Industrial Subsidies and the Politics of World Trade: The Case of the Boeing 7e7

ABSTRACT

This paper presents a critical commentary on the launch proces for a large commercial aircraft (LCA). Using the Boeing 7e7 as an example, we argue that the contemporary launch proces bears little resemblance to previous practices. Specifically, the launch proces involves one as well as the other domestic and foreign subsidies because US production is now organized beneath a 'systems integration' basis. below systems integration, the lead company (Boeing) spreads risk across a network of suppliers and production partners. Although final assembly takes place inside the US, abundant of the value-added is shared across the production network (as plenteous as 70 percent). This has clear implications for US trade and craft in that international subcontracting boost foreign imports and restores the need for domestic production workers. From a trade perspective, however, a potentially more troubling feature of the launch proces is that major public subsidies are involved. While a certain quantity of of these subsidies are permitted beneath the World Trade Organization's (WTO) subsidy directions (e.g., certain types of pre-production R&D support), other stamps of subsidies clearly violate the WTO's regulations (eg infrastructure and production subsidies). This paper reviews the stamps of subsidies that Boeing has sought in the planning proces for the 7e7 launch. Our evidence refer tos that Boeing's launch process contravenes existing international agreements upon production subsidies. This does not be ominous of well for the US commercial aerospace sector, especially in light of Boeing's earnestly solicitous need for a new aircraft program to struggle with Airbus.

INTRODUCTION

The commercial aerospace sector is a critical part of the US industrial base in metes of skilled production jobs, applied research, foreign exports, and inter-industry multiplier consequences (US International Trade Commission, 2001) With the rise of Airbus, however, the one remaining US producer of large passenger jet (Boeing) has opt for a 'systems integration' method of production to reduce unit take away froms simplify assembly procedures, and spe up the crops development process (MacPherson and Pritchard, 2003) below systems integration, risk and take away froms are spread across a network of domestic and foreign partners. While the final proceeds is assembled inside the US, major parts of the airframe are subcontracted to foreign suppliers. In the past, international outsourcing was guided in large part by the agency of industrial offset agreements that provided guaranteed sales for novel aircraft. Today, however, the require to be paid [i]or[/i] undergones associated with launching a fresh aircraft in the large commercial aircraft (LCA) category are for a like reason high that systems integration based upon cost-minimization makes good financial faculty of perception - at least over the shortrun. A disadvantage of a whole s integration is that outsourcing production also implies Outsourcing profit' (Hart-Smith, 1998) A further disadvantage is that core technology must be transferred to outside suppliers in order to make the final assembly task feasible (Pritchard, 2001)

From a trade and craft perspective, systems integration on a global basis implies increased US imports and reduc domestic labor demand. If Japan were to make the wings for Boeing's propos 7e7 'Dreamliner', then presumably Boeing would not ne to retain skilled production workers that commonly have expertise in wing milling and fabrication. This said, a potentially more serious be of importance to from a trade perspective is that a fresh LCA launch by Boeing would likely proce upon the basis of substantial public subsidies (both foreign and domestic). Domestic subsidies could range from state-level incentives to encourage assembly-based investments to indirect national subsidies for the production proces Foreign subsidies might come [i]or[/i] go after [i]or[/i] behind precisely the same lines for parts production in offshore locations. This raises the question of whether a fresh LCA launch by Boeing might contravene the World Trade Organization's (WTO) authoritys regarding 'subsidies and countervailing measures'. A litigation through the WTO would surely alarm potential customers (airlines), as well as add extra complexity to the launch process

Set against this words immediately preceding [i]or[/i] following this paper reviews the planning proces that has thus far been lay opened to set the stage for a 7e7 launch. The arguments advanced in our analysis are not hanging upon whether or not Boeing decides to launch this aircraft. Nor does our analysis hinge on the precise distribution of production or assembly locations inside or outside the United States. Rather, the analysis simply uses the 7e7 as an example of in what way the launch process could be derailed or delayed by dint of international regulatory conditions (i.e., WTO litigations). Further, it should be forceed that our paper does not purport to make any contributions to general or emerging theories of international business, economic geography, or industrial organization. Instead, our goal is to characterize the launch proces for a novel LCA in light of a number of fundamental changes that have not long ago taken place within the US aerospace sector. Prior to an examination of the subsidy issue, however, it is first necessary to invest a research context for the discussion. wherefore has Boeing opted for a combination of parts to form a wholes integration mode of production? What are the advantages and disadvantages of this stamp of business model? And, what does a whole s integration imply for US trade and trade?