeronautical Society 2005 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

References and Notes

1. Pavcnik, N.. Trade disputes in the commercial aircraft industry, The World Economy, 2002, 25, (5), p 738.Google Scholar
2. Hayward, K.. Including the launch of the 707 on the back of USAF contracts to develop the KC-135 tanker in the mid 1950s. International Collaboration in Civil Aerospace, 1986, London, Chapter 5. Lawrence, P. with Braddon, D.. Aerospace strategic trade – How The US Subsidizes The Large Commercial Aircraft Industry. 2001, Aldershot.Google Scholar
3. Gellman Research Associates, An economic and financial review of Airbus industrie, 1990, Jenkintown and Arnold & Porter Associates, US government support of the US commercial aircraft industry, Washington DC, 1991. See also the more objective study by the US Congress Office of Technology Assessment, Competing Economies: Government Support of the Large Commercial Aircraft Industries of Japan, Europe and the United States, 1991, Washington DC.Google Scholar
4. Pavcnik, , op cit. This interpretation would seem to underplay the negative effects of Lockheed and McDonnell Douglas exiting from the market, in part due to ruinous price competition exacerbated by the early stages of German and French government supports for the first Airbus aircraft that were unequivocally regarded as subsidies for an ‘infant industry’.Google Scholar
5. The European counter case is that price discounting was rife among US companies. Airbus has also argued Boeing’s 747 monopoly at the top end of the market has enabled cross subsidisation of its other aircraft in direct competition with Airbus.Google Scholar
6. See Hayward, K., The World Aerospace Industry, London, 1994, pp 58–64.Google Scholar
7. See Hayward, K. op cit.Google Scholar
8. Germany was especially generous with production subsidies, whereas the UK government provided none.Google Scholar
9. AECMA, Government Funding for Aerospace: a comparative analysis of government expenditure for aerospace in the EU and the US, Brussels, 2000.Google Scholar
10. Pavcnik argues on the basis of a range of simulations that, while the A380 is likely to repay its development costs, profitability is more uncertain. However, the rate of current orders for the A380 is more promising and Airbus claims to be well ahead of schedule to break-even.Google Scholar
11. The 787, formally known as the 7E7, is also referred to as the Dreamliner.Google Scholar
12. The WTO had just ruled against the US FSC tax break for exporters. As one of the most important US exporting companies, this cost Boeing a considerable amount of money.Google Scholar
13. Harry Stonecipher’s character and torrid experiences with MDD’s civil business and Boeing’s increasingly weak commercial position may well have been the trigger for the US WTO submission. In particular, Airbus was set to launch the A350 as a counter to the 787 and would undoubtedly seek launch investment from the partner governments. The loss of the USAF’s tanker order, threatening closure of the 767 line following the Druyan contract scandal, may also have pushed Boeing into confrontation. Certainly, growing disquiet over Boeing’s overall commercial strategy and its increasing vulnerability was increasingly evident.Google Scholar
14. Mcguire, S.. Between Pragmatism and Principle: Legalisation, Political Economy and the WTO’s Subsidy Agreement, The International Trade Journal, Fall 2002, 16, p 326; Pritchard & MacPherson, Industrial subsidies and the politics of world trade: the case of the Boeing 787, Ind Geographer, 2004, 1, (2), pp 62–3.Google Scholar
15. Mcguire, , 2002, op cit, p 326; Pritchard & MacPherson, op cit, pp 62–63.Google Scholar
16. Trinade, A.D.C.. Export subsidies and the regional aircraft industry under the WTO, unpublished paper.Google Scholar
17. This interpretation might have implications for other developing aerospace industries such as China when it is fully integrated into the WTO.Google Scholar
18. Mcguire, , 2002, op cit, pp 326–8.Google Scholar
19. Mcguire, , 2002, op cit, pp 329–339.Google Scholar
20. Goldstein, A.E. and Mcguire, S.M., The world economy, 2004, 27. Financial Times, 7 October 2004 Google Scholar
21. In the case of the UK, its RPI system is not only unique to aerospace but it has also been conventionally granted to a limited number of companies at the top end of the supply chain, in recent years, mainly Airbus and Rolls-Royce.Google Scholar
22. Carbaugh, R.J. and Olienyk, J.. Boeing-Airbus subsidy dispute, Global Economy J, 2004, 4, (2), p 7.Google Scholar
