EUROPEAN AIRCRAFT SUBSIDIES - Lexington Institute
EUROPEAN AIRCRAFTSUBSIDIESA Study of Unfair Trade PracticesLoren Thompson
RESULTS IN BRIEFThe United States historically has been thedominant supplier of commercial transports -airliners -- to the global market. As recently as20 years ago, Boeing and other U.S. companiescontrolled 85% of the market. But in 1970, agroup of European governments establisheda subsidized competitor to the U.S. industrycalled Airbus with the goal of claiming a sizableshare of global sales. The plan was successful:two of the three U.S. producers exited the market, and the sole survivor, Boeing, no longerclaims a majority of new orders or deliveries.Airbus has thus become the dominant player inthe global market.The biggest single factor explaining the rise ofAirbus was a type of subsidy called launch aid-- low-cost or no-cost loans that enabled the European company to develop a family of airlinersmuch faster than any purely commercial company could have, while also pricing its planesaggressively. Without government launch aid,none of the planes Airbus offers in the markettoday would ever have been built. The practiceof providing billions of dollars in subsidies toeach new Airbus model has distorted marketforces, putting Boeing at a severe disadvantagein the marketplace. As a result, the UnitedStates has lost hundreds of billions of dollars inexport earnings since Airbus was established,along with tens of thousands of jobs in theaerospace sector.In 2009, the World Trade Organization decided that the launch aid provided to Airbus islargely prohibited under prevailing trade rules,and found that a range of other governmentsubsidies the European company receivesare at least “actionable” in the sense that theycaused damage to Boeing and the United States.European governments have brought theirown case to the WTO alleging that Boeing received unfair subsidies, but that case does notcontend the U.S. company received launch aid.In fact, both companies have received othertypes of aid over the years, but some of that aidis permissible under trade rules and none of ithas the impact of launch aid.If the United States fails to put an end to the European practice of subsidizing Airbus planes, itwill continue to lose market share in the commercial transport business, just as it has insteel, electronics and other sectors where it wasonce a dominant global player. With the UnitedStates currently running a trade deficit of overa billion dollars per day in manufactured goods,European aircraft subsidies have become a testcase for the future of free trade and America’sglobal competitiveness. The issue is likely toinfluence how the U.S. military goes about buying a future aerial refueling tanker, since one ofthe planes that has been offered is based uponthe heavily subsidized Airbus A330.TABLE OF CONTENTSINTRODUCTION: EUROPEAN AIRCRAFT SUBSIDIES HAVE HARMED AMERICA.p.1FREE TRADE EMERGED AS NATIONS GRASPED THE BENEFITS OF FAIRNESS.p.3THE GLOBAL AVIATION MARKET IS CRUCIAL TO AMERICA’S TRADE BALANCE.p.5EUROPEAN SUBSIDIES WERE DESIGNED TO UNDERMINE AMERICA’S ROLE.p.7THE WORLD TRADE ORGANIZATION HAS RULED SUBSIDIES ARE UNFAIR.p.9THE EUROPEAN RESPONSE TO U.S. COMPLAINTS IS WEAK AND MISLEADING.p.11CONCLUSION: WASHINGTON MUST ACT TO ELIMINATE UNFAIR SUBSIDIES.p.12
INTRODUCTION: EUROPEAN AIRCRAFT SUBSIDIES HAVE HARMED AMERICAThe global market for commercial transports-- airliners -- is expected to generate over 3trillion in sales during the next two decades.The United States historically has been theleading supplier to that market. Its solesurviving producer of commercial transports,the Boeing Company, today remains one of thenation’s biggest exporters. But Boeing’s rolein the commercial aviation business is beingeroded by Airbus, a company that Europeangovernments established 40 years ago with thegoal of winning a sizable share of the airlinermarket.That goal has been achieved. Since 2000,Europe has become the dominant supplier ofairliners to the global market. However, theremarkable rise of Airbus has been achievedlargely through the use of subsidies fromEuropean governments -- some of which theWorld Trade Organization has now ruled areillegal. The cumulative value of these subsidies over the 40 years that Airbus has existedapproaches 200 billion in today’s dollars. Thesubsidies have enabled Airbus to develop afleet of transports that can compete aggressively in every market niche, without havingto assume the risks that a commercial companylike Boeing must carry.This report is about how European governments implemented a multi-decade campaignto undermine America’s role in the globalaviation market. It begins by explaining thelogic of free trade, and why commercial aircraft exports are important to America’s futureplace in the world economy. It then describeshow European governments fashioned a framework of subsidies for gradually dominatingthe airliner market by providing Airbus withbenefits not available to its competitors -- mostnotably through the use of low-cost (or nocost) loans to fund the launch of new planes.The report goes on to detail complaints bythe U.S. government that led the World TradeOrganization to rule launch aid is unacceptable,and it dissects the largely erroneous claims ofEuropean governments that Boeing tooreceives unfair assistance.The report concludes that Washington mustact to end Europe’s use of illegal aircraft subsidies. If it fails to do so, America will lose itsability to compete in the commercial transport sector in much the same way that it hasalready retreated in steel, autos, and electronics. At its inception, Airbus seemed a remotethreat to America’s dominance of the globalairliner market, and as recently as 20 years agoit claimed only 15% of that market. But today itreceives most of the orders for new planes, andas a result tens of thousands of U.S. jobs havebeen lost -- along with hundreds of billions ofdollars in export earnings. Had this occurredas a result of normal market forces, then policymakers would have to accept the verdict ofthe marketplace. But because it resulted fromthe deliberate use of improper subsidies, it is acase study in unfair trade practices that mustbe remedied.1
U.S. Balance of Trade: 1992-2009 Billions 200 9001992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*Source: U.S. Census Bureau, Foreign Trade Division, seasonally adjusted data.*Data for December 2009 assumed to be average of prior 3 months.The United States trade deficit has risen to unprecedented levels since the Cold War ended, weakening thedollar and raising doubts about its future as a global reserve currency. The imbalance is caused partly bypolicies of foreign governments that interfere with the functioning of market forces, such as European aircraftsubsidies and China’s efforts to depress the value of its currency.2
FREE TRADE EMERGED AS NATIONS GRASPED THE BENEFITS OF FAIRNESSTrade is the exchange of goods and servicesacross national borders -- in other words,between nations. It is such a commonplacehuman activity that its advent predated theinvention of money. By trading, ancient civilizations were able to obtain items not availablewithin their own borders, and specialize inactivities where they could be most productive.Thus, expansion of trade has been closely associated with improvements in the human condition, and the rise of great empires in the Mediterranean, Far East and elsewhere dependedheavily on the emergence of regional tradingsystems. However, it was not until relativelyrecently that nations understood how theycould organize their trade relations to producethe most stable, rewarding results.Free trade is the conduct of economic relationsamong nations without government interference. Interference can take many forms suchas taxes, tariffs, subsidies and quotas, but whatall such interventions have in common is thatthey impede the unfettered pursuit of commerce. In modern economic parlance, theydistort market forces and diminish the potentialfor generating optimum results from trade relations. The analytic case for free trade was firstdeveloped during the Enlightenment by philosophers such as Adam Smith and David Ricardo.Smith argued that the “invisible hand” of selfinterest would spontaneously regulate marketsin the absence of monopolies or governmentinterference, while Ricardo contended that nations could achieve comparative advantage byspecializing in the goods they produced mostskillfully or efficiently.These arguments gained a broad following inEurope during the 19th Century, and the resulting reduction in trade barriers made it a periodof unprecedented growth. While many countries (including the United States) continued topursue unilateral advantage by taxing importsand subsidizing exports, the cause of free tradebecame firmly rooted among economists. Protectionist measures taken by the U.S. and othercountries during the Great Depression werewidely seen as contributing to the slide towardwar in the 1930s. Once the Second World Warended, the United States became a proponentof trade liberalization. In 1948, America and22 other countries fashioned a General Agreement on Tariffs and Trade (GATT) to promotefreer exchange of goods and services. After sixrounds of tariff-reducing measures, the GATTsystem was replaced by the new World TradeOrganization in 1995.Today, the entire structure of global economicrelations depends on sustaining an open trading system. The key features of that systemare open access to markets; an absence of tariffs, subsidies and other trade-distorting policies; and free flow of private capital, labor andinformation across national borders. Althoughtrade barriers still exist, the main thrust ofeconomic diplomacy over the last three generations has been aimed at reducing government interference with the free interplay ofmarket forces. Countries that seek unilateraladvantage by adopting unfair trading practices or treating trade partners differently thanthey themselves would wish to be treated riskunraveling the political consensus that hasmade this the most prosperous, innovative erain human history.3
A Three trillion Dollar MarketAirplane Deliveries: 29,0002009-2028Airplane units20,00015,00010,0005,00002,100regional rge3% 1,510Btwin-aisle47% 220Blarge7%Market Value: 3.2 TrillionMarket value, billions2009-20281,6001,2008004000 70Bregional jets2% 1,420Bsingle-aisle44%Boeing projects that airlines around the world will order 29,000 new transports over a 20-year period worthabout 3.2 trillion, with the vast majority of deliveries concentrated in single-aisle aircraft. Airbus projects asimilar revenue total for the same period, making commercial transports one of the biggest export items in theglobal trading system over the next two decades.4
THE GLOBAL AVIATION MARKET IS CRUCIAL TO AMERICA’S TRADE BALANCEThe global market for jet-powered commercial transports first emerged in the 1950s withthe appearance of planes like the Boeing 707.American companies dominated the marketduring its early years due to the size of the U.S.economy, the long distances Americans oftenmust travel within their borders, and the nation’s massive outlays for military technologyduring the Cold War -- technology which oftencould be adapted to civil aviation uses. European companies were handicapped in competingwith American companies by the economic andpolitical fragmentation of the continent, whichundercut economies of scale. In an effort toovercome these obstacles, four Europeangovernments formed a commercial transportconsortium called Airbus in 1970.Although U.S. aircraft companies benefitedconsiderably from military contracts, theyremained fundamentally private enterprises.Airbus, in contrast, was entirely a creature ofthe governments that had created it, and noneof its early aircraft could have been launchedwithout extensive subsidies from the memberstates. However, subsidies by themselves didnot guarantee success: only 256 of the consortium’s first plane, the A300, were sold duringthe 1970s. Meanwhile, Boeing offerings suchas the twin-engine 737 and four-engine 747jumbo jet dominated the global market. Additional offerings from McDonnell Douglas andLockheed enabled the U.S. to claim over 90% ofthe market until Airbus introduced the highlysuccessful A320 in the 1980s. The twin-engine,single-aisle A320 attracted considerable marketinterest and produced several successful variants, due to appealing performance featuresand aggressive pricing.Because the structure of the global airlinerindustry can only sustain two suppliers inany particular niche, the growing success ofAirbus made survival of secondary U.S.suppliers problematic. Lockheed exited themarket in 1986 and McDonnell Douglasmerged with Boeing in 1997, leaving only twocompanies to supply a global market that wasgrowing at an average annual rate of about 5%.At the time of the Boeing-McDonnell merger,U.S. companies still controlled about two-thirdsof the market, but this share eroded as Airbusexpanded its offerings and underbid Boeing onprice -- often in Boeing’s home market of NorthAmerica, where 40% of Airbus’s early planeswere sold. Although the two surviving competitors sought to develop planes that addressedslightly different market niches, every Airbussales success was a loss for Boeing. OnceAirbus fielded a full family of airliners, it surpassed Boeing in sales and deliveries, claimingover half of the market every year after 2002.Despite America’s diminished role, civilaviation remains a major positive in the U.S.balance of trade. According to the AerospaceIndustries Association, the U.S. had a 54billion surplus in its aerospace trade during2009, with much of that surplus traceable to thesale of commercial transports. Last year, 40%of all U.S. aerospace industry sales -- 83 billionout of 214 billion -- were civil aircraft, and mostcivil aircraft were exported. Boeing projectsthat global sales of commercial transports willexceed 3.2 trillion over the next 20 years as29,000 new aircraft are delivered. Airbus projects sales during the same period at 3.1 trillion for 25,000 planes. Thus, airliners are a potential bright spot in the U.S. balance of trade,which currently is running a deficit of about abillion dollars per day in manufactured goods.However, the contribution of commercial transport sales to the trade balance would be muchgreater if Airbus had not become such a bigfactor in the business, and there is no guarantee Boeing will be able to preserve its present47% market share in the years ahead.5
