Boeing-Airbus: The WTO needs remedies to deal with industrial policy

On October 2, 2019, the WTO ruled on the 15-year Boeing-Airbus dispute about the EU providing billions of dollars in government subsidies to Airbus. According to the ruling, the US is authorized to levy punitive tariffs on USD 7.5bn worth of EU imports. While USD 7.5bn represents only a very small proportion of EU exports of goods and services to the US (0.5%), the tariffs are the largest ever sanctioned by the WTO, and the process for this case, as well as its result, raise a number of important questions and have significant implications.

WTO’s ruling on the Boeing-Airbus dispute

After 15 years, the United States has won its case at the WTO, alleging the EU made unfair government subsidies to Airbus. As a result, the United States is legally allowed to impose US EU tariffs on USD 7.5bn worth of imports from the EU.

In addition to a 10% tariff on the importation of Airbus aircraft, the US has imposed 25% tariffs on various consumer goods including knitwear, whiskey, French wine and cheese. The majority of the tariffs have been levied against goods from the four countries that provided the government subsidies: UK, Germany, France and Spain but not exclusively. Italy too has had tariffs imposed on it.

Furthermore, before the end of the year it is likely that the WTO will rule on a similar case, brought by the EU against the Americans alleging that Boeing was the recipient of illegal US government subsides. It is probable therefore that the EU will have the right to impose some tariffs on US imports by way of resitution.

The Airbus tariffs remedy will create new and unfair distortions

For an institution established to create and maintain free trade, the WTO’s mode of restitution seems bizarre.

First, tariffs create economic distortions, so why would the WTO’s sanctioning method for punishing distorting government subsidies be equally distorting tariffs?

What’s more, with these WTO Airbus tariffs, the costs and benefits from the newly applied tariffs will neither go to Airbus, nor to Boeing.

The Airbus illegal subsidies benefited Airbus, its customers and quite possibly airline passengers. They negatively affected Boeing and its stakeholders, as well as the EU taxpayers who financed the government subsidies.

The WTO Airbus resolution will in fact impact the consumers of knitwear, whisky, wine and cheese in the US and their producers in the EU.

As such, the resolution will create winners and losers in US EU trade that were not a party to the case and it will not offer any real remediation to Boeing or deterrent to Airbus.

The most direct and just way to rectify the wrong, would have been a direct fiscal transfer from Airbus to Boeing and from Airbus back to taxpayers.

New remedies are needed to deal with industrial policy

Another issue is that applying tariffs to remedy unfair trade practices and government subsidies is paramount to using a mercantilist solution to solve a mercantilist issue.

The tariff solution prioritizes producers’ interests over consumer welfare and promotes the idea that access to one’s market is a privilege for others rather than something that benefits one’s own economy and consumers.

It is precisely the solution being used by the Trump administration to rectify what they consider historic wrongs from China (unfair competition, government subsidies, asymmetric market access and intellectual property theft).

The slow Boeing Airbus dispute resolution undermined the credibility of the WTO

The case against Airbus subsidies originated in 2004. The fifteen years that it has taken to rule is not a useful time frame over which to settle commercial disputes, leading to more WTO criticism. It acts as a deterrent against using the WTO for dispute resolution, and what’s more, the EU is likely to appeal on the grounds that they are now compliant with WTO rules on subsidies.

What the duration of the dispute highlights is the complexity of dealing with the whole issue of subsidies and their impact on the equity of trade. Remember, this is a dispute between two WTO members that share the same political values, are both market economies and both purport to uphold the benefits of free trade (at least when it is fair).

China, Brazil and Canada are also aspirant players in the passenger aircraft industry. China’s aviation industry is highly subsidized as part of the Made in China 2025 industrial policy. Would anyone like to hazard a guess as to the duration and complexity of a WTO case against China? A lot of commercial opportunities can be lost in 15 years.

The link between trade, tariffs and industrial policy

This case further raises questions about the role of industrial policy in shaping global trade patterns and trade surpluses and deficits.

The passenger aircraft industry is closely linked to the military aircraft industry and is therefore considered “strategic”. Furthermore, it is extremely capital intensive, and displays increasing returns to scale (the more aircrafts you make the cheaper they become). A country’s comparative advantage in aircraft manufacturing is therefore as much related to its industrial policy and military expenditure as to other factors such as market size.

In the Boeing-Airbus dispute, one might question what would happen if they did not receive subsidies. Would only one company have survived? And would a global monopoly have been in the interests of anyone, other than the stakeholders in the surviving company?

The role of industrial policy in promoting dominant manufacturing capabilities does not stop with defense and aircraft. A vastly disproportionate share of modern manufacturing, that requires high volume to be cost competitive, is in countries that have engaged in all-encompassing industrial policy. These policies include subsidies that are no different from those the EU gave Airbus. Consider the national champions of Korea, the Chinese SOE’s or the Japanese Keiretsu and their role in bringing the automotive industry, the heavy machinery industry, semiconductors and consumer electronics manufacturing to East Asia.

If the only way to manage the effects of industrial policy is to seek restitution through tariffs, then global tariff rates can only rise from here.

Conclusion: The WTO needs new remedies to address industrial policy

The WTO’s recent ruling in the Boeing-Airbus dispute serves to highlight the fragility of the global trading system.

As manufacturing has come to dominate global trade, and countries that deploy holistic state-led industrial policy have taken market share within global trade and manufacturing, the inequity of the system has been laid bare and its popularity has suffered.

Survival, let alone expansion, of the global trading system requires a deep evaluation and overhaul of how market-distorting industrial policies are policed and compensated against within the context of trade.

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