Boeing v. AirbusBoeing v. Airbus

Discussion SectionDiscussion Section

February 9, 2007February 9, 2007

Brian ChenBrian Chen

AgendaAgenda

• Discuss First Written CaseDiscuss First Written Case

• ReviewReview

• Boeing v. AirbusBoeing v. Airbus– VideoVideo– Assigned ReadingAssigned Reading– Mock WTO Dispute ResolutionMock WTO Dispute Resolution

First Written Case: Summary First Written Case: Summary StatisticsStatistics• 105 written cases graded105 written cases graded• Grading standard:Grading standard:

– ““Issue spotter”Issue spotter”– Overall flow, clarity of languageOverall flow, clarity of language

• Mean score: 16.93 out of 25Mean score: 16.93 out of 25• Max: 25Max: 25• Min: 9Min: 9• Standard Deviation: 3.06Standard Deviation: 3.06• Adjustments:Adjustments:

– Add 4 pts to assignments graded by BrianAdd 4 pts to assignments graded by Brian– Add 3 pts to assignments graded by SannyAdd 3 pts to assignments graded by Sanny

• Best Answers will be posted subject to student Best Answers will be posted subject to student approvalapproval

SuggestionsSuggestions

• Answer questionAnswer question– Including all partsIncluding all parts

• Answer question ONLYAnswer question ONLY– No need to pontificateNo need to pontificate

• When possible, look at both sidesWhen possible, look at both sides

• When necessary, define unclear termsWhen necessary, define unclear terms

• Structure argumentsStructure arguments

• Facts are your friendsFacts are your friends

Review: Review: Domino’s International Domino’s International ExpansionExpansion• What was the single most important What was the single most important

message last week?message last week?– ““We expected cultures to adapt to us, … We expected cultures to adapt to us, …

but we learned that it would be better but we learned that it would be better for us to adapt to the local culture”for us to adapt to the local culture”

Doha RoundDoha Round• Cutting tariffs on industrial goods and servicesCutting tariffs on industrial goods and services

– In 2000, for example, the average tariff rates on non-agricultural 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 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, Japan, and 4.7% for the United States. On agricultural products, however, the average tariffs rates were 22.9% for Canada, 17.3% for 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. the European Union, 18.2% for Japan, and 11% for the United States.

• Phasing out subsidies Phasing out subsidies – Subsidies introduce significant distortions into the production of Subsidies introduce significant distortions into the production of

agricultural products. The net effect is to raise prices to consumers, agricultural products. The net effect is to raise prices to consumers, reduce the volume of agricultural trade, and encourage the reduce the volume of agricultural trade, and encourage the overproduction of products that are heavily subsidized (with the overproduction of products that are heavily subsidized (with the government typically buying up the surplus). government typically buying up the surplus).

• Reducing antidumping laws Reducing antidumping laws – WTO rules allow countries to impose antidumping duties on foreign WTO rules allow countries to impose antidumping duties on foreign

goods that are being sold cheaper than at home, or below their cost of goods that are being sold cheaper than at home, or below their cost of production, when domestic producers can show that they are being production, when domestic producers can show that they are being harmed. harmed.

• WTO on intellectual property should allow for health protection in WTO on intellectual property should allow for health protection in poorer nationspoorer nations– Rich countries have to comply with the rules within a year. Poor Rich countries have to comply with the rules within a year. Poor

countries, in which such protection generally was much weaker, have 5 countries, in which such protection generally was much weaker, have 5 years’ grace, and the very poorest have 10 years.years’ grace, and the very poorest have 10 years.

Subsidy Dogfight – Subsidy Dogfight – Boeing versus AirbusBoeing versus Airbus• What are the facts?What are the facts?

