Boeing vs. Airbus: The Plot Thickens
About This Event

Recent market and organizational difficulties encountered by Airbus are dramatically changing world competitive conditions in the commercial aircraft industry. Facing costly delays in the completion of its jumbo A380 aircraft, and a recent decision to completely revamp plans for a new A350 to challenge Boeing’s hugely successful 787 Dreamliner, Airbus Listen to Audio


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is set to request substantial new public subsidies in the form of “launch aid” from European governments. Such an appeal will undoubtedly raise the stakes in the already bitter dispute between the United States and the European Union over government support for the commercial aircraft industry. The United States. views “launch aid” as one-sided subsidies to Airbus for development, while the EU believes that Boeing gets implicit subsidies in its defense contracts and local tax breaks.

Over the past two years, both sides have taken their case to the World Trade Organization (WTO), while at the same time conducting desultory bilateral negotiations in an attempt to reach a compromise. Given the rapidly changing competitive situation, the slow pace of the WTO judicial process, and the increasingly hardened diplomatic position of the two sides, AEI has assembled a group of experts to assess recent economic and political developments, suggest likely scenarios for resolving the dispute, and discuss the chances that the situation will descend into an all-out trade war.

Agenda
3:45 p.m.
Registration
4:00
Panelists:
Richard L. Aboulafia, Teal Group
Marc L. Busch, Georgetown University
Robert E. Herzstein, Miller & Chevalier
Bruce E. Stokes, National Journal
Moderator:
Claude E. Barfield, AEI
6:00
Adjournment
Event Summary

July 2006

Boeing vs. Airbus: The Plot Thickens

Boeing vs. Airbus: The Plot Thickens

 

 

Recent market and organizational difficulties encountered by Airbus are dramatically changing world competitive conditions in the commercial aircraft industry. Facing costly delays in the completion of its jumbo A380 aircraft and in the wake of a recent decision to completely revamp plans for a new A350 to challenge Boeing’s hugely successful 787 Dreamliner, Airbus is set to request substantial new public subsidies in the form of “launch aid” from European governments. Such an appeal will undoubtedly raise the stakes in the already bitter dispute between the United States and the European Union over government support for the commercial aircraft industry. The United States views “launch aid” as one-sided subsidies to Airbus for development, while the EU believes that Boeing gets implicit subsidies in its defense contracts and local tax breaks.

Over the past two years, both sides have taken their case to the World Trade Organization (WTO), while at the same time conducting desultory bilateral negotiations in an attempt to reach a compromise. Given the rapidly changing competitive situation, the slow pace of the WTO judicial process, and the increasingly hardened diplomatic position of the two sides, AEI assembled a group of experts at a July 6 conference to assess recent economic and political developments, suggest likely scenarios for resolving the dispute, and discuss the chances that the situation will descend into an all-out trade war.

Claude E. Barfield
AEI

Mr. Barfield raised several policy questions surrounding the Boeing-Airbus conflict. First, is the WTO capable of handling this complex case? Second, is there a difference among the subsidies, between direct launch aid from European governments and defense research and development (R&D)--from the point of view of economists and the WTO? Third, what are the public implications of the new model of outsourcing, of having major parts of new planes made outside of the United States? Finally, what implications do the subsidies have for competition in the U.S. defense market?

He also discussed the role of Congress in trade disputes involving this industry, noting that there could be a potential adverse, protectionist response to the future development of an airplane manufacturing industry in China, given the geopolitical strategic considerations involved. The questions involved in this trade dispute, according to Mr. Barfield, are indicative of deeper issues regarding the future of government involvement in private industry.

Richard E. Aboulafia
Teal Group

Mr. Aboulafia offered an overview of the current state of the civil aircraft industry. He explored the reasons why Boeing has retaken the lead in market share over Airbus, attributing much of Boeing’s recent prosperity to the success of its mid-size airplanes, notably the 777 series. According to Mr. Aboulafia, Airbus, which became the industry leader through superior research and development, was misguided when investing in the new A380, which was created to compete with the Boeing 747 in the wide-body category. The A380, however, only appeals to a small and shrinking “niche” market.
 
Airbus should focus on the creation of a competitor to the Boeing 777 and the forthcoming 787 in the mid-size category. The A340 and A350 are, for all intents and purposes, already obsolete. Airbus needs to create a new family of midsize planes, the A370 series, soon, or risk losing even greater market share in this profitable and growing sector of the market. Moreover, Mr. Aboulafia warns that Boeing’s next project might be the creation of a new family of narrow-body airplanes. Airbus would need to react quickly or risk losing ground in this 40-45 percent of the market.
 
