Courtesy Reuters

Fear of Flying: Aviation Protectionism and Global Growth

Reduction of trade barriers has led to global economic growth, but tight restrictions and regulations on how people and goods reach markets still hamper the expansion of international commerce. Nowhere are the obstacles greater than in the skies above. Forty percent of the world's trade, by value, now travels by air. Forty percent of those crossing national borders arrive by air, with the percentage much higher in advanced growth regions. International travel accounts for half of all revenue passenger miles. Over the next decade, most estimates suggest, the travel industry will double its already sizable contribution to worldwide economic growth.

With the increasing importance of efficiently and economically transporting people and goods by air, an overarching international regime to govern air transportation -- akin to the World Trade Organization (WTO) and its role in trade in goods and services -- could bring enormous benefits. But no such regime exists. In fact, not a single international flight may take off or land without a bilateral agreement between the countries in question. This is true even if all the air carriers and airports involved are owned by private concerns. Bilateral aviation agreements often stipulate the number of flights, the routes, and the number of airlines that may serve specific markets. Worldwide, there are more than 1,200 such agreements in force today.

While the world is moving away from managed and protected trade in most goods and services, the air transportation by which people and products reach destinations and markets is still heavily regulated and often fiercely protected. This antiquated and costly state of affairs dates back to the United States' failure at the end of World War II to achieve the goal of open skies as part of a liberal postwar order. Other governments opposed the concept because the United States was then the only country capable of mounting a global air transportation effort. Resistance to U.S. domination of the airways was reinforced by the sense of countries still at war that control of the skies was a critical security issue.

The bilateral approach was sealed in 1946 when the United States and Great Britain negotiated the first bilateral aviation agreement. Ironically, the two nations that would lead the world toward a liberal regime for the trade of other goods and services negotiated a much less liberal agreement to govern air services between themselves. Their agreement became the template that all other nations would use for the next three decades when deciding how to regulate routes, the number of flights and carriers serving each market, and the fares to be charged.

The system worked relatively well when few people traveled by air and nations needed to develop their infant commercial aviation industries at their own pace. As commercial aviation grew, nations sought broader access to international markets for their airlines, and aviation agreements were built on a "one for me, one for you," or "balance of benefits," basis. The benefits to be balanced were mostly those of the airlines involved, many of which were government- subsidized "flag" carriers -- one per country, except for the United States. In time, however, heavy regulation of all aspects of aviation within domestic and international markets created conditions of inefficiency akin to those under a cartel.

REVERSING COURSE

In 1978 Congress passed the Airline Deregulation Act, deregulating commercial aviation in the United States and allowing American carriers to serve any domestic market they chose. Competition fostered by deregulation forced American companies to become more imaginative and efficient. The act also prompted Washington to campaign for international deregulation, thus coming full circle to its original open-skies proposal of 1944. Not long after the American action, Margaret Thatcher privatized British Airways. Once known for inefficient operations and poor service, British Airways now boasts global reach and an international reputation for reliable, high-quality service. With other countries following suit, the number of nationally owned carriers dwindles while the list of deregulated markets grows. The European Union (EU), for example, will completely deregulate its internal aviation market this year.

As a result of all this activity, many of the world's airlines have become more competitive in more markets. Travelers and companies shipping by air have profited from lower fares and improved service. But those airlines continuing to operate in heavily regulated markets remain much less efficient than those based in countries with deregulated systems. As the gap between the most and least efficient carriers widens, the 1,200 bilateral aviation agreements worldwide become increasingly untenable. They represent a global regulatory morass that has the ultimate effect of managing trade in basic transportation in order to maintain major countries' market share and protect home carriers and labor forces. Among the many examples of subjugating efficient commerce to the narrow interests and financial advantage of individual airlines, the best known are the United States' ongoing disputes with Britain and Japan.

Years of negotiations have yielded little progress in breaking down the flight-by-flight restrictions and other detailed regulations in these two huge bilateral markets. But the U.S.-British case offers an unprecedented opportunity. In June 1996 two of the largest airlines in that market, American Airlines and British Airways, agreed to create a partnership that will require a new bilateral open-skies agreement to work effectively. Other airlines in both countries, however, are demanding that their governments secure for them such specific pay-offs that the opportunity to create an open trade environment may once again be lost. The governments, for their part, are so acquainted with traditional methods of aviation trading that they are finding it hard to break out of the "one for me, one for you" approach.

