{"id":24633,"date":"2017-11-15T18:08:26","date_gmt":"2017-11-15T23:08:26","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/the-battle-for-the-skies-is-free-trade-losing-ground-to-protectionism\/"},"modified":"2017-11-15T18:08:26","modified_gmt":"2017-11-15T23:08:26","slug":"the-battle-for-the-skies-is-free-trade-losing-ground-to-protectionism","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/the-battle-for-the-skies-is-free-trade-losing-ground-to-protectionism\/","title":{"rendered":"The battle for the skies: Is free trade losing ground to protectionism?"},"content":{"rendered":"

The large commercial aircraft market has become a symbol of globalization. Not only are customers spread worldwide \u2013Boeing predicts that in 2036, ~60% of the global fleet will be based outside the US or EU[1]- but also supply chains: in Boeing\u2019s latest model, the B-787, over 30% of its components come from overseas[2]. The high-tech component of commercial aircraft has enabled the duopoly of manufacturers \u2013Airbus and Boeing- to be able to sell their products worldwide without excessive trade barriers. Aircrafts are difficult to substitute and highly complex to design and build. Therefore, even the most protectionist countries have been obliged to facilitate this trade.<\/p>\n

That being said, from time to time there have been some protectionist claims by, not surprisingly, the home countries of the two duopolistic manufacturers: the US and EU. For example, the legal cross battle between them in the WTO[3] (regarding state subsidies) or what was called the Deal of the Century<\/em>[4], a $35B contract for 179 tanker jets (based on commercial models) for the USAF that Boeing finally achieved after the USAF redesigned the bid which Airbus had won in the first place. Nevertheless, nothing very substantial or consequential.<\/p>\n

 <\/p>\n

\"\"<\/a>
Aircraft demand by region, Boeing Market Outlook 2017<\/figcaption><\/figure>\n

 <\/p>\n

Why then should the current protectionist wave across the world (including in the US and EU) be of any concern to aircraft manufacturers? Let\u2019s consider which factors are changing in the industry, from Airbus perspective. First of all, the duopoly might eventually come to an end. Brazil, Canada, China, Russia and Japan[5] have national manufacturers which just recently entered or are planning to enter the market of large commercial aircraft (over 150 seats). Once powerful countries with large internal demand for jets (such as China or Russia) get their own national champions, will the incentives of free trade be wiped out? It might not be the case if the historical technical advantage prevails, but that is not certain. These new challengers rely during their first stages on western suppliers6 to make up for their technology gap and they profit from technology transfers that supply chain partners from Airbus and Boeing in those countries enjoy[7].<\/p>\n

 <\/p>\n

Secondly, even if the aforementioned were not to happen, a perverse example has been set in the industry: the successful bargaining of jet orders in exchange for industrial workload in the jet programs by the Chinese government. According to Airbus COO, and I quote, the rationale was the following: \u201cThere\u2019s a direct connection between your investment, your capabilities to demonstrate that you care about the Chinese industry and at the same time your market access\u201d[8]. How long until India demands the same bargain threatening manufacturers with higher tariffs?<\/p>\n

Finally, Brexit, which for a pan-European manufacturer as Airbus could become a nightmare if the harshest version is implemented.<\/p>\n

\"\"
Airbus “Beluga” aircraft transporting fuselage parts between its multiple european factories – Cato Institute [14]<\/figcaption><\/figure>To mitigate the impact of protectionism, Airbus plans to continue with its strategy of building factories outside Europe -so far, they have final assembly lines in China and the US- and collaborating with suppliers worldwide. This could be perceived as a way to reduce costs by offshoring to lower-cost countries or to enhance their bargaining power with unions back in Europe. But the main reason is because of the difficulties to access certain markets and the lure of government support[9]. Airbus strategy can be considered as a hedge against potential backlash from governments\u2019 protectionism impulses and as an opportunity in case the US starts a trade war with China[10]. Depending on market prospects, Airbus might consider in the future new options for further offshoring[11]. Additionally, to avoid the enormous tariffs imposed by the US on Bombardier CS aircrafts, Airbus is considering producing them in its US factory after buying a 50% stake on the program for just 1\u20ac, so cheap in large part due the tariffs themselves[12]. And finally, regarding Brexit, Airbus is lobbying the UK and EU governments to avoid a hard Brexit, setting its conditions to continue its operations in the UK (i.e. free movement of people and no-tariffs)[13].<\/p>\n

\"\"<\/a>
Airbus and Bombardier executives after signing the deal to sell 50% of the CS program – Business Insider [15]<\/figcaption><\/figure>I think Airbus should double down on their offshoring strategy. Airbus is in a better position to do this than Boeing thanks to its experience in multi-country manufacturing and could enjoy a first-mover advantage in many attractive geographies where governments might be tempted to follow China\u2019s lead in negotiating sales in exchange for workload (e.g. India, Russia or Indonesia). I also suggest that Airbus makes public its plans on Brexit. Uncertainty is very high about the terms of the agreement and this represents a large liability for Airbus. By going public, Airbus could reduce investors\u2019 pressure as the deadline approaches and use it as a lobbying tool.<\/p>\n

