In October 2004, the USA lodged a complaint with the WTO. The claim was that the EU was paying illegal subsidies to Airbus to develop new aircraft, such as the superjumbo, the A380. This provoked a counter-complaint by Airbus, claiming unfair subsidies for Boeing by the US government since 1992. In July 2005, two panels were set up to deal with the two sets of allegations.
A ruling on the US claim was published on 30 June 2010. The WTO found Airbus guilty of using some illegal subsidies to win contracts through predatory pricing. For example, some of the ‘launch aid’ (LA) for research and development was given at below market rates and hence violated WTO rules. Also the provision of infrastructure and infrastructure grants for runways, factories, etc. also violated the rules. However, the WTO dismissed some of Boeing’s claims, as many of the subsidies were reimbursable at commercial rates of interest.
We still await a ruling on the EU’s complaint against US support for Boeing. This is due later in July.
Articles
WTO backs Boeing in Airbus dispute Financial Times, Joshua Chaffin and Jeremy Lemer (30/6/10)
FACTBOX-Subsidies and the WTO – issue at heart of Airbus case Reuters (30/6/10)
Q&A-What next in the Airbus dispute? Reuters (30/6/10)
TIMELINE-Key dates in Airbus subsidy dispute Reuters (30/6/10)
EU Airbus subsidies illegal, says WTO BBC News (30/6/10)
Boeing and Airbus row ruling to be made public BBC News, Richard Scott (30/6/10)
European loan rates to Airbus illegally low, says WTO Europolitics, Chiade O’Shea (30/6/10)
Airbus Subsidies From Europe Are Ruled Improper New York Times, Christopher Drew (30/6/10)
Airbus-Boeing Rivals May Benefit From Spat Aviation Week, Madhu Unnikrishnan (28/6/10)
WTO ruling
WTO issues panel report on Airbus dispute WTO (30/6/10)
Data on orders and deliveries
Competition between Airbus and Boeing (orders and deliveries) Wikipedia
Questions
- What is meant by ‘predatory pricing’?
- Which subsidies were found to be illegal by the WTO? What was it about them that violated WTO rules?
- What is Airbus’s complaint against Boeing?
- How might strategic trade theory be used to justify subsidies given to Airbus?
- In what ways might the disputes between Boeing and Airbus benefit other aircraft manufacturers?
Russia and Kazakhstan have been discussing the formation of a trade agreement for some time and an agreement is now in place. From July 1 2010 a customs union between these two countries will be launched. Belarus has also been in talks with the Russian government, but as yet, it will not become a member, due to disputes with Russia. Belarus was hoping that the customs union would free it from export duties on oil, but this has not been the case. The gas dispute between Russia and Belarus has continued, although a meeting is taking place to try to resolve the issue.
President Alexander Lukashenko has said that Belarus will sign the Customs Unions documents if Russia cancels petroleum products duties now and oil duties from January 2011. He said:
“As a goodwill step, we propose removing customs barriers and customs duties on petroleum products now, and we will wait until the beginning of next year regarding oil duties; but the duties must be removed from January 1.”
Although the customs union between Russia, Kazakhstan and Belarus formally began on January 1 2010, it will not work fully until these disputes have been resolved. The following articles consider this agreement and the likely impact on the countries’ negotiations to join the WTO.
Russia, Kazakhstan agree customs union minus Belarus Reuters (28/5/10)
Russia hopeful of settling Belarus gas dispute Reuters (19/6/10)
Belarus to sign customs union documents, if Russia cancel oil duties RIA Novosti, (18/6/10)
Creation of customs union should not hinder Russia’s entering WTO RIA Novosti (17/6/10)
Kazakhstan ‘moving to re-instate Soviet Union’ with customs unions with Russia Telegraph, Richard Orange (11/6/10)
Russia, Kazakhstan launch customs union without Belarus AFP (28/5/10)
Questions
- What is a customs union? How does it differ from a common market and a monetary union, as we have in Europe?
- Russia wants to maintain its tariff on gas and oil supplies. Illustrate the effects of the imposition of a tariff. Does society gain?
- What are the arguments for and against retaining protectionist measures on trade with other nations?
- Assess the likely effects of the customs union on (a) the individual members and (b) other nations. Who do you think will benefit and lose the most?
- What will be the impact of the customs union and its disputes on the accession of these countries to the WTO.
- Is it a good idea for Russia, Kazakhstan and Belarus to join the WTO? What conditions have to be met?
