Boeing Vs Airbus - Subsidies

Subsides were used to aid Boeing gain a first mover advantage into the emerging airline industry. They were given tax grants for R & D spending or money to develop military technology that could be transferred to civilian projects. Airbus, on the other hand, was able to enter the market through a $13.5 billion subsidy from governments in France, Great Britain, Germany, and Spain. According to a 1992 agreement between EU-US and the WTO “up to 33 per cent of the program cost was to be met through government loans which were to be fully repaid within 17 years with interest and royalties, but only if the aircraft was a commercial success. These loans are held at a minimum interest rate equal to the cost of government borrowing plus 0.25%, which would be below market rates available to Airbus without government support.” Thus, without this subsidy Airbus would have never been able to break into the world market and compete with Boeing at such a strong level. It is only recently that Boeing was able to recapture the title of “world’s largest civil aircraft company” in terms of sales from Airbus. However, Airbus is now able to compete with every model that Boeing has, so the advantage of first mover is no longer present. Thus it is clear that Boeing had benefited in its early stages, but it is Airbus - and its below market interest rates - that has led them to be the bigger beneficiary in present time. As well, the benefit of not having to repay loans if the aircraft is a flop gives them an advantage over Boeing with respect to R&D.

It is obvious that many countries are open to free trade, but it should be noted that governments will step in to protect the interests of politically important groups. The case presents the MFA, which was put into place to govern international trade and the allocation of production quotas to different nations. Quotas help domestic producers at the expense of hurting the consumer with higher prices. If one is to think back on Ricardo’s theory of comparative advantage, where a country should specialize in the production of a good that can be produced most efficiently, it justifies the effects of removing quotas. It leads to production moving to the most efficient producers or countries. The losers in this case are those countries, developed or developing, that can not produce efficiently. Obviously such a reality scares many countries who rely on these quotas to bring in money to their country. However, sometimes the truth hurts, as was the case with Brazil and the auto industry, where they were able to thrive behind the protection of quotas but never able to compete in the world markets.

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