A needless transatlantic dogfight

It turns out that the transatlantic divide over foreign policy is not sufficient. There has to be another transatlantic divide - a trade divide. That at least is what you would conclude when you watch the US and Europe as they intensify their battle over Boeing and Airbus.

President George W. Bush and Robert Zoellick, his trade representative, are bringing a complaint about Airbus's subsidies to the World Trade Organisation. Boeing must have "a fair and level playing field in the world". Pascal Lamy, the European trade commissioner, is likewise bent on confrontation. Last week, his office announced that it was "high time to put an end to massive illegal US subsidies to Boeing".

Airbus is a true child of government, created by France and Germany. Boeing's is more of a spousal relationship, involving tax breaks and hefty government contracts.

At issue in the Airbus case is launch aid that Airbus received for the development of its A380 plane. In Boeing's case, tax breaks are the focus. The WTO must determine if either is breaking international trade law.

But this is the wrong question. The real question is not whether subsidies are legal, semi-legal, or illegal, but whether to subsidise or favour at all. As economists have long demonstrated, company connections to governments eventually hurt everyone involved. These days, however, governments' links to aerospace companies yield a second kind of damage: damage in international relations.

Consider, for a start, the old arguments about markets and protectionism. Over the centuries, even respectable philosophers such as John Stuart Mill have allowed exceptional protection for new endeavours or sectors. Infant industries, as they were known, deserved help from the mother state until they were ready to stand on their own. Perhaps the original Airbus fell into this category.

Very few of these philosophers, however, argued that government had a role once a company was stronger. Josiah Tucker, a little-known forerunner to Adam Smith, warned that early help in no way meant that "this nursing and supporting should be continued forever". Airbus today dominates mighty Boeing in the market. To argue that such a behemoth is not ready for weaning is grotesque.

What about Boeing? Common sense says that we are wrong to equate its breaks to Airbus's. Contracts are not the same as subsidies, as Airbus parents BAE Systems and EADS, themselves big defence contractors, must know. Besides, EADS cannot have too big a complaint about contracts with Washington. For even as it was drawing its breath to shout about Boeing, EADS was signing a contract with the US Department of Homeland Security to provide helicopters to police the US border.

Then there is Boeing's deal with Washington state - the state gave it billions in breaks in exchange for a commitment to make its new 7E7 Dreamliner in Washington. This is a bad investment, for the taxpayers are likely to end up spending more than the value they get in jobs. But similar sorts of deals are struck by states and companies all the time - including by foreign companies such as EADS. The second tax complaint - that Boeing benefited from the current version of the old federal government's Foreign Sales Corporation tax law - is accurate. But Congress is changing that law yet again - and obviating the need for complaint. And, in the end, tax breaks are qualitatively different from state ownership, direct subsidies or subsidised loans.

What is harder to defend is the abiding relationship between the Pentagon and Boeing. The multi-decade affiliation between the company and Washington has slowed down Boeing's domestic rivals, real and potential. It has thereby slowed innovation. And it has yielded inefficiencies that spill over into the airline sector - itself bailed out or favoured from time to time.

Warren Buffett shocked audiences when he complained that airlines were so unprofitable that their existence should have been prevented - even if it meant shooting down that first plane at Kitty Hawk. The stock superstar's comment however was actually an echo of the obscure Josiah Tucker, who concluded: "That trade is not worth having, which never can be brought to support itself."

The Pentagon-Boeing nexus sometimes even generates outright corruption. One can almost feel sorry for Darleen Druyun, the Pentagon procurement officer recently convicted of having favoured Boeing in multibillion-dollar contract negotiations while seeking employment there. Clearly the signal she received at her workplace was that such dealings were all in the family.

And the trouble with being part of government's family is that relatives always want more. A company made powerful by government support will build up its lobbying office, not shut it down. Eventually, such companies can drive governments to international venues such as the WTO. Especially right before presidential elections.

Which leads us to the largest challenge. With Mr Lamy, Mr Zoellick has managed the very sort of tough, multilateral work that critics of the White House claim that this administration cannot do. By pushing these officials to force their cases at the WTO, the companies are turning the WTO into another stage for political squabbles, like the United Nations.

But while the WTO is easy to criticise, the subsidies and the favouritism are the underlying problem. At a time such as now, the Boeing-Airbus fight is unnecessary. One transatlantic rift is enough.

© Copyright 2004 Financial Times

Available for order:

To book Amity Shlaes for a speaking engagement, contact Jamie Brickhouse at the Red Brick Agency, 646.281.9041.
Recent Articles
Millennials Need This (GOP) Break
Forbes
February 28, 2017
The Promise of President Trump
Wall Street Journal
January 19, 2017
The Greatness Of The Puzder Choice
Forbes
December 13, 2016
Frank Immigration Talk
Forbes
November 30, 2016