As one of his first acts, the new UK Coalition government’s Chancellor, George Osborne, set up an independent Office for Budget Responsibility (OBR) (see Nipping it in the Budd: Enhancing fiscal credibility?. The role of the OBR is to provide forecasts of the economy and the data on which to base fiscal policy.
On 14 June, the OBR produced its first forecast in time for the Budget scheduled for 22 June. It has some bad news and some good news. First the bad news: it forecasts that growth for 2011 will be 2.6% – down from the 3–3.5% forecast by Labour in its last Budget in March. But now the good: it forecasts that the public-sector deficit in 2010/11 will be 10.5% of GDP – down from the 11.1% forecast by Labour; and that public-sector debt will be 62.2%, not the 63.6% forecast by Labour. These forecasts are before any policy changes announced in the Budget on 22 June.
Meanwhile, the accountants BDO have published a survey of business confidence. This shows the largest drop since the survey began. Talk by the government of cuts and worries that this will impact directly on the private sector have caused many businesses to cut investment plans. The worries are compounded by fears of a decline in export demand as countries abroad also make cuts.
So what does the future hold? Should we put any faith in forecasts? And should we be more worried about a double-dip recession or by failure to make sufficient inroads to deficits to calm markets?
Articles
Growth forecast is cut but borrowing improves Guardian, Phillip Inman and Hélène Mulholland (14/6/10)
UK watchdog slashes growth forecasts Financial Times, Chris Giles (14/6/10)
Fiscal watchdog downgrades UK growth forecast BBC News (14/6/10)
OBR UK growth forecast downgraded BBC News blogs: Stephanomics, Stephanie Flanders (14/6/10)
‘Sorry it is so complicated’ BBC Daily Politics, Stephanie Flanders (14/6/10)
Britain’s new economic forecasts: what the analysts say Guardian (14/6/10)
Spending cuts under fire amid new borrowing forecasts Independent, Russell Lynch (14/6/10)
The self-fulfilling deficit spiral Guardian, Adam Lent (14/6/10)
UK business confidence sees ‘record drop’ BBC News (13/6/10)
Britain to avoid double dip but recovery will be weak, CBI warns Independent, David Prosser (14/6/10)
A winding path to inflation The Economist (3/6/10)
Is inflation or deflation a greater threat to the world economy? The Economist: debate (1/6/10)
A question for chancellor Osborne Financial Times, Martin Wolf (11/6/10)
Fiscal conservatism may be good for one nation, but threatens collective disaster Independent, Joseph Stiglitz (15/6/10)
Hawks v doves: economists square up over Osborne’s cuts Guardian, Phillip Inman (14/6/10)
Data and forecasts
Pre-Budget forecast Office for Budget Responsibility (14/6/10)
Pre-Budget Report data Google docs (14/6/10)
Forecast for the UK economy: a comparison of independent forecasts HM Treasury (May 2010)
Questions
- How reliable is the OBR’s forecast likely to be? What factors could cause the forecast for economic growth to be (a) an overestimate; (b) an underestimate?
- What is likely to happen to aggregate demand over the coming months? Explain.
- What is meant by the ‘structural deficit’. Why might the structural deficit fall as the economy recovers? Would you explain this in terms of a shift or a movement along the short-term aggregate supply curve?
- Which is the greatest threat over the long term: inflation or deflation?
- Do you agree that the debate about cutting the deficit is merely a question of timing, not of the amount to cut?
- Why may policies of fiscal tightening, if carried out generally around the world, involve the fallacy of composition?
- Is there any common ground between the fiscal ‘hawks’ and fiscal ‘doves’ (see the last Guardian article above)?
In 2008 and 2009, as the global recession deepened, so governments around the world turned to Keynesian policies. Aggregate demand had to be boosted. This meant a combination of fiscal and monetary policies. Fiscal stimulus packages were adopted, combining increased government expenditure and cuts in taxes. On the monetary policy front, central banks cut interest rates to virtually zero and expanded the money supply in bouts of quantitative easing.
The global recession turned out not to be a deep as many had feared and the Keynesian policies were hailed by many as a success.
But how the tide is turning! The combination of the recession (which reduced tax revenues and increased welfare spending) and the stimulus packages played havoc with public finances. Deficits soared. These deficits had to be financed, and increasingly credit agencies and others were asking how sustainable such deficits were over the longer term. These worries have been compounded by the perilous state of the public finances in countries such as Greece, Portugal, Ireland and Hungary. The focus has thus turned to cuts. In fact there is now an international ‘competition’ as to which country can wear the hairiest hair shirt. The new Coalition government in the UK, for example, is busy preparing the general public for deep cuts to come.
