EU-US AIRPLANE SUBSIDY DISPUTES AIRBUS vs. BOEING

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A Thesis Submitted for the Degree of PhD at the University of Warwick

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EU-US AIRPLANE SUBSIDY
DISPUTES

AIRBUS vs. BOEING

By

Stephen Shimada

A thesis submitted in partial fulfillment of the requirements for the degree of
Doctor of Philosophy in Politics

University of Warwick, Department of Politics and International Studies

June, 2012
TABLE OF CONTENTS

TABLE OF CONTENTS .............................................................................. I
ACKNOWLEDGEMENTS ........................................................................ VI
DECLARATION ................................................................................... VIII
ABSTRACT .............................................................................................IX
ABBREVIATIONS ...................................................................................XI
INTRODUCTION ..................................................................................... 1
LITERATURE REVIEW ............................................................................. 5
RESEARCH OBJECTIVES ......................................................................... 8
RESEARCH QUESTIONS ......................................................................... 9
RESEARCH METHODOLOGY AND HYPOTHESES .................................. 10
STRUCTURE OF THE THESIS ................................................................. 12
CHAPTER 1 ........................................................................................... 15
THEORETICAL FOUNDATIONS .............................................................. 15
INTRODUCTION .................................................................................. 15
THE THEORY ONE: STATE-BUSINESS RELATIONSHIPS .................... 16
THE THEORY TWO: “VARIETIES OF CAPITALISM” APPROACH TO THE
THEORY OF STATE-BUSINESS RELATIONSHIPS ............................... 22
CORE COMPETENCIES ......................................................................... 24
LIBERAL MARKET EONOMIES (LME) AND COORDINATED MARKET .... 25
ECONOMIES (CME) ............................................................................. 25
AMERICAN STATE-BUSINESS RELATIONSHIP ...................................... 27
FRENCH STATE-BUSINESS RELATIONSHIP ........................................... 29
GERMAN STATE-BUSINESS RELATIONSHIP ......................................... 31
AMERICAN LIBERAL MARKET ECONOMY (LME) VS. GERMAN
COORDINATED MARKET ECONOMY (CME) ......................................... 33
BRITISH STATE-BUSINESS RELATIONSHP ............................................ 34
CONCLUSION ...................................................................................... 38
CHAPTER 2 ........................................................................................... 41
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AIRBUS, BOEING, AND THE WTO ......................................................... 41
INTRODUCTION .................................................................................. 41
STATE-BUSINESS RELATIONSHIPS IN EUROPEAN AEROSPACE INDUSTRY
............................................................................................................ 42
THREE STATE- BUSINESS RELATIONSHIP MODELS ......................... 44
ACTOR CENTERED CONCEPT AND CORE COMPETENCIES .............. 46
GOVERNMENT SUBSIDY DISPUTES BETWEEN THE EU AND THE US
....................................................................................................... 47
STATE-BUSINESS RELATIONSHIPS .................................................. 48
THE AIRPLANE SUBSIDY CASE IN THE WTO ......................................... 58
AIRBUS ........................................................................................... 59
BOEING .......................................................................................... 60
THE WORLD TRADE ORGANIZATION (WTO)........................................ 65
CONCLUSION ...................................................................................... 68
CHAPTER 3 ........................................................................................... 71
MAKING/MARKETING LARGE COMMERCIAL AIRPLANES ..................... 71
INTRODUCTION .................................................................................. 71
MARKET CHARACTERISTICS ................................................................ 72
MAKING AIRFRAMES .......................................................................... 76
EFFECTS OF SCALE AND SCOPE ECONOMIES ....................................... 77
MARKETING LARGE COMMERCIAL AIRPLANES ................................... 78
AIRBUS MARKETING STRATEGIES ....................................................... 81
Airbus’s Marketing Focus ............................................................... 81
Airbus’s Concept of Hub and Fragmentation ................................. 82
Airbus A380 Launch Customer – Singapore Airlines ...................... 84
Airbus’s Strategies for Asia ............................................................ 85
Airbus’s Portfolio Mix ..................................................................... 86
BOEING’S MARKETING STRATEGIES .................................................... 86
Boeing’s Direct Expansion .............................................................. 86
Vertical and Horizontal Integration ............................................... 86
Boeing’s “Core Competencies” and “Market Shaping” Strategy ... 87
Boeing Marketing Strategy: Boeing B787 vs. Airbus A380/A350 .. 88
Boeing’s Business Strategy ............................................................ 92
Two-Year Delays of Boeing’s “New Generation” B787 .................. 93
Boeing’s Portfolio Mix .................................................................... 93
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CHAPTER 4 ........................................................................................... 95
