In the ongoing technological competition between the United States and China, the battle for global supremacy in the 21st century has extended to the commercial aviation industry, a sector that has become high stakes. On May 28, 2023, China’s indigenous large commercial airplane C-919 took its first commercial flight from Shanghai to Beijing – the culmination of a project motivated at least as much by national pride as by economic self-interest. China’s achievement shatters the Airbus-Boeing duopoly in the large passenger commercial airline industry. Unfortunately, it does so in a way that threatens to make the airline industry less, rather than more, fruitfully competitive. One might think that an additional competitor would be a good thing in any industry. The more competitive the industry, the better the product, right? Not in this case. C-919’s challenge to Airbus and Boeing doesn’t arise from its groundbreaking technology or superior fuel efficiency. In fact, when the C-919 debut in 2017, it was technologically primitive compared to the Boeing Max and the Airbus Neo, and burns at least 10% more fuel.
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How, then, does this Chinese airplane challenge Airbus and Boeing? Well, the Chinese market will account for more than 20% of the world’s demand for large passenger commercial aircraft over the next 20 years (a percentage amounting to $675 billion), displacing the United States as the largest aviation market in the world. The Chinese government will apportion its homegrown aircraft to its state-owned airlines. It will push China’s privately owned airlines to purchase the C-919 by offering them low-interest loans and highly profitable routes, in addition to discounted or cheaper rates for fuel. Such control can force Chinese airlines into bankruptcy or to merger with large state-owned airlines if they do not comply with state goals. Thus, the arrival of the C-919 altered the way in which aircraft manufacturers compete with one another for market share. This competition will no longer be solely based on their ability to introduce aircraft that satisfies a niche in the market not served well by existing firms or to produce aircraft comparable to the most advanced of its kind while selling it more cheaply than the competition.
The aircraft industry’s productivity is already skewed by the risk-offsetting subsidies provided to Airbus and Boeing by the European Consortium (France, Germany, Italy, Spain, Great Britain, etc.) and the United States, respectively. These subsidies are troubling because even if the airplane manufacturer believes, when production begins, that it has found its niche, no one can be certain what the market will demand several years hence when the aircraft is ready to debut. However, direct governmental control of markets is much more troubling. Although Airbus and Boeing are subsidized, they do in fact compete with one another by attempting to offer potential purchasers a superior product. The new Chinese airplane, on the other hand, has purchasers largely through the pressure that the Chinese government has brought to bear on its own domestic aircraft purchasers. The Chinese government is already effectively encouraging its domestic airlines to purchase the new Chinese plane. So far, the C919 has 1,100 orders, mainly from Chinese airlines. Moreover, this reservation of market share is likely to affect multiple markets. China’s reservation of a share of the market for its domestically made aircraft is likely to cause significant problems for Airbus and Boeing. If these aircraft manufacturers do not formulate an efficient strategy to meet the Chinese challenge, they stand to lose market share, and without greater help from their respective governments to cover their losses they could be forced to contract, resulting in a great loss of jobs and less investment in research and development, and therefore in a slowing of innovation and product efficiency. This would affect the overall health of their respective economies because innovation generates important spillovers in the private and military sectors.
We can address this situation most effectively by working together with the European Consortium and the other World Trade Organization members, under the WTO’s auspices, to establish a monitoring agency that would determine whether or not governments are engaging in the injurious practice of setting aside a portion of their market for their homegrown aircraft. To eliminate such practices, WTO members would require that firms looking to acquire aircraft solicit bids from airplane manufacturers based on mandatory performance requirements. Once the firm receives all bids, its decision would be based on its judgment as to which model offers the best price advantage. The price includes the cost of producing the plane plus the cost of operating it over 30 years. Subsidization or price procurements would not be factored in as a price advantage; it would disqualify you from the bidding process. The Pentagon awarded a $35 billion contract for aerial refueling tankers to Boeing over Airbus in 2011 because, while both companies had models that satisfied the performance requirements, Airbus’s cost advantage came directly from unfair subsidization of its aircraft. This selection process would eliminate any subjective elements that might have been factored into the decision. An aircraft manufacturer who loses the bid would therefore have no grounds for challenging the rationale behind the firm’s decision. Any firm found by the WTO to be in violation of regulations prohibiting the purchase of aircraft solely to advance its nation’s domestic aircraft industry would face severe financial sanctions. Such a firm would have to issue a financial reward to the manufacturer deserving of the contract to offset any injury. Until the injured party is compensated, no WTO member would be allowed to purchase the defaulting member’s aircraft. This would ensure that competition in the aviation market is based solely on the manufacturers’ ability to produce innovative and state-of-the-art aircraft more cheaply than the competition. This approach would induce China to alter its market-controlling behavior because, as I noted at the outset, China’s aircraft project is motivated more by national pride than by economic self-interest. China wants to prove to the world that it has risen to great power status and can compete with Western nations on an equal footing in the most advanced and sophisticated industries. WTO sanctions of the sort that I propose would make it obvious to everyone that China has not, in fact, achieved the status it desires.
Derek Levine is a Professor at Monroe University He is the author of the book The Dragon Takes Flight, China’s Aviation Policy, Achievements and Implications for the United States and Europe. His book: China’s Path to Dominance: Preparing for Confrontation with the U.S. is due out in July2025. Dr. Levine can be contacted at dlevine@monroeu.edu
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