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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Session 2 Regional Cooperation in Core Technologies: The Case of Airbus Moderator: Karl-Heinz Paqué, IfW CHARLES WESSNER: For this session we have a particularly distinguished panel that will be introduced by Karl-Heinz Paqué of the IfW, the Kiel Institute of World Economics. I want to express on behalf of the National Academy of Sciences our deep appreciation for the members of this panel, who have come a great distance to participate and who are willing to talk in a constructive fashion about an exceedingly complex and disputatious element of high-technology trade, namely the success of the Airbus consortium. Briefly, Dr. Paqué is head of the Department of Growth and Structural Policy in the International Division of Labor at the Kiel Institute of World Economics in Germany. We are grateful to Dr. Paqué for leading this session, and we are sure that he will be uniquely well qualified to give us an objective assessment. KARL-HEINZ PAQUÉ: The discussion in the last session concentrated on the American and Japanese trade frictions. In this session we now turn to the European and American dimension of this issue. And I now will briefly introduce our four distinguished panelists. The stage will be set by David Mowery who will talk on an assessment of project goals, means, and international consequences. David Mowery was associate professor of business and public policy at the University of California at Berkeley from 1987 to 1988. He served as the study director for the Panel on Technology and Employment at the National Academy of Sciences in 1988. He also served in the Office of the U.S. Trade Representative as counsel on foreign relations and international affairs fellow. Also on the panel is Sally Bath, the director of aerospace at the International Trade Administration of the U.S. Department of Commerce. Her office monitors
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings the implementation of trade agreements that are specific to the aerospace industry, identifies constraints on the trade performance of the U.S. aerospace industry, and recommends ways to neutralize such constraints. Prior to her appointment with the U.S. government, she spent a year with LTV Aerospace and Defense Corporation in Dallas, Texas, as a senior market analyst. And prior to that, she was with the aerospace industry's national association in Washington, D.C., as chief statistician for nine years. After these two presentations, we will then hear the views of industry. First will be Raymond Waldmann from Boeing. He is vice president of international business for the Boeing Company. He provides policy direction on key issues in international strategy, trade policy, regulation, technology, and competitiveness. He also represents Boeing's positions with federal agencies, the Congress and the public. Our final speaker is Jonathan Schofield, who will give the perspective of the Airbus company. He is chairman and chief executive officer of Airbus, North America. Prior to his current position, he had numerous positions with United Technologies. An Assessment of Project Goals, Means, and International Consequences David Mowery, University of California at Berkeley My goal is to lay out the background concerning the development of Airbus and identify some of the issues for transatlantic and, perhaps, global high-technology trade that Airbus symbolizes or illustrates. To do this, I will make some summary comments about the origins and original goals of Airbus; some comments about policy of the respective sponsor governments toward Airbus, comparing that with the U.S. government domestic policy toward its aerospace industry; what Airbus has accomplished; and some observations on some of the factors that have contributed to its accomplishments. I will also discuss some of the responses of the U.S. government and industry to Airbus' s accomplishments and talk about some of the implications of those responses for high-technology trade in general. It is important to recognize several things about the origins of Airbus. First, the structure of the Airbus Consortium represented a new way of organizing and financing a regional aerospace industry that had achieved a fairly high level of technological development. The respective aerospace industries of France, the United Kingdom, Germany, and Holland certainly entered the 1960s with substantial technological assets and substantial involvement in the large commercial aircraft industry. What triggered the formation of the Airbus Consortium was the recognition of the end of the road for the national champion policy, wherein individual gov-
