Aircraft Subsidies to Test Clinton Mettle on Trade

PRESIDENT Clinton's effort to help the nation's struggling aircraft makers is emerging as an important test of White House trade policy.

"This is the big trade issue of '93" on the European front, says Roger Noll, a Stanford University economist. If the White House wins a more level playing field from the European Community (EC) on government subsidies for jets made by the Airbus Industrie consortium, it will be a big victory, he says.

But economists worry that the Clinton administration's activist stance will lead to increased United States protectionism. That could harm airlines, the airplane builders, and also the near-finished talks on liberalizing world trade. The aircraft dispute comes atop the longstanding US-EC rift on agriculture subsidies, which has held up the 108-nation General Agreement on Tariffs and Trade (GATT) deal.

"The message that's going out is that unless we reach an overall [world-trade] agreement," narrow trade battles such as in aerospace could escalate, says Pietro Nivola, a Brookings Institution scholar.

The Clinton administration has already supported tariffs on steel from 19 countries to punish companies for "dumping" - selling in the US below fair value.

In recent appearances, the president has emphasized his concern about the US aerospace industry, long the world leader. The top-ranking Boeing Company plans to lay off about 23,000 workers this year, while McDonnell Douglas Corporation, the world's third-largest producer, has cut commercial-jet employment in half since 1990.

The chief culprit in the job losses, experts agree, has been the deep slump in the airline industry, which has delayed plane purchases. In a shrinking overall market, European subsidies are drawing fresh fire.

"Clinton has certainly upset the Europeans" by implying that he may seek to renegotiate a US-EC accord reached last summer, says Bill Whitlow, an analyst with Pacific Crest Securities in Seattle.

THAT accord caps subsidies for development costs of new planes at 33 percent - much lower than past government support for Airbus planes.

US Trade Representative Mickey Kantor has requested European cooperation to toughen global aircraft-subsidy rules in GATT. This would effectively strengthen the bilateral deal.

In the meantime, Mr. Kantor pledges to closely monitor the existing US-EC agreement.

Airbus has received cumulative subsidies estimated at $26 billion. Under the deal Airbus need not repay aircraft development handouts but must repay subsidies for production facilities. The consortium argues that it is making those repayments, Professor Noll says. The US holds that those repayments do not even cover interest on the "loan" (subsidy), much less principal.

In this capital-intensive industry, European governments' willingness to forego profits on their investments "is a pretty hefty subsidy," says John Lott of the University of Pennsylvania's Wharton School.

Sen. John Danforth (R) of Missouri has proposed legislation opening a trade case against Airbus. If such a move resulted in tariffs on imports, however, the US industry itself might be hurt.

The two biggest jet-engine manufacturers - General Electric and United Technology Corporation's Pratt & Whitney division - sell to Airbus as well as to US jetmakers. Airlines could be hit with higher aircraft prices.

Moreover, the EC could retaliate with similar actions against Boeing, which has 22 percent of its order backlog from European airlines. "Boeing sells more planes in Europe than Airbus sells to United States carriers," Mr. Whitlow says.

Senator Danforth has also proposed granting American subsidies by creating "Aerotech," a government-industry consortium modeled on Sematech of the computer-chip industry.

Professor Lott says this would be a "horrible mistake." Companies should develop technology on their own, he says. Boeing recently agreed to work with the four Airbus member companies to study the feasibility of a new large jet seating 500 to 800 people. The market for the jet is thought to be too small to support more than one producer.

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