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GROWING GOVERNMENT INVOLVEMENT IN TRADE 77 (U.S.-French) partnership5 was competing vigorously with Pratt and Whitney. The specific engine involved was a version of the CF6, but GE and SNECMA had an extensive history of coproduction of engines and were also currently partners in developing a new engine, the CFM 56. Which engine Air France should be allowed to purchase was the subject of debate between ministries of the French government and was the subject of two formal interministerial reviews. The government finally directed purchase of the GE/SNECMA engine, with its partial French content. This example not only demonstrates the impact of government involvement but also the advantage of an international partnership for a U.S. manufacturer. The trends in air transport noted earlier, which forecast more rapid growth for the developing countries, amplify the significance of government involvement in future marketing and sales. Since most airlines in these countries are nationally owned and aircraft procurements represent major expenses, the procurements are subject to review at ministerial levels. Inevitably, the process is politicized. With Airbus looming as a major competitor, the opportunity is growing for purchasing decisions to be made, as they have been, through government-to-government negotiations. Situations in which a foreign government is involved in negotiations are frequently subject to widespread allegations of offers of tie-in sales, technology assistance in other fields, and counter-trade proposals that a private firm cannot match. The belief is widespread in industry that these inducements are frequently used and are effective. Not surprisingly, no documented evidence of such arrangements is available. The experience of U.S. government administrators who monitor activities in this field is that such actions are sometimes attempted, but in fact rarely work and can be countered by candid discussion. On occasion the pressure generated by zealous government support has been counterproductive. These somewhat differing points of view undoubtedly reflect the different channels of information that are available to each group. IMPLICATIONS FOR INTERNATIONAL TRADE AGREEMENTS The Agreement on Trade in Civil Aircraft, effective January 1, 1980, concluded under the General Agreement on Tariffs and Trade (GATT) as part of the Tokyo Round, is one of several multilateral agreements intended to control and monitor government subsidies and other trade practices affecting civil aircraft sales. This agreement requires the abolition of all customs duties on trade in aircraft and many of their components, the avoidance of
GROWING GOVERNMENT INVOLVEMENT IN TRADE 78 government pressure on parties to procurement transactions, and requires that "civil aircraft prices should be based on a reasonable expectation of recoupment of all costs." The agreement has facilitated trade in aircraft components, but is neutral to the internationalization of the industry through joint ventures and licensing. Although practice varies among countries, the experience of U.S. trade administrators and U.S. industry is that the agreement is useful. For example, both Great Britain and West Germany are thought to exact conditions for lending and repayment that are somewhat comparable to those that would be required by private financiers. The issue of subsidy is exceedingly complex, In virtually every developed country, including the United States, intimate relationships between government and aircraft manufacturing have existed for decades. The relationship covers every aspect of the industry from research to manufacturing facilities to sales financing. Modes of support are diverse and obscured by the passage of time. Opportunities for argument abound on every detail that may be under negotiation regarding a particular sale and legitimate costs for the pricing of a product. Consequently, one must have modest expectations regarding attainable progress in trade discussions to assure compliance with agreements. One must keep in mind that the U.S. objective is not to eliminate subsidies (an unrealistic goal), but rather to eliminate trade-distorting subsidies such as selling below cost.6 The fact remains that negotiations related to previously agreed trade standards represent the only vehicle currently accepted by our trading partners. The United States has little choice except to pursue trade negotiations as vigorously as possible, recognizing their limitations. To do otherwise invites trade wars with implications and ramifications that are difficult to predict, much less control. The aircraft industry suffers from two special vulnerabilities connected with the ex post facto monitoring of compliance with international trade agreements: the large size of individual aircraft purchases and the leverage gained by initial sales. Aircraft purchases tend to come in spurts rather than in a continuous flow as an airline replaces aging equipment or adds capacity. Consequently, by the time the terms of a transaction have been determined to be in violation of a trade agreement the entire sales opportunity can be over. The importance of this circumstance is magnified by the leverage of initial orders. Airlines prefer commonality of equipment for better logistics in stocking parts and for greater efficiency in the operation of flight and maintenance crews. Consequently, the manufacturer who secures the initial order has a major advantage with respect to all subsequent orders.
GROWING GOVERNMENT INVOLVEMENT IN TRADE 79 While various provisions of the Agreement on Trade in Civil Aircraft have been questioned, the agreement does provide a forum for discussion on trade policy issues that can prevent the occurrence of or help resolve a dispute before it escalates. It also strengthens the basis for demonstrating injury and pursuing countervailing duties and other actions within the United States, The agreement is weakened to a degree by its failure to include all of the nations involved in aircraft production. Brazil, Israel, Spain, Indonesia, and Australia are not signatories. There is some reason to believe that their reluctance to sign reflects a desire to change their competitive position in the world market. Spain will be brought under the terms of the agreement should it join the E.E.C. The agreement's enforcement on a "most-favored nation" basis, however, means that signatory and nonsignatory nations are treated equally by signatories and thus nonsignatories have no incentive to join insofar as tariff protection is concerned. The "most-favored nation" treatment, however, does provide a basis for discussions with nonsignatories of their policy on import restrictions. Brazil, Israel, and Indonesia are protected by the agreement's tariff provisions in approaching the U.S. market, but the agreement is not binding on their governments with regard to sales in those countries, Enforcement of the agreement, though aggressively pursued, has been hampered to some degree in the past by insufficient data and staff resources. Recent steps taken in the U.S. Department of Commerce to organize along the lines of industrial segments and to increase staff manyfold have dramatically strengthened the U.S. capability for monitoring and enforcement. U.S. administrative support is now comparable in an absolute sense with that in key European countries; however, elected officers at the highest level, the diplomatic corps, and even royalty are thought to be more actively involved in supporting trade than their counterparts in the United States. Furthermore, the aggregate participation of those countries in international trade in civil aircraft is small compared with its importance to U.S. trade. Unfortunately, our expanded effort is vulnerable to the political changes in administration. The panel endorses the recent action to strengthen capability for monitoring and enforcement and recommends that the importance of this activity receive sufficiently broad political endorsement that it transcends changes in administration. The panel recommends continuing vigorous efforts by the United States to bring into the Agreement on Trade in Civil Aircraft those nonsignatory countries currently or prospectively exporting to the United States. One might argue that this effort could be facilitated by the possible revocation of "most-favored nation" status for nonsignatory countries, a basic principle of GATT. Such a step