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings ernments supported the launch of aircraft by single national firms, combined with a continued commitment to supporting what was viewed as a critical high-wage, dual-use industry, avoiding dependency on foreign suppliers of a critical product, and trying to grow or expand the aerospace supplier and industry within Western Europe. So in many respects Airbus was a regionalization of policies of government support for aerospace industries that had a long history. The second point about the origins of Airbus, which can be traced to the mid-1960s, is that the early years were characterized by a great deal of upheaval and change in the goals of the program. The original consortium (which included British membership in the development of an all-European large commercial aircraft) that was to include European-developed engines was replaced in the late 1960s by an essentially Franco-German initiative with some Dutch participation to develop a less technologically ambitious airframe for which engines would be sourced elsewhere. This phase was followed in the late 1970s by the reentry of the British into the Airbus Consortium. There was a lot of instability in the early years, and some clear trade-offs were made between technologically ambitious objectives and what were perceived to be more economically feasible designs and goals. I will now talk about some of the member governments' policies toward Airbus and U.S. policy toward its domestic aerospace industry. The current estimate of support by the Airbus sponsor governments, in the form of so-called launch aid and subsidies for the production of Airbus aircraft, is approximately $13 to $14 billion. When the cost of capital investments is added, we get a figure in the low $20 billion range. This support has been fairly product specific. How does this compare with the historic U.S. posture toward its commercial aerospace industry? Aerospace in the United States, particularly in the postwar United States, has been treated rather differently than other industries in the U.S. economy because of its importance for national security. The United States has had a dedicated civil aeronautics R&D program operated by NACA (the National Advisory Committee on Aeronautics) and NASA. The federal government has made important interventions to sustain major U.S. aerospace corporations, and it has spent substantial sums of defense dollars on procurement and development of airframe, avionics, and engine technologies. But postwar U.S. support of its domestic aerospace industry was motivated largely by national security considerations; such support was much less consciously structured to advance national competitiveness, and it was not directed at specific individual commercial aircraft development projects. By and large, the focus of U.S. support has been much more diffuse, much more generic, and many of the technological benefits associated with the military R&D and procurement expenditures that were arguably important during the 1950s and 1960s have declined substantially and some even reversed, particularly in airframe and propulsion technologies.
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings So there are clear differences in the structure of policy in the postwar United States and Western Europe, although one must recognize that aerospace in the postwar United States is not quite the same as steel in the postwar U.S. economy. What has Airbus accomplished and what are some factors that have contributed to this accomplishment beyond the support of its member governments? The first very significant accomplishment of Airbus over a lengthy history is survival, particularly when one compares the less successful histories of earlier trans-European ventures in nuclear energy, or the very unsuccessful Concorde collaboration. Second, Airbus has managed to expand its global market share, particularly at the expense of McDonnell Douglas in the United States. What factors have contributed to this success? By comparison with the Concorde, the management structure for Airbus is both stronger and has much greater autonomy from the types of direct, micromanaged government control that characterized that venture. Another feature of Airbus that distinguishes it from other programs that have followed Airbus and have been directly sponsored by the European Union [EU] is that although there has been a great deal of pulling and hauling within the Consortium over the distribution of benefits and jobs, the distributive politics operating within the Airbus Consortium have been far less pronounced than what we see within other consortia sponsored by the European Union, such as ESPRIT and other programs. It is far from obvious to me that the EU Commission itself could have sponsored and launched the type of focused program that is represented by Airbus, with very large expenditures devoted to a small number of national champions brought together in a regional consortium. The distributive politics now operating within many EU programs are far stronger than that. But the other important point to recognize about the government support for Airbus, something that is particularly important for U.S. observers to recognize, is that Airbus has invested a long-term commitment of substantial sums of money. The ability of U.S. federal programs to mount a similar long-term and stable commitment of resources to a civil technology is, I believe, very much in question. So the durability, length, and stability of the financial commitment have been very important. The Airbus Consortium itself also has been effective in a strategic sense in several areas. The first has been the development of a viable product family, a five-aircraft line of different products that makes the attractiveness of any given Airbus aircraft more attractive to a would-be purchaser. A second important strategic accomplishment of the Airbus Consortium has been its construction of a viable, global, product-support network. Third, and here we get into a finer line between Airbus's ability to rely on low-cost capital and its ability to manage technology, Airbus certainly has led U.S. firms in the adoption of certain advanced technologies in flight control and composite materials.
