On aviation and climate, the EU must stick to its route

Major trade disputes should force the EU to act coherently and decisively – particularly when dealing with China.

A ruling from the World Trade Organization this week (12 March) on subsidies to the American aviation giant Boeing comes at an interesting time. 

The European Union’s fight with the United States over their respective subsidies to Airbus and Boeing is not in itself the most edifying of trade disputes. The two sides fought each other to a standstill long ago. They did their best to break the WTO, in that the scale of subsidies on both sides was so large that it made a nonsense of the WTO’s procedures for compensation (ie, retaliation). At the risk of provoking long diatribes from highly paid trade lawyers, I would venture that it was obvious to many people a very long time ago that both sides were giving subsidies to their aviation industries that were in breach of WTO rules. What was also obvious was that neither side was going to stop. It has taken WTO dispute panels and appellate bodies many months to add some detail that embellishes (and confirms) these generalities. Now that the two sides have exhausted the WTO’s procedures, they must get down to negotiations on how to resolve this trade dispute of Brobdingnagian proportions.

But what makes the WTO ruling interesting – something more than the final paroxysm of a fight whose intensity has cooled – is that the aviation industry is once again moving centre-stage of the European policymaking arena.

The chief executive of Airbus, in concert with the bosses of six airlines and two engine makers, has written to governments in Europe warning them that jobs are at risk because of retaliatory action threatened by China and other countries upset at the inclusion of aviation in the EU’s emissions-trading system (ETS). The EU has, since the start of the year, been requiring airlines that fly into European airports to keep a record of their emissions, with a view to having to buy emission permits. Airbus claimed that Chinese airlines had suspended orders for its aircraft. Effectively, the European companies, for reasons of naked self-interest, have sided with China, the US and other critics that do not like the extension of the ETS to aviation.

It is one of those fascinating moments when commerce and politics come together and we get to see how much politics will bend to the will of commerce and why. It is usually an unwholesome experience – the German government prostrating itself before Gazprom is a memory that lingers. In the past, the car industry used to have the ability to bring politicians to heel, but its power has dwindled of late. The aviation industry might still have the muscle, but its influence is not evenly distributed through the EU, so if it attempts to flex its muscles, its intervention will not be universally welcomed.

If the German and French governments, say, were to take up Airbus’s cause, they would have their work cut out to undo the EU legislation that included aviation in the ETS. A major retreat would be required from the European Commission of José Manuel Barroso, who once nailed his colours to the climate change mast, lest anyone has forgotten.

But perhaps even more intriguing is what the effects of this stand-off might be for relations between the EU and China. Will China try to use its undoubted economic muscle to undo the EU’s ETS? The parallels and contrasts with the trade dispute over rare earths are fascinating. The EU, the US and Japan each launched a challenge at the WTO this week over China’s restrictions on the export of rare earths, moves that follow an earlier ruling at the WTO against China on restricting raw-material exports. So will China comply with these rulings, or will it refuse to modify its behaviour? Will China’s obsession with economic self-sufficiency and independence trump its membership of the WTO?

Charles Grant, the director of the Centre for European Reform, a think-tank, could hardly have timed better his pamphlet on “Russia, China and global governance”, published at the end of last month. In it, he raises some pertinent points about whether China’s leaders are interested in multilateralism and how the EU’s behaviour might influence China’s choices.

Before the aviation and ETS dispute goes any further, the member states of the European Union have to agree on a few basic points. They believe in rules-based trade. They believe in multilateral international institutions. The challenge thereafter is to counter China’s view that the decision to include aviation in the ETS was some kind of unilateral action to tax foreign airlines. They must encourage China to keep faith in the WTO and the principles of regulated free trade. As a prerequisite, they have to hold firm on the ETS.

They cannot afford to wobble, to give the impression that they are going to back down in the face of economic threats. To do so would damage more than the ETS. It would damage the EU’s chances of nudging China along the path of multilateralism. That path, as the Airbus-Boeing dispute illustrates, is neither easy nor straight, but it is the EU’s chosen route.

Click Here: geelong cats guernsey 2019