World Championship Airliner Subsidy Fight (Refereed by WTO) Round 1: USA Wins on Points

(by Bruce Lyons) Just six years after the USA first complained about State aid to Airbus, the WTO has today found 16 specific subsidies to be illegal.  Another 11 measures were found not to have broken the rules.   The WTO also decided that the effects had included displaced Boeing exports to Europe and third countries, and reduced potential Boeing sales in the USA.  However, it did not find that the subsidies either had significant price effects or caused Boeing material injury.  The latter conclusion appears to be because Boeing sales and orders grew substantially 2004-06, despite the fact that Airbus had increased its US market share from c.30% in 2001 to c.50% in 2005.

This is only first round of a lengthy fight for two reasons.  First, an extended appeals process will undoubtedly be triggered by the WTO requirement that the illegal subsidies should be repaid within 90 days.  The second reason is more interesting and we will not have to wait so long for the result.  Within the next few weeks, the WTO is due to publish its findings on a counter-complaint (counter-punch?) by Europe that the new Boeing 787 Dreamliner has received billions of dollars of illegal research aid from the US government.

What does all this mean for competition policy?  On one level, it is a poor lesson for third countries when the supposedly leading free trading nations punch it out like this.  Why should emerging nations now listen to lectures from the West on the inefficiencies of subsidised markets?  On another level, the economies of scale and entry barriers for large passenger airliners are (uniquely?) such that there would be a severe danger of global monopoly emerging in the absence of some level of subsidy.  I emphasise global because this is quite different to subsidising national firms when international competition is feasible.  Could it be that, even if unseemly, the occasional punch-up at the WTO is the best way to keep subsidies in an otherwise global natural monopoly at an appropriately modest level?  I doubt it.

Finally, once the Dreamliner decision is out, and assuming there is some element of illegality found by the WTO, there will no doubt be a transatlantic deal to limit the impact on Airbus and Boeing.  As I argued last week in relation to the Areva-Siemens joint venture, if competition decisions can be brought to bear in a dispute, then they will be strategically by protagonists to maximise bargaining power.

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