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings The reaction of U.S. industry and the U.S. government to Airbus is also interesting. Airbus had certain opportunities that resulted from slow or perhaps simply inattentive behavior by leading U.S. firms. The first was the decision of McDonnell Douglas to pursue a DC-10 rather than a twin engine, wide-body jet, which created a vacuum in the market, one that to some extent was filled by the Airbus A300 and A310. A second gap in the market that resulted from decisions of U.S. manufacturers was the decision of Boeing to go above the 150-seat class in the development of the 757. In both cases, commercial decisions made by U.S. manufacturers created opportunities for Airbus that Airbus was able to fill, in part because of its government sponsorship. Another point about the industry response is the consistent ambivalence and a real reluctance on the part of U.S. industry to invoke conventional instruments of trade policy, such as countervailing duties, or the big club of Section 301, against Airbus. Why is this? U.S. firms have important European markets for other commercial aircraft that are not competing directly with Airbus; therefore, concerned about retaliation, U.S. firms have historically been reluctant, even in the face of encouragement from the U.S. government, to pursue these types of remedies in this particular trade dispute. This reluctance reflects the global nature of the industry and the global characteristics of markets. The U.S. government response has also been interesting in its focus on sectoral agreements covering the commercial aircraft industry. One characteristic of these agreements is that during a prolonged period of negotiation, the world does not stand still—market shares decay, new products are developed, other events intervene. So the very time constraints associated with negotiations are an important factor and an important limitation. A second characteristic of these sectoral agreements is that it is very hard to figure out what it is you have negotiated in some cases, and therefore, in many cases it is difficult to enforce the agreement. As I understand the EU-U.S. agreement on Airbus, direct support is capped at 33 percent. Indirect support is capped at approximately 4 percent of any firm's turnover or 3 percent of industry turnover. These provisions raise messy issues of how to define or measure direct and indirect support. These problems are not unique to this agreement, but are likely to occur in any sectoral agreements elsewhere. What are some implications for high-technology trade and policy generally? The policy of the European governments regarding Airbus in commercial aerospace, I would argue, bears more than a passing resemblance to the budding or emerging U.S. policy in some other high-technology industries—for example, SEMATECH, perhaps, in semiconductors or in flat-panel displays. If the United States is pursuing similar policies in other industries, can the U.S. government successfully oppose foreign government subsidies in commercial aircraft? How viable is the sectoral agreement approach to the resolution of high-technology trade disputes? Arguably, commercial aerospace is sui generis, but it
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings suggests that sectoral agreements have very complicated features and some serious disadvantages. What are the prospects for collaboration between Boeing and Airbus in the development of the so-called super jumbo aircraft? Should such collaboration emerge, what does that imply for the future of competition and the future of disputes in other segments of their product lines? Finally, Airbus has discussed at various times moving into the production of military transports. What are the implications of that move, particularly in light of the indirect support question? Thank you. The American Reaction Sally Bath, Department of Commerce Let me put a few things into historical perspective. Airbus came into being officially in 1968. They laid the keel for the first aircraft in 1970. It rolled out in 1972. It was delivered in 1974. In 1978, the U.S. industry woke up, and I mean that quite literally. At that point, I was still on the industry side and I can speak a little bit more bluntly about that period of time than I can about my recent career. In May of 1978, five members of the Industry Sector Advisory Committee [ISAC] on Aircraft Trade, advisers to the Tokyo Round of Multilateral Trade Negotiations, met the day after a briefing by the government concerning the results of the apparent direction of the Tokyo Round. They believed that the Tokyo Round Subsidies Code was not going to address subsidy issues adequately, because subsidies to Airbus were going to be adversely affecting U.S. industry. They felt that the Tokyo Round Subsidies Code would basically have no teeth and that they needed something more direct. In the Trade Act of 1974, Congress authorized the development and negotiation of sector-specific agreements, but none were being negotiated. So ISAC drafted a two-page document, which it planned on presenting to the special trade representative, as the framework about which an aircraft agreement should be drafted. Their concept was that the agreement should focus on large transport aircraft only. At that time, I was appointed to ISAC-17, and I went to my first meeting in June. They presented this two-page document to the other industry representatives and suggested that the document be presented as advice to government. It was a document that read as a series of ''thou shalt nots." Governments shalt not subsidize. Governments shalt not intervene in aircraft marketing campaigns. Governments shalt not demand offsets. It was a very specific "thou shalt not" document. The committee generally agreed that such an agreement would be a good idea. Then, all of a sudden, some of the subcontractors and the platform manufacturers from other sectors of the industry—the helicopter industry,
