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By Robert J. Samuelson
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The United States and Europe are edging toward their biggest trade dispute ever--and Washington shouldn't blink. The dispute involves competition between Boeing and Airbus, which has toppled Boeing as the world's largest producer of commercial jets. In 2004 Airbus will deliver about 315 jets compared with Boeing's 285. Some industry analysts expect Airbus to maintain its lead over Boeing until at least 2008. Despite this success, the European Union still supports subsidies for Airbus. The state support must stop, and if the Europeans can't be convinced, the U.S. Congress should protect Boeing from predatory competition.
Created in 1970, Airbus reflects Europe's ambitions and pride. The French, Germans and British didn't want to cede the global aircraft market to the United States. Given the huge investments needed to develop new planes, Airbus couldn't have survived its early years without subsidies. The U.S. Special Trade Representative says Airbus has received $15 billion in "launch" subsidies for its planes. Total subsidies are hard to determine because they take many different forms. Whatever the figure, enough is now enough.
It's true that many of Boeing's problems are self-inflicted. The company has been grossly mismanaged. It faces charges involving corrupt practices in winning military contracts. In commercial jets, Boeing lost dominance in part by underinvesting in new planes and technologies. Its last genuinely new plane was the Boeing 777, a two-engine long-distance aircraft launched in 1990. From 1998 to 2001, Boeing spent $9 billion buying back its own stock. The money would have been better used investing in the future. Boeing's prospects are also darkened by the weakness of some big customers (American Airlines, Delta).
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It's also true that the Airbus-Boeing competition forces both to make better planes. Much of Airbus's success is honestly won with quality products. Its planes, unlike Boeing's, have common cockpits. This enhances airlines' flexibility in using pilots and saves on training costs.
But there's another truth: Europe has an industrial policy to put Boeing out of the commercial jet business. "We will give Airbus the means to win the battle against Boeing," former French prime minister Lionel Jospin once said. Unsurprisingly, Europe is shrinking as a market for Boeing planes. In 2000 about 23 percent of Boeing's deliveries went to Europe. In 2004 the figure is about 15 percent, and it will probably drop further. For whatever reasons--political pressures, nationalism, low Airbus prices--European airlines are moving away from Boeing. By contrast, the U.S. market remains wide open to Airbus, which recently delivered its 1,000th plane here.
The latest battle involves two future planes: the A380 from Airbus, the largest commercial jet ever with potential seating of 555; and the Boeing 7E7, carrying about 250 passengers more than 15,000 kilometers. The two planes, expected to go into service in 2006 and 2008, respectively, reflect contrasting views of the future. Airbus thinks airlines will need bigger planes to handle more traffic; Boeing expects airlines to fly more routes with somewhat smaller planes. Development costs of the A380 are estimated at $10.7 billion; direct "launch aid" from European governments covers about 30 percent of that. Although Boeing hasn't revealed the 7E7's development costs, it has obtained some subsidies from states and Japanese subcontractors. Confusing the controversy further is a 1992 U.S.-European agreement that permits some, though not all, of the various subsidies.
It's time to stop the subsidy game. The Bush administration proposed a pragmatic bargain: forgive all past subsidies, but bar future subsidies. Airbus plans a competitor to the 7E7 (called the A350) and wants more subsidies. These would be forbidden. Interestingly, Airbus has admitted it doesn't need more subsidies. So, why is anyone arguing? The solution is not rival complaints to the World Trade Organization. It is for both sides to give up subsidies. If European governments insist on subsidies, they're making a statement to Boeing: you're competing with government treasuries; you can't win.
The European position is awash in contradictions. For starters, Europeans now complain that the rising euro (and falling dollar) hurts their export industries. But if Europe targets U.S. aircraft exports for extinction, one consequence is inevitable: weaker American exports will lead to an even higher euro. Airbus may thrive, but other European exporters will pay a price.
The European Union also charges that Boeing is subsidized by NASA and the Defense Department. Putting aside the fact that Europe has its own defense and space programs--and it is free to expand them to the benefit of EADS and BAE Systems, the aerospace companies that own Airbus--the alleged size of the subsidies is preposterous. From 1995 to 2003, Boeing is said to have received $22 billion in subsidies from NASA and defense contracts. Some of these contracts (for example, on composite materials for aircraft bodies) may help Boeing build commercial planes, but most do not. If they had, Boeing would have slaughtered Airbus in most competitions.
Indeed, the theory that covert military aid was responsible for Boeing's success in commercial jets is cockeyed. Until it merged with McDonnell Douglas in 1997, Boeing was a secondary defense and space contractor. Most of its business was commercial planes. Two American companies that were big government contractors--Lockheed and McDonnell Douglas--had to abandon the commercial jet business. If indirect government subsidies were so essential, Lockheed and McDonnell Douglas would still be in the airline business and Boeing wouldn't.
In a fair market, both Airbus and Boeing can survive in the commercial jet business. But Boeing will have a hard time surviving against a state-supported competitor. If the Europeans won't disavow subsidies, Congress should protect Boeing. It should bar Airbus from selling planes to airlines that fly domestically in the United States. Presumably, Europe would bar Boeing from selling there (though this would mainly codify the emerging status quo). Let's admit it: this is an awful solution. It would diminish competition and raise costs for airlines and passengers. It would risk a wider trade war that both the United States and Europe might lose. But it may be necessary to run these risks for America to send Europe a clear message: if you target our major companies, we will target yours.
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