We are now seeing a re-emergence of new classical views that increased deficits, far from stimulating the economy and resulting in faster growth, largely crowd out private expenditure. To prevent this crowding out and restore confidence in financial markets, deficits must be rapidly cut, thereby allowing finance to be diverted to the private sector.
But if the contribution to aggregate demand of the public sector is to be reduced, and if consumption, the largest component of aggregate demand, is also reduced as households try to reduce their reliance on borrowing, where is the necessary rise in aggregate demand to come from? We are left with investment and net exports – the remaining two components of aggregate demand, where AD = C + G + I + (X – M).
But will firms want to invest if deficit reduction results in higher taxes, higher unemployment and less spending by the government on construction, equipment and many other private-sector goods and services. Won’t firms, fearing a decline in consumer demand, and possibly a ‘double-dip recession’, hold off from investing? As for export growth, this depends very much on growth in the rest of the world. If the rest of the world is busy making cuts too, then export growth may be very limited.
The G20, meeting in Korea on 4 June, wrestled with this problem. But the mood had definitely turned. Leaders seemed much more concerned about deficit reduction than maintaining the fiscal stimulus.
The following articles look at the arguments between Keynesians and new classicists. The disagreements between their authors reflect the disagreements between economists and between politicians about the timing and extent of cuts.
Articles
Time to plan for post-Keynesian era Financial Times, Jeffrey Sachs (7/6/10)
The Keynesian Endpoint CNBC Guest Blog, Tony Crescenzi (7/6/10)
Keynes, Recovered Boston Review, Jonathan Kirshner (May/June 2010)
How Keynes, not mining, saved us from recession Sydney Morning Herald, Ross Gittins (7/6/10)
The verdict on Keynes Asia Times, Martin Hutchinson (2/6/10)
The G20 Has Officially Voted For Global Depression Business Insider, Marshall Auerback (7/6/10)
Deficit disorder: the Keynes solution New Statesman, Robert Skidelsky (17/5/10)
Hawks v doves: economists square up over Osborne’s cuts Guardian, Phillip Inman (14/6/10)
Reports and data
OECD Economic Outlook No. 87, May 2010 (see)
Economics: Growth rising faster than expected but risks increasing too, says OECD Economic Outlook OECD (26/5/10)
Economy: responses must reflect governments’ views of national situations OECD (26/5/10)
Editorial and summary of projections OECD (26/5/10)
General assessment of the macroeconomic situation OECD (26/5/10)
Statistical Annex to OECD Economic Outlook No. 87 OECD (10/6/10)
Communiqué, Meeting of Finance Ministers and Central Bank Governors, Busan, Republic of Korea G20 (5/6/10)
Questions
- Summarise the arguments for and against making rapid cuts in public-sector deficits.
- What forms can crowding out take? Under what circumstances will a rise in public-sector deficits (a) cause and (b) not cause crowding out?
- Assess the policy measures being proposed by the G20.
- How important is confidence for the success of (a) fiscal stimulus packages and (b) deficit reduction policies in boosting economic growth?
’The steepest and longest recession of any developed country since World War II.’ This has been the case for Ireland, which has seen national income fall by 20% since 2007. Many countries across the globe have experienced pretty bad recessions, but what makes Ireland stand out is how it has been dealt with.
In the UK, the government has continued spending in a bid to stimulate the economy and to use Gordon Brown’s phrase from 2008, we have aimed to ‘spend our way out of recession’. Ireland, however, did not have that option. With too much borrowing, Ireland was unable to stimulate the economy and needed to cut its debts in order to maintain its credibility in the eurozone. Last year, significant cuts in government spending were accompanied by tax rises equal to 5% of GDP. Similar action is to be expected in the UK following the election, where popular benefits may have to be reduced, as transfer payments do account for the majority of government spending. Whoever is in government following the election will have some hard decisions to make and everyone will be affected. Read the article below and listen to the interview and think about what the UK can learn from Ireland.
Irish lessons for the UK (including interview) BBC Stephanomics (9/4/10)
Questions
- In the interview, Brian Lenihan said that the UK was expecting too much from the falling value of sterling. What was the UK expecting following significant depreciations in the value of sterling and why has that not happened?
- What is a deflationary spiral? Why has it caused Ireland’s public debt to rise so much?
- Why does Brian Lenihan argue that there are limits to how much taxes can be increased? What are diminishing returns to taxation?
- Would the UK be any better off had we joined the euro? What about other countries: would they have benefited had we joined the euro?