23. The dispute documents can be found on: http://docsonline.wto.org/DDFDocuments/t/G/SCM/D62-1.doc and http://docsonline.wto.org/DDFDocuments/t/G/SCM/D63-1.doc Google Scholar
24. Carbaugh, and Olienyk, J., op cit p 4.Google Scholar
25. Pritchard, and Macpherson, , op cit, pp 66–68. The US argues that state level tax breaks are available to all aerospace companies in Washington, even Airbus suppliers.Google Scholar
26. Pritchard, and Macpherson, , op cit, pp 69–70. Airbus suppliers will provide the difference between launch investment and the total.Google Scholar
27. Carbaugh, and Olienyk, , op cit, p 7.Google Scholar
28. In the event, Rolls launched this engine without UK government launch investment. GE and P&W have been less excited publicly about the EU approach primarily because they sell engines to both Boeing and Airbus; they have European partners that receive launch investment and other assistance; and the benefit of defence related R&D are much more direct in the engine sector than on the airframe side.Google Scholar
29. Well, more than a hint, see Jean-Louis Beffa, Pour une nouvelle politique industrielle, 15 January 2005, www.rapport-jeanlouis-beffa.com. Beffa, president of Saint-Gobain, was tasked by President Chirac to review French industry and technology policy. His report recommends the creation of a new public agency with funds to support near market R&D in a range of sectors such as nano-technology on a repayable basis.Google Scholar
30. Pritchard, and Macpherson, , op cit, pp 58–61, 64.Google Scholar
31. Mcguire, S. op cit, pp 322–327.Google Scholar
32. Lall, S., Reinventing industrial strategy: the role of government policy in building industrial competitiveness, International Development Centre, University of Oxford, September 2003, pp 1–2.Google Scholar
33. Endogenous Growth Theory is a key reference in current UK government thinking about the economy.Google Scholar
34. Christian Science Monitor, 21 October 2004.Google Scholar
35. See Fingleton’s, E.. very trenchant critique of Boeing’s shortsighted strategy; ‘Boeing, Boeing …Gone’, The American Conservative, 31 January 2005, pp 7–13.Google Scholar
36. Hutton, W.. The World We’re In, 2002, London, pp 128–33, 259–252; and more recently, in The Observer, 24 January 2005.Google Scholar
37. Aviation Week, 21 February 2005, pp 28–29. There may not even be a consensus among the Airbus states: the UK has been reluctant to see increases in EU spending and has in the past deducted EU funding from national budgets.Google Scholar
38. This included a deliberate attempt to convert DARPA from pure defence research into a dual technology sponsor. A number of near market R&D support schemes were also introduced. The Bush administration has drawn back from this activist interventionism.Google Scholar
39. Golaszewski, R.. Executive VP GRA Inc. House of Representatives, Committee on Science, Subcommittee on Space and Aeronautics, 7 March 2002.Google Scholar
40. Fingleton, , op cit p 13.Google Scholar
41. Jeffrey, Garten. ex Under Secretary of Commerce for International Trade, Financial Times, 10 January 2005.Google Scholar
42. Financial Times, 19 January 2005.Google Scholar
43. US Embassy London, Press Release, 11 January 2005.Google Scholar
44. Euroactiv, , http://www.euractiv.com/Article?_lang=EN&tcmuri=tcm:29-134025-16&type=News, 27 January 2005. One report suggests that the EU is seeking access to some US NASA and DoD research contracts. Flight International, 15 February 2005, p 13.Google Scholar
45. Financial Times, 27 January 2005.Google Scholar
46. Noël, Forgeard, Financial Times, 12 and 13 January 2005.Google Scholar
47. Delmas, Philippe, Airbus Executive VP Government Affairs, Aviation Week, 21 February 2005, pp 28–29.Google Scholar
48. Financial Times, 27 January 2005.Google Scholar
49. Financial Times, 22 March 2005.Google Scholar
50. This is already evident to some extent in the approach to the next (7th) round of EU R&D funding under the Framework policy.Google Scholar
51. Current trends in US policy are some what ambivalent: under pressure to make room for manned space, the NASA 2006 budget for aeronautics has again been cut (by 5% over 2005), but air traffic management, noise reduction and low emission energy generation remain priority areas for investment in long term, potentially ‘breakthrough’ technologies. The EU approach has been concentrated on more near market, product-related research. Both may not have got the balance right (see editorial in Flight International, 15 February 2005).Google Scholar