Airbus’s Lesson for Young Socialists

Its A380 debacle shows how hard it is for state planners to outguess markets.

Years ago, when an editor asked me if Boeing would be around to pay off a 100-year bond it had recently offered, I flippantly replied that 100 years was only two product cycles for the company.

I underestimated the duration of its products. The Boeing 747 first flew in 1969 and a freighter version will continue to be built near Seattle at least through 2022. The Boeing 737, which first flew in 1967, faces an order backlog that extends through 2027. An all-new replacement for the commuter workhorse is unlikely to appear until the 2030s.

Which makes all the more anomalous Airbus’s decision to end production of its impressive and giant A380, which has been flying only since 2005.

Socialism is currently in vogue. If the word means anything in today’s context, it means projects of unusual government ambition, built on our globally shared capitalist technological and commercial base. The A380 was exactly such a project. Underwritten by massive European government subsidies, the plane was an engineering sensation. Passengers loved the roomy jet. Yet now it’s kaput. What went wrong? Or to phrase the question more usefully, what technological and commercial realities would its sponsors have had to overrule to assure its success?

The list is not a short one. They would have had to overrule the desire of passengers to fly direct, bypassing the crowded hub airports (like London’s Heathrow) for which the A380 was built.

They would have had to overrule the preference of business travelers for frequent departures. With 535 seats to fill, the superjumbo was hopelessly matched against operators offering more convenient schedules by using smaller planes.

Most of all, they would have had to overrule the public’s appetite for lower fares. On a per-seat basis, a new generation of super-efficient twin-engine planes such as the Boeing 787 proved cheaper to operate even though the four-engine A380 could accommodate twice as many customers.

In the end, enough socialism could be mobilized to get the plane built, but not enough to make it commercially viable. Europe’s governments would have needed to extend their dominion beyond their own taxpayers who financed it. They would have needed to dictate to the world’s airlines and travelers and even the aerospace industry’s global supplier base, which proved unwilling to develop a new fuel-efficient engine for a plane with a doubtful future.

This should guide us in our thinking about what kind of “socialism” is possible today. Governments can tax their own people until they rebel at the ballot box, refuse to pay, or emigrate. They have no power, in our world, to dictate what kinds of goods and services and technologies (green or otherwise) the global marketplace will accept.

Statement from President Donald J. Trump on Standing with Saudi Arabia

The world is a very dangerous place!

The country of Iran, as an example, is responsible for a bloody proxy war against Saudi Arabia in Yemen, trying to destabilize Iraq’s fragile attempt at democracy, supporting the terror group Hezbollah in Lebanon, propping up dictator Bashar Assad in Syria (who has killed millions of his own citizens), and much more. Likewise, the Iranians have killed many Americans and other innocent people throughout the Middle East. Iran states openly, and with great force, “Death to America!” and “Death to Israel!” Iran is considered “the world’s leading sponsor of terror.”

On the other hand, Saudi Arabia would gladly withdraw from Yemen if the Iranians would agree to leave. They would immediately provide desperately needed humanitarian assistance. Additionally, Saudi Arabia has agreed to spend billions of dollars in leading the fight against Radical Islamic Terrorism.

After my heavily negotiated trip to Saudi Arabia last year, the Kingdom agreed to spend and invest $450 billion in the United States. This is a record amount of money. It will create hundreds of thousands of jobs, tremendous economic development, and much additional wealth for the United States. Of the $450 billion, $110 billion will be spent on the purchase of military equipment from Boeing, Lockheed Martin, Raytheon and many other great U.S. defense contractors. If we foolishly cancel these contracts, Russia and China would be the enormous beneficiaries – and very happy to acquire all of this newfound business. It would be a wonderful gift to them directly from the United States!

The crime against Jamal Khashoggi was a terrible one, and one that our country does not condone. Indeed, we have taken strong action against those already known to have participated in the murder. After great independent research, we now know many details of this horrible crime. We have already sanctioned 17 Saudis known to have been involved in the murder of Mr. Khashoggi, and the disposal of his body.