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings the general aviation industry, the business jet industry—stated that they were facing the same kind of competition. So ISAC-17 went back to the drawing board and wrote a more general agreement on civil aircraft trade, which would address all civil aircraft platforms, all civil aircraft engines, and all parts and components. It was still a two-page document and it was still a series of "thou shalt nots." They took it to the government in July 1978. The initial government response was negative. In fact, I heard a government representative respond to the ISAC-17 suggestion with "Who in the hell do you people think you are?" He was told exactly who they thought they were. They were representatives of Boeing, Lockheed, McDonnell Douglas, General Electric, Pratt & Whitney, Gulfstream, Cessna, and the rest of them. And the representatives of the U.S. civil aircraft industry felt they had a right to ask for such an agreement because they did not think the Tokyo Round addressed their concerns. Each of the companies was facing increasingly subsidized foreign competition. Subsidized competition was becoming the rule, and it was becoming apparent that a regional focus for the development of new aircraft programs was coming into play. The strength and the threat of Airbus was regional. You no longer had the British competing against the French competing against the Italians competing against the Germans competing against the Dutch. They were combining their resources to compete against the Americans. By the middle of the fall of 1978, the industry had been loud enough and vehement enough that a negotiator was appointed, and by the middle of the following year, 1979, a text of the GATT [General Agreement on Tariffs and Trade] Agreement on Trade and Civil Aircraft was concluded. It took less than one year, which may have been part of its problems, but also a source of some of its strengths. It was a very intense set of negotiations. It was done quickly and in close accord with U.S. industry. Although the initial focus had been Airbus, the negotiations became broader, focusing on subsidies to the aviation industry in general. The agreement was implemented on January 1, 1980, and almost immediately thereafter the U.S. government entered into negotiations to explain it. The agreement talked about government supports instead of government subsidies. This was quite deliberate. The agreement laid out rules by which governments could continue to involve themselves in what was considered to be a strategic industry. So the word "subsidy" was avoided. The language referenced the Subsidies Code. There was some additional language that referenced the Standards Code; Article Four discussed how governments should conduct themselves in marketing campaigns; Article Two provided for tariff-free treatment of products covered by the agreement, etc. In the early 1980s, the Europeans provided additional supports for a new program designated as the A320. That got everyone's attention. We did not know how to address it in government. We did not know how to address it through the industry group. No one wanted a trade war. The European market is
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings a very good market for the U.S. aerospace industry, and it is and has been a very balanced market. We send them a lot of aerospace "stuff' and they send us a lot of "stuff." While the industry did not want to spoil its market in Europe, at the same time it did not want to face subsidized competition. This issue resulted in a marathon negotiation, and in 1988 we entered strenuously into formal negotiations to develop what became an interpretation of two articles of the GATT Aircraft Agreement: Article Six, which is the subsidies language; and Article Four, which is the so-called inducements language. The interpretation and resultant disciplines apply to large transport aircraft only. The U.S. government and the European Community entered into serious negotiations to interpret the language of Articles Six and Four and, if necessary, to develop clarifying rules. Again, the focus was only on the large transports, but the hope was that the negotiations would eventually be expanded to everything covered by the GATT Aircraft Agreement. It was a marathon negotiation, finally "concluded" in March 1992. On July 17, 1992, I went to the Office of the U.S. Trade Representative to witness the signing of this marathon bilateral agreement and discovered that the lawyers were talking transatlantically. The European Community lawyers in Strasburg, not in Brussels, had made some changes when they were translating the various languages of the EC, and those changes resulted in changes in interpretation in the English text. The discussions resulted in handwritten corrections being entered into the formal document and initialed by the chief negotiators. What was the U.S. government responding to when it entered into the bilateral negotiations? First of all, to U.S. industry. U.S. industry and government worked in lockstep to encourage both industry and governments overseas to participate in the negotiations of the GATT Aircraft Agreement and the European agreement affecting the large transport aircraft. The key was industry and government working together on a common front, and following up on an industry, not a government, initiative. I will make one final point. Airbus as a regional organization is becoming a pattern for Europe. Since Airbus came into being, Ariana Space EroCopter and UroFighter have been established. Each of them is a work in progress and each of them is organized in a slightly different way from Airbus. Airbus now is looking at reorganizing itself as well. But the use of a regional approach in Europe is certainly taking hold. Thank you. Lessons and Prospects: The Boeing Perspective Raymond Waldmann, The Boeing Company RAYMOND WALDMANN: Many recognize that Airbus is a historic enterprise. It has been in business for over 27 years. It has achieved a respectable market share. It has customers throughout the world. It has a full product line.
