Score One for Fair Trade

By Will Marshall and Jim Arkedis

Public support for free trade these days is not exactly robust, with the recession and the unrelenting erosion of U.S. manufacturing jobs. To a significant extent, Americans’ attitudes about trade and globalization depend on their confidence that the rules of world commerce are both fair and enforceable.

That’s why the World Trade Organization’s ruling late last week in a case involving Boeing and European arch-rival Airbus is a big and welcome victory that shows rule-based trade works.

In an interim decision, the WTO found that European governments have lavished Airbus with illegal production subsidies known as “launch aid.” This loan program gives Airbus a huge advantage in financing new airplanes that private companies like Boeing can’t match.

Unlike standard loans, which have to be repaid over some fixed period of time, launch aid is paid back through royalties on aircraft sales. This essentially means that Airbus doesn't have to repay loans on planes that don't sell. With such generous and forgiving bankers, it’s little wonder that Airbus overtook Boeing in 2003 as the world's largest aircraft supplier.

The WTO’s final decision isn’t expected for several months. Nonetheless, its initial ruling is a victory for Boeing, which says Airbus has reaped about $15 billion in launch aid from European governments. Although organized labor often has taken a skeptical if not hostile stance toward international trade, Boeing’s unions strongly backed the U.S. government’s decision to file the case in 2004. The unions realized that Boeing competitiveness was suffering and that only fair and enforceable trade rules would ensure it.

The panel’s decision also vindicates the internationalist vision of progressive U.S. leaders—Franklin Roosevelt, Jack Kennedy and Bill Clinton—who labored over a half century to construct a rules-based global trading system. It is that system, with its emphasis on openness, reciprocity and adherence to common rules, that keeps global competition from becoming a zero sum game.

The WTO is the system’s umpire. But while it can decide trade disputes on the merits, it has no power to enforce its rulings. That’s up to national governments. However, the WTO can authorize governments to impose retaliatory tariffs on countries that break the rules laid down by international treaties.

If the interim ruling holds, the United States could slap tariffs on European goods bound for America, pressuring Europe’s governments to give up Airbus’ launch aid. If you're wondering why the federal government doesn’t just tax Airbus' American exports, it wouldn’t be effective: Airbus sells only a fraction of its planes to American carriers. Washington wields better leverage by taxing lucrative European exports like wine and cheese, or luxury cars destined for our shores.

We hope it won’t come to that. The sensible thing would be for the Europeans to accept the WTO’s decision and bring Airbus into compliance with international trade rules. But the Europeans don’t seem to be giving up. As it happens, they have political, as well as economic, motives for shoveling subsidies to Airbus. Without the subsidies, Airbus could be forced to save money by cutting labor costs to make up for the loss of cheap capital. Many Europeans, spooked by rising competitive pressure from Asia, worry that Airbus might respond by shipping more production jobs overseas.

Consequently, the Europeans will likely appeal the WTO decision. Furthermore, they filed a counter-suit that alleges Boeing's 787 "Dreamliner" is heavily subsidized as well, though that decision shouldn't have any bearing on this one.

In any event, the WTO’s decision strikes an important blow for both open markets and global cooperation. For Americans, it affirms the principle that economic competition should not be distorted by heavy government loans and subsidies. For Europeans, it shows that global governance through international institutions like the WTO actually works, at least in the economic realm.

Finally, the ruling sets a healthy precedent for vigorous, unsubsidized competition, just as a host of other nations – China, Russia and Brazil – are casting a jealous eye on the world’s lucrative aerospace market.

So, for now, score one for trade that’s free and fair.

Marshall is the President of the Progressive Policy Institute (PPI); Arkedis directs the PPI’s Project on National Security and Foreign Policy.

Follow Jim Arkedis on Twitter: www.twitter.com/gjark3

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