Air India got U.S. government support and used it to vanquish the competition. With the help of cheap loans backed by American taxpayers, the airline bought Boeing 777s — manufactured in the United States by American workers — and then launched nonstop service between New York City and India’s business capital, Mumbai.
The only problem was that the competition on that route was Delta, which says it was forced to abandon the nonstop daily service it had pioneered two years earlier.
The collision between the interests of the nation’s largest airline and one of its largest manufacturing companies illustrates the trade-offs facing the country as leaders weigh how to create a more durable economic recovery.
On Friday, President Obama toureda Boeing factory in Everett, Wash., where those wide-body planes are made, and pressedhis plan for building a stronger economy. Key elements include tax breaks to spur domestic manufacturing and a drive to increase exports — in part by helping foreign companies buy American products.
But, experts say, Obama’s activist approach to the economy could put him in the position of picking winners and losers. That is likely to mean tens of billions of dollars in additional business for Boeing — a company that has helped power the economic recovery and whose chief executive, W. James McNerney Jr., chairs Obama’s export advisory panel — but also new challenges for U.S. carriers.
“A clash is inevitable,” said Richard L. Aboulafia, a vice president with Teal Group, a firm that analyzes the aerospace industry. “Do you want to help manufacturers, or do you want to ensure a level playing field for airlines? It’s an extremely tough call.”
The clash is already playing out in Washington, where the airline industry late last year sued the federal Export-Import Bank to stop $3.4 billion in new loan guarantees being provided to Air India for the purchase of aircraft. (Not all airlines participated in the suit.)
The Ex-Im Bank, a federal agency, helps foreign firms buy American-made products by offering cheap loans directly to the firms or providing them loan guarantees — which can make it less expensive for the companies to borrow from private lenders, because the U.S. government stands behind the loan.
The airline industry’s lobbyists also have enlisted the support of top Republicans to limit the availability of low-cost financing for exports.
Lobbyists for major manufacturers such as Boeing and General Electric are fighting back, warning that if the agency does not expand its financing program in the next month or two, export-led growth could suffer.
Boeing is the behemoth of the export industry and for years has been a top beneficiary of Ex-Im’s programs. According to the lawsuit, between 2000 and 2010, the bank provided more than $52 billion in guarantees to help foreign airlines buy Boeing aircraft, providing the financing for 950 jet planes. In the past few years, about 60 percent of all Ex-Im’s loans have gone to benefit Boeing, while a third of the company’s jets delivered to customers were backed by Ex-Im support.
Other companies also have won business with the help of Ex-Im, including U.S. makers of turbines, solar technology and trains. While the impact of these programs on other sectors is harder to quantify, Ex-Im’s efforts provide support to foreign industries in countries that could be long-term competitors of the United States, such as India and Brazil.
“Export subsidies is a transfer of money from the United States to others,” said David Weinstein, a Columbia University economics professor. “The more you subsidize exports, the cheaper it is for foreign companies to compete.”
Throughout his term, Obama has advocated shifting the nation’s economic foundation to manufacturing, with an eye toward selling products overseas, especially in fast-growing developing countries. In Everett on Friday, Obama advocated expanding the work of Ex-Im, as well as other steps such as reorganizing the federal bureaucracy to help streamline government efforts to promote exports.
“If we want an economy that’s built to last, we have to do everything we can to strengthen American manufacturing and make it easier for companies like Boeing to create jobs at home and sell their products abroad,” Obama said after his tour of the Boeing manufacturing facility.
The president may soon face pressure to accomplish more. Several independent forecasters say he will not meet his goal of doubling exports by 2015. Two of the analysis firms cited most frequently by the White House, Macroeconomic Advisers and Moody’s Analytics, say it will take until at least 2018 and perhaps considerably longer, with adjustments for inflation.
Many economists applaud the goal of increasing exports and support efforts to break down trade barriers and enforce international rules that ensure fair trade.
Yet some economists — including Christina Romer, formerly Obama’s top economist — have reservations about some of the president’s proposals, including offering tax breaks to manufacturers. The economists question whether it makes sense for the government to support a sector that has been shrinking relative to service industries.
“It’s very hard for the government to figure out what sectors would be appropriate to help,” said Howard Pack, a professor of business and public policy at the University of Pennsylvania. “If you want policy that will help people, you make research and development more attractive using the same tax revenues that you would be using to stimulate the manufacturing sector.”
Some economists are also skeptical about using tax breaks to try to keep companies from moving jobs overseas or encouraging them to bring jobs back to the United States, as Obama has advocated.
“When you use your tax code to keep the jobs that are going overseas, one of the things you end up doing is reducing the creation of jobs in sectors that are high-paying,” said Weinstein, the Columbia economist. “That’s less clear to politicians, because they see the factory stay in the United States. What they don’t see is, all those workers who end up producing shoes are not producing software. There’s a hidden cost.”
The debate over aircraft subsidies provides one of the sharpest examples. Delta and other carriers say Ex-Im Bank support for Boeing sales allows foreign airlines to buy jets for about $5 million less in financing costs per year than U.S. carriers can.
“If we’re unable to meet prices established by airlines operating with U.S. government subsidies, we end up not entering the market or exiting the market,” said Ben Hirst, Delta’s general counsel.
The airline industry claims that the policies have cost thousands of jobs.
But many government officials and executives argue that the government has to provide financial support for foreign customers if American manufacturers want to get their business. Many foreign airlines might not be able to afford the cost of financing multiple $200 million-plus jets from Boeing without a subsidized interest rate.
Boeing officials note that Ex-Im activities support the company’s 80,000 aviation workers.
The U.S. government is not unusual in supporting exports. It is common practice for countries to subsidize their industries.
Supporters of Ex-Im point out that in Europe, for instance, three countries provide export financing to Airbus, Boeing’s chief rival in Europe.
“If you didn’t have it,” said Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics, “you’d surrender a large part of the market to Airbus.”
And when Delta has had the chance, the carrier has taken advantage of export financing support provided by Canada and Brazil.
Obama has championed Ex-Im, recently heralding it for helping seal a $22 billion deal between Boeing and Lion Air of Indonesia. And he has called for raising the total amount of funding Ex-Im can provide to $140 billion from $100 billion. That proposal has run into opposition from some Republicans in Congress.
Agency officials say that unless action is taken soon to lift the agency’s caps, government support of exports will come to a sudden halt.
“Any halt in export financing will . . . embolden foreign competition to question the reliability of Ex-Im financing to U.S. companies and their workers,” Fred Hochberg, president of the Ex-Im Bank, said by e-mail. “And as the last several years have demonstrated, export credit is increasingly essential to competing in the global marketplace.”