Airbus and Boeing Are Signing Economic Suicide Pacts With China

By Marshall Auerback, a market analyst and commentator.Produced by Economy for All, a project of the Independent Media Institute

Airbus is considering whether or not to shift the assembly process of its latest generation of A330 planes to China as part of a bid to increase its market share in the world’s fastest-growing civil aviation market.

The European multinational is following a trend started by Boeing, which recently opened a new completion plant in China. On the face of it, the decision by the two companies (which dominate the civilian aviation market) makes sense: build where your biggest customer lives, especially as China does not yet have a fully homegrown civil aviation industry ready to compete globally. The benefits are many, including the goodwill and esteem of the country that would be buying these planes. In the long term, however, that might prove to be a costly miscalculation. Based on its recent history (hereand here), it won’t take long for China to catch up and largely displace both companies domestically in Beijing’s home aviation market, as well as seizing a large chunk of the corporate duopoly’s global market share. Airbus and Boeing could therefore be making short-term decisions with negative long-term consequences for their future profitability.

Given China’s formidable economic advancement, none of this should come as a surprise to either Airbus or Boeing. Nor should it shock Western governments. The problem is that everybody has historically been guided by the naïve assumption that simply admitting China to organizations such as the World Trade Organization (WTO) would induce Beijing to, in the words of Philip Pan, “eventually bend to what were considered the established rules of modernization: Prosperity would fuel popular demands for political freedom and bring China into the fold of democratic nations. Or the Chinese economy would falter under the weight of authoritarian rule and bureaucratic rot.” China has unquestionably modernized, but its politically illiberal, dirigistepolity has, if anything, massively moved in the opposite direction, strengthened by that very modernization process that has done anything but falter. Furthermore, the country has many aims and goals that are antithetical to the long-term prosperity of Western companies and economies (as the European Union is beginning to recognize).

Boeing and Airbus might simply become the latest Western sacrificial lambs. Beijing has explicitly targeted wide-bodied aircrafts as one of its 10 new priority sectors for import substitution in its “Made in China 2025” document, so whatever short-term gains Airbus and Boeing receive in terms of securing additional orders from China could well be undermined longer-term. The resultant technology transfers and lower labor costs will almost certainly give Beijing a quantum leap toward competing directly and ultimately displacing both companies. Given the merger with McDonnell Douglas, Boeing will continue its march toward effectively becoming a branch of the U.S. Department of Defense, as its civilian market share crashes, but Airbus doesn’t really have the luxury of a military alternative, given the relative paucity of European defense expenditures.

As if Boeing needed any further problems, the 737 fiasco represents the latest in a series of setbacks for the company. Boeing’s 737 global recall, coming on the heels of the initial launch problems of the 787 Dreamliner some six years ago (where the “demoduralization” of production meant that Boeing “could not fully account for stress transmission and loading at the system level,” as Gary Pisano and Willy Shih write), together illustrate the dangers of spreading manufacturing too far across the globe: Engineers, notes CUNY fellow Jon Rynn, “need to ‘kick the tires’ of the new production processes they design. So while a market may be global, production and the growth of production take place most efficiently” in relatively close geographic quarters.

American companies such as Boeing consistently underestimate the value of closely integrating R&D and manufacturing, while underplaying the risks of separating them (as recent events have demonstrated again to the company’s cost). By deciding to expand its A330 production in China, Airbus looks poised to repeat Boeing’s error, a potential miscalculation that most European Union companies have hitherto largely avoided, because the EU has prioritized domestic manufacturing/discouraged offshoring more than its U.S. counterparts (in regard to the loss of U.S. manufacturing jobs attributable to China, the American Economic Review paper by Justin R. Pierce and Peter K. Schott specifically notes that there was “no similar reaction in the European Union, where policy did not change”).

Beijing itself has historically balanced its purchases from both major civil aviation manufacturers to ensure that it does not rely too heavily on one aircraft supplier, which means that Airbus will likely benefit from the void created by the 737 recall. All the more reason why the European conglomerate should be wary of following the pied piper-like expansion into China. (The 737 recall also complicates resolution of the U.S.-China trade conflict, which had appeared closer to resolution in light of Beijing’s proposal to buy an additional $1.2tn in U.S. exports over six years. Boeing aircraft purchases featured heavily on Beijing’s shopping list.)

But the longer-term challenges relate to China’s economic development path and its corresponding move up the high-tech curve, which have largely been characterized by mercantilist policies of protection and heavy government subsidy. In this regard, the Chinese state has followed a national development strategy first outlined in the mid-19th century by the German economist Friedrich List, who argued that the national government should play a crucial role in promoting, guiding, and regulating the process of national economic advancement.

Protectionism, List argued, should play a role here as well during the country’s “catch up” phase of technological development. List wrote the analysis against a historic backdrop where Germany was beginning to challenge the dominant economic power of its time, the United Kingdom. So the defenders of Beijing might well point to his work to show that there is nothing new about using the state as a principal instrument to accelerate economic development and innovation.

However, List was analyzing two capitalist economies operating within the context of a 19th-century gold standard global financial system, which invariably circumscribed the scope of state involvement (the finite availability of gold reserves limiting fiscal policy options). By contrast, today the global economy operates under a fiat currency system, and what therefore distinguishes China’s economic domestic development from its 19th century predecessors is the sheer scale of fiscal resources it can deploy in the furtherance of its economic (and military) objectives. Some of these objectives might not be so benign to the West longer-term.

Which points to another consideration for the West: for all of its supposed embrace of capitalism, China is still primarily a state-dominated economy, which eschews the disciplines of a free market economy. This means it has the capacity (and ideological predisposition) to use the national fiscal policy as a loss leader, absorbing losses well beyond what would be tolerated in an economy dominated by private enterprise (private companies, of course, can go bust). Beijing underwrites its designated national champions by relying on a combination of subsidies (some disguised, as they flow through state-backed investment funds and the financial sectors) and “Buy China” preferences to develop Chinese products, even though these policies are contrary to the rules of WTO membership, which China eagerly joined in 2001. As the economist Brad Setser argues, “various parts of the Chinese state compete, absorb losses, and then consolidat[e] around the successful firms. Other countries… [might] worry about the [scale of the cumulative] losses,” notes Setser, but not the Chinese government, which simply socializes the losses at the national level, and writes them off.

In this regard, Boeing and Airbus would do well to consider China’s experience in the solar industry. Designating this as another strategic sector for growth in the 1990s, Chinese solar companies, with the explicit backstop of the state, ultimately raised enough funding via debt to build sufficient solar capacity for the world three times over. The overinvestment ultimately killed the cash flows of major Western competitors and knocked them out of the business, leaving the market free for China to dominate. Commenting on the trend, Scientific American highlighted that “between 2008 and 2013, China’s fledgling solar-electric panel industry dropped world prices by 80 percent, a stunning achievement in a fiercely competitive high-tech market. China had leapfrogged from nursing a tiny, rural-oriented solar program in the 1990s to become the globe’s leader in what may soon be the world’s largest renewable energy source.”

Here was a classic case of state-guided/supported commercial companies receiving benefits that went far beyond anything in, say, Korea or Taiwan, or even Japan in the earlier part of their development. Now this trend is manifesting itself across the entire spectrum of the Chinese guided economy, including agricultural equipment, industrial machinery, telecommunications, AI, computer chips, and civil aviation. In another disturbing parallel that Boeing and Airbus would do well to consider, “[t]he timeline of China’s rise began in the late 1990s when Germany, overwhelmed by the domestic response to a government incentive program to promote rooftop solar panels, provided the capital, technology and experts to lure China into making solar panels to meet the German demand,” according to Scientific American. Much like the German solar companies, which shipped valuable manufacturing and technological expertise to China, to sustain demand, Boeing and Airbus could well be signing their economic death warrants by agreeing to offshore increasing amounts of production in China to sustain their global market shares (aided and abetted by their more market-oriented governments, which frown on the idea of national industrial policy).

The same thing is happening in wind power in China, which is expected to see offshore wind capacity grow from 2 gigawatts last year to 31 gigawatts in the next decade. China’s expansion here has already forced Siemens and Gamesa to merge to cope with the rising competitive challenge. As far as aviation itself goes, Setser makes the point that “China may cut into the United States’ future exports by building its own competitor to the 737 and also cut into Europe’s future exports if Airbus decides to build the A330 in China and China buys ‘Made in China’ Rolls-Royce engines for the C929 and the A330.” Even if this allows the duopoly to maintain its dominance in global civil aviation, it is hard to see how shifting manufacturing production of aircraft components to China to get orders constitutes a “win” for the U.S. or European workers who are already being displaced. And Boeing’s weak-kneed response to the 737 crisis will likely exacerbate the company’s problems going forward.

The bottom line is that both Western governments and Western corporations have persistently underestimated the power of China’s economic development model, and the corresponding economic threat that it poses to the West’s own affluence. The usual criticism leveled against the Chinese growth model is that a country that subsidizes its industries ends up with inefficient industries, because heavily protected local firms are shielded from global competition, ultimately leaving the country that resorts to protectionism with inferior products. The idea of national champions, built up via state dirigisme, according to classic liberal economic doctrine, ultimately ensures that economic efficiency and commercial considerations get squeezed out. Rent-seeking and corruption become institutionalized, goes the argument, so these national champions ultimately will not be able to compete in the global marketplace. That was certainly the assumption of Milton Friedman, who called the Chinese Communist Party’s state-driven strategy “an open invitation to corruption and inefficiency.” By contrast, according to Defense and the National Interest, the governing assumptions of capitalist economies is that “[t]he discipline of the ‘marketplace,’” not the state, is better suited to choose winners and knock out losers “who cannot offer the prices or quality or features of their competitors.”

