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An Airbus A320neo aircraft and a Bombardier CSeries aircraft are pictured during a news conference to announce a partnership between Airbus and Bombardier on the C Series aircraft programme, in Colomiers near Toulouse, France, October 17, 2017.   REUTERS/Regis Duvignau - RC18654BC520
Up Front

Airbus, Boeing, and Bombardier: Making sense of the aircraft subsidy wars

Geoffrey Gertz

In a surprise move late Monday, the Canadian aircraft company Bombardier announced it had reached a deal to sell part of the production of its CSeries planes to Airbus, the European air giant. The agreement is notable because the CSeries had been at the center of a fight between Bombardier and Boeing, which in turn had turned into a diplomatic spat between the United Kingdom and Canadian governments (where Bombardier’s production is based) on the one hand versus the United States. The U.S. had been threatening Bombardier with punitive tariffs equaling 300 percent of the jet’s value, essentially killing a planned sale to Delta Airlines. Under the new Bombardier-Airbus deal, at least some of the production of the CSeries is expected to take place at Airbus’ Alabama plant, thus potentially avoiding U.S. tariffs–though international trade lawyers note it’s not yet clear if this will be the case, given the complexity of U.S. trade enforcement laws. 

These latest developments are in fact just the latest salvo in a decades-long fight over aircraft subsidies. The two lead actors in this drama are Boeing and Airbus, with supporting roles played by Bombardier and Brazil’s Embraer. Ever since Airbus emerged some 40 years ago to challenge Boeing’s position as the world’s dominant aircraft manufacturer, governments have been accusing one another of illegitimately propping up their respective national champions, while simultaneously professing their own innocence in providing support. Before the U.S. took on Canadian subsidies to Bombardier, it had long been decrying the “launch aid” European governments gave Airbus to help it bring new models to market. The Europeans, for their part, complained about the indirect subsidies Boeing received in terms of inflated defense procurement contracts and NASA research expenditures. The two sides reached something of a truce in a 1992 agreement that set limits on subsidies, but that deal broke down about a decade ago, and since then the disputants have been fighting it out in a series of seemingly never-ending World Trade Organization (WTO) disputes. Meanwhile Brazil and Embraer have also brought their complaints against Bombardier—which are very similar to the grievances alleged by Boeing—to the WTO, in a case that is still pending. All in all, aircraft manufacturing is arguably the most contested industry in international trade governance.

The irony is that the traditional tools of trade governance are particularly ill-suited to aircraft manufacturing. The basic logic behind trade enforcement mechanisms, whether pursued unilaterally or multilaterally through the WTO, is an attempt to “level the playing field,” or to correct the market for the distortions of government interventions. The problem is, when it comes to aircraft manufacturing, there’s never been anything close to a perfectly competitive, distortion-free market: It’s politics and subsidies all the way down. Not only are there tons of subsidies on the production side, but governments are also the most important consumers of aircraft, buying both military planes and consumer planes for publicly-owned national airlines.

Thus the aircraft market consists of governments subsidizing production by their national champions, then lobbying other governments to buy their planes—often linking these procurement decisions to diplomatic relationships. Indeed, in late August President Donald Trump sparked a diplomatic hiccup when, at a joint press conference with Finnish president Sauli Niinistö, Trump announced that Finland would be buying F-18 fighter jets from Boeing, news which Finland promptly denied. Two weeks later, meeting with Malaysian Prime Minister Najib Razak, Trump announced Malaysia would be buying new Boeing jets. And such high level political interventions in airline sales are nothing new: a New York Times analysis of leaked diplomatic cables revealed how American ambassadors and envoys frequently served as Boeing salespeople throughout the last decade.

How much are such diplomatic overtures—an indirect form of government support—worth to Boeing? There’s no good methodology to reasonably price this subsidy. And this points to the larger problem in trying to arrive at a “fair” outcome in the aircraft subsidy complaints: Given how governments are so deeply and fundamentally involved in the industry, asking what a jet would cost in the absence of government distortions to the market is an impossible question. Government distortions constitute the aircraft market; take them away, and there’s nothing left.

Ultimately the aircraft manufacturing industry shows both the strengths and limits of the rules-based, legal approach to global economic governance. The WTO has made a valiant attempt to discipline some of the more direct subsidies governments provide to their aircraft manufacturers. But the legal record shows it has been a long, drawn-out fight, with no signs of easing. And the institution is not cut out to weigh into the informal, indirect subsidies provided by defense contracts, let alone adjudicate how much diplomatic pressure is appropriate in pushing for a jet sale. It’s unclear if governments could ever delegate binding enforcement over such matters to an international organization. Informal truces hashed out by diplomats, rather than binding legal agreements, may be the best that can be hoped for.

Meanwhile, looming on the horizon is a bigger and potentially far messier aircraft subsidy fight. In May of this year, China’s COMAC, a state-owned aircraft manufacturer, completed a successful first flight test of its new jetliner, designed to compete with Boeing and Airbus. For now neither Boeing nor Airbus wants to take an aggressive stance against COMAC, as the two Western companies don’t want to risk losing out on lucrative sales to China’s domestic airlines. But ultimately they—along with their government backers—will need a strategy for dealing with this new challenger. Perhaps this will finally prompt Boeing and Airbus to aim their attacks away from one another and toward a common threat, just as Siemens and Alstom recently joined forces to take on the China Railway Rolling Stock Corporation, China’s state-backed train maker that’s winning more and more contracts overseas. In the meantime, expect the aircraft subsidy feuds to continue; at the moment Boeing seems to have lost the battle, but the war is far from over.

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