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings The bottom line for Boeing, of course, is that now that Airbus has reached that state, it ought to be able to stand on its own feet. It ought to be able to operate as an independent company, publish reports, disclose its finances, and operate without further government subsidy. That was the basic thrust of Boeing's support for government activities over the last ten years: to negotiate the subsidy agreement finally concluded in 1992. There are a couple of things that I want to say about Airbus. First, it is a partnership of the major aerospace and defense contractors of Europe: Aerospatiale, DASA, Daimler-Benz, and British Aerospace, with Dutch, Spanish and Belgian companies, and now an Italian company participating as well. These are not small companies. They are extremely large companies, and if you add them together, they are, of course, much larger than either Boeing or McDonnell Douglas. Second, the governments have sponsored Airbus since its inception. In fact, you could say that the governments of Europe buried the question of Alsace-Lorraine in Airbus because they decided that the wings would be built in the United Kingdom, the fuselage in Germany, and the cockpit and some of the electronics and control systems in France. The financial support for Airbus has been extensive. The range in various studies is from $12 billion to $26 billion over its 25-year history, and at various points this made Airbus extremely vulnerable to U.S. trade actions. There could have been antidumping, countervailing duty, Section 301, or GATT actions against Airbus at almost any time in its existence. There was serious thought given to these actions in 1978 when the first sale was made to Eastern Airlines in the United States, in 1984 when Pan Am bought Airbus, and then in various stages throughout the long negotiations. But at every point, the industry counseled the government to stay the course on negotiation to avoid what could have been a major trade dispute between the United States and Europe. Did the European governments know what they were getting into when they started down this road in 1968? Probably not. I believe that their expectation was that there would be one or perhaps two infusions of subsidies for Airbus and that it would quickly achieve a market position and be able to stand on its own. But, of course, that is not the way these things work. Once the taste of government support was gained in Toulouse and elsewhere, it became an increasingly attractive way to finance aircraft programs. I do think that it did have a significant effect on Airbus's willingness to take risks. If you know that somewhere between 70 and 90 percent of your development cost is coming from the government and only 10 to 30 percent is coming from the company shareholders, it does alter your perception of risk on such things as launching new aircraft programs, applying new technology, and the types of discounts or concessions that you are able and willing to give to customers. I believe that a major part Boeing's and the U.S. industry's problem with the government subsidy is that it changed the perception of risk in the industry.
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings We also had another problem with government salesmanship. This is one of those features of the GATT Aircraft Agreement that has not been made effective. We tried again in the 1992 agreement between the United States and the EC, again without much success, and now it seems that the only way to deal with this issue is to fight fire with fire. And, so President Clinton and his colleagues in the Cabinet have become significant salesmen for aircraft, as they have for other products for U.S. external commerce. A couple of quick points: I do not see Airbus as a technology issue. We are here in the halls of the National Academy of Sciences and Engineering; yet, we are talking about production subsidies, export subsidies, and major development support. There is, to some degree, a small element of transferable research that moves back and forth across this industry that is allowed under the Subsidies Code and under the 1992 agreement. That is the so-called indirect support. The problem we have is with the highly program-specific, the competitive-specific support, the big dollars. This can range into the billions of dollars of product support, which Airbus has received in the past. In looking ahead, it is important to say that the industry is cooperating on a wide range of projects—not only the ones that Sally Bath mentioned, but across the oceans. For example, for the subsonic super jumbo aircraft, we have a study group that comprises Boeing and the Airbus partners. In the small aircraft sector, we have active studies under way with our Japanese colleagues at the Japan Aircraft Development Corporation and with China and Korea. In the supersonic area, we are talking with the Airbus partners, with Japan Aircraft Development, with the Italian company, and even with the Russians through Tupelov. So there are efforts under way to recognize that this is increasingly a global industry and that any new, big program will be an international program. I want to comment on one statement that was made this morning, that we should all be happy with international competition because, after all, it is not a zero-sum game. Well, in this industry it does look like a zero-sum game when your aircraft program is not launched because your competitor has already launched, or when you do not make a sale because your competitor has already made the sale. Finally, Boeing' s interest in the issues is confined to trying to level the playing field, a phrase that is perhaps hackneyed, but, nevertheless, still true. We want to see the same types of rules operating for everyone in this industry. Currently, there is an extensive fragmentation. We have some countries that are outside the WTO system and, therefore, are not subject to any of the rules that have been patiently negotiated. Some countries have signed the WTO Subsidies Code and, therefore, are bound by some of the disciplines. There is a smaller number of countries, essentially the United States, Europe, Canada, Japan, that are now signatories of the 1979 Aircraft Code, and, of course, only the United States and the EU are signatories to the 1992 bilateral agreement, which has a much more specific set of disciplines on supports.