However, doubts remain. Could more offshoring mean more protectionism to preserve new national manufacturers? Could it create even more competitors? Is the most relevant risk of tariffs not in emerging economies but in the US and EU?<\/p>\n

 <\/p>\n

WORD COUNT: 800<\/p>\n

 <\/p>\n

    \n
  1. Boeing, Current Market Outlook, 2017: http:\/\/www.boeing.com\/commercial\/market\/current-market-outlook-2017\/<\/a><\/li>\n
  2. Steve Denning, \u201cWhat went wrong at Boeing\u201d, Forbes, Jan 31 2013: https:\/\/www.forbes.com\/sites\/stevedenning\/2013\/01\/21\/what-went-wrong-at-boeing\/#15ca29eb7b1b<\/a><\/li>\n
  3. Shawn Donnan, Peggy Hollinger and Arthur Beesley, \u201cUS and EU both claim victory in Boeing-Airbus state aid dispute\u201d, Financial Times, Jun 9 2017: https:\/\/www.ft.com\/content\/71cc85d4-4d2c-11e7-919a-1e14ce4af89b<\/a><\/li>\n
  4. \u201cEADS Abandons Airbus ‘Deal of the Century’\u201d, Der Spiegel, Mar 9 2010: http:\/\/www.spiegel.de\/international\/europe\/us-tanker-jet-eads-abandons-airbus-deal-of-the-century-a-682543.html<\/a><\/li>\n
  5. Robert Wall, \u201cNew Jets Threaten Airbus and Boeing Duopoly\u201d, Wall Street Journal, Jul 16 2017: https:\/\/www.wsj.com\/articles\/new-jets-threaten-airbus-and-boeing-duopoly-1500202802<\/a><\/li>\n
  6. Christina Larson, \u201cWith 2 New Jets, Chinese Manufacturer May Become Global Contender\u201d, New York Times, Nov 12 2014: https:\/\/www.nytimes.com\/2014\/11\/13\/business\/international\/with-2-new-jets-chinese-manufacturer-may-become-global-contender.html<\/a><\/li>\n
  7. Howard Schneider, \u201cGE \u2018all in\u2019 on aviation deal with China\u201d, The Washington Post, Aug 22 2011: https:\/\/www.washingtonpost.com\/business\/economy\/ge-all-in-on-aviation-deal-with-china\/2011\/07\/17\/gIQAgPmTXJ_story.html?utm_term=.a280e2fd7878<\/a><\/li>\n
  8. \u201cAirbus Chooses China for First Overseas Wide-Body Jet Plant\u201d, Bloomberg News, Sep 19 2017: https:\/\/www.bloomberg.com\/news\/articles\/2017-09-19\/airbus-seeks-chinese-goodwill-with-first-overseas-wide-body-site<\/a><\/li>\n
  9. Sarah Gordon, \u201cAirbus \u2013 the European model\u201d, Financial Times, May 23 2014: https:\/\/www.ft.com\/content\/c9a9a77c-db07-11e3-8273-00144feabdc0<\/a><\/li>\n
  10. Julie Jonhsson, \u201cA Trade War With China Would Be Bad News for Boeing\u201d, Bloomberg, Nov 17 2016: https:\/\/www.bloomberg.com\/news\/articles\/2016-11-17\/a-trade-war-with-china-would-be-bad-news-for-boeing<\/a><\/li>\n
  11. \u201cAirbus Draws Line at Giving China its Own Widebody Jet Plant\u201d, Bloomberg News, Mar 1 2016: https:\/\/www.bloomberg.com\/news\/articles\/2016-03-02\/airbus-draws-line-at-giving-china-its-own-wide-body-jet-plant<\/a><\/li>\n
  12. Benjamin Zhang, \u201cAirbus Draws Line at Giving China its Own Widebody Jet Plant\u201d, Business Insider, Oct 16 2017: http:\/\/www.businessinsider.com\/airbus-bombardier-c-series-boeing-tariffs-us-2017-10<\/a><\/li>\n
  13. Christopher Jasper, \u201cAirbus Warns New U.K. Government of Risk to Jobs, Fighter Role\u201d, Bloomberg, Jun 8 2017: https:\/\/www.bloomberg.com\/news\/articles\/2017-06-08\/airbus-says-u-k-government-must-guarantee-mobility-to-save-jobs<\/a><\/li>\n
  14. Cato Institute: https:\/\/www.cato.org\/blog\/airbus-beluga-how-bad-government-makes-cool-looking-things-sometimes<\/a><\/li>\n
  15. Business Insider:\u00a0http:\/\/www.businessinsider.com\/airbus-bombardier-c-series-deal-challenges-2017-10<\/a><\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

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