One of the longest running trade disputes, since the formation of World Trade Organization (WTO), involving the aviation industry seems to be nearing a final resolution. United States (US) and European Union (EU) have decided to suspend tariffs on aviation products for the coming five years. The deal shall take effect from 11 July, 2021. During this while, both US and EU will try to work together on research and technological development. Airbus and Boeing will be the direct beneficiaries of this agreement. At the same time, ancillary units and passengers stand to gain from reduced taxes on purchase of new planes from across the Atlantic Ocean.
Aviation industry is among the hardest hit sectors due to the Covid-19 pandemic. Airlines all over the world are either unwilling or unable to take delivery of new aircraft. Like most other consumer driven sectors, aviation too is looking forward to pent-up demand. Economists generally use the term pent-up demand to describe the general public’s return to consumerism following a period of decreased spending. No one has a clue when we will attain pre-pandemic air travel numbers. Among all these developments, major economies in Western Europe and North America are worried about the rise of China. Both US and the EU have a negative trade balance with China, which in simple terms means that China sells more goods to US and EU in comparison to what it buys from them.
Policy makers on both sides of the Atlantic Ocean are mindful about the trade arithmetic with China. It will not be incorrect to say that China is fueling its economic engine with help from its alleged adversaries. We cannot question China on the progress it has made in the last two decades. By turning itself as the factory of the world, China was able to lift millions out of poverty. US considers most major European nations as its natural ally. Shared values for democracy and human rights keeps Western Europe and North America glued together.
US-EU Trade War Since 2004
Industries or companies which receive cash subsidies or soft loans from the Government have a lower cost of development and production of goods. In October 2004, US requested consultation with WTO regarding measures affecting trade in large civil aircraft. It was alleged that France, Germany, Spain and United Kingdom provided subsidies that are inconsistent with their obligations under the Subsidies and Countervailing Measures Agreement and GATT 1994.
As per the complaint, measures included: the provision of financing for design and development to Airbus companies (“launch aid”); the provision of grants and government-provided goods and services to develop, expand, and upgrade Airbus manufacturing sites for the development and production of the Airbus A380; the provision of loans on preferential terms; the assumption and forgiveness of debt resulting from launch and other large civil aircraft production and development financing; the provision of equity infusions and grants; the provision of research and development loans and grants in support of large civil aircraft development, directly for the benefit of Airbus, and any other measures involving a financial contribution to the Airbus companies. The subsidies in question included those relating to the entire family of Airbus products (A300 through the A380).
From Litigation to Cooperation
US President Joe Biden had a lot of things on the agenda for his first trip to Europe after taking office in January. After agreeing to the suspension of tariffs, President Biden said that, “Both the US and EU agreed to suspend our tariffs for five years, and we committed to ensuring a level playing field for our companies and our workers”. US is trying to mend ties with its allies which were unnecessary hostile during President Donald Trump’s time in office. The world cannot counter the economic and geopolitical threat from China in isolation; having allies for this herculean task can make the difference between success and failure.
President Biden’s statement touched upon the challenges posed by China’s economic model of state-sponsored manufacturing. “Significantly, we also agreed to work together to challenge and counter China’s non-market practices in this sector that give China’s companies an unfair advantage”, he added.
In 2020, China became the biggest trade partner of EU; trade between China and the EU was worth $709 billion last year, compared with $671 billion worth of imports and exports from the US. EU had a trade deficit of €180.8 billion with China in 2020, out of which €102.42 billion was on account of machinery and transport equipment. Although the EU currently has a trade deficit with China but its overall trade balance is positive.
China’s Trade Surplus
Since 2012, US has an annual trade deficit of more than $300 billion with China. Even at the height of Covid-19 pandemic in 2020, China sold goods worth $434 billion to US while it purchased goods worth $124 billion. Looking from the vantage point of China, the surplus is financing never seen before infrastructure development. At the same time, China is one of the top buyers of US Government treasury bills. In short, US consumerism (and some wasteful and avoidable expenditure) and high cost of producing similar goods has become the rocket fuel for China’s ascent.
Developed economies will not make it easy for China to reach the pinnacle of economic and strategic power. To put it mildly, China has a ‘different political set up’ as compared to what people living in democracies experience. No one should underestimate or overlook China’s resolve to become the strongest nation in the world. They have toiled hard with discipline and single-mindedness. China’s record with free speech and human rights are known to everyone. It is easy to dislike someone we don’t know completely. Nations have started to formulate economic policy with one eye on China. Some of you may feel, how did China become the focal point of an article about the resolution of a trade dispute between US and EU.
When two quarrelling nations or economic blocs (US and EU) have a common enemy (China), it is prudent to settle petty arguments and pool resources for the battle which may have already begun. Russia may not be an economic concern, but Kremlin has always been at loggerheads with NATO and its allies. After all, surprise, deception and back-channel diplomacy are never out of favour from the chess game of geopolitics.