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings It is our view that all these rules, specifically the WTO Subsidies Code, the Aircraft Code, and, perhaps even this special 1992 regime on supports, should apply to all of those countries that have either industries or pretensions to build within this industry. Thank you. Lessons and Prospects: The Airbus Perspective Jonathan Schofield, Airbus Industries Raymond Waldmann said that one day Airbus may be aligned with Boeing in terms of a public company. I personally think that will happen. We basically have all of the larger partners privatized except one, which is Aerospatiale. Aerospatiale, I believe, will be privatized probably within the next five years, and that puts the company in a position to go become a public corporation. In the meantime I have some observations as an Airbus employee who has worked for a large American aircraft corporation. First of all, at Airbus I am one of the few old guys in the company. That is to say, there are a lot of very young, bright people. Comparing that with the U.S. structure, a lot of authority and responsibility is delegated at a very young age. There are risks to that, but I believe that the U.S. corporations are following that trend closely and I applaud that. Technologically, I believe at this point that the United States is extremely competitive. On the other hand, I invite all of you to walk the factory floors of the various partner facilities and you would be extremely impressed. They are extremely well capitalized. Competition with my colleagues is always very difficult. There is one thing that is somewhat sane about the aircraft industry that was not sane in the engine industry. Cooler heads prevail, and one is in business to make a profit and, therefore, one sells aircraft at a profit. My old industry is beginning to deal with that. It is a much more difficult business, but be that as it may, competition at the end is keen. If there were no competition, aircraft would not evolve as quickly as they do now. Nevertheless, what is driving the industry are technology and risk. I do believe that the capability exists among the industry to build the VLCT [very large commercial transport], and the timing is quite simply market driven. No one is going to go forward alone and spend a whole lot of money building a new airplane when there is no market to justify the investment. It just will not happen. The forecasters say that over the next 20 years, a bigger plane will be required and that that plane will be built at a point that is market ready. And you can be sure that this will not happen within the next year. When Sally Bath mentioned trading "stuff" with the European market, it reminded me of the engine business at United Technologies in the 1970s when
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings we started to go global. The company was 35 percent international in 1985, it was 55 percent in 1992, and I believe they will be 75 percent international by the year 2000. In other words, United Technologies, as Boeing, as Mitsubishi, as DaimlerBenz, is a global company. They are searching for the growing markets as they emerge. They build where they have to, and you can see that an airplane today is a multinational entity. The wings, tails, flaps, and engines come from all over the world, and that is not any different whether it be in Seattle, Toulouse, or Long Beach. It is who we are. It is who we are going to continue to be. And it is the right way to move. Each company will make its choice and decisions based on economics and market. You will find our industry is probably the most multinational of industries. And I think all of us are proud of that. And I believe that globalization will continue as we move forward. Thank you. DISCUSSION HANS-ECKART SCHARRER: I have a question for David Mowery. This session has been confined to the Airbus issue. The Airbus case is a much larger case of competition in aircraft in general, and there are allegations from the European side that the subsidization of the aircraft is just the response to indirect subsidization of Boeing and other U.S. producers by way of the U.S. defense program. Could you perhaps