Commercial Transport Market Shares, 1960 - 20091968: Lockheedreceived first orderLoGlobal Market Share, Announced Orders100%1971: Airbusreceived first orderck1986:Lockheedexited themarket1997: McDonnellDouglas merged intoBoeingAirbusheed90%80%McDonne70%ll Douglas60%50%Boeing40%30%20%10%Boeing average globalmarket share from1960-1986 63%(1986 is when Lockheedexited the market)Boeing average globalmarket share from1998-2009 49.4%(1998 is when McDonnellDouglas merged with Boeing)06 80 2 460 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 0 0 0 0 019 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20U.S. producers dominated the global market for commercial transports until the 1990s, when Airbusbegan offering a diverse family of narrow-body and wide-body airliners. As subsidized European aircraftclaimed a growing share of the market, two of the three U.S. producers exited the business and the solesurvivor, Boeing, ceased to be the biggest recipient of new aircraft orders.6
EUROPEAN SUBSIDIES WERE DESIGNED TO UNDERMINE AMERICA’S ROLEAirbus was founded as a consortium of European aircraft companies in 1970 with the explicitgoal of diminishing the dominance of American producers in the global aviation market.Recognizing the high barriers to market entryand structural disadvantages that indigenouscompanies faced in competing with marketleader Boeing, the four founding Europeannations -- France, Germany, Spain and theUnited Kingdom -- embraced from the beginning the need to subsidize Airbus operations.Airbus later evolved into a joint stock companyand then into a wholly-owned subsidiary of theEuropean Aeronautic Defense & Space (EADS)Company, but the centrality of governmentsubsidies to its commercial transport operationshas never changed. None of the aircraft currentlycomprising the Airbus family of airliners couldor would have been developed without suchsubsidies.At its inception, Airbus member governmentsstated they were providing subsidies to support an “infant industry,” subsidies that wouldgradually disappear as the enterprise matured.That has not happened. The initial agreementto cover costs for the development of the A300was followed by later agreements to fund development of the A310, A320, A330, A340, A350and A380. The latter aircraft, the biggest passenger plane in the history of civil aviation, wasalso the most subsidized -- even though its development was begun after Airbus had becomefirmly established in the global market. A 1992agreement between the United States and European countries limited the extent of subsidiesbut did not prevent them. Subsidies have takenseveral forms, but by far the most importantis launch aid, the provision of low-interest orno-interest loans that need not be repaid ifthe aircraft model fails to achieve economicsuccess. Such loans make it much easier forAirbus to finance the very high cost of developing new planes. While the nominal dollar value of these loans over time has only added upto about 15 billion, U.S. government expertshave testified that the true market value intoday’s dollars is roughly 200 billion.Airbus and Boeing both receive some commercial benefits from military contracts, local taxincentives, and other relatively modest kindsof government assistance. Much of this assistance is permissible under current tradingrules, and it does not appear to have played adecisive role in shaping the rivalry between thetwo companies. However, Boeing gets nothinglike the multi-billion-dollar infusions of launchaid that Airbus regularly receives. This aid hasfundamentally altered the terms of competitionbetween the two companies by enabling Airbusto develop new planes faster than would be feasible using private sources of funding, and toprice existing planes more aggressively thanwould be prudent in the absence of governmentprotectors. In effect, launch aid transfers manyof the risks of being in the airliner businessfrom Airbus to European governments, so thatthe company can operate more boldly in challenging Boeing’s offerings to the marketplace.European leaders have not been shy in describing what the ultimate aim of the launch aid is.French prime minister Lionel Jospin told theFrench National Assembly in 2000 that “we willgive Airbus the means to win the battle againstBoeing.” Airbus executives are even more unvarnished, for example describing the heavilysubsidized A380 as a Boeing 747 “killer.” Theexistence of European aircraft subsidies was asignificant factor in the decision of Americanproducers Lockheed and McDonnell Douglasto exit the commercial aircraft business, and isthe biggest single reason why Boeing no longercommands a majority share of global airlinersales. With the ranks of U.S. producers reducedto only one company by the beginning of thecurrent decade and that one company falteringbadly in its competition with Airbus, the BushAdministration decided to abandon diplomaticchannels and lodge a formal trade complaint.7
Selected Commercial Aircraft Types600A380Number of seats5
export earnings since Airbus was established, along with tens of thousands of jobs in the aerospace sector. In 2009, the World Trade Organization decid-ed that the launch aid provided to Airbus is largely prohibited under prevailing trade rules, and found that a range of other government subsidies the European company receives
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