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March 30, 2006
Protectionism Watch, Air Travel Edition
The rising tide of protectionism that killed the Dubai ports deal threatens to swamp another major transportation proposal: removal of 62-year-old limits on air service between Europe and the USA.
If European Union transport ministers approve the move at a meeting scheduled for June, any U.S. airline could fly to any of the European Union's 25 nations. Likewise, any European airline could fly from anywhere in Europe to anywhere in the USA.
Supporters of so-called Open Skies say it would allow airlines to step up competition for an estimated 17 million new passengers annually, making a trans-Atlantic market already valued at $22 billion a year even more lucrative. For travelers, Open Skies could mean more flights, more convenient routes and cheaper fares across the Atlantic...
In the USA, the Bush administration backs Open Skies because officials believe it would lower fares and benefit U.S. carriers. No. 2 United Airlines and No. 3 Delta Air Lines support it as a welcome step toward globalization of the industry.
Well, that certainly sounds like a good thing. But wait...
Just as adamantly, Houston-based Continental Airlines argues that the promised benefits are illusory. Open Skies has also drawn vehement opposition from labor groups that fear American jobs might be lost.
"Giving away another vital U.S. industry to foreign interests is one more example of globalization run amok," says the AFL-CIO's Edward Wytkind.
Open Skies was no sure thing even before the political flare-up that killed the plan to turn over management of five major U.S. ports to Dubai Ports World, a company based in the United Arab Emirates. Now some of the same arguments used to thwart that deal are being used to attack Open Skies.
Great. From my perspective, those arguments look just as weak as they seemed in the case of the port deal:
Opponents are aiming criticism not at Open Skies directly, but at a proposed change in rules that govern ownership of U.S. airlines. EU transport ministers aren't inclined to approve Open Skies unless the U.S. first relaxes restrictions on foreign control of U.S. airlines to better reflect foreign ownership rules for European airlines...
Tight restrictions on foreign control of U.S. airlines date back to the 1920s, when memories of World War I were still fresh. Even today, no U.S. airline is permitted to have foreign interests control more than 25% of its voting stock or more than one-third of its board of directors...
U.S. citizens must control an airline's safety, security, routes, fares — everything. To invite foreign investment and to pave the way for Open Skies, the DOT now proposes changing this rule so foreign investors could exert control over purely "commercial" decisions, such as fares and routes.
Only U.S. citizens would make decisions on safety and security, the proposal says. Limits on stock ownership and board control wouldn't change. Loosening foreign-control restrictions is not formally linked to Open Skies, but EU officials say one follows the other.
In other words, the increasingly abused safety and security shield is, once again, a red herring. No matter:
Reps. James Oberstar, D-Minn., and Frank LoBiondo, R-N.J., sponsors of the House bill to block the easing of ownership restrictions, are sounding alarms about homeland security and national defense. During war, the Pentagon pays U.S. airlines to transport troops in the airlines' jets. Critics of the rule change say foreign investors might resist allowing aircraft use in a war they oppose.
"Allowing the daily operations of our airlines to be controlled by competing — and potentially unfriendly — foreign interests could significantly undermine homeland security," LoBiondo says.
Look, I'm no expert on the airline industry and maybe there is something I am missing here. If there is, I welcome the opportunity to be educated. But I'm waiting for someone to give me an example where cutting out competition ultimately served the public good (as opposed to narrow or parochial interests). And putting up walls to foreign direct investment at a time when the U.S. economy has a large exposure to rapid reverses in capital inflows does not strike me as wise. For sure, none of this serves to enhance our claim to global economic leadership:
... criticism in the USA shows no sign of relenting. "Some of the rhetoric has been embarrassing, even xenophobic," [Michael Whitaker, vice president of United Airlines] says.
Unfortunately, merely looking foolish looks to me to be the best possible outcome.
UPDATE: On the general topic, today brings this from the Adam Smith Institute Blog:
Tony Blair is telling them Down Under that the biggest threat to world stability is not terrorism, not even climate change, but American isolationism after Iraq. On trade, the WTO implies he may be right.
There is more, and you should read it. And while I am at it, let me belatedly commend to you the Becker-Posner discussion of a few weeks back on the "Dubai Ports World Fiasco" -- here, here, here, and here.
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