Airbus follies


LAST week, speaking at Boeing's big Seattle plant, President Clinton accused the European Community of unfairly subsidizing the arch-rival Airbus. The message, aimed at the 28,000 Boeing workers slotted for layoff due to declining orders, apparently signals a harder line on trade.

But while the United States indeed should seek the elusive "level playing field," and while Boeing's plight is serious, Airbus is the wrong target. Both the United States and the Europeans have committed comparable subsidies to aircraft.

Since World War II, the United States has subsidized its industry indirectly, through military contracts valued in the trillions. Those contracts not only purchased fighters and bombers; they taught Americans how to design planes; they subsidized the construction of aircraft factories, the purchase of advanced production machinery and the training of skilled workers.

All of this gave American firms dominance of world aircraft markets. That dominance, in turn, allowed ample profits to be plowed back into investment, yielding even more sophisticated planes and deterring potential competitors.

In 1971, the Europeans, with far smaller military budgets, looked enviously at Boeing and decided to subsidize a new civil industry, directly. The French, Germans and British, after all, had built impressive military aircraft. But with U.S. manufacturers supplying over 90 percent of the world's jetliners, no private European company could muster the capital investment to get back into the civilian game.

So the European Community provided start-up capital and subsidized loans for what became the Airbus Consortium. Airbus began building jetliners that are today the technical equal of Boeing's, and enjoying a world market share approaching 30 percent.

The U.S. government reckons the total value of past EC Airbus subsidies at $26 billion. The EC in turn, says Boeing and the other U.S. manufacturers received some $33 billion to $41 billion in indirect subsidies mainly from NASA and the Pentagon just since 1976 -- and more during the early post-World War II years.

Such subsidies are difficult to score with precision -- for example, what is the implicit subsidy attributable to a Boeing engineer trained thanks to a NASA contract? But both Europe and the United States are roughly equal sinners against free aircraft markets. Ironically, less than a week after his Seattle speech, Mr. Clinton was proposing to shift billions in Pentagon industrial aid into commercial technology aid -- more subsidy!

The issue, therefore, is not whether to ban subsidies that most governments view as development aids, but how to define rough equity. And in fact, last March the United States and Europe concluded a pact which attempts just that in aircraft, allowing some direct and indirect state aid, but placing ceilings on both. This approach makes sense.

In my books and articles, I have advocated both industrial policies and a measure of managed trade -- views that are often mistakenly termed "protectionist." Perplexed readers who think me protectionist of U.S. industry must find it odd that I defend Airbus.

But this precisely illustrates the flaws in the usual concepts and labels. The Airbus-Boeing saga suggests several lessons, all consistent with the managed trade/industrial policy view -- and none necessarily "protectionist":

First, industrial policy and selective subsidy can be economically virtuous. As the aircraft saga reveals, both the U.S. indirect subsidy and the European direct subsidy helped create superior planes, which would have evolved far more slowly if companies had waited for private capital.

Second, once a nation is subsidizing a strategic product, we are no longer in the world of free markets or laissez-faire trade. The only alternative to allowing that nation to dominate markets is to tolerate other subsidies, but then to balance and restrain total subsidies lest a trade war break out. This is a form of managed trade, but it is the only sane alternative.

Further, "protectionism" misses the point. As an American, I would like Boeing to thrive. As a human being, I would like the global economy to produce broadly rising living standards for everyone. Toward this end, there is room for dynamic aircraft industries on both sides of the Atlantic, and elsewhere as well. So I am no protectionist, if that means jingoist.

Rather, political economists like me advocate industrial policies and partially managed trade, because these are the necessary ingredients of a mixed economy. And a mixed economy is a better route to sustainable economic growth than a laissez-faire one, in both Europe and America.

Laura Tyson, President Clinton's chief economist, grasped this truth in her book, "Who's Bashing Whom: Trade Conflict in High Technology Industries." She and the president need to talk, lest he begin to sound like the crude protectionist that he is not. One must hope that the Seattle speech was political posturing, not incipient bad policy.

A final thought about the aircraft business and laissez faire: The real killer of Boeing's sales is not Airbus, but airline deregulation -- another gift of free-market ideology run riot. When airlines are oscillating wildly between selective price-gouging and ruinous price-cutting, they can't afford to buy new planes. To help Seattle, President Clinton needn't bash Airbus. Rather, he should revive Boeing's best customers, by reregulating the airlines.

Robert Kuttner writes a column on economic matters.

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad