Why we need a global non-aggression pact among airliners

The current tug-of-war between Bombardier and Boeing, which has accused the Quebec aircraft manufacturer of being unduly subsidized, shows that Canada has a strong interest in proposing a new international agreement to avoid a ruinous subsidy race in the aeronautic sector.

Although Boeing’s complaint refers to Bombardier’s C Series lineup, one Bombardier customer, U.S.-based Delta Airlines, has asked the U.S. Department of Commerce to limit its investigation to the larger version of the planes, not the smaller version Delta has ordered because Boeing does not build planes of the smaller size.

However, the massive help Bombardier has received over the past two years to support its C Series program – a total of more than $3-billion in investments and loans from the provincial and federal governments – sets a precedent, which other countries could use to justify heavily assisting their own aerospace industries. There is now a real risk that a costly beggar-thy-neighbour dynamic might be created.

Imagine if a country such as China, with a much larger tax base, decides to emulate Canadian subsidies to support its own industry. A similar reasoning applies to Russia, which has a much larger work force in the sector, and where the stakes are even higher than they are in Canada.

Canada would not come out ahead in a subsidy race. The Canadian industry would wither, and lose significant market share. A large portion of the more than 55,000 jobs in the aerospace manufacturing industry would thus be put in danger. Of course, even the “winners” of such a conflict would pay a heavy price – or at least, their taxpayers would.

One way to avoid this scenario would be to send a credible signal that such government intervention will be limited in the future. Such a signal could take the form of a new international agreement, which Canada has a strong interest in initiating.

While state aid is never a desirable thing from an economic point of view, it is a political reality. Nevertheless, it can be circumscribed by international agreements.

There have been other such agreements in the past. Notably, there is the Aircraft Sector Understanding (ASU), its first version signed in 1986 and updated a few times since then, with its latest major revision in 2011. The ASU has been relatively effective in limiting the expansion of state aid through export credits, but governments have been creative in finding other ways to directly and indirectly subsidize their national champions.

It would not be the first time the Canadian aeronautic sector provokes negotiations and the adoption of a new international treaty. The 2011 version of the ASU, negotiated through the Organization for Economic Co-operation and Development, was largely a response to the need to take into account the new Bombardier C Series planes, still in development back then.

A new version of this treaty, a kind of “ASU plus,” could provide guidelines for other types of direct and indirect subsidies. It would define what kind of government support is acceptable. It would also specify the maximum amount that such assistance could represent in the total cost of producing a plane without threatening the fragile international equilibrium.

Finally, such an agreement should reaffirm WTO principles with regard to international trade: stability, respect for the rules, the absence of discrimination, gradually freer trade through negotiation, as well as economic development throughout the world.

The benefits of such an agreement would extend beyond the participating countries. The promise that all the countries involved in the current ASU would respect it would likely be enough of a credible commitment to dissuade non-signatories such as Russia and China from engaging in a harmful subsidy race.

A new agreement between aircraft manufacturing countries could act as a non-aggression pact, and prevent an “arms race” in the aeronautic sector that would have devastating effects on Canadian companies and workers.

Competition, in order to be as widely beneficial as possible, should not be based on which government has the deepest pockets, but on the merits of the competing products themselves, and of the companies that provide them.

Mathieu Bédard is Economist at the Montreal Economic Institute and the author of “Viewpoint – Avoiding the Aeronautics Subsidy Race Canada Is Sure to Lose.” The views reflected in this op-ed are his own.