Dade Medical College Boeing & Airbus Are in a Dogfight over Illegal Subsidies Case Discussion Read the case and answer the questions that follow. You can s

Dade Medical College Boeing & Airbus Are in a Dogfight over Illegal Subsidies Case Discussion Read the case and answer the questions that follow. You can see the case in the file.
These are the question:
1. Are there any circumstances under which the subsidies that Airbus received in its early years might be justified?
2. Do you think that Boeing originally benefited from subsidies? If they did, could they be justified?
3. Boeing and Airbus have allegedly been receiving subsidies for decades. How might ongoing subsidies distort the market for large commercial jet aircraft?
4. Who benefits from government subsidies to Boeing and Airbus? Who loses?
5. Under what circumstances, if any, should national governments subsidize the development of new technologies?
6. What would be the optimal outcome (in terms of economic welfare) of the ongoing trade dispute between the United States and the EU countries backing Airbus? How might such an agreement be enforced? Read the case and answer the questions that follow.
Boeing (boeing.com) and Airbus (airbus.com) are the dominant players in the
global market for large commercial jet aircraft of 100 seats or more. The two
companies are locked in a relentless battle for market share. For decades,
these two companies have been accusing each other of benefiting from
government subsidies. In its early years, Airbus received 100 percent of the
funds it needed to develop new aircraft from the governments of four
European countries where Airbus’s operations were based: Germany, France,
Spain, and the United Kingdom. These funds were provided in the form of
loans at below-market interest rates. For its part, Airbus claimed that Boeing
has long been the recipient of R&D grants from the U.S. Department of
Defense and NASA, which amount to indirect subsidies. For example,
Boeing’s first commercial jet aircraft, the 707, was a derivative of an aerial
refueling tanker, the KC-135, originally developed for the United States Air
Force under a Pentagon contract.
The two companies reached an agreement on phasing out subsidies back in
1992, but Boeing walked away from that deal in 2004, claiming that Airbus
was still benefiting from billions in illegal development subsidies. In 2006, the
U.S. government filed a case with the World Trade Organization (WTO)
alleging that Airbus had received $25 billion in illegal subsidies, mostly in the
form of launch aid for developing new aircraft. In 2010, the WTO ruled that
Airbus had benefited from $18 billion in illegal government subsidies, including
$15 billion in launch aid. The WTO gave the European governments until
December 2011 to remove the harmful effects of the subsidies.
In September 2016, the WTO issued another ruling criticizing the Europeans
for failing to comply with its 2010 ruling and, moreover, for giving another $5
billion to Airbus in the form of noncommercial loans to help develop its latest
aircraft, the A350. In this latest ruling, the WTO stated that “it is apparent that
the A350 could not have been launched and brought to market in the absence
of launch aid.” In total, the WTO calculated that Boeing had lost 104 widebodied jet orders and 271 narrow-bodied jet orders as a result of Airbus
launch subsidies. This latest ruling opens the door for the United States to
apply retaliatory trade sanctions against noncompliant European
governments.
However, it seems unlikely that the United States will apply retaliatory
sanctions any time soon. Part of the reason is that the United States itself has
been countersued by the EU through the WTO for providing illegal subsidies
to Boeing. In November 2016, the WTO ruled that Boeing would receive
around $5.7 billion in illegal tax breaks from Washington State, where
Boeing’s main production facilities are located. The State of Washington had
promised to give Boeing these tax breaks between 2020 and 2040 on the
condition that the company kept the production of the wings for the widebodied 777X aircraft in the state. According to Airbus, these tax breaks give
the 777X an unfair advantage against its rival aircraft, an assessment that the
WTO seems to agree with.
In 2017, the WTO issued a report largely clearing the United States of
maintaining unfair support for Boeing. However, the WTO noted that the U.S.
had failed to withdraw tax breaks offered by Washington State where most of
its planes are assembled, and it continued to suggest that those tax breaks
have adverse effects. It remains to be seen what the final outcome will be.
The WTO has yet to rule on how much damage the tax breaks Boeing has
received for the 777X program might impose upon Airbus. For its part, Boeing
claims that the benefits from the subsidies to the 777X program only amount
to $50 million a year, an assessment that Airbus vigorously disagrees with. A
final ruling isn’t expected until at least 2018.

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