Discussion Section February 9, 2007 Brian Chen 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 Answer question ONLY 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