give some sort of an unbiased view on that? DAVID MOWERY: In contrast to the U.S. steel industry, and in contrast to some other U.S. industries, the commercial aircraft industry has been treated differently as a matter of policy by the U.S. government, at least to the extent of bailing out a couple of firms. There has been a great deal of federal money in the form of procurement contracts and some defense R&D contracts. Some of those procurement and R&D contracts have generated so-called military-civilian spillovers that have filtered into the commercial product lines of the major producers of engines and airframes. But spillovers also were created by the military procurement programs of the member nations involved in Airbus, and certainly there was a history of launch aid in all of the member states with respect to airframes and engines before the formation of Airbus. In other words, there is a pre-Airbus history of subsidization in Europe, and there is a pre-Airbus history of indirect spillovers in the United States. In addition, the spillovers from military to civil commercial aircraft in particular have decreased dramatically in the past 25 years and perhaps have reversed direction. Commercial aircraft is a peculiar industry. There are big first-mover advan-
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings tages, and it takes a long time to overcome the advantages achieved by early entrance. So some portion of the Airbus support was a regional infant industry program that should have eventually supported the repayment of a significant portion of those original supports to the member governments. By most accounts, we have not yet seen much of that happening. SALLY BATH: I would like to comment on this. The indirect support issue has always been one that has bothered me a great deal because there are some interesting implications. First, what the Europeans refer to by the phrase "indirect supports" are really government purchases of goods and services, not industry-targeted subsidies. Second, the issue of whether or not there are government purchases of goods and services in the aerospace sector in Europe is never addressed, and we all know that it should be. Third, periodically during the negotiations I thought that we were being pushed into a situation in which the Europeans were trying to make us apologize for using the best contractor available on contract awards and then to force us not to use the best contractor available on contract awards for contracts that had a government purpose. No government wants to be put into a position where freedom of choice is curtailed. We object to such efforts and to such arguments. RAYMOND WALDMANN: Just two quick comments. First, when that issue came to a head in the closing days of the negotiations in 1992, people at Boeing were somewhat amused because we had just had three or four years of major losses on our defense contracting, and this looked to us as if we were subsidizing the government and not the other way around. Second, it was quite clear that this was a post hoc rationalization to balance the agreement. It had nothing to do with the original sponsorship of Airbus. SYLVIA OSTRY: The question of the spillover is an important issue. However, a much more important issue than either indirect or direct subsidies is the long time horizon, which came from government procurement, that permitted the planning and the utilization of technology. If the Europeans argued that government procurement in the defense industry was a major source of innovation, then I suppose the rationale for intervention rested on the first-mover advantage that would create a potential monopoly supplier. The reason I am raising this issue is because I think that in high technology, I have never considered Airbus a model of friction for the reasons that have been discussed here today. There is too much at stake on either side and now they are globalizing it. But I think that the issue of government procurement is the next enormous friction-generating area in high technology, and I do not see any evidence that the WTO is paying attention. The procurement code seems to be more important to high-technology trade than subsidies.