The 1952 agreement between the United States and Japan has many liberal features, permitting a number of airlines to fly from either country to third-country markets (for example, U.S. airlines can fly from Tokyo to all other markets in Asia). But in interpretation over the last 30 years, the rights under the agreement have been reserved for just two passenger airlines in the United States and one in Japan, and over the past decade those rights have been progressively restricted in terms of capacity. A number of cities in the United States, the United Kingdom, and Japan could support direct airline service, and a number of airlines not currently serving those markets are willing to fly the routes. But so far, the carriers already in the market have blocked their governments' efforts to reach market expansion agreements.

The aviation relationship between the United States and the EU, the world's two largest trading areas, is similar. Although its aviation market will be deregulated this year, the EU does not have the authority to negotiate services with non-member states like the United States, largely because prominent members like Britain, Italy, and France are skeptical of Brussels' negotiating ability. The United States thus chose to proceed bilaterally, achieving breakthroughs in 1995-96 when liberalizing agreements were reached with more than half the EU's member states, including Germany.

The next opportunity for regional progress may be between the United States and Asia. Washington is receiving positive responses to proposals for open-skies deals with several Asian countries. Singapore, Brunei, and Taiwan have already signed open-skies agreements. Malaysia is finalizing language, and New Zealand and Korea have stated that they are interested in signing open-skies agreements this spring. Asia's geography dictates that, as regional growth takes off, air transportation will be the primary means for conducting international business and trade. Moreover, new technology will soon allow carriers to fly directly to previously remote destinations from points in the United States and Europe without refueling.

The United States has urged that the leaders of the Asia-Pacific Economic Cooperation forum liberalize aviation throughout the region, perhaps on the timetable APEC leaders have set for trade in goods and services -- by 2010 for most countries. If for no reason other than the region's geography, the potential unleashed by liberalizing APEC trade will be constrained if the region's aviation network does not expand. As might be expected, the airlines in some APEC countries would be more comfortable with a more restrictive and less competitive approach. But if the political leaders and the businesses that depend on air transportation stand their ground, optimism may not be misplaced.

FLIGHT PATH TO THE FUTURE

The growing importance of air transportation will require that change occur faster than under the current system of nation-by-nation, flight-by-flight bilateral agreements. President Clinton has the opportunity to break the mold in the field of international aviation and lay the foundation for a new, rapidly growing system of global commerce. He could seize the initiative by declaring a global transportation regime the next step in making trade an engine of global growth. The president should declare that aviation liberalization will be pursued not simply as an exercise in gaining and protecting market share for airlines on a bilateral basis, but as a means of fostering growth all over the globe.

By making aviation liberalization part of the debate over the expansion of global commerce, President Clinton can move international aviation policy beyond the interests of air carriers, helping other businesses and workers who need better air transportation to develop markets for their products. Fortunately, the process would not start from scratch. The market -opening agreements with European countries, the relatively liberal arrangements with some Asian nations, and the negotiations for similar terms now under way with other countries provide a basis for a new international initiative. In the western hemisphere, a 1995 deal with Canada will lead to full liberalization next year, and agreements with Mexico and many of the Central American and Caribbean nations are already quite liberal. The United States should make a point of extending deregulation to the rest of the hemisphere as it works to expand NAFTA to Chile and other countries.

While American leadership is already in evidence, the most critical elements of a grand design are not yet in place. What is needed now is creative diplomacy. The United States still lacks open competition agreements with its two largest overseas aviation partners, Britain and Japan. While achieving such agreements will not be easy, the United States possesses considerable leverage, including carrots and sticks involving access to and participation in its domestic markets. While flights that both originate and end in the United States are not yet politically feasible for foreign carriers, the possibility of forming enhanced relationships, perhaps including franchises, with American counterparts should be of interest. If deals can be reached with Britain and France, the two nations might drop their opposition to allowing the EU to negotiate a transatlantic aviation agreement. Likewise, a deal with Japan could make other Asian nations more comfortable forging open-skies agreements with the United States and, ultimately, other nations.

The United States should lead the effort to bring together these many arrangements, assuring access to air transportation to and among the world's great and emerging economies. While not all nations may be able to participate immediately (as was the case with the General Agreement on Tariffs and Trade a half-century ago), others could join later, as many have done with the WTO. In time this grand design could be institutionalized, whether within the WTO or some other structure. This approach would also help link together regional trading arrangements. And if regional organizations can improve transportation between themselves, they can contribute to the development of global trade while reducing the likelihood that regions will restrict trade with one another.

President Clinton's lasting legacy may be the realization of a global commitment to expanded commerce. His administration has accomplished much in its first term. But a grand design for open global aviation is crucial to completing the task. If the transportation system does not fly, the trading system cannot get off the ground.

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