1. Discussion Section February 9, 2007 Brian Chen
Boeing v. Airbus
Discussion Section
February 9, 2007
Brian Chen

2. Agenda Discuss First Written Case Review Boeing v. Airbus Video
Assigned Reading
Mock WTO Dispute Resolution

3. First Written Case: Summary Statistics
105 written cases graded
Grading standard:
“Issue spotter”
Overall flow, clarity of language
Mean score: 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

4. 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

5. 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”

6. 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.

7. 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

8. 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?

9. 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?

10. Discussion Question 3
Do you think that R&D contracts from NASA and the Pentagon benefit Boeing’s commercial aerospace business? How?

11. 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?

12. 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?

13. 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)

14. 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 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

15. 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

16. 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