The European Union and the United States eagerly announced today that they had resolved their 17-year dispute over aerospace subsidies. They exaggerate their claims. It is good news that both sides are standing down on tariffs for at least five years. But the reason for the dispute in the first place was over subsidies to Boeing and Airbus. Those will remain in place.
The tariffs that each side levied on the other had the explicit goal of stopping the subsidies. The World Trade Organization even allowed tariffs on each side to go through, on the theory that these wrongs were intended to make a right. But as usually happens with tariff-based diplomacy, it didn’t work. As a result, industries from cheese and wine to motorcycles had to deal with tariffs for years over a dispute they had nothing to do with. And now that the tariffs are going away, they didn’t accomplish their actual goal.
Why are the U.S. and EU suddenly OK with each other’s aerospace subsidies? China. China’s aerospace sector is heavily subsidized. Both Europe and the U.S. feel it is better to work together to counter China than to squabble with each other.
Their fears may be exaggerated, though. Industries that rely on subsidies and are essentially government enterprises tend not to be very competitive in the long run. Yes, China’s aerospace market share is increasing, but subsidized and protected industries grow soft. Their corporate cultures are closer to the Post Office than to Silicon Valley startups. So are their rates of innovation.
Still, for the sake of argument, assume that China’s model of government subsidies and control does work in the long run, and Boeing and Airbus become also-rans. Relatively poor Chinese taxpayers would essentially foot the bill for relatively wealthy American and European airlines and travelers. This is income redistribution in reverse. Even this unlikely best-case scenario is unwise policy from China’s perspective.
Most of the 20th century’s economic history showed that state planning doesn’t work. Even if Boeing, Airbus, and their captured politicians think the short term looks scary, there is no reason for this current instance of state capitalism to be any different in the long run.
This week’s decision to remove the Boeing-Airbus dispute tariffs was a wise one. But if the goal is to make the aerospace industry more competitive, President Biden and European leaders did not do that. They need to end subsidies that make companies soft and dependent. The best way to counter China’s state-run enterprises is not with our version of the same thing. It is with actual enterprises.
Some of my earlier commentary on the Boeing-Airbus dispute is here. My papers on the Export-Import Bank, whose billions of dollars in annual assistance to Boeing played a starring role in the dispute, are here and here.