My term paper examines the considerable subsidies granted to the European Aircraft conglomerate, Airbus, by countries within the European Union. Economic theory traditionally finds subsidies to be inefficient. In most cases, subsidies merely artificially expand the supply curve in an industry, shifted resources from one sector of the economy to another. These shifts depend on the continuation of these subsidies, which are only provided through inefficient taxation in another market. Furthermore, when subsidizing international trade, subsidy wars can often eliminate any benefits gained.
However, despite these arguments for inefficiency, European Union countries have granted over $18 billion in subsidies to Airbus over the last 40 years. Have these subsidies resulted in a net gain or loss for the average European citizen? In my paper I contend that these subsidies have resulted in a net gain for 3 reasons:
1.) These subsidies have had “competitiveness shifting effects”, allowing Airbus to enter the market and wean themselves off of reliance on subsidies. This has brought higher paying jobs to European workers. More importantly, Airbus entered into an industry with incredibly high barriers to entry that was trending towards monopoly. Because this industry is so insulated, there are profits to be made. The introduction of a domestic firm into this oligopoly directed these rents to the domestic market instead of abroad. If the profits gained outweigh the costs of the protectionist policies, European citizens see a net gain. My paper first demonstrates the competitive shifting effects by using an infant industry subsidy model. Later I examine profit margins compared to subsidies provided and conclude that eventually the rents will outweigh the costs.
2.) World consumers all benefit from competition in the market, reducing prices by up to 40% and creating incentive for innovation in an essential and effective transportation medium. To demonstrate these effects, my paper compares a monopoly model to a Bertrand oligopoly model.
3.) Lastly, the creation of a robust civil aircraft market has vastly increased the aeronautical defense capabilities of European Nations. Airbus has increased the production capabilities and technological projects defense companies like EADS can undertake. This give European nations independence in air defense, reducing diplomatic dependence on traditional weapons producers such as the US or Russia
My paper concludes with a discussion on the future of Airbus. These subsidies have allowed Airbus to secure the market leader position, however with new possible entry by Russian and Chinese firms these gains may be challenged. Furthermore, while in theory the firm will be able to operate without subsidies, recent WTO rulings against illegal subsidies provided to both Airbus and their competitor Boeing will test this dependence. My paper briefly highlights the prisoners dilemma present in Aircraft subsidies and predicts both nations will continue to provide subsidies of some sort because of the rents gained through them.
Work Cited
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2. Benkard, L. (2004), “A dynamic analysis of the market for wide-bodied commercial aircraft“, Review of Economic Studies 71, 581–611.
3. Irwin, D. A. and N. Pavcnik (2004), “Airbus versus Boeing revisited: international competition in the aircraft market”, Journal of International Economics 64, 223-245.
4. Kiel Institute for the World Economy. (2009). Exchange rate misalignments in duopoly: The case of boeing and airbus. Kiel Working Papers, (1488), Retrieved from http://www.ifw-members.ifw-kiel.de/publications/exchange-rate-misalignments-in-duopoly-the-case-of-airbus-and-boeing/KWP1488.pdf
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6. Garcia Pires, A. 2006. ‘Losers, Winners and Prisoner’s Dilemma in International Subsidy Wars’. CEPR Discussion Paper no. 5979. London, Centre for Economic Policy Research. http://www.cepr.org/pubs/dps/DP5979.asp.
7. Caliskan , O. (2010). An analysis of the airbus-boeing dispute from the perspective of the wto process. Ege Academic Review, 10(4), 1129-1138. Retrieved from http://econpapers.repec.org/scripts/redir.pf?u=http://www.onlinedergi.com/MakaleDosyalari/51/PDF2010_4_2.pdf;h=repec:ege:journl:v:10:y:2010:i:4:p:1129-1138
8. Olienyk, J., & Carbaugh, R. (2011). Boeing and airbus: Duopoly in jeopardy. Global Economy Journal, 11(1), 4. Retrieved fromhttp://www.bepress.com/cgi/viewcontent.cgi?article=1740&context=gej
9. “Airbus S.A.S. Company Profile .” DATAMONITOR. New York: 2011.
10. Knorr, Andreas, Jörg Bellman , and Rahel Schomaker. Subsidies in Civil Aircraft Manufacturing: The World Trade Organization and the Boeing-Airbus Dispute. “EStal.” EStal. 3. (2012): n. page. Web. 2 Dec. 2012.
11. “Boeing vs Airbus: Nose to Nose.” Economist. 03 2005: n. page. Print.
12. Maennig, Wolfgang, and Stephan Wittig. “Intereconomics.” Intereconomics. 3. (2010): 180-187. Print.
This is interesting given I just recently wrote a paper on a similar topic in my management class. In the words of the low-cost airline Ryanair CEO Michael O’Leary, he believes EU regulators’ view is “If it moves tax it. If it still moves, regulate it. And if it dies, subsidize it.” It does often seem subsidies go toward inefficient industries, which ultimately would seem to raise prices for consumers. This, however, seems to have benefitted low-cost airlines such as Ryanair (my paper was about their CEO), who have taken part in extreme cost-cutting measures and become the most profitable airline in Europe. He attributed the subsidies to Air France and British Air to the view that they are the “future of Europe” yet he is of the belief that the lowest costs, regardless of quality of experience, will benefit the consumer the most.