– Boeing’s development of Boeing 7E7 (now Boeing’s development of Boeing 7E7 (now 787), which promises as much as 20% 787), which promises as much as 20% reduction in operating costsreduction in operating costs

– Alliance with three Japanese companiesAlliance with three Japanese companies– 1992 Agreement limits state aid that both 1992 Agreement limits state aid that both

companies can receive from respective companies can receive from respective governmentsgovernments

– Does 1992 Agreement extend to other parties Does 1992 Agreement extend to other parties in the project? Japanese MET? State of in the project? Japanese MET? State of Washington and KansasWashington and Kansas

– Airbus applies for launch aid for A350, direct Airbus applies for launch aid for A350, direct competitor to 787competitor to 787

– Dispute now before WTO as to the legality of Dispute now before WTO as to the legality of the various subsidiesthe various subsidies

Discussion Questions 1Discussion Questions 1

• How might the repayable launch aid How might the repayable launch aid for Airbus change its decision making for Airbus change its decision making on launching a new aircraft? What on launching a new aircraft? What are the potential consequences for are the potential consequences for (a) Boeing, (b) airlines, and (c) the (a) Boeing, (b) airlines, and (c) the profitability of both Boeing and profitability of both Boeing and Airbus?Airbus?

Discussion Question 2Discussion Question 2

• When Airbus originally received When Airbus originally received government aid back in the 1960s, it government aid back in the 1960s, it was a new enterprise. Today it is the was a new enterprise. Today it is the global market share leader in the global market share leader in the commercial aerospace business. How commercial aerospace business. How do gains in market share effect the do gains in market share effect the legitimacy of claims for subsidies? legitimacy of claims for subsidies?

Discussion Question 3Discussion Question 3

• Do you think that R&D contracts Do you think that R&D contracts from NASA and the Pentagon benefit from NASA and the Pentagon benefit Boeing’s commercial aerospace Boeing’s commercial aerospace business? How?business? How?

Discussion Question 4Discussion Question 4

• If the EU does file a complaint with If the EU does file a complaint with the WTO protesting Japanese launch the WTO protesting Japanese launch aid on the Boeing 787 aircraft, how aid on the Boeing 787 aircraft, how might the Japanese retaliate? Given might the Japanese retaliate? Given this, what should Airbus urge the EU this, what should Airbus urge the EU to do? to do?

Discussion Question 5Discussion Question 5

• At this point, what do you think is the At this point, what do you think is the most equitable solution to the long most equitable solution to the long running battle between the US and running battle between the US and EU on subsidies for commercial EU on subsidies for commercial aircraft development? aircraft development?

Boeing v. AirbusBoeing v. AirbusWTO Dispute ResolutionWTO Dispute Resolution• Boeing’s ClaimBoeing’s Claim

– Airbus receives subsidies from UK, France, German and Airbus receives subsidies from UK, France, German and SpainSpain• Why is this bad?Why is this bad?• $13.5 billion government subsidies between 1970 and 1990 $13.5 billion government subsidies between 1970 and 1990

($25.9 billion if commercial interest rates applied)($25.9 billion if commercial interest rates applied)• Loans at below market interest rates and tax breaksLoans at below market interest rates and tax breaks• Airbus is believed to have financed 80% of the cost of aircraft 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 for a term of 8 to 10 years at an annual interest rate of approximately 7%approximately 7%

• In contrast, US Export Import Bank required 20% down In contrast, US Export Import Bank required 20% down payments from Boeing customers, financed only 40% of the cost payments from Boeing customers, financed only 40% of the cost of an aircraft directly, and guaranteed financing of the of an aircraft directly, and guaranteed financing of the remaining 40% by private banks at an average interest rate to remaining 40% by private banks at an average interest rate to 8.5 for 10 years8.5 for 10 years

• Airbus received government $3.7 billion launch aid and $2.8 Airbus received government $3.7 billion launch aid and $2.8 billion in indirect subsidies for the development of the A380 billion in indirect subsidies for the development of the A380 superjumbo and need not repay the aid if the aircraft is not a superjumbo and need not repay the aid if the aircraft is not a commercial successcommercial success