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings SALLY BATH: Actually, that issue was addressed at some length during the WTO, but we were unable to come to closure on it. I think there will be more discussions on it as we go along. DAVID MOWERY: As I understand it, you are describing a situation of procurement policy in a classic dual-use industry, but we are talking about procurement for national security or national defense purposes, and that really pushes the envelope on a procurement code that the WTO historically has stayed well away from and GATT has stayed well away from as well. JONATHAN SCHOFIELD: Procurement of goods and services is ultimately another mechanism. I do not worry about it because I do not think that my colleague is pushing the limits of the agreement. It is as simple as that. RAYMOND WALDMANN: Just one factual matter. We should not assume that there was a first-mover advantage or any momentum in the United States in the civil aircraft jet business. Remember, the Comet was the first to fly. There were, of course, other national programs, such as the BAC-111, the Caravelle, the Trident, and other types of programs in Europe that predated Airbus. So there was a history in Europe for building jet aircraft, and in the United States we had four jet manufacturers: Convair, Lockheed, McDonnell Douglas, and Boeing. CHARLES WESSNER: I would like to ask a question to both of our industry representatives: Will your companies bring us a world of global cooperation or will your companies, and perhaps other emergent producers, bring us a world of headaches in a high-wage, high-value-added industry? RAYMOND WALDMANN: I can see it going both ways. Obviously, we have cooperation now. Boeing has cooperation with a number of suppliers and with major aircraft companies. We are currently discussing with the Airbus partners the potential for cooperation on two very big projects. However, the market is not right for either one of these projects, so we may put them on the shelf for a while. But I think the willingness to cooperate is there, and that, of course, is the key item we are talking about here. JONATHAN SCHOFIELD: I agree. You will always be competing, so there will always be a natural amount of friction. But on these particular programs you are not competing so you are cooperating. My experience in this industry is that cool heads prevail, technology overcomes, and production moves forward. It is as simple as that. DON KASH: My question is for Raymond Waldmann. My impression is that the 777 has subsystems that have been developed and that are being purchased
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings and produced in a number of countries and that the GE90 engine is also physically an international engine. I would like you to comment about the motives for this network of international production; that is, the extent to which it is driven by capital, technology, and markets. I suspect it is all three, but there has been quite a movement outside the United States. Are there now areas in which the U.S. development production capability with regard to subsystems no longer exists that did exist at one time? RAYMOND WALDMANN: The triple seven program has approximately 20 percent Japanese content and an additional 4 or 5 percent foreign content beyond the Japanese content. The engine companies have their own programs, and, of course, we are not structuring those programs. Clearly, all three factors you mentioned are important. The capital availability in certain countries is important to market access. Whether we like it or not, it is an important factor. Technology is probably the least important of those three, only because there is, at this point, no product which cannot be sourced in several different countries, in addition to the United States. So you might find that these are factors that would lead you to cooperate or make an arrangement with a foreign subcontractor, but these arrangements have not weakened the U.S. industry to the point where it is not able to compete extensively and aggressively across the board. PARTICIPANT: Is this panel discussion relevant to other high-technology industries? Is your industry unique? Is there room for anyone else? Governments dominate the marketplace through their national airlines, and the reason they are unwilling to use these trade sanctions that are available to them is that they make governments mad, which is a bad idea if you want to sell to that government. Is this relevant to the rest of high-technology industry? Is there any other industry that has this type of concentration, dual-use nature and government role, that we need to worry about? DAVID MOWERY: I think that aerospace is substantially unique, and that your question is an important one. Is the current lack of conflict attributable to the sectoral agreement, and does this suggest that a sectoral agreement model is relevant to other high-technology industries? I think the sectoral agreement is an effect rather than a cause of the reduced tensions. Perhaps the sectoral agreement has established a better vehicle for consultation, combined with other trends operating within the Airbus Consortium that are pushing for greater transparency and more autonomy from government. If so, these are positive trends. But it is hard to think of another industry in which governments are major buyers of commercial products and important subsidizers and purchasers of the military products of the industry. Semiconductors do not exhibit a comparable
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings level of government demand either as a direct purchaser or perhaps as a supporter of R&D. Telecommunications equipment may be one industry in which one could think about an agreement structure of this type. It is an industry, like aerospace, in which governments are heavily involved as buyers, regulators, and investors. SALLY BATH: There are no tensions apparent at the present time. There has also been no new launch since 1992, so the bilateral agreement has not been tested. As for whether or not this industry is unique and, therefore, this type of an agreement is unique, I think that the answer is yes for two reasons. First, the time lines in this industry on any project are excruciatingly long. An announcement is made of an aircraft launch. Then it rolls out seven years later. This is an extraordinarily long time to have an extraordinary large amount of money at risk. The amount of capital required for this industry, the long time lines, and the government involvement in most areas makes this a strategic industry. And that makes it a unique industry. RAYMOND WALDMANN: I agree that we are a unique industry. Of course, there is always a danger in thinking that you are unique, because then somebody sneaks up and proves to you that you are not. Maybe the U.S. automobile industry at one time thought it was unique. In any case, I would like to just close with a comment. We do not launch our airplanes. Our customers do. The customers are the ones who we have to respond to, and I think that does, in fact, make us a little bit unique.
Representative terms from entire chapter: