The Effects of Offsets, Outsourcing, and Foreign Competition on Output and Employment in the U.S. Aerospace Industry

Robert E. Scott

Economic Policy Institute

The debate over the employment effects of offsets is contentious because of the interplay of several closely related questions that can be quite difficult to disentangle. Overall employment has declined steeply in the U.S. aerospace industry since 1989 for a variety of reasons, including sharp reductions in public spending for defense goods and space exploration; rising imports of aircraft, engines, and components; and increasing productivity and structural changes in the defense and commercial aerospace industries, including numerous mergers and consolidations. Furthermore, industry representatives argue that, in the absence of offsets, foreign sales of commercial and defense aerospace equipment would decline or disappear, raising questions about the appropriate counterfactual exercise that should be used to analyze the effects of offsets and related issues on total industry employment.1

Barber and Scott (1995:2) examined a number of these issues and concluded that, in addition to the 500,000 jobs already lost in this industry since 1989, an additional 469,000 jobs in aerospace and related industries could be at risk by 2013 because of offset policies and increased foreign competition." In this report I update Barber and Scott (1995) and re-examine the evidence that increasing foreign competition will threaten a large number of jobs in this industry over the next one to two decades. I begin by reviewing trends in aerospace employment and then examine the principal causes of declining sectoral employment using a straightforward counterfactual exercise to assign changes in employment that

1  

See, for example, Johnson (1997:34) who noted that "if a foreign customer wants to deal in offsets. companies will have to listen and negotiate."



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--> The Effects of Offsets, Outsourcing, and Foreign Competition on Output and Employment in the U.S. Aerospace Industry Robert E. Scott Economic Policy Institute The debate over the employment effects of offsets is contentious because of the interplay of several closely related questions that can be quite difficult to disentangle. Overall employment has declined steeply in the U.S. aerospace industry since 1989 for a variety of reasons, including sharp reductions in public spending for defense goods and space exploration; rising imports of aircraft, engines, and components; and increasing productivity and structural changes in the defense and commercial aerospace industries, including numerous mergers and consolidations. Furthermore, industry representatives argue that, in the absence of offsets, foreign sales of commercial and defense aerospace equipment would decline or disappear, raising questions about the appropriate counterfactual exercise that should be used to analyze the effects of offsets and related issues on total industry employment.1 Barber and Scott (1995:2) examined a number of these issues and concluded that, in addition to the 500,000 jobs already lost in this industry since 1989, an additional 469,000 jobs in aerospace and related industries could be at risk by 2013 because of offset policies and increased foreign competition." In this report I update Barber and Scott (1995) and re-examine the evidence that increasing foreign competition will threaten a large number of jobs in this industry over the next one to two decades. I begin by reviewing trends in aerospace employment and then examine the principal causes of declining sectoral employment using a straightforward counterfactual exercise to assign changes in employment that 1   See, for example, Johnson (1997:34) who noted that "if a foreign customer wants to deal in offsets. companies will have to listen and negotiate."

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--> occurred between 1989 and 1996 to their proximate causes. In the next section I examine international competitive challenges and forecast the effects of offsets and other types of international competition on industry employment for the next two decades. The paper concludes with a discussion of policy alternatives for addressing the industry's problems. Employment Trends Overall Trends Between 1989 and 1995 total employment in the aerospace industry declined by 545,000 workers, as shown in Table 1. In 1996 output and employment began to recover and they improved in 1997 (AIAA, 1997), and are forecast to increase for several more years (Aviation Week and Space Technology, 1997). The most important causes of the decline in employment were (1) declining defense budgets, (2) a worldwide recession in commercial aircraft demand, and (3) the effects of increased international competition. Between 1989 and 1995 overall aerospace employment declined by 40 percent. The decline in employment had very similar effects on production and non-production employment in the aerospace industry. The share of production workers in total industry employment fell only by 1.6 percentage points between 1989 and 1995, and the production worker share recovered strongly in 1997 (AIAA, 1997). The global recession in aircraft demand caused employment to fall in all major aircraft-producing nations, as shown in Table 2. Total aerospace employment in the triad countries (the United States, Europe, and Japan) fell by more than 550,000 workers, according to the European Commission (EC).2 However, the losses were not evenly spread. Employment in the United States and the United Kingdom, as reported by the EC, fell by about 42 percent between 1989 and 1995, but declined only 20 percent in the rest of Europe, 13 percent in Canada, and was unchanged in Japan. The United States absorbed about 74 percent of the job losses during this period, although only 62 percent of total triad aerospace employment was located in the United States in 1989. As a result of these differential impacts, the U.S. share of aerospace employment in the triad countries declined by about 6 percentage points between 1989 and 1995, as shown in Figure 1. The other members of the triad all gained employment share, relative to the United States (with the exception of the United Kingdom, as shown in Table 2). Data reviewed below suggest that one reason that employment levels remained higher in Europe was the growing share of Airbus Industrie in commercial aircraft markets. 2   The EC uses a narrower definition of the aerospace industry than does the Aerospace Industries Association of America, as shown in Table 2.

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--> TABLE 1 Aerospace Industry Employment, 1982-1997 (in hundreds of thousands) Year Total Aerospace Total Aircraft Civil Aircraft Military Aircraft Missiles and Space Other Related Other Related Share of Total (%) 1982 1,027 516 231 285 243 268 26.1 1983 1,027 484 174 310 259 284 27.7 1984 1,097 517 184 333 286 294 26.8 1985 1,206 588 210 378 294 324 26.9 1986 1,272 639 238 401 309 324 25.5 1987 1,300 653 257 396 316 331 25.5 1988 1,311 666 280 386 313 332 25.3 1989 1,331 702 326 376 306 323 24.3 1990 1,270 687 341 346 281 302 23.8 1991 1,180 660 345 315 251 269 22.8 1992 1,040 597 322 275 217 226 21.7 1993 907 523 275 248 176 207 22.8 1994 827 469 285 184 165 193 23.3 1995 786 423 256 177 172 181 23.0 1996a 805 451 282 168 171 183 22.7 1997b 826 469 304 165 172 185 22.4 a Preliminary. b Estimated. SOURCE: Economic Policy Institute analysis of AIAA (1996, 1997).

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--> TABLE 2 Aerospace Employment in Europe, Canada, Japan, and the United States, 1974-1995 Year United Kingdom Other European Union Total European Union United Statesa Canada Japan Total 1974 210,100 199,541 409,641 666,000 28,400 29,814 1,133,855 1979 196,566 227,071 423,637 775,000 37,700 31,666 1,268,003 1980 229,821 241,874 471,695 830,000 46,800 32,991 1,381,486 1984 203,202 262,318 465,520 817,000 44,041 34,200 1,360,761 1985 206,677 274,971 481,648 898,000 48,794 34,300 1,462,742 1989 189,911 295,829 485,740 992,000 66,106 38,300 1,582,146 1990 186,337 297,635 483,972 946,000 65,679 39,100 1,534,751 1994 119,353 240,954 360,307 616,000 54,031 38,100 1,068,438 1995 110,549 237,512 348,061 580,000 57,329 38,300 1,023,690 a Figures for U.S. employment include only companies in SICs 372. 376. 366. 381, and 382 and exclude other aerospace-related companies and their employees. SOURCE: European Commission (1994, 1997).

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--> Figure 1 Shares of triad aerospace employment. Source: Economic Policy Institute analysis of data from European Commission (1997). Causes of U.S. Aerospace Job Losses, 1989-1997 Industry revenues, measured in constant dollar terms, declined sharply in all the major sectors of demand in the early 1990s, as shown in Table 3. The sectoral changes were not evenly spread, as was the case with employment in Table 1. Total industry revenues fell 30 percent between 1990 and 1995 and increased 26 percent between 1995 and 1998. Civil aircraft sales fell by 32 percent in the first half of the 1990s, but are forecast to nearly double between 1995 and 1998. Missile sales declined much more rapidly than average and will remain flat through 1998. Space purchases (including research and development [R&D]) were essentially flat in the 1990s. Of the five major subsectors of the aerospace industry, shown in the last five columns of Table 3, civil aircraft sales were responsible for the greatest majority of the industry's $23 billion expected increase in real sales

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--> TABLE 3 Aerospace Industry Revenues (constant 1987 dollars, in millions) Year ($Millions) Total Aerospace ($Millions) Total Aircraft ($Millions) Civil Aircraft ($Millions) Military Aircrafta ($Millions) Missilesa ($Millions) Spacea ($Millions) Related Products and Services 1979 71,528 41,546 20,830 20,717 7,524 10,307 12,150 1987 110,008 59,188 15,465 43,723 10,219 22,266 18,335 1988 112,426 59,751 18,664 41,086 10,079 23,859 18,738 1989 113,604 58,011 20,644 37,367 12,839 23,821 18,934 1990 121,606 64,573 28,382 36,281 12,833 23,933 20,268 1991 121,508 66,246 32,673 33,573 9,572 25,438 20,251 1992 117,251 62,525 33,754 28,772 9,947 25,238 19,542 1993 101,636 54,314 27,323 26,991 6,973 23,409 16,940 1994 89,160 46,490 20,642 25,848 6,099 21,710 14,860 1995 85,473 43,654 19,005 24,649 5,857 21,717 14,246 1996 91,364 46,987 21,074 25,913 6,309 22,841 15,227 1997b 99,480 53,048 29,657 23,391 6,358 23,494 16,580 1998c 108,121 59,540 36,754 22,785 6,003 24,559 18,020 Change in Constant Dollar Revenues (%) 1979-90 70 55 36 75 71 132 67 1990-95 -30 -32 -33 -32 -54 -9 -30 1995-98e 26 36 93 -8 2 13 26 a Includes funding for research, development, testing, and evaluation. b Preliminary. c Estimated. SOURCE: Economic Policy Institute analysis of AIAA (1996, 1997).

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--> TABLE 4 Relationship of U.S. Aerospace Revenues to Exports, Imports, and the Balance of Trade (billions of current dollars) Year Total Aerospace Revenues ($) Total Aerospace Export Revenues ($) Exports as Percent of Total Aerospace Total Aerospace Import Revenues ($) Imports as Percent of Total Aerospace Aerospace Balance of Trade ($) 1979 45.4 11.7 25.9 1.6 3.6 10.1 1989 120.5 32.1 26.6 10.0 8.3 22.1 1990 134.4 39.1 29.1 11.8 8.8 27.3 1991 139.2 43.8 31.4 13.0 9.3 30.8 1992 138.6 45.0 32.5 13.7 9.9 31.4 1993 123.2 39.4 32.0 12.2 9.9 27.2 1994 110.6 37.4 33.8 12.4 11.2 25.0 1995 106.3 33.1 31.1 11.5 10.8 21.6 1996a 112.4 39.6 35.2 13.6 12.1 26.0 a Preliminary. SOURCE: Economic Policy Institute analysis of AIAA (1996, 1997).

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--> between 1995 and 1998. Increased sales of $3.8 billion in related products and services roughly offset losses in military sales in this period. Imports have also been rising rapidly, as shown in Table 4. Between 1989 and 1997, imports increased by $8.1 billion in nominal terms. The import share of the domestic market increased by 5.7 percentage points. One way to assess the effects of trade on employment is to construct a counterfactual scenario in which trade remains constant as a share of domestic output. In this scenario, if demand were unchanged in 1997, then domestic sales and output could have been 5.7 percent higher than they actually were if the import share had remained unchanged at its 1989 level. This translates into about 49,500 jobs, out of the actual loss of 462,000 jobs between 1989 and 1997(see Table 1). Thus, increased imports directly account for about 11 percent of the decline in aerospace employment observed in this period. Falling output also reduced employment, although a significant recovery had occurred by 1997, relative to the nadir reached in 1995. Total industry sales, in real terms, declined by 12.5 percent between 1989 and 1997 (Table 3). If output were unchanged in 1997, relative to 1989, then an additional 109,000 jobs would be been retained or created in this industry. Thus depressed demand for aerospace products explained about 24 percent of employment losses in this period. Declining demand in all sectors, especially in the military industries, was the most important cause of falling employment between 1989 and 1995 (as indicated in Table 3), but productivity and related factors played a more significant role after 1995.3 Productivity growth, broadly defined as output per worker, also eliminated significant amounts of aerospace employment in this period. The unexplained employment changes (those due to forces other than increased imports and demand changes) amounted to 292,000 jobs between 1989 and 1997, or two-thirds of all jobs lost in this period. However, this measure also includes the effects of changes in the capital/labor ratio, and interactions between productivity and the other factors discussed above (trade, demand, and capital intensity). In the absence of data on changes in capital inputs in this period it is impossible to estimate the effects on employment of total factor productivity growth, or pure technical change as it is usually measured by economists. Nonetheless, it appears that productivity growth does explain a substantial share of the job losses that did occur between 1989 and 1997. In assessing the causes of declining employment, it is also important to note that trade also has indirect effects on employment that are not reflected in the 3   Editing of the proceedings for this volume permitted updating of the data reported in this chapter. The analysis in this section has been revised to reflect changes in trade and output through 1997, as a result. These revisions altered the details of the analysis, but did not affect the basic conclusions. In particular, the trend rate of growth in the ratio of imported engines and parts to aircraft sales, a key indicator in the analysis in this chapter, accelerated sharply in 1997, as shown in Figure 4, below.

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--> Figure 2 Aerospace exports, imports, and trade balance. Source: Economic Policy Institute analysis of AIAA (1996, 1997). simple decomposition given above. For example, increased foreign competition may explain a significant portion of the observed productivity increase. In addition, the loss of foreign market shares also explains part of the decline in total sales. As shown below, Airbus, in particular, has sharply increased its share of foreign markets for commercial aircraft, which are some of the most important sources of demand for U.S. producers (Table 4). The increasing international competition, and the global decline in aircraft demand, led to a sharp decline in the nominal value of U.S. exports between 1992 and 1995, as shown in Table 4 and Figure 2. Exports began to increase again in 1996, stimulated by the end of the commercial aircraft glut of the early 1990s and also by the introduction of Boeing's new 777 aircraft. The effects of the international business cycle were amplified by a technology cycle in which Airbus was

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--> first to market with its new generation of long-haul aircraft (the A330 and A340 models, first delivered in 1993) and was therefore able to capture market share from the U.S.-based producers until the 777 was launched in 1995 (European Commission, 1997:20). Despite these difficulties, export sales fell less sharply in the early 1990s than other types of aerospace sales (Table 4). Therefore, because their share of domestic production increased, the constant share model suggests that export markets helped sustain domestic production in this period. Exports increased from 29.1 percent of total revenues in 1990 to 38.8 percent in 1997, an increase of 9.7 percentage points. Without this increase in export sales, U.S. aerospace employment would have been reduced by a similar amount in 1996. In other words, if the export share of U.S. aerospace sales had remained constant at its 1989 level, then there would have been approximately 84,000 fewer jobs created. The question that must be addressed is whether a constant export share is the appropriate counterfactual exercise. The United States controlled a substantial share of the world commercial aircraft industry in the 1980s, and in fact that share has fallen in the 1990s, as discussed below. It is the growth in overall world demand for commercial aircraft, in combination with the shrinkage of demand for other domestic aerospace products, that has caused the increase in the export share of U.S. aerospace sales. For these reasons it is incorrect to assume that these export sales, and the increase in the share of exports in total sales, would not have taken place in the 1990s unless imports had also increased, as suggested by some observers. The two trends are driven by different forces. Changes in imports and exports should be analyzed independently. Future Threats to U.S. Aerospace Employment Airbus and other potential new foreign competitors in the commercial aircraft industry are the most important direct threats to U.S. aerospace employment. This threat was realized and became increasingly important in the 1990s, as shown in Figure 3. The market share of Airbus and other European aircraft producers began to rise sharply, especially after 1992, in all significant markets. In the United States their share attained a peak of 30 percent in 1994 and has declined since. However, their share in the rest of the world (excluding the United States and Europe) increased by nearly 50 percent between 1994 and 1995, from 30 percent to nearly 45 percent. This reflects, in part, the technological cycle discussed above. However, it may also reflect (1) more aggressive sales promotions by European Union (EU) governments (for example, through more generous export financing), (2) more competitive pricing by Airbus, and (3) market-share gains through increased willingness to engage in offset transactions. In China, in particular, Airbus has increased its market share sharply and has also announced a number of joint and co-production arrangements with Chinese producers (see examples in Box 1).

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--> Figure 3 European Union shares of aircraft deliveries, by region of the world, 1986-1995. Source: Economic Policy Institute analysis of European Commission (1997). Airbus and the other European aircraft manufacturers have also maintained a larger share in their home market throughout the period shown in Figure 3. They became the dominant suppliers in Europe in the 1990s. In 1995 European firms captured 55 percent of their home market (measured in value terms), while controlling approximately one-third of the total world market for commercial aircraft sales. In 1995, 22 percent of European commercial aircraft sales were in their home market (European Commission, 1997:32). Boeing is also heavily dependent on exports. It now ''exports 70% of its commercial jets," a fraction that has been increasing in recent years (Waldmann, 1997:6). The relatively large market share of Airbus and other European aircraft producers in the EU suggests that European airlines (public, private, and mixed) may be skewing sales to European firms for non-market reasons. Although such preferences may violate the spirit or letter of the 1979 General Agreement on Tariffs and Trade (GATT) aircraft agreement (signed by the United States and the countries of the EU) or the 1992 civil

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--> Figure 4 U.S. engines and parts imports as a growing share of total aircraft sales. Source: Economic Policy Institute  analysis of AIAA (1996, 1997). Third, there is some evidence of a stable or increasing trend in employment in the U.S. aircraft parts industry. This is illustrated in Figure 6, which compares employment in parts with employment in the much larger airframe sector. This comparison also reveals that employment in parts is somewhat more volatile than in the airframe sector. There are several possible explanations for these trends that are consistent with the evidence on rising parts imports shown in Figure 4. First, as the technological complexity of aircraft has increased it is likely that the number and value of components (electronics, for example) has also increased, as a share of value added. Second, modularization of component production has eliminated final assembly labor in a wide range of industries, from motor vehicles to electronics, so it is not surprising to observe evidence of that trend here. Finally, products counted as parts may substitute for production that used to take place within the plants of airframe manufacturers. Several examples of this are given in Box 1 that involve Chinese offsets and outsourcing, including doors,

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--> Figure 5 Long-run decline in employment in aircraft production. Source: Economic Policy Institute analysis of Bureau of Labor Statistics (1997) and AIAA (1996, 1997). fins, stabilizers, and body parts for various types of commercial aircraft. As a consequence of each of these trends, employment in airframe manufacturing appears to be declining, relative to both domestic and foreign parts production. Thus, domestic workers in the airframe industry are correct to blame both outsourcing and imports for job loss in their industry. The higher level of variability in parts employment suggests that employment in parts production is more heavily affected by the business cycle than is employment in the airframe sector. The secondary or sub-tier supplier base therefore appears to absorb a disproportionate share of the job losses that occur during downturns, once we control for the long-run shift of employment out of engines and airframes, as discussed above.

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--> Figure 6 Employment in aircraft parts versus airframes. Source: Economic Policy Institute analysis of Bureau of Labor Statistics (1997) and AIAA (1996, 1997). Jobs at Risk in the Future In this section, employment effects of growing foreign competition, and also foreign outsourcing and other practices that encourage U.S. firms to shift component and parts production abroad, are briefly re-examined. As noted by several other contributors to this volume and other participants in the National Research Council conference (Wessner and Wolff, 1997), offsets are an important threat to domestic production in both military and commercial aircraft production. These problems are particularly important in the case of trade with large, non-market economies because of the role of and bargaining power exercised by government officials as the ultimate arbiters of all major import purchasing decisions. Some examples of current offset and co-production practices are illustrated in Box 1.

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--> Boeing officials have acknowledged that their company does enter into voluntary offsets "as a means of gaining market access" (Waldmann, 1997:6). Other analysts concluded that, although the issue of offsets is "not even on the radar screen" at the present time, offsets will increase and become a "major factor over the next decade or two" (Bozdogan 1997:27). These views are confirmed by closely examining the trends discussion above and their implications for future employment in the U.S. aerospace industry. International competition threatens U.S. production in at least two distinct ways. First, the market share of U.S. producers of commercial aircraft could decline in the future as a result of market-share gains by Airbus Industrie and/or other potential new entrants to this market.8 This will impact U.S. employment primarily by reducing U.S. exports because the majority of commercial aircraft produced in the United States are now sold in export markets, as noted above. The second threat to domestic employment is through increases in the foreign content of domestically produced aircraft as a result of increases in offsets and other forms of international component outsourcing. Ultimately, such outsourcing could help create new competitors to U.S. producers and hence exacerbate the first type of international competition. However, such secondary effects are ignored here and only the effects of increases in the foreign content of domestically produced aircraft on U.S. aerospace employment are considered. The foundations for my estimate of the number of jobs at risk in the future because offsets increase foreign competition are (1) the 1994 DRI/McGraw-Hill study of the U.S. manufacturer market share, as reported in Barber and Scott (1995:43-45) and (2) Boeing's estimates of the future world market for commercial aircraft. These estimates are used to forecast the future effects of increased foreign competition on total (constant dollar) sales of U.S. aerospace products. The potential job losses that could result from offsets and other types of foreign outsourcing are estimated by extrapolating the current trend in the rate of growth of aircraft engines and parts (see Figure 4) as a share of the value of total domestic aircraft sales (military and commercial). I assume that real output remains constant at the level that prevailed in 1994 and that the trend in the rate of growth in the imported parts share continues through 2013.9 A recently released (Department of Labor, 1996) input-output-based employment requirements table is used to estimate the direct and indirect employment effects of trade for both types of employment threats. These procedures are similar to those used in Barber and Scott. However, they differ in two respects. First, use of the new input-output table provides industry-specific employment 8   This analysis ignores competitive threats in the military and space sectors. Increased competition in any of these other sectors could further reduce domestic employment opportunities in the aerospace industry. 9   The year 1994 is taken as a base for comparison with the estimates developed in Barber and Scott (1995:40-47).

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--> TABLE 6 Potential Job Losses Attributable to Increased Foreign Content of Aircraft Made in the United States and Total Jobs at Risk Due to Foreign Competition, 1994-2013   Revenue ($ billions) Total Job Losses Period Peak Annual Lost Revenue Cumulative Lost Revenue Total Jobs Direct Jobs Indirect Jobs 1994-1998 1.6 4.0 17,863 10,219 7,644 1999-2003 3.5 17.8 39,498 22,596 16,902 2004-2008 5.4 41.1 60,386 34,546 25,840 2009-2013 7.2 73.5 80,553 46,083 34,470 Projected Losses Due to Declining U.S. Market Share   Average Annual Lost Revenue         1994-1998 2.1 10.7 23,933 13,692 10,241 1999-2003 4.2 31.8 47,194 26,999 20,195 2004-2008 7.3 68.4 81,863 46,833 35,031 2009-2013 12.0 128.6 134,650 77,031 57,619 Total Jobs at Risk Due to Increased Foreign Competition 1994-1998 3.7 14.7 41,796 23,911 17,885 1999-2003 7.8 49.6 86,692 49,595 37,097 2004-2008 12.7 109.5 142,249 81,378 60,871 2009-2013 19.2 202.1 215,202 123,114 92,089   SOURCE: Economic Policy Institute analysis of DRI/McGraw-Hill (1994:9-1 1) and Boeing Company (1994: Appendix C). multipliers that are much more accurate (and significantly smaller) than those used in the prior study. Second, the share of imported parts and components in aircraft sales is used to estimate the effects of outsourcing. This is a much more precise and appropriate base than the one used in our previous research (trends in total imports as a share of total aerospace sales). The resulting projections of output and job losses are shown in Table 6. The first panel in the table reports the effects of increased foreign outsourcing, assuming that the trend of increasing foreign content of the past decade continues into the future. The first column of results shows the annual loss in output, relative to

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--> the base year of 1994 in constant dollars.10 Employment losses are calculated, using the multipliers described above, at the end point of each period. Cumulative losses in output are shown for informational purposes only and are not directly used to calculate employment effects. The employment losses shown are the permanent losses of job opportunities, based on the given annual reductions in domestic output. More than half of all jobs resulting from a given amount of expenditure on aircraft are located in the aircraft and parts industries (direct jobs). Within ten years (by 2003) of the base year, 22,596 aerospace jobs will have been eliminated by outsourcing, plus an additional 16,902 indirect jobs in industries that provide inputs to the aerospace industry, for a total loss of 39,498 jobs. Within two decades, offsets and other forms of foreign outsourcing could eliminate 46,083 aerospace jobs and 34,470 jobs in other industries for a total loss of 60,553 jobs. The direct jobs lost in 2013 would equal 9.6 percent of total aircraft employment in 1994.11 This estimate of job loss may be too small for several reasons. First, Bozdogan (1997) and others appear to suggest that the growth of offset activity could accelerate in the future. Second, these estimates do not include any "indirect offsets" in other aerospace or non-aerospace sectors. However, recent reports from the U.S. Department of Commerce (Department of Commerce, BXA, 1996) suggest that indirect offsets are increasing as a share of total offsets, at least in the military sector. Finally, the base of production in 1994 is quite low because the recovery in aircraft production had not yet occurred (see Table 3). If a later base year were assumed, or if we assume that the trend rate of growth in output is positive, then job losses as a result of outsourcing will increase. On the other hand, some suggest that the level of outsourcing is constant or leveling off (Waldmann, 1997). If so, then the outsourcing estimates in Table 6 may be too high. The threat of reductions in the U.S. share of the world commercial aircraft market could have an even larger effect on employment than outsourcing in the next two decades, as shown in the second panel of Table 6. In this case the U.S. 10   The U.S. market share trend line was derived from historic data (1970-1992), combined with DRI/McGraw-Hill market share projections ( 1994-2000) and then extrapolated to 2013. Estimated lost commercial jet aircraft sales are derived from the difference between the 1989-1993 average U.S. revenue market share (73.5 percent) and the projected market share described above, using Boeing forecasts for constant 1994 dollar global revenues through 2013. Estimated job losses are derived from Bureau of Labor Statistics (1996) input-output data on the jobs supported by final demand for aircraft, expressed in 1987 dollars for the year 1993, which reports that 13,748 total jobs (7,865 direct and 5,883 indirect) were supported in 1993 by each $1 million (1987 dollars) in final demand for aircraft. Comparable estimates, expressed in constant 1994 dollars (adjusted for changes in aerospace prices between 1987 and 1994) are 11,184 total jobs (6,398 direct and 4,786 indirect) per $1 million of final demand (1994 dollars). These figures were then multiplied by projected revenue losses, from the 1994 base, to estimated lost jobs, as described in the text. 11   The base of comparison in this example includes only those workers employed in aircraft and parts (Standard Industrial Classification 372).

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--> share of the world market for commercial aircraft, which has been declining since at least 1970, could fall from approximately 80 percent in 1990 to 50 percent in 2003 and 35 percent in 2013, using the assumptions made by Barber and Scott (1995: Figure 11, p. 44). The new multipliers described above are used to estimate the employment effects of the output losses implied by these forecasts. By 2003, 26,999 direct jobs and 20,195 indirect jobs could be lost, for a total of 47,194 jobs lost in aerospace and related industries. Within two decades, 77,031 direct jobs and a total of 134,650 direct and indirect jobs could be lost because of declining U.S. shares of the world market. The effects of outsourcing and potential losses of international market share are combined in the last panel of Table 6. By 2003, 49,595 direct and a total of 86,692 direct and indirect jobs could be lost in aerospace and related industries. By 2013, these totals increase to 123,114 direct and 215,202 total jobs lost. The direct jobs lost in 2013 would represent 25.6 percent of the total jobs in aircraft production in 1995. Although foreign competition will not eliminate the U.S. aerospace industry in the next two decades, it could greatly undermine employment in this critical high-skill, high-wage industry that, for at least four decades, has been one of America's leading export sectors. These estimates of jobs at risk hold domestic output and labor requirements constant at levels prevailing in the mid-1990s. Other factors could increase or decrease actual employment in the aerospace industry. Given these assumptions, productivity growth would also reduce employment in the industry. On the other hand, if aircraft and parts exports continue to grow, they would put upward pressure on employment.12 This paper does not forecast the impact of changes in overall demand, or of productivity growth. However, it is likely that overall U.S. aerospace employment will follow a declining trend in the future. Both productivity growth and increased foreign competition will put substantial downward pressure on employment. Despite the strong upsurge in aerospace exports and revenues between 1995 and 1997, based on data in Table 3, aircraft sales and industry revenues remained 18 and 22% below their previous cyclical peaks (in constant 1987 dollars) in the early 1990s. The sharp increase in EU market shares between 1992 and 1995 (Figure 3) and the continued improvement in Airbus shares of aircraft sales in 1997, suggest that the U.S. share of the commercial aircraft market may be declining more rapidly than was assumed in Table 6. The surplus in aircraft parts, reflects, in part, aftermarket sales of the existing base of aircraft, which is dominated by U.S.-made planes. Rapid growth in the global stock of Airbus aircraft, and the retirement of older U.S.-made models, will begin to erode this surplus within the next five to ten years. 12   The need to consider productivity and output growth was noted by David Mowery, who also pointed out that the U.S. trade surplus in aircraft parts and equipment has grown for the past 8 years.

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--> For these reasons, U.S. aerospace employment is likely to decline in the future. Offsets, outsourcing, increased foreign competition and productivity growth will all contribute to these declines. While it is not possible to say which of these factors will be most important, they are all related to the decline of the U.S. as a competitive location for aerospace production, and the falling market shares of U.S.-based aircraft integrators. Expected future job losses in the aerospace industry can only be avoided or reduced through sharp improvements in the competitiveness of the U.S., and of aerospace firms based in this country. Conclusions and Policy Alternatives Other countries are actively targeting the commercial aircraft industry. The Chinese and other Asian governments are using trade and industrial policies to capture production and technologies from the United States. Many of these systems were developed with public support. The U.S. aerospace industry stands at the edge of a precipice. If the challenges it faces are not addressed, at least 215,000 additional jobs in aerospace and related industries will be eliminated over the next two decades. In Barber and Scott (1995) we develop a broad range of policy recommendations that are needed to restore and maintain the international competitiveness of the U.S. aerospace industry. These include: creation of an aerospace executive and an interagency task force within the National Economic Council; promotion of aerospace production and employment through reform of government regulatory processes, including those that encourage firms to engage in offsets, and new programs to stimulate domestic demand for aerospace research and products; and negotiating fair international trade agreements, including new initiatives to bring China into compliance with the GATT codes and their own Memos of Understanding and other agreements with the United States. These policies, taken as a whole, could constitute the initiation of a coordinated industrial policy for the aerospace sector. The United States is unique among developed and many of the larger developing nations in its refusal to develop and implement conscious and coherent industrial policies for the aerospace industry. The United States clearly has industrial policies for this sector, but they are uncoordinated, incoherent, and frequently internally contradictory. Discussion and debate over the past two years, as reflected in the National Research Council conference (Wessner and Wolff, 1997) and in other papers in this volume, clearly suggest that a new national system for monitoring commercial offsets is urgently needed. This system should encompass both mandatory and voluntary offsets. Additional measures are also needed to address the causes of offset and

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--> outsourcing problems. Defense demand has apparently stabilized, and the industry has begun to recover from a global aircraft glut, but the recovery has had only a small positive effect on industry employment. Foreign competition is now the most important future threat to domestic aircraft demand, as shown above. Rising imports of engines, parts, and components, in particular, are the result of offset deals that Boeing and McDonnell Douglas have made with foreign governments to trade aircraft sales for production and technology transfer. Offsets are the result of a prisoners' dilemma problem. In China, for example, there is effectively only one major buyer in this rapidly growing market (the government), and all three major assemblers are competing for sales by offering offsets. These companies are giving away more technology and production than would be warranted if the market were competitively structured. Controlling Offsets U.S. trade problems could be greatly improved through further agreements with the EU. The United States should open negotiations to revise the 1992 Aircraft Agreement with the EU, which technically expired in 1994 when it was excluded from the Uruguay Round Trade Agreements. In addition to reopening the subsidies provisions (which U.S. manufacturers feel are far too weak), there is an opportunity to fix the prisoners' dilemma problem from the supplier's side by prohibiting the export of jobs and technologies in exchange for sales. The EU may also be motivated to participate in such talks because of unresolved concerns about the merger of Boeing and McDonnell Douglas. U.S. firms have opposed a unilateral limit on offsets because they believe it would result in lost sales to Airbus. A new U.S.-EU agreement could benefit both Boeing and Airbus by restoring a competitive balance to this industry. One precedent for government regulation of unfair sales practices is the Foreign Corrupt Practices Act (FCPA) of 1977, which was adopted after the discovery of a $12 million bribe paid in a sale of Lockheed L-1011 aircraft. Despite harsh penalties (both fines and imprisonment), the temptation to cheat may still be irresistible. It was recently reported that General Dynamics paid a $100 million bribe for a Korean military aircraft sale. One problem with the FCPA is that it was imposed unilaterally, and only on U.S. firms. The FCPA approach can serve as a model, but it must be modified to solve the aerospace trade problem. The solution to the prisoners' dilemma is to impose a new marketing limit (no offsets in exchange for sales) multilaterally. The United States and the EU should adopt essentially identical measures proscribing such behavior by firms based in each region. This agreement would reduce the trade and jobs-distorting use of offsets worldwide. This measure should be acceptable to both U.S. and European aircraft manufacturers, because all would experience higher levels of future sales and production than they would without the agreement.

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--> Defining the National Interest Clearly, the United States has a national interest in aircraft sales and the movement of production and technologies abroad, which is different from that of the aircraft companies. Boeing and McDonnell Douglas may be content to become ''virtual companies," designing planes but outsourcing most or all of their production. Stockholders' interests may be protected by collecting royalties on technologies developed with public support in the United States. However, U.S. workers and suppliers will clearly suffer. Decisions about key aerospace technologies should be designed to protect the national interest in jobs and exports as well as corporate profits. All three can benefit from prompt, effective government action if the United States does not wait too long. If it does, aircraft production could go the way of color TVs and DRAMs (dynamic random access memories), and with it, the U.S. trade balance and future standard of living. If the United States acts quickly, it can retain and rebuild a strong aerospace industry for the twenty-first century and the high-wage, high-skills jobs that go with it. References AIAA (Aerospace Industries Association of America, Inc.) 1996 and earlier editions. Aerospace Facts and Figures. Washington, D.C.: AIAA. AIAA (Aerospace Industries Association of America). 1997. 1996 Year-end Review and Forecast UPDATE. Washington, D.C.: AIAA. Almeida, B. 1997. Are Good Jobs Flying Away? U.S. Aircraft Engine Manufacturing and Sustainable Prosperity. Unpublished manuscript. Center for Industrial Competitiveness, Lowell, Mass. Aviation Week and Space Technology. 1997. "Robust 1996 sales for Boeing, Airbus," January 13, 146(2):371. Barber, R., and R.E. Scott 1995. Jobs on the Wing: Trading Away the Future of the U.S. Aerospace Industry. Washington, D.C.: Economic Policy Institute. Boeing Company. 1994. Commercial Market Outlook, 1994. Seattle, Wash.: Boeing Company. Bozdogan, K. 1997. Is anyone there? Monitoring U.S. strategic interests. In C.W. Wessner and A.M. Wolff, eds, Policy Issues in Aerospace Offsets : Report of a Workshop. Washington, D.C.: National Academy Press. Bureau of Labor Statistics. 1996. Employment Outlook: 1994-2005 Macroeconomic Data, Demand Time Series and Input Output Tables. Office of Employment Projections. Washington, D.C.: U.S. Department of Labor. Department of Commerce, Bureau of Export Administration. 1996. Offsets in Defense Trade. May, U.S. Government Printing Office. DRI/McGraw-Hill and the Teal Group. 1994. High-Skill. High-Wage Production Jobs in the U.S. Aviation Industry. Lexington, MA: DRI/McGraw-Hill. European Commission. 1994 and 1997. The European Aerospace Industry : Trading Position and Figures. Brussels, Belgium: European Commission, Directorate-General III. Johnson, J. 1997. Maintaining high value-added exports amidst structural change. In C.W. Wessner and A.M. Wolff, eds., Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, D.C.: National Academy Press. Seattle Times. 1996. How Boeing Woos Beijing. Stanley Holmes, May 26, p. Al.

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--> Waldmann, R. 1997. Strategies for success in the commercial aircraft market. In C.W. Wessner and A.M. Wolff, eds., Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, D.C.: National Academy Press. Wessner, C.W., and A.M. Wolff, eds. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, D.C.: National Academy Press.