China represents the ultimate repudiation of these seemingly ironclad economic laws. The country’s success has come across a slew of industries: clean tech, notably wind and solar power, internet companies (despite overwhelming censorship, China has corporate behemoths, such as Alibaba, or Baidu, which rival Google in scale and scope), and more recently, in the telecommunications sector (where Huawei has clearly benefited from “Buy China” preferences created by the state via its state-owned telecommunications enterprises and now is considered to be the global leader in 5G telephony). In practice, therefore, there is no reason why the same model cannot work with regard to civil aviation even as Airbus and Boeing eagerly provide the rope with which they may hang their respective companies in the future.

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  1. foppe

    Designating this as another strategic sector for growth in the 1990s, Chinese solar companies, with the explicit backstop of the state, ultimately raised enough funding via debt to build sufficient solar capacity for the world three times over.

    I’m confused. Why should it matter that they raised funding via debt? It kinda reads like Auerback feels this should shock us, or make us think China is “cheating” or somesuch. But iirc there’s a nice book by Mazzucato that proves something that Chomsky’s been saying since forever about the US (federal) govt. Now to be sure, the US govt tends to mainly simply give away money, rather than extending loans, but..

    1. Susan the other`

      Fiat economies have solidly proved that debt is just noise. Unless politicians use it as a cudgel to kill good fiscal governance. I am confused about the use of the term “socializing losses” here because what really seems to be happening is China is creating social value. When our corporations are coddled and their externalized costs and losses are socialized we, the tax payers, are the ones who suffer the austerity in order to keep the dollar “strong” and etc. I’ll never forgive this country for allowing our corporations to murder American labor in the 80s and hot-foot it off to China to make their profit. Now that was definitely socializing losses – in fact it was socializing losses in advance. I don’t think we will ever recover from that little episode of free marketeering. China might be scary because they are so very powerful, pragmatic and adaptable. But they are no more “illiberal” than we are. It’s time to set some standards.

    2. eg

      Regarding your confusion, I infer that the implication is that we had better start using debt the same way China does.

    3. Marshall Auerback

      Not trying to scare anybody. Just indicating that it was largely funded via debt as opposed to equity. You’re reading WAY too much into this.

    4. Chad boudreau

      It’s that the debt was explicitly backstopped by the state. That allows a company to issue bonds at what is essentially the government’s cost of raising money. It is genuinely shocking, even though it is old news by now.

      Like if instead of having to get a bailout during the 2008 crisis, Ford was able to just issue some treasury bonds at it’s own discretion. Not quite the same, but it sure would be shocking

  2. PlutoniumKun

    Just to point out that Airbus has had an assembly plant in Tianjin in China since 2010. I recall reading a few years ago that Airbus found costs were so high because of a shortage of the right workers it would actually have been cheaper to make them in France. Airbus also assemble aircraft in the US for precisely the same reason – to get a manufacturing ‘foothold’ in important markets to prevent mercantilist retaliation.

    But as the article says, many a manufacturer has found to their cost that the Chinese simply don’t play fair, they will extract every bit of information they can from those plants and use it for their new Comac aircraft (which so far are not very impressive, nobody wants to buy them).

    1. Jay Gallivan

      “…the Chinese simply don’t play fair…”

      An American and European elites do?

      1. Louis Fyne

        i had to laugh in my history nerd way.

        according to my mathematical modelling, from 1066 on, when it comes to global wealth extraction, the Chinese have lots of catching up to do.

        The Chinese elites haven’t even caught up to King Leopold 2 and the Belgians yet.

        1. Julian

          How do you measure this extraction, and what in your model constitutes global wealth extraction?

          1. Harry

            Well, judging by Louis’s comment, the Belgian Royal Family’s possession of Congo is one example. I read one history which suggested that the King of Belgian was unaware of the worst of the excesses (of course!) which were driven by Anglophone investors Congo Free State partners and concession buyers.

            Its not something I am so familiar with so I cant really comment on the truth of this.

            1. Mel

              The sources I know of are
              For the Congo:
              Correspondence and Report from His Majesty’s Consul at Boma Respecting the Administration of the Independent State of the Congo, Roger Casement et al.

              For a rubber harvesting operation on the Putumayo River in Peru:

              The Putumayo, the Devil’s Paradise, W. E. Hardenburg

              and The Devil and Mr. Casement, by Jordan Goodman

              The second of these I’ve only just found in this search, and haven’t read.
              From the first, the second included letter is a rebuttal by a Belgian official to Casement’s report. It suggests that foreign involvement was allowed by Belgium, but remarks that it was mostly limited to the lower Congo, possibly through the fault of the foreigners.