THE TERMINATION OF THE 1992 EU-US AGREEMENT ......................... 95
INTRODUCTION .................................................................................. 95
THE 1992 GATT AGREEMENTS AND THE 2004 TERMINATION ............ 96
1992 GATT Agreement ................................................................... 97
The 2004 US Termination of the 1992 Bilateral Agreement .......... 98
The 2004 US’s Allegations and Assertions ................................... 100
THE EU’S ALLEGATIONS AND COMPLAINTS ....................................... 103
THE EU-US DISPUTES OVER FOREIGN SALES CORPORATIONS (FSC) . 104
THE WTO CASE ON AIRBUS SUBSIDIES .............................................. 106
NEGOTIATION OF NEW BILATERAL AGREEMENT .............................. 108
FRAMEWORK FOR NEGOTIATIONS ................................................... 110
CONCLUSION .................................................................................... 114
CHAPTER 5 ......................................................................................... 117
THE CASE OF THE EU AT THE WTO ..................................................... 117
INTRODUCTION ................................................................................ 117
THE EU’S ALLEGATIONS AT THE WTO ................................................ 117
THE EU’S LEGAL CLAIMS .................................................................... 124
WTO DISPUTE PROCESSES FROM 2007 TO 2008 ............................... 125
THE EU WTO CHALLENGE TO US SUBSIDIES TO BOEING (WTO CASE
DS353) .............................................................................................. 125
First Panel Hearing ....................................................................... 126
The US Reply to the EU’s Challenge Filed by European Commission
..................................................................................................... 127
CONCLUSION .................................................................................... 137
CHAPTER 6 ......................................................................................... 140
THE CASE OF THE US AT THE WTO ..................................................... 140
INTRODUCTION ................................................................................ 140
US ARGUMENTS - THE US REBUTTAL OF THE EU’S ADVERSE EFFECTS
ALLEGATIONS (DS353) ...................................................................... 142
FOUR MAJOR “ADVERSE EFFECTS” ARGUMENTS (THE US COUNTER-
ARGUMENTS) ................................................................................... 142
THE US REBUTTAL OF THE EU’S SUBSIDY ALLEGATIONS .................... 146
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CONCLUSION .................................................................................... 169
CONCLUSIONS ................................................................................... 170
EU-US AIRPLANE SUBSIDY DISPUTES ................................................ 170
POLITICAL-ECONOMIC VARIABLES .................................................... 171
FINDINGS .......................................................................................... 172
THEORETICAL IMPLICATIONS............................................................ 180
CONCLUDING STATEMENTS ............................................................. 183
GENERAL CONCLUSIONS ................................................................... 185
RESEARCH QUESTIONS AND ANSWERS ............................................ 186
RESEARCH QUESTIONS #1 ............................................................ 187
RESEARCH QUESTIONS #2: ........................................................... 191
RESEARCH QUESTIONS #3: ........................................................... 200
CONCLUSIONS OF THE RESEARCH QUESTIONS ................................. 211
EXPLANATIONS ON THE HYPOTHESES .............................................. 212
BIBLIOGRAPHY .................................................................................. 214
TRADE JOURNALS AND NEWSPAPER ARTICLES ................................. 214
BOOKS AND ARTICLES ....................................................................... 216
APPENDICES ...................................................................................... 232
EXHIBIT 1 AIRBUS VS. BOEING MARKET SHARE (%) BY THE NUMBER OF AIRPLANE
DELIVERED ........................................................................................... 232
EXHIBIT 2 BOEING AIRPLANE ORDERS – NEW NET ORDERS FOR 2005 VS. 2006
.......................................................................................................... 232
EXHIBIT 3 2001-2005 BOEING FINANCIAL HIGHLIGHTS .............................. 232
EXHIBIT 4 2003-2006 BOEING ANNUAL ORDERS SUMMARY ....................... 233
EXHIBIT 5 BOEING 787-8 VERSUS AIRBUS 350-800 .................................. 234
EXHIBIT 6 BOEING 787 - GLOBAL AIRFRAME MANUFACTURING EFFORT ......... 234
EXHIBIT 7 LENGTH OF TIME REQUIRED FOR SETTLEMENT PROCEDURE BY STAGE235
EXHIBIT 8 MAIN STAGES OF THE PANELS’ WORK ........................................ 235
EXHIBIT 9 OVERVIEW OF US SUBSIDIES TO BOEING’S LARGE CIVIL AIRCRAFT (LCA)
DIVISION .............................................................................................. 236
EXHIBIT 10 SINGLE-AISLE PASSENGER AIRPLANES ...................................... 240
EXHIBIT 11 TWIN-AISLE PASSENGER AIRPLANES ........................................ 240
EXHIBIT 12 THE COMMISSION’S DIRECTORATES-GENERAL, SERVICES AND OTHER
.......................................................................................................... 240
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EXHIBIT 13 OBJECTIVES ASSOCIATED WITH COMPETITION POLICIES............... 241
EXHIBIT 14 ARTICLE 85[81] OF THE EEC TREATY ON EUROPEAN UNION ........ 242
EXHIBIT 15 ARTICLE 86[82] OF THE EEC TREATY ....................................... 243
END NOTES ........................................................................................ 244

