Boeing v. Airbus
Discussion Section
February 9, 2007
Brian Chen
Agenda
• Discuss First Written Case
• Review
• Boeing v. Airbus
– Video
– Assigned Reading
– Mock WTO Dispute Resolution
First Written Case: Summary
Statistics
• 105 written cases graded
• Grading standard:
•
•
•
•
•
– “Issue spotter”
– Overall flow, clarity of language
Mean score: 16.93 out of 25
Max: 25
Min: 9
Standard Deviation: 3.06
Adjustments:
– Add 4 pts to assignments graded by Brian
– Add 3 pts to assignments graded by Sanny
• Best Answers will be posted subject to student approval
Suggestions
• Answer question
– Including all parts
• Answer question ONLY
– No need to pontificate
•
•
•
•
When possible, look at both sides
When necessary, define unclear terms
Structure arguments
Facts are your friends
Review:
Domino’s International Expansion
• What was the single most important
message last week?
– “We expected cultures to adapt to us, … but
we learned that it would be better for us to
adapt to the local culture”
Doha Round
• Cutting tariffs on industrial goods and services
– In 2000, for example, the average tariff rates on non-agricultural products were
4.4% for Canada, 4.5% for the European Union, 4.0% for Japan, and 4.7% for
the United States. On agricultural products, however, the average tariffs rates
were 22.9% for Canada, 17.3% for the European Union, 18.2% for Japan, and
11% for the United States.
• Phasing out subsidies
– Subsidies introduce significant distortions into the production of agricultural
products. The net effect is to raise prices to consumers, reduce the volume of
agricultural trade, and encourage the overproduction of products that are heavily
subsidized (with the government typically buying up the surplus).
• Reducing antidumping laws
– WTO rules allow countries to impose antidumping duties on foreign goods that
are being sold cheaper than at home, or below their cost of production, when
domestic producers can show that they are being harmed.
• WTO on intellectual property should allow for health protection in poorer
nations
– Rich countries have to comply with the rules within a year. Poor countries, in
which such protection generally was much weaker, have 5 years’ grace, and the
very poorest have 10 years.
Subsidy Dogfight –
Boeing versus Airbus
• What are the facts?
– Boeing’s development of Boeing 7E7 (now 787),
which promises as much as 20% reduction in
operating costs
– Alliance with three Japanese companies
– 1992 Agreement limits state aid that both companies
can receive from respective governments
– Does 1992 Agreement extend to other parties in the
project? Japanese MET? State of Washington and
Kansas
– Airbus applies for launch aid for A350, direct
competitor to 787
– Dispute now before WTO as to the legality of the
various subsidies
Discussion Questions 1
• How might the repayable launch aid for
Airbus change its decision making on
launching a new aircraft? What are the
potential consequences for (a) Boeing, (b)
airlines, and (c) the profitability of both
Boeing and Airbus?
Discussion Question 2
• When Airbus originally received
government aid back in the 1960s, it was
a new enterprise. Today it is the global
market share leader in the commercial
aerospace business. How do gains in
market share effect the legitimacy of
claims for subsidies?
Discussion Question 3
• Do you think that R&D contracts from
NASA and the Pentagon benefit Boeing’s
commercial aerospace business? How?
Discussion Question 4
• If the EU does file a complaint with the
WTO protesting Japanese launch aid on
the Boeing 787 aircraft, how might the
Japanese retaliate? Given this, what
should Airbus urge the EU to do?
Discussion Question 5
• At this point, what do you think is the
most equitable solution to the long
running battle between the US and EU on
subsidies for commercial aircraft
development?
Boeing v. Airbus
WTO Dispute Resolution
• Boeing’s Claim
– Airbus receives subsidies from UK, France, German and Spain
• Why is this bad?
• $13.5 billion government subsidies between 1970 and 1990 ($25.9
•
•
•
•
•
billion if commercial interest rates applied)
Loans at below market interest rates and tax breaks
Airbus is believed to have financed 80% of the cost of aircraft for a
term of 8 to 10 years at an annual interest rate of approximately
7%
In contrast, US Export Import Bank required 20% down payments
from Boeing customers, financed only 40% of the cost of an aircraft
directly, and guaranteed financing of the remaining 40% by private
banks at an average interest rate to 8.5 for 10 years
Airbus received government $3.7 billion launch aid and $2.8 billion
in indirect subsidies for the development of the A380 superjumbo
and need not repay the aid if the aircraft is not a commercial
success
Catalyst for latest dispute: launch aid for A350, direct competitor to
B-787 ($700 million by UK, 30% launch aid from EU)
Boeing v. Airbus
WTO Dispute Resolution
• Airbus’ claims
– Airbus success due not to subsidies but to good products and strategy
– Boeing benefited from US government aid for a long time
– Planes were built under government WWI, WWII. Boeing 707, for
example, was subsidized by the US government
– 1991 EC study contended that Boeing/McDonnell Douglas received $18
to $22 billion in indirect aid between 1976 and 1990. US Dept of
Defense gave as much as $6.34 billion from 1976 to 1990, and NASA
gave $8 billion to commercial aircraft production. Moreover, tax
exemptions gave an addition $1.7 billion to Boeing and $1.4 billion to
MD
– Boeing rejected these claims, saying no additional 5% for commercial
work for every defense contract; only 3% of Boeing’s R&D from
Department of Defense, and only 4% from NASA funding
– Airbus contends: Boeing received some $12 billion from NASA to
develop technology, much of it found its way to commercial jet aircraft
– Airbus further contends: Boeing would receive as much as $3.2 billion in
tax breaks from Washington, $1 billion in loans from the Japanese
government
Boeing v. Airbus
Application of Concepts/Instruments learned in class
• What are some examples of instruments of trade policy
in the aviation industry?
– Tariffs
• Russia levies a 20% tariff on imported aircraft
– Ad valorem
– Subsidies
• Cash grants (e.g., launch aid)
• Low-interest loans (e.g., 7% versus 8.5% interest)
• Government equity participation (early version of Airbus
consortium)
– Quotas
• E.g., if U.S. limited number of allowable importation of foreign
aircraft to 100 per decade
– Voluntary Export Restriction
• E.g., if EC limits sale of Airbus aircraft to 100 per decade to the U.S.
– Local Content
– Administrative Policies
Boeing v. Airbus
Application of concepts learned in class
• Political Arguments for Intervention
– Protecting jobs and industries
– National security
– Retaliation
– Protecting consumers
• Economic Arguments for Intervention
– Infant Industry
– Strategy trade policy