The Endangered Asian Century
America, China, and the Perils of Confrontation
The latest target of U.S. President Donald Trump’s anti-trade campaign may be the aviation industry. For the last several months, some administration officials have been reassessing Open Skies, a set of trade pacts that have governed the skies since the 1990s. Essentially a collection of bilateral and multilateral free trade deals, the agreements give foreign airlines unfettered access to the U.S. market. For over two years, however, American Airlines, Delta, and United have accused three state-owned Gulf airlines—Emirates, Etihad Airways, and Qatar Airways—of accepting billions in “unfair” government subsidies in violation of Open Skies.
The chief executives of all three U.S. carriers took the dispute a step further when they met with Secretary of State Rex Tillerson on August 30. They reiterated throughout the meeting the “threat that the massive Gulf carrier subsidies pose to 1.2 million American workers and the harm that will only continue if . . . Open Skies agreements aren't enforced.” Industry leaders had tried similar tactics with former President Barack Obama but had failed. They are now hoping for more success given Trump’s protectionist stance.
Before Open Skies, governments kept a tight grip on international air travel in an effort to give national carriers a financial advantage. The result was limited competition and high prices. In fact, studies show that prior to Open Skies, airfares for transporting passengers and cargo were between nine and 32 percent higher than after Open Skies was implemented. The goal of Open Skies was, and remains, an aviation market free from government intervention. U.S. legacy airlines interpret that to mean carriers from signatory countries—in this case, the United Arab Emirates and Qatar—cannot accept government handouts.
In response to these countries’ alleged breach, Trump can either freeze Gulf carrier access to new U.S. markets or renege on the Open Skies agreements with Gulf countries altogether. Either option, however, would not only have severe political and economic consequences but also make Open Skies less fair.
According to Open Skies, airlines cannot offer “artificially low” prices that result from “direct or indirect governmental subsidy or support.” But subsidies aren’t prohibited outright. That’s because airlines have historically been government-backed ventures. American Airlines, for example, owes its very existence to U.S. government contracts and subsidies handed out during aviation’s early days, when it was primarily transporting mail across the United States. Banning subsidies completely would also prevent other foreign airlines—many of which partner with U.S. carriers—from accessing local markets. Singapore Airlines, for example, which partners with United Airlines, is majority controlled by the Singapore government.
The language of the Open Skies agreement is also vague, making it legally difficult to say whether the Gulf airlines are in violation. At least one probe by CAPA—Centre for Aviation has found fares between the United States and the Middle East to be roughly comparable across U.S. and Gulf carriers. In some cases, fares on Gulf carriers are actually higher. Even if this were not true, it could be argued that the airlines in question are offering competitive prices, but not ones that are “artificially low,” especially when it is generally accepted that U.S. carriers inflate prices to keep them artificially high. This is especially true on the lucrative transatlantic market—the very one that Gulf carriers are trying to enter. Here, U.S. airlines are offered immunity from antitrust laws, allowing them to collude to keep fares up, even as the price of oil declines.
If a subsidy ban were to be enforced against the Gulf countries, U.S. domestic carriers would get barred from other markets as well, since they too have relied on subsidies over the years—including billions in tax breaks as well as partnerships with and investments in government-backed ventures. Delta Air Lines, which is leading the charge against Gulf carriers, is arguably the most egregious offender. Not only has it bought subsidized oil refineries and airplanes, it holds a stake in China Eastern, which is arguably the Middle Kingdom’s most subsidized airline.
Domestic carriers' ultimate advantage, however, is the rule that prohibits foreign airlines from flying a purely U.S. route. This means that they cannot pick up customers in one American city and fly them to another. This gives U.S. carriers a monopoly over a market that generates more than half the world’s airline profits. As some note, the real reason the United States pushed for an Open Skies agreement in the first place was to give it leverage—a clever political marketing device to open markets where U.S. carriers hold the upper hand, all while protecting domestic markets from full competition.
Meanwhile, the primary reason Gulf countries are subsidizing their airlines is to diversify their economies and reduce dependence on hydrocarbon revenue sources. Emirates, Etihad Airways, and Qatar Airways contribute to this effort. All three aim to generate returns by using the Gulf to grow their stopover market.
Dubai, for example, which serves as Emirates’ home base, attracted some 15 million travelers in 2016. The government wants this figure to reach 20 million by 2020. The reason is financial. The average spend per visitor is over $2,000, among the highest in the world. Dubai’s tourism industry generates $4.7 billion annually from food and beverage sales and an additional $9.7 billion from retail.
Put simply, more fliers means a boost in non-oil-related revenue. This makes government handouts to local airlines a long-term investment tool rather than a short-term tactic to steal customers from U.S. companies. It is a mechanism that supports economic diversification. Thus, pouring billions into local aviation ventures is seen by the Gulf establishment as critical to economic security.
The idea isn’t new. According to a 2009 Congressional Research Service report, the U.S. government provided over $150 billion in subsidies to the aviation industry between 1918 and 1998 as a part of its strategy to grow the national economy.
That is why it is misleading for the United States to use Open Skies to demand “a level playing field for all.” The playing field will never be level, owing to geographic, economic, and political differences across the globe. The U.S. government knows this. It has long leveraged these differences to give domestic airlines the upper hand. Intervening now would send a message that its support of truly open skies is nothing more than lip service.