The Application of the Protectionist Movement - Essay Example

INTERNATIONAL BUSINESS Table of Contents Table of Contents 2 References 9 Question The issues that areraised in the case study have much to do with the intervention of governments in the market mechanism, specifically the distortion of the ability of the same to allocate the highest return to that producer that most effectively captures customer's demand, gathers resources primarily on their own and produces products to meet this demand. Their origins may be traced as far back as early mercantilist theory, which is of the effect that the wealth of a country is safeguarded by increasing the net of export less import, which basically means to out-produce the foreign countries, a situation which led to the development of protectionist policies by most governments (Ivanyna, 2006). The widest application of the protectionist movement is in the incubation of new industries which by themselves cannot survive the harsh realities if the competitive market, the idea being the protection will be withdrawn once the company is established (Iowa State university, n.d.). This concept is however extended in modern times and as captured by the events of the case study evolved to be proactive rather than reactive, where we see that the European Countries, namely France, Germany, Spain and Great Britain formed an alliance whose sole purpose was to gather enough capital to birth and sustain an aircraft manufacturing business with enough resources to effectively compete with the hitherto world monopoly of US based Boeing, the result of which was the birth of Airbus (Holmes, 2004). Given its current market strength, Boeing was enjoying vast economies of scale thus posing a significant barrier to entry to any interested private firm, and in the absence of competitive forces, concentrated more in research and development rather than marketing, and thus when they interfered with this monopoly power, the European governments eroded Boeing's potential returns from its investment, thus interfering with the market mechanism, and hence the first issue/conflict of the study. The second issue has to do with the governments' support of private enterprise, especially as it relates to the struggle that exists between one side trying to eliminate while the other struggles to sustain a major world monopoly. As mentioned above the aircraft industry is extensively capital intensive, and whatever labour is involved is highly skilled and specialized, as evidenced by the investments in Research and Development by both sides of the conflict presented in the study. The world authority on trade, the World Trade Organization clearly prohibits the support of private enterprise by governments and other public entities. Differences in terms of reference is also a major issue that has been highlighted in the case study. The Americans do not consider the massive government contracts that were awarded to Boeing as any form of government support, that is they argue that they did not interfere with the market but rather only participated in it, in a willing buyer willing seller fashion. This is of course in sharp contrast with the Europeans' initial direct capital investment into Airbus, let alone the continuing capital inflows into the company for continuing research and development in the form of very soft loans. The effect of governments' activities on both sides is basically the same, essentially to strengthen the respective aircraft manufacturers, therefore the argument lies in channels through which support was availed, rather than whether it was actually availed or not. The relation of the above activities to protectionism is where we find on one side a government being the largest and most lucrative domestic customer to the company, thereby not only preventing any foreign competition in the domestic market, but also propelling it into world dominance (fulfilling the mercantilist view of what protectionism is all about) and preventing other foreign nations from producing the same product and thus having to import it from the company's home country. In response, the other side recognized the danger posed by the situation to their own economies, and instituted measures to protect themselves, specifically creating a strong competitor to the world monopoly (thus invalidating the mercantilist situation in the US) and actually continuing to support it to the point that it exceeded the monopoly in terms of sales (Knowledge@Wharton, 2005). Question 2 At its simplest form, the arguments between the two side is that basically the united states (as an agent of Boeing) believes that it is upholding the provisions of the World Trade Organization, is a friend to free trade and is therefore the aggrieved party. It believes since it was there first (Boeing was started earlier than Airbus), and has consequently invested heavily into research and development, it is only fair to let the market mechanism allocate the return from this investment back to Boeing. The European Union on the other hand claims that it is only looking after the interests of its people and its economies, production facilities increase the number of people employed, the spin off effects on the countries' infrastructure are also a major factor, foreign direct investment has increased tremendously as a result of Airbus' investment in Research and Development and also the revenues, especially those realized from foreign sales earn the respective governments considerable amounts in the form of tax. This argument, together with the WTO acceptance of the infant industry protection practice for a short period of time provided the European union with a strong case (Bown, 2005). When confronted on the tax breaks, investment incentives and infrastructure support, the Americans argue that it is the responsibility of every government to create a conducive environment for the flourishing of private enterprise, as part of its mandate of bettering the livelihoods of its citizens. The European Union is also of the opinion that in the pursuit of the aforesaid goal, governments have sole discretion in the awarding of support and incentives to whichever private enterprise in their estimation will have the largest benefit to their people, citing such reasons as increased employment, foreign capital inflow amongst others. They also counter the Americans' attack on their provision of loans to Airbus, accusing it of rather hypocritical conduct since Boeing was only able to develop and complete their fast selling Boieng 767 Dreamliner after entering into partnership with major Japanese manufacturing firms, which received soft loans much akin to the ones awarded to Airbus (Aboulafia, January 2005). This is without mentioning the various research support received by Boeing from NASA as well as the pentagon, the results of which Boeing was at liberty to apply to commercial aircraft, giving it a definite competitive advantage (Ackman, 2005). From a critical viewpoint, both sides seem to have rather little regard to the rules, give from the European Union's blatant admittance of the awarding of soft loans to Airbus, which is in direct contravention of the provisions of the WTO, specifically the Agreement on Subsidies and Countervailing Measures (ASCM) which specifically prohibits this (Inslee, 2005). The Unites States on its part, is no better, as seen from its seeking of the same loans it has so vehemently opposed from the Japanese. Both sides therefore only seem to be self centered and are out only to maximize their own benefit, with disregard of whether this is to the detriment of the other party. For example, it is fairly obvious that the Boeing monopoly is dangerous for the European countries, but the United States is out to defend it at all costs. Also, and agreement that was formed as a form of compromise to the conflict of governmental support disintegrated as soon as one side realized that it is losing, irrespective of whether the success of the other side could be directly tied to the governments' actions or to some other subtle factors (Seattle pi. 2006). Question 3 The World Trade Organization is supposed to be the arbitrator in all such international trade disputes, with powers to institute official sanctions against member countries that violate its agreements and provisions. Founded in 1995, it had membership of 153 countries as of 2008. In reference to the issues raised in the case study, the World Trade Organization was involved at the request of the United States, who's case was that countries who were members of the European Union were contravening agreements of the organization and therefore were liable to suffer sanctions under the same. From the onset, it would seem that the Word Trade Organization is clearly on the side of the United States, since it is the one which seem to be in support of its authority. However, this position rapidly changed when the United States mimicked the actions of the European Union countries and itself sought loans indirectly from the Japanese government through the manufacturing firms from that country. As an overall evaluation, the World Trade Organization appears to be ineffective from its inability to respond to the United States complaint, which by all purposes and intents appeared to be genuine. Its inaction over the matter is what probably led to the United States to breach the same rules it was using to present its case. It also did not provide clear guidelines into what is support from government, which is what is contained in the Agreement on Subsidies and Countervailing Measures. This led to inability to react to the European's insistence that the incentives received from the pentagon and NASA constituted support from government (Wheeldon, 2007). After the allegations of Boeing regarding subsidization of A380, WTO decided to formally investigate the matter. On 3rd September, 2009 an interim report has been sent to both Airbus and Boeing. It is still not clear whether WTO would be able to solve the problem. Many experts believe that WTO's report does not include all the findings and the report is mostly inclined in favor Boeing. According to a US senator, the panel of WTO found that huge subsidies given by European governments to Airbus have badly affected its rival Boeing (Palmer, 2009). Airbus has also claimed that report is a partial one. In its reply, WTO said that it will also consider the allegations of Airbus against Boeing and will come out with a similar interim report regarding these allegations (Alcock, 2009). References Alcock, C. 2009. 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