Testimony of Under Secretary Grant Aldonas "Trade and the Competitiveness of the U.S. Aircraft Manufacturing Industry"

Testimony of Under Secretary of Commerce for International Trade
Grant D. Aldonas

“Trade and the Competitiveness of the U.S. Aircraft Manufacturing Industry”

U.S. House of Representatives
�Committee on Transportation and Infrastructure
Subcommittee on Aviation

July 26, 2001

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�� Thank you, Mr. Chairman, Congressman Oberstar, Congressman Matheson, and Members of the Committee, for inviting me to testify before the Committee on Transportation and Infrastructure.� I look forward to establishing a close working relationship with you and your staff.� Secretary of Commerce Evans asked me personally to convey his interest in your advice and counsel as we represent U.S. businesses abroad.� Since the Wright brothers took to the skies, the United States has developed an aircraft-manufacturing base that is the envy of the world.� As Secretary Evans emphasized at the Paris Air Show last month, U.S. manufacturers of aircraft and aircraft components can more than hold their own in the global marketplace, given an opportunity for free and fair competition.

�� Mr. Chairman, your subcommittee has jurisdiction over a key high-tech sector of our economy – one that has long been linked to our national growth, prosperity, and international trade.� I appreciate your holding this hearing to enable us to discuss the competitiveness of the U.S. aircraft manufacturing industry, which is closely tied to our ability to open markets and liberalize international trade.� Given that major markets for aircraft lie beyond our borders, trade is critical to this industry’s competitiveness.� And, granting the President Trade Promotion Authority (TPA) is a key step in ensuring that our industry competes on a level playing field internationally.�

�� Mr. Chairman, I would first like to underscore the importance of aircraft trade to the U.S. economy.� I will then discuss some current competitiveness issues.� Finally, I will emphasize how the grant of Trade Promotion Authority is essential to this innovative, high-tech manufacturing industry.

Aircraft trade is vital to the U.S. economy

�� Our aerospace industry has the highest net trade surplus of all of our manufactured goods and has consistently recorded trade surpluses even as the overall U.S. trade balance in manufactured products has widened.� Last year, when the United States experienced a record trade deficit, the U.S. aerospace industry recorded a trade surplus of some $27 billion.

�� These exports sustain hundreds of thousands of high wage, high-tech U.S. jobs.� Export sales help support not only the airframe manufacturers themselves, but many other companies, including small- and medium-sized enterprises who serve as “indirect exporters.”� Manufacturers of complete aircraft rely on over 10,000 U.S. suppliers to provide the millions of individual components that comprise a complete aircraft.� In addition, U.S. parts suppliers support a vigorous market in after-sales service support.� Last year, U.S. exports of aircraft parts (at about $28.5 billion) exceeded the value of U.S. exports of complete aircraft (at about $24.7 billion).

�� Access to foreign markets is crucial for the U.S. aerospace industry, and especially for manufacturers of civil aircraft and parts of civil aircraft.� This is the largest segment of the U.S. aerospace manufacturing industry, accounting for about one-third of total U.S. aerospace shipments measured by value.� About two-thirds of all the large civil aircraft produced in the United States are shipped to customers overseas.�

�� Mr. Chairman, I applaud you for holding a hearing to focus on the civil sector of the aircraft industry.� Over the last decade, the value of U.S. exports of civil aircraft in any given year has exceeded that of military aircraft by as much as 10 times.� While there are important issues concerning the role of military aircraft in U.S. international trade, the civil side of the business is key, and the parts manufacturers play an important role in this industry.

U.S. Competitiveness��

�� A number of variables impact the competitiveness of U.S. aircraft manufacturers.� The policies and practices of the United States as well as those of our competitors’ governments influence our competitiveness.�

�� The single largest U.S. civil aircraft competitor is Europe’s Airbus, and the nature and scope of this competition is different from any other kind of competition that we encounter.� In the United States, aircraft manufacturers have never been owned by the government.� With the exception of military aircraft procured in the interests of national defense, the U.S. Government has not sought to direct what type of aircraft are produced, or when they are produced, or the price at which they are sold.� Our industry is dynamic and shaped by market forces.�

�� European governments have a different orientation.� Many governments in Europe view aircraft manufacturing in terms of its contribution to their national economic and engineering capability.� These governments point to the aerospace industry as an engine of high technology growth and jobs.�

�� Airbus and other major aircraft manufacturers in Europe have a history of government ownership and control.� Given this direct financial interest, European governments have undertaken steps to boost their industry’s competitiveness.�� Airbus’s corporate structure is telling.� Airbus is owned by two companies: 20 percent is owned by British Aerospace Systems, and 80 percent by the European Aeronautics Defense and Space Company (EADS), which is the result a merger (of France’s Aerospatiale, Germany’s DASA, and Spain’s CASA) that was created at the behest of European governments.