• Catalyst for latest dispute: launch aid for A350, direct Catalyst for latest dispute: launch aid for A350, direct competitor to B-787 ($700 million by UK, 30% launch aid from competitor to B-787 ($700 million by UK, 30% launch aid from EU)EU)

Boeing v. AirbusBoeing v. AirbusWTO Dispute ResolutionWTO Dispute Resolution• Airbus’ claimsAirbus’ claims

– Airbus success due not to subsidies but to good products and Airbus success due not to subsidies but to good products and strategystrategy

– Boeing benefited from US government aid for a long timeBoeing benefited from US government aid for a long time– Planes were built under government WWI, WWII. Boeing 707, for Planes were built under government WWI, WWII. Boeing 707, for

example, was subsidized by the US governmentexample, was subsidized by the US government– 1991 EC study contended that Boeing/McDonnell Douglas 1991 EC study contended that Boeing/McDonnell Douglas

received $18 to $22 billion in indirect aid between 1976 and received $18 to $22 billion in indirect aid between 1976 and 1990. US Dept of Defense gave as much as $6.34 billion from 1990. US Dept of Defense gave as much as $6.34 billion from 1976 to 1990, and NASA gave $8 billion to commercial aircraft 1976 to 1990, and NASA gave $8 billion to commercial aircraft production. Moreover, tax exemptions gave an addition $1.7 production. Moreover, tax exemptions gave an addition $1.7 billion to Boeing and $1.4 billion to MDbillion to Boeing and $1.4 billion to MD

– Boeing rejected these claims, saying no additional 5% for Boeing rejected these claims, saying no additional 5% for commercial work for every defense contract; only 3% of Boeing’s commercial work for every defense contract; only 3% of Boeing’s R&D from Department of Defense, and only 4% from NASA R&D from Department of Defense, and only 4% from NASA fundingfunding

– Airbus contends: Boeing received some $12 billion from NASA to Airbus contends: Boeing received some $12 billion from NASA to develop technology, much of it found its way to commercial jet develop technology, much of it found its way to commercial jet aircraftaircraft

– Airbus further contends: Boeing would receive as much as $3.2 Airbus further contends: Boeing would receive as much as $3.2 billion in tax breaks from Washington, $1 billion in loans from the billion in tax breaks from Washington, $1 billion in loans from the Japanese governmentJapanese government

Boeing v. AirbusBoeing v. AirbusApplication of Concepts/Instruments learned in classApplication of Concepts/Instruments learned in class

• What are some examples of instruments of trade What are some examples of instruments of trade policy in the aviation industry?policy in the aviation industry?– TariffsTariffs

• Russia levies a 20% tariff on imported aircraftRussia levies a 20% tariff on imported aircraft– Ad valoremAd valorem– SubsidiesSubsidies

• Cash grants (e.g., launch aid)Cash grants (e.g., launch aid)• Low-interest loans (e.g., 7% versus 8.5% interest)Low-interest loans (e.g., 7% versus 8.5% interest)• Government equity participation (early version of Airbus Government equity participation (early version of Airbus

consortium)consortium)– QuotasQuotas

• E.g., if U.S. limited number of allowable importation of E.g., if U.S. limited number of allowable importation of foreign aircraft to 100 per decadeforeign aircraft to 100 per decade

– Voluntary Export RestrictionVoluntary Export Restriction• E.g., if EC limits sale of Airbus aircraft to 100 per decade to E.g., if EC limits sale of Airbus aircraft to 100 per decade to

the U.S.the U.S.– Local ContentLocal Content– Administrative PoliciesAdministrative Policies

Boeing v. AirbusBoeing v. AirbusApplication of concepts learned in Application of concepts learned in classclass• Political Arguments for InterventionPolitical Arguments for Intervention

– Protecting jobs and industriesProtecting jobs and industries– National securityNational security– RetaliationRetaliation– Protecting consumersProtecting consumers

• Economic Arguments for InterventionEconomic Arguments for Intervention– Infant IndustryInfant Industry– Strategy trade policyStrategy trade policy