Boeing, Airbus, and the WTO

The Economist has an update on the brutal competition between Airbus and Boeing. The highlights:

It is always the way with Airbuses: you wait for years, and then three come along at once. In January, the European aircraft manufacturer will roll out the first of its A380 super-jumbos, in preparation for its first test flight by the end of March. Before that, however, it is set to unveil plans for two versions of a smaller, wide-bodied plane, aimed at the mid-sized market. The rivalry between Boeing and Airbus, the big commercial-aircraft duopoly, has never been more intense. While Boeing struggles to persuade mainstream airlines to buy its latest offering, the 250-seater 7E7, Airbus will soon announce two versions of a new plane, dubbed the A350, to attack it head on…. At its next meeting, on December 10th, the board of the parent company of Airbus, European Aeronautic Defence and Space company (EADS), is expected to rubber-stamp a decision to launch two souped-up versions of its A330, fitted with new wings and engines to increase the range and carrying capacity and so compete with Boeing’s plane. Boeing’s new design claims to offer savings of 15-20% on fuel by making extensive use of lightweight composite materials instead of the usual aluminium. Anticipating Airbus’s response, last month Boeing persuaded the American government to complain to the World Trade Organisation (WTO) about the subsidies Airbus receives from European governments. Refundable launch aid from Germany, France, Britain and Spain could cover one-third of the over €3 billion cost of developing the A350. Crucially, this aid does not have to be repaid if a plane flops, giving Airbus an unfair advantage in product development, which it has ruthlessly exploited in the past decade. Boeing is spending almost $6 billion to develop the 7E7, with further contributions from its partners in Japan and Italy. The European Union is counter-protesting to the WTO that Boeing gets all sorts of indirect aid from the American government. The likeliest result is that both sides are found guilty of breaking the rules but that subsidy continues to flow.

I suspect the Economist is correct. The trouble with this case is that the fixed costs for commercial aircraft are high enough to ensure increasing returns to scale for the entire market. Which means that this may be one of those situations where strategic trade theory applies. Which means that the WTO is ill-suited to resolving this dispute.