Economic Shocks Do Not Discriminate

Milena Di Nenno

The Covid-19 pandemic has caused one of the major economic shocks since World War II. The negative effects of the almost worldwide lockdown are already clear.

The global economy is entering into recession, and, as the economist Rogoff affirms,

if this goes on for a long time, it’s certainly going to be the mother of all financial crises.”

All major industries have been suffering notable losses. Among them, the aircraft production sector and the travel sector have a very uncertain future, because travel ban and restrictions might be lifted last.

The two aircraft suppliers that hold a market duopoly, Airbus and Boeing, have been hurt in the same way, regardless all the disputes between them. Since their establishment, the two have been strongly competing on many aspects: technology development, production outsourcing, sales and exchange rates, and safety and quality. On this last point, we might recall the drastic loss, of around 25 billion of dollars, in Boeing’s 2019 revenue, due to the scandal of the Boeing 737 Max.

The disagreement between Airbus and Boeing became a political concern over the years. Airbus is considered among the greatest achievements of the European Single Market, because it was one of the first companies to take advantage of the common market and to grow thanks to it. Probably, this is also the reason why the European Union feels entitled to protect it with every mean at its disposal. In fact, the World Trade Organization (WTO) accused the EU of providing illegal export subsidies to Airbus.

WTO’s decision followed a failure in bilateral negotiations between the EU and the U.S., having the latter referred to the WTO for EU’s violation of international ban on export subsidies. Export subsidies in the aircraft market are fundamental to shift the excess returns from the foreign to the domestic company. Without subsidies or state aid, the market has two Nash equilibria. If Boeing does not produce, Airbus will profit from the production of aircrafts. When Boeing produces, Airbus will have fewer losses if it does not produce than if it enters the market as well. Of course, in reality, both companies not only must produce and sell to survive, but they also benefit from aids, whether considered illegal or licit.

The whole dispute continues to be inevitably politicized, also because retaliatory measures have effects on the rest of the economy. For instance, in October 2019, after the last WTO’s decree blaming both parties for not having complied with previous rulings, the U.S. government imposed $7.5 billion of European goods at large.

With this global health emergency, Airbus and Boeing have been forced to decrease production, as many orders were cancelled, and demand drastically dropped. Because their situation is now a political issue, the two companies expect more measures in their support from the respective government and amical institutions. Boeing has sought a bailout, and Airbus has remarked the urgency of economic aids to airlines and suppliers. This period might be considered as a truce, while waiting for WTO’s ruling in June because that economic shocks do not discriminate. The pandemic has hurt every economic actor indistinctively, and governments’ decisions play an irreplaceable role in reducing the harm.

  • The Airbus vs. Boeing dispute demonstrates that government’s aid is beneficial for the company, but possible retaliatory measures may hurt the rest of the economy. Is this trade-off necessary? Or should economic aid from the state not be a measure to adopt?
  • The U.S. has referred the suspects of illegal subsidies to the WTO, instead of adopting retaliatory measures directly. Is it the only factor that prevented a U.S.-EU trade war?
  • Would it be fair and beneficial if the EU and the U.S. government included ad hoc support to the respective aircraft-suppling companies in the package of measures to contrast the economic consequences of the COvid-19 pandemic?

Suggested readings:

EU’s Next Move in Airbus-Boeing Feud Clouded by Pandemic

WTO panel: EU fails to end illegal subsidies for Airbus

Timeline: Highlights of the 16-year Airbus, Boeing trade war

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Economic Shocks Do Not Di…

by Milena Di Nenno time to read: 3 min