Monday, 30th October 2017

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The contentious duopoly

The WTO cannot always discipline big and powerful entities

By Writing on the wall-Ashok V. Desai
  • Published 22.11.16
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Making large and fast planes requires high technology. Such planes are enormously useful in war; from thousands of feet above ground, they can rain bombs that kill off people and reduce buildings and machines, ports and airports to rubble.

Wright brothers' invention of the aeroplane in 1903 was followed before long by World War I, which provided a market for fighters and bombers as well as resources for their development from countries battling for survival. A byproduct of the aircraft industry was the first airlines: by 1920, there were a couple of dozen airlines flying in the United States of America and Europe.

The next technological boost came from World War II. Germany did severe damage to London with its Stuka fighters; but Britain developed the radar, which gave the Allies a considerable advantage, especially in night raids. British and American bombers reduced Germany to a vast junkyard.

The thousands of planes that served in the war were propeller planes. Both Allies and Nazis worked on jet planes during the war, but did not produce them in numbers or make them operational. When peace returned in 1945, air forces stopped buying big planes; their makers had to find other markets for the jet planes they developed. BOAC started flights from London to Johannesburg with de Havilland Comet, but the model crashed a number of times and was withdrawn. Boeing 707, introduced in 1958, was the first passenger jet plane that had all defects ironed out; it led to a succession of models - 737, 747, 777, 787 et al.

The British, threatened by German bombs, had transferred transport aircraft manufacture to the US in 1942; and the aircraft industry of Germany died with its defeat in 1945. Americans ruled the roost, and the European aircraft industry was in danger of dying. In 1965, European airlines met at the Paris air show and discussed a model passenger plane for which they might pool their orders.

But it was not enough to have orders; it was necessary that enormous investments be first made in making the planes. The capital required was too large for private companies; it was necessary that European governments should finance the manufacturers. Finally, the German and French governments took on the project in 1970 through their respective subsidiaries, Deutsche Airbus and Aerospatiale, and formed Airbus Industrie, a 50:50 joint venture. The manufacture was entrusted to Aerospatiale of France, Deutsche Airbus of Germany, Hawker Siddeley of Britain and Fokker-VFW of Holland. Spanish CASA and British Aerospace, which acquired Hawker Siddeley, bought into the venture later. This was a poor ownership structure, for the shareholders were upstream manufacturers and would, therefore, want to make money out of their supplies to Airbus, which also they owned. Britain and France were also sponsors of Concorde, which competed with Airbus. Altogether, it was a mess.

Boeing is the prime supplier of planes to the US armed forces, which subsidize it in a number of ways. Boeing gets tax subsidies, government contribution to research and development expenditure, and has guaranteed profits on armed forces' purchases. European governments did not give direct subsidies to Airbus Industrie; instead, they subsidized research and development, and funded Airbus Industrie's investments on the condition that the money would have to be repaid out of any profits it made out of the planes it sold. Each side objected to the other's financial support; in 1992, they made an agreement to limit such aid, specifying that government finance to aircraft development programmes - termed launch aid - must be less than a third of their costs, be repaid within 17 years and meanwhile bear interest no lower than what governments paid on their borrowings. And it should be no more than 3 per cent of the industry's turnover.

In 2004, both the US and the European Union abrogated the 1992 agreement and filed cases against each other for its breach. Most of the litigation has been before the World Trade Organization, which, as is its wont, appoints a judicial committee (which it calls panel) and waits for it to report, usually many years later. The latest such report was made public recently. It beats any document of the government of India in obscurity and jargonitis. It exceeds 350,000 words, and uses over 100 abbreviations, including SSNIP for small but significant and non-transitory increase in price, and HSBI for highly sensitive business information.

At the end of it all, the panel concluded that of the 36 steps the EU had said it had taken to comply with the rules prohibiting subsidies, 34 were not steps at all; they only stated facts or presented arguments supporting the EU's case. The EU had claimed that many of the subsidies had "expired"; the panel said that the fact that the EU had stopped giving some subsidy did not mean that the subsidy was not wrong. The various models of the Eurobus displaced American planes; improper subsidies enabled them to do so unfairly. To put it simply, the EU subsidized its Eurobus programme with impunity for years, and went on ignoring the judgments of dispute settlement bodies; by doing so, it increased the market share of its planes at the expense of American planes.

The verdict of the WTO panel is clear and well supported; but it did not define the punishment. That is not surprising, for it would be difficult. Part of it might be a fine, which would run into billions of euros - enough to ruin Airbus Industrie if it had to pay it. The other part would be to desist from anti-competitive behaviour, which would be very difficult to define. So many variables are involved in the competition; only some can be controlled by companies. And then there is the involvement of national interest: Boeing makes military planes for the US, and Airbus Industrie could also make them.

To sum up, the WTO has made all the moves involved in dispute settlement, but singularly failed to settle the dispute because the two parties involved in the dispute - the US and the EU - are too big and powerful, and the WTO is incapable of disciplining them. The competition in big planes will continue as an oligopolistic war; even if a system of regulation could be worked out in theory, no one has the might to impose it. What may work is an understanding between the two parties; but it can only be voluntary. If one party breaches the agreement, there is little the other can do. But the world is lucky that there are two parties capable of producing such planes, and that they do not collude - although politically, the US and the EU are allies.

It is not only the EU that has defied the WTO; even India has defied it on patents, and on the launch of the new round of trade negotiations. Such nations have destroyed the effectiveness of the WTO. Should it continue to survive, or is it time to wind it up? However impotent it may be, even the countries that have made it impotent will continue to support its survival. For its meetings give ministers and bureaucrats opportunities to travel to beautiful resorts and have a good time. The point of the WTO - and to some extent, of all international organizations - is official entertainment.