RichardAboulafia.com 

:: February 2007 Letter ::

link

Dear Fellow Traffickers,

Smuggling is one of the great pleasures in life. Transporting contraband across borders brings great rewards—the thrilling danger of getting caught, and of course the enjoyment of consuming the smuggled good. For years my wife and I routinely did it—with cases of California wine. We’d check them at OAK or SFO and pick them up at IAD baggage carousels when we arrived. We were never discovered. There’s nothing like the great taste of illegally imported wine.

It’s true. Bringing back more than a few bottles was illegal until 2005 when the US Supreme Court struck down these laws as unconstitutional (even now the law is vague). The reason for the Court’s ruling was simple. States barring direct wine purchases were protecting their own producers, and the constitution bars states from enacting discriminatory trade practices. They were putting up import barriers as a kind of state industrial policy. The US is thankfully still one country, and any state that seeks to gain at the expense of another state is violating that principle.

Now for the hard part—migrating this sensible outcome to our industry. For years, the WTO has tried to reduce subsidies and protectionism that distorts trade. But WTO primarily concerns national governments. State and local governments are another story. Boeing threatened to move 787 jetliner production to another state to pressure Washington State to provide tax breaks and infrastructure improvements. EADS and Finmeccanica wisely shop around for the best incentives when looking to build plants in the US. And sometimes state governments use public money to compete with each other. Not long ago I toured the Sino-Swearingen plant in West Virginia. I got an earful about state-supported training programs. Their SJ30 competes mostly with planes built in Kansas.

This is all objectionable, but hardly a crisis. Unless it gets worse. For a view of things gone horribly worse, look at New Mexico. Last year the state got the bright idea of poaching piston aircraft maker LoPresti from its Florida home. They used every kind of infrastructure improvement and job training incentive a state government can muster. Even though LoPresti isn’t in Teal’s coverage universe, this got my attention, so I did some more research.

Finding One. Poaching jobs isn’t as good as creating your own program. A few years back, New Mexico attracted Eclipse Aviation with a simple incentive: an outright equity injection. Basically, New Mexico decided to invest seed money to create a jet that would compete with jets built in Wichita. When Europe does it the US Government calls it “illegal launch aid,” but apparently New Mexico’s aid is fine because…well, because it comes in dollars. Eclipse’s own website references Molly McMillan’s fine Wichita Eagle piece about New Mexico gaining at Kansas’s expense (“New Mexico, a.k.a. New Wichita”). What’s next, a higher tax on registering those competing Kansas jets in New Mexico? If state governments can erect “import” barriers to out-of-state wine, why not do the same for out-of-state jets?

New Mexico taxpayers will benefit mightily as soon as annual Eclipse production exceeds 1,000 planes, according to its plan. And if Eclipse implodes like a snake oil-fueled pyramid scheme, well, I’m sure New Mexico state officials can recoup their losses through their Nigerian email correspondence program.

Finding Two. If a state plays this game it quickly reaches an absurd level. Just after the LoPresti micro-triumph New Mexico announced a $100 million investment to build…a spaceport (I really wish I was making this up). This will service Richard Branson’s Virgin Galactic and is obviously a necessary subsidy, because Branson, for some reason, has no cash. (See the December 2005 press release at http://ww1.edd.state.nm.us. Title: Richardson Announces $100 Million Commitment to Build World’s First Spaceport. Implicit subtitles: “Private Sector Baulks At Risky Project; We’re enlisting New Mexico Taxpayers To Provide Generous Help” and “Hooray! We’re Morons!”). Today, Kansas and Florida. Tomorrow, Low Earth Orbit.

Who can stop New Mexico from operating like an aerospace banana republic? In search of good government I asked my friend Jeff Schwartz what could be done. Jeff is one of the smartest government guys I know, and he works for the Appalachian Regional Commission, which funds development work in states in their jurisdiction. “We’re on it,” he reassured me, referring me to their code (http://www.arc.gov/index.do?nodeId=1242#chap8). The ARC prohibits its money from going to “(A) Any form of assistance to relocating industries; (B) recruitment activities that place a state in competition with another state or states; and (C) projects that promote unfair competition between businesses within the same immediate service area.”

In short, the ARC helps fight stupid inter-state job poaching. Lamentably, the ARC’s authority doesn’t include New Mexico. Perhaps what the US really needs is its own domestic NAFTA, or a WTO that prevents intra-country subsidization.

Or maybe accepting government cash produces its own quick punishment. When Eclipse’s business case smacks into the tarmac, sensible taxpayers will demand accountability. And in Europe, taking government cash has also backfired. Airbus/EADS desperately needs to restructure its industrial arrangements—outsourcing, plant divestitures, whatever. Yet this restructuring is now threatened by government equity. It isn’t just the usual national government interests getting in the way. It’s also the German equivalents of US states (hectares, grand duchies, whatever). These authorities offer Airbus badly needed equity investments, but they also demand job preservation in their home duchies. Boeing might want USTR to drop the WTO case. After all, state aid may be damaging Airbus more than it’s helping it.

Finding Three. American politicians give away the store, foolishly expecting businesses to stay loyal. European politicians are smarter, demanding jobs for their investment, even if their demands strangle the businesses they claim to help.

Memo to EADS management: There is no “I” in “Team.” There are, however, two “Is” in “Single Corporate Entity.” Hopefully for Airbus, next month will see further Power 8 restructuring progress, despite the politics. Meantime, Teal updates this month include the Fighter and Special Mission overviews, plus the F-16, 777, 787, S-3, B-1, and Challenger 300.

Yours, ‘Til Washington DC Builds An Aircraft Factory In My Neighborhood,

Richard Aboulafia

 

© Richard Aboulafia 1997-2006, All rights reserved.
RichardAboulafia.com
  ~  Last updated on January 08, 2006