Representatives of Saudi Arabia say that Jamal Khashoggi was an “enemy of the state” and a member of the Muslim Brotherhood, but my decision is in no way based on that – this is an unacceptable and horrible crime. King Salman and Crown Prince Mohammad bin Salman vigorously deny any knowledge of the planning or execution of the murder of Mr. Khashoggi. Our intelligence agencies continue to assess all information, but it could very well be that the Crown Prince had knowledge of this tragic event – maybe he did and maybe he didn’t!

That being said, we may never know all of the facts surrounding the murder of Mr. Jamal Khashoggi. In any case, our relationship is with the Kingdom of Saudi Arabia. 1 They have been a great ally in our very important fight against Iran. The United States intends to remain a steadfast partner of Saudi Arabia to ensure the interests of our country, Israel and all other partners in the region. It is our paramount goal to fully eliminate the threat of terrorism throughout the world! 2

I understand there are members of Congress who, for political or other reasons, would like to go in a different direction – and they are free to do so. I will consider whatever ideas are presented to me, but only if they are consistent with the absolute security and safety of America. After the United States, Saudi Arabia is the largest oil producing nation in the world. 3 They have worked closely with us and have been very responsive to my requests to keeping oil prices at reasonable levels – so important for the world. As President of the United States I intend to ensure that, in a very dangerous world, America is pursuing its national interests and vigorously contesting countries that wish to do us harm. Very simply it is called America First!

 


  1. Not free-speech or justice

  2. yes, and fully and forever eliminate the threat of murder too

  3. what is the connection between the security and safety of America and oil?  Did I missed the connecting transition?

U.S.-Saudi Defense Ties on Track to Weather Controversy

President Trump last year heralded nearly $110 billion in potential deals during a trip to Saudi Arabia in May 2017. Many defense analysts said that figure includes existing commitments and contracts that could last as long as 30 years.

.. “We continue to believe that the death of Jamal Khashoggi will not lead to a major break in U.S. or European defense sales to Saudi Arabia,” said Byron Callan at Capital Alpha LLC. Mr. Callan estimated that Saudi Arabia accounts for about 5% of sales at the big U.S. defense companies.

.. Saudi Arabia is the world’s third-largest defense market after the U.S. and China and the biggest export destination for U.S. contractors, which made more than $3 billion in sales to the kingdom last year

.. The biggest signed deal is a $10 billion purchase agreed in 2014 of hundreds of armored vehicles by a Canadian subsidiary of General Dynamics, which is continuing to make shipments.

..  The kingdom’s wealth and longstanding tensions with Iran led it to plan to purchase best-in-class capabilities such as Lockheed’s Thaad missile-defense system.

.. Saudi Arabia has also bought precision bombs and missiles

.. Defense executives were among prominent attendees lined up for the Future Investment Initiative conference in capital Riyadh next week. A number of executives from finance and industry have pulled out of the conference.

.. Lockheed Martin CEO Marillyn Hewson in April hosted a tour of a U.S. satellite and missile facility by Crown Prince Mohammed bin Salman, heir to the Saudi throne and the kingdom’s day-to-day ruler.Boeing CEO Dennis Muilenburg in March hosted the prince at the plane maker’s plant in Seattle. Other executives, including Mr. Kennedy at Raytheon, have talked of frequent trips to the kingdom

.. Saudi Arabia’s huge arms bill has led the country to push for a greater share of the economic benefits, especially jobs. The kingdom has said it wants to become less reliant on imports and spend half its weapons budget in domestic facilities—compared to just 2% at present—part of a plan to diversify its economy beyond the oil industry by 2030.

.. That has led U.S. companies to open Saudi subsidiaries and to agree to shift assembly and other production processes to the kingdom. Boeing announced a joint venture in March that would place more than half the repair work for Saudi helicopters in the country, creating 6,000 jobs.

