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Harry, I owe you an apology for ending my last
posting to you rather snarkely by thanking you for reminding us of the economics
of the 19th Century. So, forgiveness please, but you do tend to carry on
about the superiority of the free market as in "The free market (when it exists) tosses out the
companies which fail to supply the best service at the cheapest price." I
note, however, that you very wisely covered yourself with the little bracketed
phrase "(when it exists)", which suggests that you too recognize
reality.
My own
view of free markets is that, like the Garden of Eden, they are a beautiful
idea. They may have existed long ago when, as Keith maintains, people
traded red ochre over long distances, but I doubt that they were all that free
even then. The following article reminds us once again that there are huge
multi-polar interests involved in markets as they now exist. It also
reminds us that, the more complex and costly the product, the more likely
these interests are to rise to the surface (or to just under the
surface) and attempt to steer markets in directions to their
advantage.
Ed
_______________________________________
Power and
Interest News Report (PINR)
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07
June 2005
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Intelligence
Brief: Airbus vs. Boeing
Drafted By: Dr. Michael A.
Weinstein
http://www.pinr.com
On May 31, Washington
filed a case with the World Trade Organization (W.T.O.) against the
European Union's commitment to provide $1.7 billion in "launch aid" to
Airbus S.A.S. for its A380 commercial jumbo jet, handing the W.T.O. the
most politically sensitive dispute that it has yet had to
confront.
From Washington's perspective, the launch aid, which
comes in the form of low-interest loans that do not have to be repaid
unless the aircraft is profitable, violates W.T.O. agreements banning
subsidies. Brussels fired back that U.S. aircraft manufacturer Boeing has
received $7 billion in government subsidies in the form of defense and
space contracts, infrastructure improvements, tax breaks and the launch
aid that Tokyo has given Boeing's Japanese subcontractors for Boeing's 787
Dreamliner, which is poised to compete head-to-head with the
A380.
The Washington-Brussels conflict is the familiar fare of
trade disagreements, with each side accusing its opponent of breaking the
rules. Its significance lies in three directions. Most obviously, the
outcome of competition between the two rivals making up the duopoly of
manufacturers of large commercial aircraft will impact the economies of
the political adversaries in terms of employment, capital procurement,
trade balances and technological development, which will have a spillover
effect into the military sector.
More generally, the dispute is a
test of whether the W.T.O. can successfully manage a conflict between two
great power centers concerning an industry that both parties consider to
be strategic. Most importantly, for the long-term view, the dispute indicates a fundamental tendency in world
politics and global trade for globalization to reach its limits in the
harsh realities of multipolar power politics.
The
Airbus-Boeing Dispute
The root of the conflict between
Washington and Brussels over aircraft subsidies is a major shift in the
balance of competitive power in the industry. Once the dominant supplier
of large commercial aircraft to the world, Boeing had been losing ground
to Airbus for the past three decades, but the tipping point came in 2003
when Airbus for the first time sold more planes than Boeing, a trend that
continued in 2004. Boeing's loss of competitive advantage and market share
spurred lobbying efforts by the company to have Washington resort to the
W.T.O. on its behalf.
Boeing's efforts to gain political support
bore fruit in October 2004 when Washington announced plans to file a case
over E.U. launch aid and Brussels retaliated with a counter-suit detailing
its list of U.S. violations of aid limits. The two sides then settled down
to bilateral negotiations in order to avoid an escalation of the conflict
to the level of the W.T.O., an eventuality that both sides believed would
be contrary to their respective interests in progress on the Doha round of
general tariff reductions, cooperation on preserving and strengthening
intellectual property rights and a common policy on Chinese exports,
particularly textiles.
In January 2005, the talks appeared to be
making progress when the two sides agreed that they would suspend aid to
the aircraft companies and would not activate a W.T.O. panel until April
11. In the interim, the discussions stalled and finally ended in March,
with Washington accusing Brussels of failing to negotiate in good faith
and of retreating from a preliminary agreement. Brussels responded that
Boeing's pressure on Washington had made the latter inflexible and
unprepared to entertain a compromise in which launch aid would be scaled
back.
Washington's May 31 move to avail itself of a W.T.O. panel is
a sign of its weakness in the dispute. A high-profile public conflict in
the W.T.O. is likely to strain U.S.-E.U. relations and make cooperation
between the two powers more difficult whatever the outcome of the case.
Brussels is the more confident player at the moment, with E.U. Trade
Commissioner Peter Mandelson arguing that further negotiations would not
be useful and U.S. Trade Representative Rob Portman calling for a restart
of bilateral talks even while the cases proceed.
Mandelson's hard
line was based on Washington's rejection of a final offer by Brussels to
reduce launch aid for the A350 to up to 30 percent of the jumbo jet's
start-up cost if Washington would agree to equivalent reductions in aid to
the Dreamliner. Both opponents had reached their respective limits,
constrained from further compromise by powerful domestic business and
labor interests. A prime example of the aggressiveness of those interests
is the effort in the U.S. Congress spurred by legislators with links to
Boeing to bar Airbus from bidding on Pentagon contracts for aerial
refueling tankers.
In an attempt to contain the conflict, Mandelson
and Portman issued a joint statement in which they pledged to "remain
united in our determination that this dispute shall not affect our
cooperation on wider bilateral and multilateral trade issues." It is far
from clear that Washington and Brussels will be able to make good on their
pledge, especially if a W.T.O. panel disadvantages one of the sides
severely.
The Bottom Line
Washington's decision to escalate the conflict with Brussels
over subsidies to aircraft manufacturers not only indicates the
seriousness with which both parties take competition for sales of the next
generation of large commercial jets; it also shows that domestic interests
in major power centers are increasingly able to inhibit the compromises
necessary for continued movement towards less protected
markets.
The same kind of protectionist forces that were behind the
votes against the European Constitution in France and the Netherlands, and
are resisting the ratification of the Central American Free Trade
Agreement in the U.S. Senate, are at work in the Airbus-Boeing dispute.
Report Drafted By:
Dr. Michael A.
Weinstein
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