In the end, however, Mr. Aboulafia is confident that Airbus will return the market to a true duopoly, probably by 2010 or 2011. The years when the A370 will be in production will be “tough times” for Airbus, a company which some thought was driving Boeing out of the civil aircraft business altogether.

Robert E. Herzstein
Miller & Chevalier

 
Mr. Herzstein presented an overview of the facts of the dispute. Both sides allege that the subsidies received in airplane manufacturing by the other party constitute WTO violations. Airbus’ subsidies come in the form of “launch aid” and favorable government loans. Boeing, via NASA and Department of Defense R&D grants, receives less direct, although equally significant, government support in its civil aircraft sector.

Mr. Herzstein doubts that the WTO tribunals will be able to resolve the pending case for four reasons: (1) coming to a ruling in the required nine months will be impossible due to the extreme complexity of the claims and limited resources of the tribunal, (2) the lack adequate precedent will force the tribunal to “fly blind,” (3) precedent has illustrated that in such high profile cases governments do not comply with WTO decisions, and (4) the resolution of the current subsidies controversy will have little consequence for this constantly changing industry. Mr. Herzstein fears that this case could severely discredit the WTO dispute resolution system and can be resolved more efficiently through bilateral negotiations between Boeing and Airbus.

Marc L. Busch
Georgetown University

Mr. Busch disagreed strongly with Mr. Herzstein’s analysis and responded to each of his four main concerns. He argued that WTO tribunals have admirably dealt with cases that were just as technical and politically charged and required as much data collection and analysis as in the pending case. He then discussed the value of viewing litigation and negotiation as mutually supportive. In the past, impending WTO rulings have served as a catalyst for negotiations between the complainant parties. He noted the importance of creating legal precedent, concretely determining which types of subsidies are illegal and which types are not. Mr. Busch does not see the pending WTO case as a burden, but rather an opportunity to dispel future issues regarding illegal subsidies in an industry that is growing ever more complex.

Bruce E. Stokes
National Journal

Mr. Stokes put the dispute into a larger framework of U.S.-EU relations and, specifically, of the transatlantic trade relationship. He first pointed out that strong motivations could emerge both on the part of the manufacturers and their representative governments that could lead to the abandonment of their WTO cases. He remarked that transatlantic relations have been on an upward tilt of late and doubted that neither side would be willing to mortgage future cooperation on broader issues on a commercial dispute. Furthermore, he commented that while this is not a case of two sharply diverging government ideologies, the United States should not underestimate the domestic political importance of European airplane subsidies. While he can envision scenarios where new developments in the industry or the deterioration of U.S.-EU trade relations could prove dangerous for the management of the dispute, Mr. Stokes remains optimistic.

AEI intern Scott Ganz prepared this summary.

View complete summary.
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AEI Participants

 

Claude
Barfield
  • Claude Barfield, a former consultant to the office of the U.S. Trade Representative, researches international trade policy (including trade policy in China and East Asia), the World Trade Organization (WTO), intellectual property, and science and technology policy. His many books and publications include Swap: How Trade Works with Philip Levy, a concise introduction to the principles of world economics, and Telecoms and the Huawei conundrum: Chinese foreign direct investment in the United States, an AEI Economic Studies analysis that explores the case of Chinese telecom equipment maker Huawei and its commitment to long-term investment in the US.
  • Phone: 2028625879
    Email: cbarfield@aei.org
  • Assistant Info

    Name: Hao Fu
    Phone: 202-862-5214
    Email: hao.fu@aei.org

 

Marc L.
Busch

 

Phillip
Swagel
  • Phillip Swagel, an economist and academic, was assistant secretary for economic policy at the Treasury Department from 2006 to 2009, where he was responsible for analysis on a wide range of economic issues, including policies relating to the financial crisis and the Troubled Asset Relief Program. He has also served as chief of staff and senior economist at the White House Council of Economic Advisers and as an economist at the Federal Reserve Board and the International Monetary Fund. He is concurrently a professor of international economics at the University of Maryland's School of Public Policy.  He has previously taught at Northwestern University, the University of Chicago’s Booth School of Business, and Georgetown University. Mr. Swagel works on both domestic and international economic issues at AEI.  His research topics include financial markets reform, international trade policy, and the role of China in the global economy.


    Follow Phillip Swagel on Twitter.
  • Phone: 202.687.4869
    Email: pswagel@aei.org
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