Boeing Versus Airbus: Trade Disputes

BOEING VERSUS AIRBUS: TRADE DISPUTES

SYNOPSIS

The key issue is whether there is fair competition in the commercial aircraft industry, and if the Europeans or Americans are subsidizing their commercial aircraft industries to the detriment of each other. While the US criticize the direct subsidies European governments pay to the companies that comprise Airbus, the Europeans note the level of US government support for military programs - programs that certainly have spill over effects into the commercial aircraft industry. The Europeans also question whether the merger of Boeing and McDonnell Douglas is injurious to competition in the industry.

Until the 1980s the US had a virtual monopoly in the commercial aircraft industry, and Boeing was the single largest exporter in the USA. While Airbus Industrie was formed in 1970 as a consortium of several European companies, it was not until the mid-1980s and early 1990s that it started to make a significant impact on the world market. The combination of high development costs, break-even levels that account for a substantial percentage of world demand, significant experience curve effects, and volatile demand makes for an industry that can only support a few major players. While Airbus clearly required and received some subsidies to break into the market, it also had a very good product strategy and has developed some truly state of the art planes.

In 1992 the US and the four European governments backing Airbus entered into an agreement that was intended to equitably solve the disputes about subsidization and unfair practices. The US industry generally thought the agreement was fair, and had for the most part "leveled the playing field." The industry was also aware that this is a very complex international business, as there are important international suppliers that sell to both the US companies and Airbus. Thus raising too much rancor over the issue potentially politicizes it further, and is not in the best interest of the firms involved.

In 1997 it was clear that McDonnell Douglas was no longer viable as a commercial aircraft manufacturer, and it merged with Boeing. This action was challenged by the European Union, and while in the end they did not block the deal, they did force Boeing to release several airlines from long-term exclusive contracts. The battle over subsidies, however, continues.

TEACHING OBJECTIVES

The main teaching objectives of the case are:

1. Show how cases of subsidies and government interference in trade are not always very straightforward. It is difficult to determine just how much a domestic firm is being helped by protectionist policies, or how much a foreign competitor is being helped by

...