Does America need further strategic trade policy for Boeing?

by on July 12, 2014 at 7:10 am in Current Affairs, Economics, Uncategorized | Permalink

One of the arguments for reauthorizing the Ex-Im Bank is that the EU subsidizes Airbus in an increasing returns to scale industry, and so therefore we need to do the same for Boeing.  Boeing is by far the largest beneficiary from the Bank.

Yet the Pentagon spends a lot of money on Boeing already, basically ensuring the company will operate at quite a large scale.  I cannot find formal figures on how much the European Union spends on military contracts with the Airbus Group, but it is highly likely to be much less than what the Pentagon spends on Boeing, given the differences in defense spending across the two regions.

In other words, through military spending we are already doing what strategic trade policy (ostensibly) dictates.  General Electric, which is number two on that list of Ex-Im beneficiaries, is also a significant Pentagon contractor, as is number three Bechtel of course.

By the way, did you know that the standard models dictate an export tax rather than an export subsidy if the duopolistic firms operate as Bertrand rather than Nash competitors?  See Eaton and Grossman (1986), or this Flam and Helpman piece (pdf) or Cheng (1988).  I am not suggesting that Bertrand competition is exactly the right assumption here, rather the point is that strategic trade models are not very robust in their policy implications.

Jan July 12, 2014 at 7:32 am

I’m not enthusiastic about all the military money that goes to Boeing (or any particular manufacturer), but wouldn’t the supporters say that Pentagon spending isn’t designed to prop up Boeing or act as a subsidy, so why count it as such?

At least as of 2012, the WTO ruled that Airbus was getting much more in subsidies than the Boeing, and I am not sure the EU has fully stopped the funny business yet. http://money.cnn.com/2012/03/12/markets/boeing-airbus-wto/ http://www.reuters.com/article/2013/04/16/us-airbus-boeing-wto-idUSBRE93F0UV20130416

I don’t know if this is a sign of more cooperation in future, but the Pentagon just signed a contract with Airbus: http://247wallst.com/aerospace-defense/2014/05/28/pentagon-awards-127-million-in-defense-contracts/

I am not defending the Ex-Im Bank, but I don’t know if this is the best argument against reauthorization.

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dearieme July 12, 2014 at 7:41 am

“Does America need further strategic trade policy for Boeing?” = Should the federal taxpayer subsidise Boeing shareholders more?

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Bill July 12, 2014 at 8:42 am

Bill needs a strategic trade policy for Bill.

He is competing with the Chinese, Japanese and everyone else.

I am willing to have you offer me a military contract which you identify as a subsidy to me, so long as I can subcontract it out. And, I would also like a subsidized loan so that I can go out and buy an American car, made in or subcontracted in Japan with joint venture partners, just as Boeing does with its airplanes.

Bill needs this.

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Bill July 12, 2014 at 8:49 am

On top of it, Bill, like Boeing and GE, both of which paid no federal taxes, would also like not to pay any federal taxes either.
http://www.huffingtonpost.com/2014/02/20/boeing-tax_n_4824918.html

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Steve C. July 12, 2014 at 10:10 am

Politicians don’t know how to create jobs. But, they know how to “create jobs”. Giving money to companies with both military and civilian product lines is an “easy A” for the average lawyer/politician. “It’s necessary defense spending”. “It’s a back door subsidy”.

I wish it were easier to untangle. We need fighters, bombers and helicopters. Airlines need 777s. Are there cross subsidies? Sure. Are there dual use technologies. No doubt. Chicken? Egg?

Regardless, I resent tax payer guaranteed loans so Senator Claghorn can boast about “job creation” to his constituents.

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Cahokia July 12, 2014 at 11:05 am

Not one word from Tyler about how Boeing has systematically transferred its core technologies to Asia, and in particular Japan.

With the 787 Dreamliner they’ve even outsourced the wings to Mitsubishi.

Michael Crichton’s 1996 novel “Airframe” depicted a conspiracy to send wing manufacturing to China as part of a major passenger jet sale. The late author was prescient.

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Jan July 12, 2014 at 11:33 am

Would probably be a good opportunity for him to rail against American unions (I know that is an argument that would be Koch-stamped ;-) ).

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Adrian Ratnapala July 12, 2014 at 3:32 pm

I wonder, did Boeing transfer wing technology to Mitsubishi so that it could take advantage of cheap Japanese labour. Or did it buy wings from Mitsubishi because, well, those guys know a lot about making airplanes.

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Bill July 12, 2014 at 5:25 pm

Or, that if Boeing had Japanese content, Japanese Airlines would buy their product over Airbus’s

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CMOT July 12, 2014 at 12:00 pm

Airbus Defence & Space has revenues of about 15 billion Euros a year, which is on par with Beoing’s revenue in these areas.

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Nathan W July 12, 2014 at 1:54 pm

One of the first things I noticed when starting to study economics …

OK, a wee bit of context. I had nearly completed a specialized degree in political science at some high brow institution.

Then was taking some political economy courses which they let me sneak into even though I hadn’t formally studied any economics yet. (I started in engineering and so had the math down pat.)

There I learned about Nash and Bertrand for the first time. But the math applications were basically the same as I learned in evolutionary biology (the other 30-35% of my undergraduate studies, via botany).

THEN, after starting to study economics for real, it immediately became apparent to me just how much we are in the child’s sandbox when it comes to concrete formal analytical tools which actually give us tractable and useful outputs to direct political economy considerations.

How will we negotiate for the arctic? Starting with nash, 1 actor, now 2 actors, now 3 actors (!!! OMG what do I do!!!), now they have 2 choices, 3 choices (!!! Nash is exploding!). And the choices are defined in such simplistic manners to allow tractability that they are practically useless for real world considerations.

But sometimes they give us sensible and useful outputs, like “if they goal is to maximize short-term American growth, subsidize semiconductor research and beat the hell out of the Japanese industry, if the goal is to maximize net technology gains for global benefit, don’t beat the hell out of the Japanese industry, unless [conditions A or B, based on real world reasoning outside of the model]“.

Sure, sure, you can index things with i’s and j’s and have 1000 actors with a million possible choices each, and via mathematical and visual tools provide somewhat tractable results. But will they have any relevance for explaining how things work in the real world, or for guiding policy in the real world?

I sure hope not too much relevance imbued yet, because Nash already starts to explode (!!) once we have 3 actors and more than 2 choices.

Yes, I know, a bunch of guys already figured out 3 actors and more than 2 options. Some fancy math. I probably even solved it on some exam (or maybe went off on tangents to demonstrate why it’s a silly question before we’ve taken care of A, B C ..). Good job. But in the real world, the model needs to work for n assymetric actors and m difficult-to-pin-down options.

We have hardly scratched the surface. But I hesitate to suggest further research is warranted, because it deals with such big issues and is so likely to church out universes of BS before we get anything useful out of it.

Slowly but surely … imo.

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Nathan W July 12, 2014 at 1:58 pm

Recall, semiconductor research of the 1980s and 1990s, primarily revolving around Japanese-American competition, and with huge awareness of military relevance of semiconductors (computing ability in broader/integration senses, as well as specific applications for many pieces of hardware).

I suspect that many of the same real world concerns will be very similar to the case of strategic trade policy w.r.t. Boeing. With the exception that many people think it would be good for DRC to make semiconductors directly in order to capitalize on profits linked to their resources, whereas I doubt many people think that much of anything would be better for much of anyone if DRC started producing advanced aviation outputs in the near future.

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mulp July 12, 2014 at 4:41 pm

“I don’t think Boeing should get corporate welfare when small businesses are struggling. ExIm is corporate welfare Boeing benefits from. Kill ExIm.”

Screw the 2000 small businesses who lost business because no bank helpt – not their small bank that doesn’t do that, nor the big banks who couldn’t care less about a small business that isn’t their customer. The amounts of credit are in the thousands to tens of thousands, not millions of dollars in most cases.

Quoting NY Times: “In 2013, 2,160 of the 2,775 exporting companies that used the bank, or almost 80 percent, were small businesses. But about the same proportion of the financing dollars authorized by the bank went to big companies.”

The thing is, small businesses just use it for insurance of exports to ensure they get paid. This traditionally was handled, in reverse, by letter of credit, but today global competition means buyers want easy and cheap – they don’t need to protect the seller, the seller must protect himself or take all the risk. If the seller demands payment before shipment, the deal is off.

“In fact, small companies accounted for more than 90 percent of the bank’s insurance authorizations in 2013, and just over half the insurance dollars. (The bank’s working capital loan guarantees, which are used to finance the production of exported goods, are also popular with small companies. In 2013, 95 percent of all working capital loan guarantees and 70 percent of all dollars guaranteed went to small companies.)”

This is a classic case of picking one or two actions out of a Federal program and ignoring everything else to attack a law or administration for political gain.

Reagan pointed to one woman without kids who had committed fraud and then claimed by implication that all women with kids who are in financial fraud are criminals. Hey, that woman down the street from you is a criminal committing fraud because she purposely had her husband die painfully and leave her supporting young kids just so she could get $5000 in welfare instead of fixing her husband a lunch box to take to his $40,000 factory job.

Sure, Boeing could easily borrow $15 billion and take all the risk selling to Saudi Arabia. After all, oil prices will NEVER FALL to $10 a barrel. To “turn a profit” on the Gulf war, Bush had to get the Saudis to kick in billions, but oil prices resumed falling after Iraqi oil was taken off the market, so the Saudis were having cash flow problems. They paid for the war on the basis of getting fighters on favorable credit terms, so when Clinton took office, one of the bits of business was collecting the cash for the war from the Saudis while getting the fighters shipped without the Saudis paying for them right away.

Oil will NEVER FALL below $80 because its impossible for the US to reverse the 30 year constant unrelenting decline in oil production, and its impossible to cut oil consumption by efficiency. And we know that from the period from 1975 to 1985. When oil prices start falling, the Saudis will cut production and try to get others to cut production, until they lose market share, and then they will drive prices down to kill off Arctic, Canadian tar sands, just like the oil shale projects Cartter championed were killed off by Reagan calling them wasteful spending.

With Reagan, he and all politicians did the same thing, but all knew that the workings of Congress will quietly do a good approximation of the right thing. Reagan would never have agreed to kill off the Federal welfare programs. In fact, he signed the laws that made the biggest one a non-crisis for three decades, the one that Republicans defend for all their Reagan Republican base currently drawing benefits.

But the right-wing and then the Tea Party populists are demanding purity. They will end up blaming Obama if the ExIm is killed and they get laid off from their small manufacturer because they can’t export something, The business owner will blame Republicans and Obama for failing to be the angry black commie the Republicans need him to be to support ExIm – Obama should have tried to nationalize all the corporations, not support the corporations, especially banks who the businessman hates.

After all, the banks refusal to help the small businessman is the reason for the ExIm bank – Obama should have nationalized them.

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Bill July 12, 2014 at 5:28 pm

Respectfully disagree. Today, large banks are capable of assessing political risk and are large enough to serve large companies. And, if one bank is not big enough, it can joint venture with another bank to share the risk.

The real issue is not risk, but subsidy. Rather than continue the subsidy arms race, we should agree with other countries to discontinue subsidy or challenge subsidy at the WTO.

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Harun July 12, 2014 at 9:52 pm

“If the seller demands payment before shipment, the deal is off.”

I need you to speak with my Chinese suppliers who often demand down payments!

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Nathan W July 13, 2014 at 1:07 pm

My heart agrees with most of what you say.

However, the mind (indeed, guided by the heart) is what we should rely on.

If you want to achieve the best outcome for the poor, sometimes a generally more advanced economy via corporate subsidies at the cutting edge may lead to better outcomes for all.

It stinks though. I think we should start with that. It stinks. As long as we can agree on that, then we can keep fixed on the objective that poorer populations should ultimately benefit as well. If the case cannot be made convincingly, then there should be the assumption that this implies a far weaker case for the corporate subsidy.

I think this is already broadly internalized for many people. But some will take too much for granted that “trickle down” is natural. It is only natural when the system is constructed in a way which is conducive to that. For history tells us that powerful people like to use markets for monopoly and to achieve relative gain, even at great cost to others.

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carlospln July 12, 2014 at 6:43 pm

“Respectfully disagree. Today, large banks are capable of assessing political risk and are large enough to serve large companies. And, if one bank is not big enough, it can joint venture with another bank to share the risk” (snip)

1) Really? All the Mega Euro Banks that piled into european sovereign bonds in 2011 ‘are capable of assessing political risk’? They can’t even properly assess credit risk any longer (if this were the case, they wouldn’t still be insolvent, seven years on from the GFC)

2) “Rather than continue the subsidy arms race, we should agree with other countries to discontinue subsidy or challenge subsidy at the WTO” The biggest welfare queens by far are the grotesquely swollen USA MilIndustrialComplex ‘manufacturers’ such as Lockheed, General Dynamics and Boeing [the old McDonnell Aircraft business]. Hell, Lockheed by its own admission could not compete in the private sector.

Respectfully suggest that the USA get its own increasingly dishevelled house in order, before insisting on change from other countries.

ps Latest Unfolding Fiasco: http://www.foreignpolicy.com/articles/2014/07/08/pentagons_399_billion_plane_nowhere

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andrew' July 13, 2014 at 6:47 am

So far this century airliners have been a defense net negative.

I sure hope we get a world war soon to save the roi.

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TallDave July 13, 2014 at 4:12 pm

No.

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