How to save the aircraft industry


April 15, 1992|By Robert Kuttner

THE OLD imagery of "free traders" versus "protectionists" is giving way to a much more practical and less ideological search for common rules to govern trade among nations. The latest of these is the tentative agreement between the United States and the European Community limiting government subsidies for the development of aircraft.

This agreement, whose final details are still being hammered out, is emblematic of the new pragmatism. The deal, reached after six years of talks,would limit direct subsidies to about one-third of a plane's total development costs, and indirect subsidies to about 5 percent of them.

When the talks started, the Reagan administration's negotiators took the extreme position that no government should ever subsidize an airplane, and that Europe's subsidy of development of its Airbus was an affront to free trade. The United States even filed an indignant complaint with the General Agreement on Tariffs and Trade.

The Europeans responded, with impeccable logic, that Boeing and McDonnell Douglas, the world's leading aircraft producers, in effect had been subsidized by the trillions of dollars worth of military planes sold to the U.S. Air Force. American producers also benefited from the hundreds of billions of dollars that our government put into development of aviation technology.

In reality, it is hard to imagine that any private entrepreneur would launch a new jetliner without some government aid. The capital costs are simply too large, the time lag between initial design and eventual profits too long. Taiwan Aerospace, which has proposed to buy a large share of McDonnell Douglas in order to enter the business, is likewise doing so with aid from the government of Taiwan.

Other complex and costly products, such as high-speed rail systems and supercomputers, invariably have some government involvement in their development, too.

In the past, many economists have argued that the world would be a better place if all countries simply agreed to a kind of economic disarmament, in which no government would ever subsidize anything and market forces would then produce the best possible outcome. But the aircraft agreement suggests a more mature view. Complete "disarmament" of government subsidies for industrial development is neither likely nor even beneficial; a better analogy is arms control.

In the modern, high-tech world, countries that can learn to produce complex products like jetliners derive several benefits. They create high-paying industrial jobs. After a period of start-up subsidies, the products eventually earn big profits. The country also derives ongoing benefits in the form of cumulative technical learning. Engineers who work on this generation of aircraft get a head start on the next generation of planes.

It is not just improbable politics to advise governments to get out of this business. It isn't even good economics -- for private entrepreneurs and free markets would simply not undertake these costly investments on their own.

In the aircraft deal, the Bush administration has belatedly and wisely acknowledged that the practical task is not to convert everyone to perfect "free trade," but rather to decide symmetrical and sustainable rules. Such rules, on the one hand, need to limit mutually ruinous subsidy wars; and on the other, they need to make sure that the fruits of industrial development subsidies are equitably shared.

If America can incubate an aircraft industry as a byproduct of government spending for the Air Force, it's perfectly fair for Europe to perceive the benefits and develop an industry of its own. And it's fair for Taiwan to want into the game, too.

The problem is that the world can sustain perhaps four or five major aircraft companies, but not 40 or 50. Here again, the solution is a form of managed trade that used to give economists hives. Countries that buy aircraft typically negotiate "co-production" agreements with aircraft manufacturers, so that some of the parts are manufactured in the consuming country. That country thus gets some of the benefits of the production -- the jobs, technology and engineering experience -- as well as the consumption.

Japan has negotiated such deals with respect to co-production of Boeing planes, and the United States has negotiated similar deals on domestic production of auto parts for Japanese cars. This sort of thing is no longer considered an abomination, but a concession to reality. It isn't exactly free trade, but it is hardly protectionism either.

Now that we've stopped fighting about issues that are ultimately theological rather than economic, we can get down to the practical business of devising reasonable rules for world trade. It's about time.

Robert Kuttner writes regularly on economic matters.

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