�� The Airbus consortium’s “parent” governments have intervened in sales competitions in an effort to win orders for Airbus.�� Due to the fact that many foreign airlines are government-owned or substantially government-controlled, political rather than market forces can become decisive factors in purchasing decisions.� In the past, some European governments have sought to influence these decisions by potentially offering increased airline landing rights for the purchasing airline, granting preferential trading rights in unrelated sectors to benefit the country purchasing aircraft, and demonstrating willingness to advance the status of countries interested in joining the European Union.� The United States makes no such linkages.�

�� To counter such pressure, we have raised our concerns in U.S.-EU aircraft trade consultations, and we coordinate “advocacy” campaigns on behalf of U.S. exporters.� The thrust of these campaigns is to neutralize political factors in the aircraft selection process.� Through representations by senior officials, including Secretary Evans and other cabinet members, we focus attention on the technical and commercial considerations of aircraft purchases, ensuring that the foreign buyer is aware of U.S. Government interest in a fair competition.� In FY 2000, the Commerce Department participated in dozens of advocacy cases in the aerospace industry, assisting U.S. companies in completing billions of dollars in export sales.

�� Another major challenge to U.S. competitiveness is foreign government funding.� All models of Airbus aircraft appear to have been supported through financial support from European governments.� A substantial part of this is from so-called royalty-based “loans” to defray the costs of developing a new aircraft model.� The terms of the “loans” were such that European government funding may not have had to have been repaid if the actual level of sales for a particular aircraft failed to meet projected levels.

�� Some defenders of this “direct” support to Airbus claim that it is necessary to counter “indirect” support that Boeing receives in the form of NASA-funded aeronautical research and development and the technological spin-offs from designing and producing military aircraft under Department of Defense contract.� This line of reasoning should be questioned closely.� Both Airbus and Boeing receive “indirect” support.� In fact, I understand that Airbus’ parent companies have more military and government sales than does Boeing.� But Boeing has not received direct subsidies; only Airbus has received billions of dollars of direct, low-cost government financing for specific aircraft programs.

�� In January 2001, the European Commission released a report on the importance of research and development to the future competitiveness of Europe’s aircraft industry.� The report calls for a major re-orientation of research and development, in which member states and other public institutions would increase funding and better coordinate programs to meet the perceived challenge of the United States.�

�� Airbus plans to develop a 550 seat-plus “super jumbo” civil aircraft, the A380.� The European Union has notified us that seven member state governments plan to contribute funding for development of the A380.�� As a first step, we have requested detailed information on the funding, and the EU is reviewing our questions.

�� Another major concern affecting U.S. competitiveness relates to regulatory measures. Increasingly, foreign governments are turning to issues such as aircraft airworthiness certification and environmental issues in what appears to be a strategy aimed at limiting U.S. aircraft exports.

�� A celebrated example of a regulatory issue, addressed by this committee, concerns the European Union “hushkit” regulation.� Ostensibly implemented to address concerns with excessive levels of aircraft noise, the regulation results in a trade barrier through environmental protection legislation.� It embodies a carefully constructed design standard that negatively impacts U.S. aircraft and aircraft engines while allowing the continued operation of aircraft that are as noisy, and even noisier, than the aircraft being restricted.� Consultations are continuing today aimed at reaching a resolution with the European Union on this issue.

