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March 30, 2006

Protectionism Watch, Air Travel Edition

From USA Today:

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.

March 30, 2006 in Trade | Permalink


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I am finally getting why there is so much protectionist rhetoric emerging. At first I thought it was reaction to the war. In reality, it is a political issue. The Dems are weak on national security. At their core, they do not trust the military or corporate America. One of their political bases is unions. Hence, Charlie Shumer front and center on the port deal, when he really was worried about losing union jobs. The two Dems front and center on airlines, when really they are concerned about union jobs.

Dems are advancing the cause of pre K education, and they are couching it as being for the children when really they want to create more union teaching jobs for pre K kids and run the independent day care and pre schools out of business.

You are right, protectionism is never good for America. Security can be achieved, and competition in the air will be good for everyone in the long run.

Posted by: jeff | March 30, 2006 at 01:43 PM

Good for consumers, yes, good for the industry, you have to be kidding. It isn't a matter of protectionism among the public though, security concerns are real even if being taken to ridiculous degrees. Ownership is really the least of these. Bush has fanned the flames whenever he has needed to bolster his support. The public got it.

Considering how difficult travel has been made these days, one wonders why there is even any need to expand routes. Heard of an orchestra that couldn't spare the expense of personal visits to consolates to obtain visas to travel here. Those are much greater barriers than routes.

Posted by: Lord | March 30, 2006 at 02:38 PM

Another sad and frustrating case of protectionism, made all the more embarassing because of the "safety/security red herring" that Dave points out.

However, given that the Wright amendment continues to resist all but piecemeal attempts to repeal it, I can't say that I'm surprised. Why should we expect people to embrace international competition when they can't even handle the domestic version?

Posted by: Peter Summers | March 30, 2006 at 04:09 PM

"Look, I'm no expert on the airline industry and maybe there is something I am missing here."

Neither are the managers at United but that does not stop them.

Gordon Bethune is possibly the closted to an expert.

I'd like to see the U.S. consider auctioning United away to foreign companies (Lufthansa?). This would cut losses vs. letting losses continue to grow

Posted by: anon | March 30, 2006 at 06:15 PM

one more:

This influenced my position on U.S. auctioning-away United Airlines to a foreign airline (see last paragraph at post below).


I do not see a material difference in selling United to a domestic or foreign competitor. I did not know there were limits on foreign ownership of airlines until Becker highlighted this.

Posted by: anon | March 30, 2006 at 08:49 PM

Ayn Rand meets United Airlines - When is "competition" not "competition" - when it is really monopoly dressed as "competition". Heard any good radio lately? No - neither have I - maybe that's because a couple of companies are buying it all up and making it so "competitive".

The only thing that refuses to die are all these pseudo-scientific economic theories that succeed in academia and fail in the real world. That doesn't stop them though, does it. Just change the argument from "bad for consumer" to "protectionism" and carry on the good fight.

Some days I truly believe that global warming (another result of "competition") is God's revenge on his moronic children.

Posted by: john | March 31, 2006 at 06:10 AM

It is the natural and to be expected reaction to the inconsistent fiscal policy.

Our structural federal deficit requires a massive inflow of foreign capital and some of that will go into buying assets.

Somebody tell Cheney to look at the destruction of our international competitive position and he will see that deficits do matter.

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