Boeing vs Airbus Subsidy Dispute - Essay Example

?Boeing vs Airbus subsidy dispute: The American jetliner company Boeing started operating before the European jetliner Airbus. Boeing along with McDonnell Douglas and Lockheed dominated the jetliner industry globally which completely sidelined the European divided commercial aviation industry. As a result of this, the four European governments joined hands and added their resources in a pool which ultimately resulted in the launch of Airbus (Gunstone, 2010). Airbus initially had the daunting challenges to compete in a market which was being dominated entirely by America. The new competitors were not able to survive in a market which was virtually the sole provider of the jets. To help develop a strong competitive foundation, the European governments starting providing substantial subsidies to Airbus for the development cost. The subsidies played important role in forcing the Lockheed out of the jetliner industry whereas Douglas merged with Boeing (Pelletier, 2010). Airbus eventually took the major share of the market and is providing more jetliners as compared to Boeing which raised the concern among the US. This led them to form an agreement at the WTO to reduce the subsidies to provide healthy competitive economic environment. The agreement at WTO clearly stated that both Boeing and Airbus can enjoy the direct governmental subsidies at 33% of the jetliner’s developmental costs. It also included the limitation on the subsidies provided by indirect programs or civilian or military institutions as well. In addition to these, many other limitations were imposed on the subsidies. However the market share for Airbus kept on increasing at a steady rate which again raised the concern for Boeing (Gunstone, 2010). When the matter was taken to WTO, the legal challenges which were drafted and exposed are following: 1) US accused Europe for providing illegal subsidies to Airbus and on the counterclaim the EU accused USA for providing indirect and illegal subsidies through NADA, department of Defense and other illegal tax incentives. Both the companies were actually violating the WTO agreement in their capacities. Legally, both the jetliners exploited the WTO agreement by violating the subsidies limitation clause. As of Boeing, it has been taking help from the Japanese government as well in the making of wings along with Italian government providing the similar support. The EU threatened to sue Japan for providing this help because without this help, the Boeing aircraft will be more expensive and less competitive. Both these companies in order to have the greater market share used the subsidies but didn’t really share the actual figure which leaves the global competitors and market very dubious over the certainty of their accusations. This case leaves the global market very vulnerable to violation of agreements and can create the dissatisfaction among the other jetliners in the competence and central position of WTA as well (Pelletier, 2010). Ethically, Boeing engaged in the aggressive pricing strategy with the help of unlimited subsidies affected the European jetliner Airbus by cutting their sales short, price and market suppression of Airbus in various markets of its hold. Secondly, Boeing terminated the WTO agreement on its own and filed the case against Airbus which was pretty much against the essence of the business. The agreement comes to an end by the mutual consent of both parties. In addition to this, both the companies have created duopoly which has left the market pervasive to other competitors which is strictly against the global business’s essence and practices. In addition to this, at this time when the successful industrialized countries should work towards trade liberalization, their subsidies wrangling will have the trickledown effect on the suppliers. The emerging economies look towards the industrialized economies for markets access (Newhouse, 2008). Culturally, the general inclination of US towards Japan in the greatest interest of their economies has created the clear biasness towards the Europeans. The Europeans on the other hand have cultural rigidness against the Americans which has led the formation of a bond between different European states to support their jetliner company. Instead of joining hands and working in line to provide the best quality to their customers, both the companies prefer the market share race (Newhouse, 2008). Role of host governments: Airbus-EU government The European government prior to WTO agreement was providing the launch-aid subsidies which after the agreement were limited. However the government was accused of providing larger subsidies than decided. The conditions on which this subsidy was provided were very generous. On the other hand, Boeing is not receiving any such launch aid from its government which makes the EU government role very dubious. The European governments joined hands including Spain, Germany, UK and Hamburg who provided the maximum facilities to increase the market share of the Airbus. The EU government might have decreased the launch aid but included the indirect aid from different EU states which goes against the agreement (Pandey, 2010). Boeing: American government The US government has involved a civil institution and military institution as well for the subsidiary and support for the manufacturing of Boeing. Boeing had a support of R&D from Department of Defense and NASA. The R&D contract includes the benefits for LCA division along with aircraft models of Boeing. In addition to this, it includes the reimbursement of R&D expenses of Boeing, no-cost cooperation with DOD engineers and NADA along with zero-cost testing equipments and facilities. The government of USA also arranged the facilities for Boeing that includes the transfer of vital knowledge and patents to Boeing with strict restriction on this knowledge usability by the competitors. The government has arranged the tax breaks for Boeing at the federal level which was illegal. In addition to this, the US government got in contract with Italy and Japan as well for the subsidies and other assemblies. All these subsidies helped the Boeing to practice aggressive pricing (Pandey, 2010). The violation of WTO agreement has been immense on both sides. The governments have acted in the greatest interest of their personal share market magnanimity without considering the ethics and legalities of the business world. Challenges for Boeing and Airbus In case of failed negotiations between the two giants, the WTO will obviously decide in favor of one complaint which will leave the opponent losing the subsidies and penalties. Boeing and Airbus are facing the challenge of being called valid by WTO which will increase their cost of production as the benefits that were given under the agreement will disappear. As both the companies are working in the duopoly which makes the market success highly dependent on the competitor’s decisions. Boeing has been trying to not push the issue too far so that it would lose its European customers. Both Airbus and Boeing are the significant contributors in the economic progress of US and EU. The economies of both the countries reap substantial advantages from these two jetliners. Each of these producers is also responsible for the world economy as both tend to outsource their operations globally. in case of failed negotiation, not only the host countries but the global business will suffer the severe setback in terms of technology, outsourcing, employment and profits (Pandey, 2010). References: Gunstone, B. (2010) Airbus: The complete story. Haynes Publishing. Newhouse, J. (2008) Boeing versus airbus: The inside story of the greatest international competition in business. Vintage. Pandey, M. (2010) How Boeing defied the airbus challenge: An insider’s account. CreateSpace. Pelletier, A. (2010) Boeing: The complete story. Haynes Publishing. Read More