University of Warwick institutional repository: http://go.warwick.ac.uk/wrap A Thesis Submitted for the Degree of PhD at the University of Warwick http://go.warwick.ac.uk/wrap/54056 This thesis is made available online and is protected by original copyright. Please scroll down to view the document itself. Please refer to the repository record for this item for information to help you to cite it. Our policy information is available from the repository home page. 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 i 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 ii 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 iii 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 iv 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 v 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 vi 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. viii