When silence isn’t a virtue
There was a time when anything to do with wide-bodied aeroplanes, as Boeing and Airbus’ best selling planes are known, would trigger high profile accusation and counter-accusation across the Atlantic. Events this past week suggest this era is over–or is it? First, the facts.
For nearly a decade the U.S. Air Force has been trying to replace its tanker fleet, much of which came into service when President Eisenhower was in the White House! Boeing and Airbus duly launched rival bids for the 179 or so planes the American government wanted to buy. The expected outlay on these planes was not pocket change, US$35 billion in fact. Boeing got into a lot of trouble in a procurement scandal almost 10 years ago, something which is said to have persuaded the US Air Force of the need for genuine competition in public procurement. Bravo!
Turns out, however, that Airbus and its US partner, Northrop, won the first bid to supply these aircraft, but that decision was overturned after Boeing complained and on a technicality. New criteria were put in place, which if complied with, involved the U.S. government having to predict oil prices for the next 50 years (the likely duration of the planes being tendered for.) Then, late last month, despite lots of press speculation that Airbus would win outright (this time bidding on its own) or at least part of the contract, Boeing was awarded the entire contract. The appeals that were expected to follow (whoever won) were simply not pursued.
Then the strangest thing happened. There was almost silence from Europe about the outcome. For sure, there were pro forma statements of regrets from senior political figures. But no ritual bouts of American baiting, threats to take the US to the World Trade Organization, etc., ensued. Airbus, having snatched defeat from the jaws of victory, faced a chorus of silence from its supporters. It’s all a far cry from the hysterical reactions on both sides of the Atlantic that characterise the aeroplane industry.
What’s going on? And, why should anyone else care? As to the latter question, let’s be clear: it’s bad enough when firms are in cahoots with each other, even worse when firms cooperate with customers–in extraordinary circumstances, even state customers. Such deals are counter to the principles underlying open competition and a free trading system. At a time when many governments have resorted to subsidies to prop up ailing industries, it seems competition on the merits gives way all too easily to something far less appealing.
There could be two reasons why Airbus has called off its European attack dogs. First, in return for its silence, Airbus believes it will be first in line for other Federal Government plane contracts. Having being strung alone and misled for so long, surely Airbus must serious discount any such overtures? Perhaps now it plans to build planes in North America, Airbus reckons political forces are shifting in this direction. As Japanese automobile producers found out, buying commercial peace with the Americans meant investing in the USA and hiring lots of workers. Déjà vu all over again?
Or, perhaps a bigger deal is afoot? For years US Administrations and the European Commission have been at loggerheads over their subsidies to their producers of wide-bodied aircraft (for our dynamic duo, Airbus and Boeing.) Each side has brought cases to the WTO’s Dispute Settlement body. The end game of such disputes could be upon us. Neither party will unilaterally withdraw its subsidies–doing so here is a first mover disadvantage. Neither party is likely to win outright–and with so much apparently at stake, full compliance with any Dispute Settlement Ruling is unlikely. Rather than have a damaging standoff, the premium on a negotiated outcome grows. A dangerous game of chicken–waiting for the first party to blink–ensues.
In these circumstances, the temptation might be to bundle the tanker procurement problem with that of the more general WTO dispute over aircraft subsidies, seeking a solution between the parties. Europe’s silence after the tanker procurement announcement may have won it a negotiating chip in endgame tussle over aircraft subsidies. If the payoff to Europe is large enough, then maybe silence is golden after all.
By now, plenty of readers may be recoiling. What about the rules-based trading system, you might well ask? What indeed. What about the demise of transatlantic power and the end of U.S. and European carve-ups? What indeed. It is evident that the dinosaurs have not died. Still, something fundamental has taken a knock and the world economy is not better for it. The longer term damage will become all too clear when Russia, Brazil, and China all expand their aircraft development subsidies so as to break the transatlantic duopoly. For most of us only the most frequent flyers will be the winners, the rest of us picking up the tab through increased tax bills and interest payments.
Rather than rubbish the existing set of international rules that allow such nonsense to happen, far better to build a constituency in favour to tightening them up. Airbus’ and Europe’s silence last week was a pointed reminder of Adam Smith’s lesson that the customers’ best friend is the competitive process and no one particular competitor–irrespective of nationality. In business, silence is rarely golden. The case for open borders and a freer world trading system inevitably lie elsewhere.