address illegal subsidies ,” seattle times W r i t i n g
All original threads should be at least 250 words. This parameter helps to promote writing that is thorough, yet concise enough to permit other students to read all the postings. The thoughts and opinions expressed in your thread need to be substantiated by research and literature (from the textbook or outside sources). All references should be in correct APA style. While this is a formal discussion environment, you are allowed to use the first person perspective in all your posts since you will be expressing your personal opinions. All original threads should: Bring clarity to the issues being discussed. Raise new and novel (yet relevant) points. Relate issues to personal experience. Rationally defend your stated position.
This activity is important because, as a manager, you must be able to understand the political reality of international trade. Specifically, you should recognize the impact that trade barriers can have on a firm’s strategy and the role that business firms can have in promoting free trade or trade barriers.
The goal of this exercise is to demonstrate your understanding of the policy instruments that governments use to intervene in international trade, and the political and economic arguments behind the use of these policy instruments.
Read the case and answer the questions that follow.
Boeing (boeing.com) and Airbus (airbus.com) are the dominant players in the global market for large commercial jet aircraft of 100 seats or more. The two companies are locked in a relentless battle for market share. For decades, these two companies have been accusing each other of benefiting from government subsidies. In its early years, Airbus received 100 percent of the funds it needed to develop new aircraft from the governments of four European countries where Airbus’s operations were based: Germany, France, Spain, and the United Kingdom. These funds were provided in the form of loans at below-market interest rates. For its part, Airbus claimed that Boeing has long been the recipient of R&D grants from the U.S. Department of Defense and NASA, which amount to indirect subsidies. For example, Boeing’s first commercial jet aircraft, the 707, was a derivative of an aerial refueling tanker, the KC-135, originally developed for the United States Air Force under a Pentagon contract.
The two companies reached an agreement on phasing out subsidies back in 1992, but Boeing walked away from that deal in 2004, claiming that Airbus was still benefiting from billions in illegal development subsidies. In 2006, the U.S. government filed a case with the World Trade Organization (WTO) alleging that Airbus had received $25 billion in illegal subsidies, mostly in the form of launch aid for developing new aircraft. In 2010, the WTO ruled that Airbus had benefited from $18 billion in illegal government subsidies, including $15 billion in launch aid. The WTO gave the European governments until December 2011 to remove the harmful effects of the subsidies.
In September 2016, the WTO issued another ruling criticizing the Europeans for failing to comply with its 2010 ruling and, moreover, for giving another $5 billion to Airbus in the form of noncommercial loans to help develop its latest aircraft, the A350. In this latest ruling, the WTO stated that “it is apparent that the A350 could not have been launched and brought to market in the absence of launch aid.” In total, the WTO calculated that Boeing had lost 104 wide-bodied jet orders and 271 narrow-bodied jet orders as a result of Airbus launch subsidies. This latest ruling opens the door for the United States to apply retaliatory trade sanctions against noncompliant European governments.
However, it seems unlikely that the United States will apply retaliatory sanctions any time soon. Part of the reason is that the United States itself has been countersued by the EU through the WTO for providing illegal subsidies to Boeing. In November 2016, the WTO ruled that Boeing would receive around $5.7 billion in illegal tax breaks from Washington State, where Boeing’s main production facilities are located. The State of Washington had promised to give Boeing these tax breaks between 2020 and 2040 on the condition that the company kept the production of the wings for the wide-bodied 777X aircraft in the state. According to Airbus, these tax breaks give the 777X an unfair advantage against its rival aircraft, an assessment that the WTO seems to agree with.
In 2017, the WTO issued a report largely clearing the United States of maintaining unfair support for Boeing. However, the WTO noted that the U.S. had failed to withdraw tax breaks offered by Washington State where most of its planes are assembled, and it continued to suggest that those tax breaks have adverse effects. It remains to be seen what the final outcome will be. The WTO has yet to rule on how much damage the tax breaks Boeing has received for the 777X program might impose upon Airbus. For its part, Boeing claims that the benefits from the subsidies to the 777X program only amount to $50 million a year, an assessment that Airbus vigorously disagrees with. A final ruling isn’t expected until at least 2018.
Sources: Dominic Gates, “Airbus Scoffs, Boeing Crows as WTO Slams EU for Failing to Address Illegal Subsidies,” Seattle Times, September 22, 2016; “Boeing Illegally Given $5.7 Billion in Tax Breaks by Washington State, WTO Rules,” Associated Press, November 28, 2016; Robert Wall and Doug Cameron, “EU Failed to Cut Off Illegal Subsidies to Airbus, WTO Rules,” The Wall Street Journal, September 22, 2016; and Tom Miles, “WTO Largely Backs Boeing in Trade Row, Faults Tax Breaks,” Reuters, June 9, 2017.
Who benefits from government subsidies to Boeing and Airbus? Who loses?
Under what circumstances, if any, should national governments subsidize the development of new technologies?
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