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(05/1200 - Prestowitz) COMMENT & ANALYSIS - Flying In The Face Of The Market

COMMENT & ANALYSIS - Flying In The Face Of The Market.
By Clyde Prestowitz
834 words
12 May 2000
Financial Times
(c) 2000 Financial Times Limited. All Rights Reserved

The EU's unilateral ban on aircraft using muffler technology is misguided and anti-competitive, argues Clyde Prestowitz.

Despite protracted negotiations between the US and the EU to reduce aircraft noise levels, the EU took unilateral action this week to ban "hush kits" on aircraft serving European routes after May 2002.

Hush kits, which act as a mufflers to reduce engine noise on older aircrafts, are seen by the EU as an impediment to its strategy. It instead wants existing fleets to be replaced with new, quieter aircraft.

The EU's latest move is unfortunate. Rather than focusing on performance levels the Europeans are mandating a specific design solution, which constitutes a clear, anti-competitive act.

In 1977, the International Civil Aviation Organisation, the governing body for the airline industry, established "Chapter 3" standards for aircraft noise. In 1990, ICAO member countries agreed that such standards would become effective by May 2002. Hush kits already reduce noise to decibel levels that comply with Chapter 3. So, if the kits are effective in meeting mandated standards, why should Europeans care how the goals are achieved?

Regrettably, the dispute over hush kits is symptomatic of deeper problems in the EU-US commercial relationship. On an array of trade issues - ranging from hormone-treated beef to online privacy protection - Europeans and Americans have been at odds over the appropriate scope and tools of regulation.

In the days of the "Red Menace", commercial disputes between the EU and the US were muted by mutual security interests. In the post-cold war era, forging a stronger relationship will require a better dialogue and a new common vision.

The EU's favoured option - new, quieter aircraft rather than planes re-engineered with hush kits - tilts the playing field in favour of European companies. Because EU member states continued to regulate airline fares well into the 1990s, European airlines passed the cost of buying new aircraft to passengers. The EU position will also benefit Airbus Industrie, the European multinational consortium that receives funding from EU member states, as Airbus order books are filled by European airlines eager to replace ageing fleets.

The US airline industry operated in a much more competitive environment in the 1990s and adopted an efficient, technological solution to meet standards.

Regardless of its intent, however, the outcome of the hush kit ban will be unfortunate: a technology that allows airlines to meet established guidelines is prohibited, and the alternative yields an illegitimate competitive advantage to the home team.

One of the lessons of the new economy's success is that regulating design can thwart innovation and improvements to existing technologies. It is very likely that advancements in hush kits will allow aircraft to exceed the Chapter 3 standards. On the other hand, hush kits may become obsolete, and be replaced by a better technology that meets ICAO noise-emission standards.

However, none of this will be possible if the EU is allowed capriciously to decide on what is and what is not an acceptable means to a desired end. The EU alleges that the US is creating much ado about nothing. Of the total 1,339 hush-kitted aircraft operated by US airlines only 20 operate in Europe. Nevertheless, the potential economic costs of the ban are significant. Among the greatest costs borne by airlines is fleet replacement. The ban will increase the cost of new aircraft and will reduce the resale market for long-haul fleet. In addition, hush kit manufacturers will see their sales decrease sharply and their investments in research and development for the next generation of hush kits will be wiped out.

In September 1999, the US Commerce Department estimated that the economic injury sustained by US airlines exceeded $2bn.

Beyond that, the hush kit ban violates the spirit, if not the rules, of the World Trade Organisation. More important, banning hush kits sets an ominous precedent. If countries are permitted to regulate design as opposed to enforcing performance standards, it will open a Pandora's box of mischief from any party that wants to impose arbitrary rules to discriminate against competitors. Both micromanaging business decisions and over-regulating markets reduce economic performance.

The US recently filed a complaint to the ICAO against each member state of the EU, arguing that the hush kit regulation constituted a anti-competitive discriminatory action affecting only US manufactured aircraft. Washington is also considering unilateral retaliation, such as a surcharge on airlines from EU member states operating in the US and a ban on Concorde flights to the US. Such retaliatory remedies are typical of the unilateral, vindictive exchanges that are weighing on the current EU-US relationship. What is badly needed is a dialogue at the highest level to frame a new era of EU-US co-operation in today's global economy.

The writer is president of the Economic Strategy Institute in Washington, DC.

Copyright Financial Times Limited 2000. All Rights Reserved.

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