The European Union has enough to worry about these days, with the economy and the Brexit escapade. They now have to deal with a very real threat of $11 billion in tariffs.
The United States and the European Union have been battling over the fairness of European subsidies to leading aircraft maker Airbus for 14 years now. The matter is a complex one, as these things often are, and takes real time to unravel properly, but the American side is becoming frustrated that it is taking as long as it has and is willing to now take matters into their own hands.
At issue here is the U.S. claim that these subsidies convey an unfair competitive advantage to Airbus over domestic aircraft maker Boeing. During the time of this dispute, Airbus has passed Boeing as the world’s largest commercial aircraft maker, and Airbus now commands over half of the market by themselves.
A government provides subsidies to a company to make them more competitive in the marketplace, essentially reducing their costs of production and allowing their products and services to be sold at lower price points than would otherwise be possible.
What drives governments to use public funds to help private companies is the desire to maintain jobs and even to expand them in some cases. Airbus selling more jets helps both the French economy and the European economy as well, given how well connected the countries in the European Union are.
Subsidies are therefore often used by governments to promote economic growth or prevent economic shrinkage in their countries, and even the United States uses subsidies to promote commerce. Unlike corresponding tariffs, where the sides can just withdraw, it is not so easy to seek to achieve balance by just ending the subsidies. This has repercussions that need to be considered, which consist of the goal of the subsidies no longer being achieved, and whatever flows from that.
The U.S. Goes After Several Other Types of European Imports
The solution therefore tends to be one of looking to increase tariffs in order to look to offset these unfair competitive advantages. Since Airbus sells a lot of aircraft to countries aside from the United States, the U.S. can’t put tariffs on trade between two other countries, they need to spread the tariffs around generally, and a lot of other goods and services get caught up in this net.
If we could balance things off completely with tariffs on the targeted goods only, for instance if Airbus only sold jets in the U.S. and all of their benefits from the subsidies could be offset this way, then we end up in the same place essentially price wise, with the only real difference is that the United States gets to collect all of the subsidies.
That’s actually worse than just ending the subsidies, as these targeted tariffs would amount to a transfer of funds from European governments to the United States, where they would not only be watching Airbus take a nosedive, they would be paying for it to happen as well.
Given that Airbus is a global company, this can’t be done, and the amount of economic advantage that is deemed to be involved ends up getting spread around more widely, entrapping other businesses that have no involvement in the dispute.
This at least does set off the advantage, in this case one of $11 billion a year according to American officials, and if this is accurate, the $11 billion that Airbus allegedly gets every year in economic benefits gets transformed into an $11 billion loss in the European economy.
We can’t forget about the other side of things though, and if Boeing is taking in $11 billion less every year now due to Airbus’ subsidies, that also shrinks the American economy by this amount, and this is actually the first shot in this battle.
The Goal is to Remove the Effects of the Subsidies, One Way or Another
From that perspective, we could say that these retaliatory tariffs do return the parties to their original position, as is the intent as well as the fair outcome. Countries do want to try to distance their subsidies from their trade, but the two are too intertwined to really allow this without some sort of restriction or compensation.
If a company wishes to subsidize a company that only trades domestically, then this is their own affair, but when the company trades mostly internationally, this can and does affect trade relations where the affected parties may want to make adjustments to account for the effects of these subsidies upon their own companies, such as Boeing.
The response of adding this $11 billion in tariffs on things like aviation parts, wine and cheese, clothing, food, and beverages isn’t being made unilaterally though. The intention is to propose this matter to the World Trade Organization, where an arbitrator would need to sign off on the amount before it all would be put in place.
Tariffs have a negative impact upon business, although this isn’t targeted toward American businesses and this is not something that you would think that the U.S. stock market should be too concerned about.
Still though, we did see a sell-off in the market on Tuesday from this, and the downward momentum that was created by European traders in the hours leading up to the open was joined by regular traders.
Perhaps some people were just looking for a reason to sell, but this current market is quite sensitive to news lately and have generally taken a more negative view of things at the outset anyway, although a little distance from it has us settling back in.
We continue to be challenged by certain things though, and thus far have been up to the task as far as keeping this upward trend moving, but these moves and events still bear watching, as they speak to the amount of overall resolve we have right now.