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Flying the Subsidized Skies

The WTO rules against Airbus.

12:00 AM, Sep 16, 2009 • By REUBEN F. JOHNSON
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Then there is the famous Eurofighter program, which is a cooperative venture between four European nations--the Britain, Germany, Spain and Italy--which has been a huge jobs program for the major partners of the Airbus consortium and is supported by generous (and overly taxed) European taxpayers. Various aspects of the Eurofighter program--like having four separate flight test centers (one in each of the four member nations)--have been monuments to bureaucratic inefficiency. Small wonder that there are those who refer to the program as the "Bureaufighter."

But the larger problems for both Boeing and Airbus--and how "illegal subsidies" should be defined--loom not too far in the future.

Among these looming problems is Brazil's Embraer. Although the company is now largely engaged in commercial aircraft production, it will soon begin licence-producing the Dassault Rafale fighter from France for the Brazilian Air Force and will also start-up a production line for an Embraer-developed military cargo/tanker aircraft, the C-390. Separating the company's defense business from its commercial product lines, which compete with smaller commercial models like the Boeing 737, could become another sticky wicket.

Then there are Russia and China. Both nations have completely state-owned industries in everything but name, and both seem determined to enter the commercial aircraft business on the backs of their taxpayers. Russia is estimated to spend over $9 billion on two commercial aircraft programs--the Sukhoi Superjet 100 and United Aircraft Coroporation MS-21--both led being built by formerly all-military firms. These programs are not just being subsidised by the state--they are being paid for in full by the Russian government, with sales being made to Russian state-owned aircraft leasing companies backed up by loans from Russian state banks so that the planes can be operated by Russian state-run airlines. Kremlin Jets might be a more appropriate name for these aircraft.

China, however, is in a league all its own. China's government-owned and financed AVIC consortium is the only aircraft-building entity in the country. Originally, the mammoth consortium existed with a largely fictitious divide between military (AVIC I) and commercial (AVIC II) business units. Last year the charade ended as the two were merged, but such formalities hardly make any difference in a firm with no private ownership or non-state funding for its programs.

What governments refuse to admit is that aerospace industries are--no matter which nation we are talking about--large, publicly-funded entities that continue to exist because governments do not want to lose the strategic assets that they represent. Trying to draw a line between where government funding ends and commercial profits begin becomes nearly impossible. Additionally, what does and does not constitute state assistance becomes increasingly meaningless in an age of government rescue packages for troubled industries, or at a time when the U.S. Congress votes for production of military systems that are beyond the numbers requested by the Pentagon.

What the Boeing-Airbus dispute should generate would be some intelligent talk about what constitutes unfair trade practices in aerospace, and how to enforce and levy penalties against those who violate those guidelines. As of today, a nation that is sanctioned by the WTO is not required to pay fines or other monetary compensation. The worst that can happen is that other nations can impose tariffs against the offending nation. These sort of trade wars seldom produce the desired outcome, so clearly a change in procedure is needed.

But the WTO process of hearing grievances is not likely to produce anything definitive anytime soon. The EU's counter-complaint against the U.S. practice of providing government contracts to Boeing will not be heard for another six months--and then possibly years more of deliberations before any ruling is issued. The only assured outcome is a lot more work for lawyers, accountants, negotiators and bureaucrats, all of whom have a vested interest in the process being prolonged to the maximum extent possible.

By the time the WTO does make a decision, there will be more nations playing in the aerospace market and the issues will be far more complicated--and the decision rendered even more irrelevant--than the current WTO finding is in the present day.

Reuben F. Johnson is a frequent contributor to THE WEEKLY STANDARD Online.