�� The granting of aircraft airworthiness certification also can be used to injure U.S. competitiveness, such as with the Boeing 737 NG (“New Generation”) aircraft.� Despite being approved by the Federal Aviation Administration, and despite the Joint Aviation Authorities approving a basis for its certification throughout Europe, the French government has not certified the Boeing 737NG at its full limit of passenger capacity.� Draft legislation proposed by the European Commission to create a “European Aviation Safety Authority” contains provisions that would permit the European Commission to overturn a member state’s certification of U.S.-produced aircraft if the Commission were to consider that the approval “would give an unfair advantage” to the United States or would be “contrary to Community policy” vis-a-vis the United States.� We have pressed the EU to avoid linking aircraft safety and technical issues to trade considerations.

�� Finally, Mr. Chairman, unfortunately, this is an industry where foreign corruption has a real impact.� Bribery by foreign companies can have important consequences for U.S. competitiveness.� Because of the critical role governments play in selecting aircraft suppliers, and because of the huge sums of money involved in aircraft purchases, this sector has been especially vulnerable to trade distortions involving bribery of foreign public officials.� Whereas U.S. law has long prohibited U.S. companies from offering bribes, the governments of many foreign aircraft companies allowed bribery, and in some cases, even permitted tax deductions for bribe‑giving.

�� A major step towards remedying this imbalance was the establishment of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.� Its 34 signatory countries (all 30 OECD members and Argentina, Brazil, Bulgaria and Chile) have pledged to criminalize the offering and payment of bribes to foreign public officials.� Unfortunately, there continue to be credible reports implicating competitors in the bribery of foreign public officials as a tool to get the contract.� In his July report to Congress on implementation of the Convention, Secretary Evans stated that he is committed to deriving the intended benefits from this landmark agreement.� I have directed staff in the International Trade Administration to redouble efforts aimed at obtaining our trading partners’ full compliance with this important anticorruption agreement.

Trade Promotion Authority

�� To enhance our competitiveness, the President intends to press forward bilaterally, regionally and multilaterally to expand trade and the economic opportunities they create for� U.S. aircraft manufacturers and for the American people more broadly.

�� Mr. Chairman, as the President has observed, “Free trade agreements are being negotiated all over the world, and we’re not party to them.”� There are more than 130 preferential trade agreements in the world today, and the United States belongs to only two.� The European Union is not restricting its negotiators.� They are busy inking agreements that give their manufacturers preferential treatment across the globe – including in markets where we’ve previously enjoyed a competitive advantage.� We have to get off the sidelines and back into the game.� Our inaction hurts American aircraft manufacturers and the workers they employ as they find their goods and services shut out of markets by the many preferential trade and investment agreements negotiated by our trading partners.�

�� This Administration welcomes the fundamental role that Congress was intended to play in setting our trade policies under the Constitution.� In fact, what Trade Promotion Authority really provides is a vehicle to ensure that Congress and the President have agreed on negotiating objectives.� Our intent is to work closely with Congress, not only for the passage of Trade Promotion Authority, but to rebuild the political consensus necessary for our negotiators to engage with their counterparts at the bargaining table.� Congress is an indispensable partner in this enterprise.

�� We must make the needs of aircraft manufacturers and their suppliers a priority as we draft our negotiating objectives.� Trade Promotion Authority can help this high-tech sector by enabling us to fully participate in a new round of global trade negotiations, which we seek to launch at the World Trade Organization (WTO) Ministerial in Doha.� This could set the stage for resolving legal uncertainties over the status of the WTO Agreement on Trade in Civil Aircraft, the core WTO agreement liberalizing trade in civil aircraft.� These uncertainties have led some WTO members to be reluctant to accede to the aircraft agreement.�

�� Through continued trade liberalization, we can continue to open markets for our civil aircraft and reduce pressures to provide “offsets” to source components for aircraft and major aircraft assemblies from foreign suppliers to gain market access.� Decreased pressure for foreign sourcing can help improve sales prospects for U.S. parts suppliers.� Trade liberalization is a boon especially for smaller companies – such as aircraft parts manufacturers – that often cannot afford to invest behind the high “tariff walls” that certain countries erect.

Conclusion

�� Let me close by saying that, together, we have some tough work ahead of us.� That is true of the work we have to do abroad in liberalizing trade for the aircraft manufacturing industry to enhance its competitiveness and of the work we have to do here at home in setting the stage for further trade liberalization by the renewal of Trade Promotion Authority.

�� Thank you again for inviting me to testify.� I welcome your questions.