.. BAE Systems BAESY -3.80% plc, Europe’s largest weapons maker with deep ties to Saudi Arabia, is expected to have representatives at the business conclave in Saudi next week,

Robert Stallard, an analyst at Vertical Research, said the signing of the multibillion-dollar combat jet deal could be delayed. He said, though, long-term BAE’s business would not be dented. “We think the Saudi situation will blow over,” he said in a note.

If There’s a U.S.-China Trade War, China May Have Some ‘Unconventional Weapons’

There are ways to make life harder for American companies in China that need not be formal, or widely publicized.

“One of the very important tools that the Chinese have is the ability to make life difficult for a large number of American businesses,” ..

.. “They have all of these unconventional weapons that are not covered by traditional trading rules that could be potent weapons in actually fighting a trade war.”

.. As President Trump often notes, the United States does run a large trade deficit with China — especially if you look only at goods, and don’t count the value of services. That means that if China seeks to match tariffs on goods — a classic tit-for-tat approach — China runs out of “tats” pretty quickly.

.. In 2017, the United States imported $506 billion in goods from China while exporting only $131 billion in goods to China

“It mathematically means that China can’t match the U.S. dollar for dollar,” said Brad Setser, a senior fellow at the Council on Foreign Relations.

.. For example, in its planned retaliatory tariffs, the Chinese government included narrow-body aircraft but not wide-body aircraft. This makes sense strategically, Mr. Setser argued, because only two companies in the world make wide-body planes: Boeing and Airbus. If China put a tariff on planes from the American Boeing but not the European Airbus, it would lose leverage with Airbus with which to extract favorable prices and access to cutting-edge technology.

.. It is unlikely there will be uprisings in the streets of Shanghai if Kentucky bourbon gets more expensive.

..  it also risks raising food costs within China. It’s a fair bet, then, that China views remaining options as even more problematic for the prices of staple goods or the country’s industrial strategy.

.. In other words, for China the low-hanging fruit is gone. If this trade battle continues to escalate, China will have to bear a greater cost.

.. That reality could push China to seek other buttons to press.

.. American companies do significant business in China that doesn’t show up in trade data. When Apple assembles an iPhone in Zhengzhou and sells it in Shanghai, that doesn’t count as international trade, though the profits accrue to the benefit of a California-based company. The Chinese government has any number of tools to try to weaken that business if it wishes. It could decide that phones made by a foreign company are a national security threat, or shut down plants because of minor regulatory problems.

.. Making life difficult for American companies in China as retaliation in a trade war need not be formal and widely publicized. American automakers who make cars in China might find their local joint-venture partners squeezing them out. Regional governments might send safety inspectors to plants of American companies so often as to disrupt production.

.. There are more public options, too. For example, in 2013, Chinese state media accused Jaguar Land Rover and Audi of overcharging buyers for car parts, which analysts viewed as part of a campaign to pressure those automakers to locate more manufacturing in China.

.. Could China use its role as No. 1 lender to exert pressure in a trade war?

It would be a risky maneuver, in which China itself would potentially have much to lose. But it can’t be ruled out.

.. If China were to suddenly unload some of its holdings, or even signal an intention to buy fewer dollar assets in the future, that would probably cause long-term interest rates in the United States to rise

.. And this would cause some pain in the United States, as borrowing costs — whether for the federal government or individual home buyers — would rise.

.. But it would also drive down the value of China’s existing bond portfolio, meaning China could lose billions. And it would tend to push down the value of the dollar relative to other currencies, which would actually help the United States attain more advantageous trade terms.

.. Even after all that, bond prices would most likely readjust over time as other buyers took advantage of the rise in interest rates.

.. That doesn’t mean there isn’t room to cause some near-term pain and disruption. “The Chinese have some leverage to rattle U.S. bond markets, even if the threat of substantive action is not very credible,”

.. Given that a trade war with such a major trading partner is without precedent in modern times, we don’t really know what it would look like.