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ACKNOWLEDGEMENTS

This research could not have been completed without the help and the generous
support from great many people. At Warwick I was very fortunate to have Professor
Wyn Grant, the distinguished scholar in the politics as my PhD thesis supervisor. It
was an immense privilege to conduct my research under his supervision. He offered
me innumerable suggestions and a great deal of enlightened guidance and advice
for continuous improvement of my research. I am also very grateful to my second
supervisor, Professor Dominic Kelly at Warwick for offering me helpful insights,
invaluable comments from which the quality and the value of this research were
greatly enhanced.
I have benefited immensely from the advice of many other scholars who
have read all or various parts of the manuscript. I am especially grateful to two other
Warwick professors, Shaun Breslin and Peter Burnham for providing me with basic
skills on how to develop this thesis in the early stage of my research work.
My special thanks go to the following Boeing officials who spent time with
me from their busy schedules discussing their views on the current subsidy disputes
between Airbus and Boeing: Mr. Ted Austell, Boeing Vice President for International
Trade Policy in Washington D.C. in charge of Boeing’s on-going disputes with
Airbus during our discussions on the subject over the phone; Mr. Charlie Miller,
Director of Communications, Europe, International & Sales Communications of the
Boeing Company during my visit with him in his office in London in October 2009.
It was my privilege to discuss the on-going subsidy disputes between
Airbus and Boeing with Dr. Rainer Ohler, SVP Public Affairs and Communications,
Airbus SAS. My research studies were highlighted by the different entrepreneurial
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approach and modus operandi of large commercial airline business between Airbus
and Boeing. I would also like to thank Mr. Francisco W. Peiro, Aeronautics and Raw
Materials, DG TRADE G.2 – Industrial Sectors, European Commission in Brussels
for the generosity and hospitality extended to me during my interview in his office in
Brussels. He generously spent a great deal of time with me from his busy schedule
discussing Airbus side of the views on NASA’s critical role of subsidizing Boeing.
And also my special thanks go to Mr. Nusrat Nazeer, Senior Information Officer,
Information and Media Relations Division with twenty-years of experience at the
WTO (World Trade Organization) in Geneva, who kindly spent time with me in his
office in Geneva discussing the basic concept of ‘rules-based, negotiated
agreements as they relate to Airbus vs. Boeing subsidy disputes at the Disputes
Settlement Mechanism of the WTO.
Following the critical comments gained from my research supervisors and
reviewers, this thesis has been restructured to make it more useful and effective to
those who are interested in the international political economy and international
trade politics and disputes. I was very fortunate to have the opportunity of receiving
the critical comments on my thesis by two PhD joint examiners, who are
distinguished scholars in the business management and the politics: Steven
McGuire, Professor of Business Management of Aberystwyth University and Ben
Clift of the University of Warwick. I also thank the institutions and individuals who
have contributed new information and assisted me to make this research possible
and bring the thesis to its eventual fruition.

vii
DECLARATION

This thesis was presented in accordance with the regulations for the degree of
Doctor of Philosophy. It has not been submitted in any previous application for
degree at any other academic institutions. I declare that the thesis is strictly my own
work. It has been conducted all by me under Professor Grant, my research
supervisor at the University of Warwick.
In revising the originally submitted study, examiner’s comments were
followed, research questions further explored and competing hypotheses re-

examined.

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