              Along the Putumayo River, the British became involved because the Peruvian owner made a bid to become multi-national, and incorporated in Britain. Complaints caused Casement to be sent to investigate, and the British company was wound up, so Peruvian rubber harvesting reverted to what it had been before.
              Sometime after WWI, plantation-grown rubber proved to be cheaper than wild rubber, and the collecting businesses disappeared.

          2. Summer

            And then there is this for a comparison of colonial systems:


            “New research by the renowned economist Utsa Patnaik – just published by Columbia University Press – deals a crushing blow to this narrative. Drawing on nearly two centuries of detailed data on tax and trade, Patnaik calculated that Britain drained a total of nearly $45 trillion from India during the period 1765 to 1938. “

    2. Ignacio

      You may consider that chinese don’t play fair, it also migth be considered that Airbus strategy is just another way of economic colonization and to prevent the surge of new competitors maintaining the duopoly. Is it fair?

      Given the recent drift of political geostrategy leaded by the US in which anything is “fair” to defend particular interests, my opinion is that China interest on developing their own airplane industry is not only fair but very reasonable. One wonders when the US will put in place another arbitrary ban.

      Fairness is gone with the wind

    3. Norb

      I don’t see how nations- or states- can develop other than with a mercantilist mindset. Doesn’t the failure of globalization demand a return to mercantilist methods in order to have a functioning society in the modern, technological world?

      The argument that globalization has not failed is tested by growing social tensions and inequality around the world. A return to mercantilism, or a version thereof seems logical. Thriving internal markets linked to strong alliances seem to offer a path into the future that is workable. Peaceful nations trading among themselves. Over time, resource issues can be worked out peacefully. The competition will be over functioning economies, not world domination. But to get there, nations have to have both security and technical ability. Should the Chinese or the Russians be trusted to bring about a positive transformation in world society? Time will tell. I would hope so.

      From my limited and naive understanding of history, it seems to me that the opportunity for peaceful coexistence on the planet is consistently being squandered by Western nations- particularly the US.

      If a functioning world government is not possible, than the next best thing would be functioning national governments that set standards and economic policy that benefited the majority of citizens, not just the elite. It seems the truly intelligent, and wise ones see this.

      1. JBird4049

        If a functioning world government is not possible, than the next best thing would be functioning national governments that set standards and economic policy that benefited the majority of citizens, not just the elite. It seems the truly intelligent, and wise ones see this.

        This is what we had under the Bretton Woods system from appoximately 1945 to 1973. Moderate free trade with each country setting its own goals, policies, and standards, yet being connected economically to other countries. An intermediate level between full mercantilist protectionism and completely open free trade and unrestricted currency flows. It was replaced by neoliberalism’s goal of open borders with unrestricted free trade, currency flows, and labor.

        1. Norb

          Yes, but a return seems inevitable. If not, serfdom and peasantry brought back due to excessive crapification of production and rent seeking by a global oligarchy is in our future.

          Native populations would gladly buy less advanced goods and services if produced locally and offered secured jobs and livelihoods. Made in China, Made in USA, Made in Russia- makes perfect sense. Supplying the world through monopolistic corporations is only feasible if not weaponized. But that is the path not taken.

          If you ask a neoliberal what the end game would look like, and they are forced to answer, most people would be horrified by the answer.

          Brexit is a good analogy. The transition could be a managed affair with less pain to go around, or a crash out.

          In the end, saner heads will prevail if only for growing grass roots efforts to create a fairer economy and necessity.

    4. Yikes

      US forced UK to break and give up jet turbine, Radar, and many other technologies. Philips, Dutch under Nazi occupation, had all it’s patents abrogated and USA assets seized and never returned. WW 2 made USA a world power not just from being isolated from war but because USA stole everything and everyone of any value.

      1. JBird4049

        Blame the United States for many things, but realize that technology like radar and jet turbines were extremely important during the Second World War.

        During a major war everything is open to theft, or even just being given away, by everyone as merely surviving becomes more important than any other concern by the various states. There are also the large businesses that often, very illegally and even treasonously, continue to do business with their country’s enemies. Those businesses just get nasty words usually and keep their profits (of course).

        Examples of both are the Polish and French work on the German Enigma encryption system given to the British, the Soviet theft and reverse engineering of American technology, IBM’s leasing and maintaining its punchcard machines (census records used in Holocaust) Ford’s manufacturing and maintaining its vehicles and Standard Oil’s running its refineries in, and shipping when possible oil, into Europe for the Nazis, the Nazis stold from everyone (technology in armored vehicles, artillery, radar, radio) likewise the Japanese who also got technology from the Nazis. And everyone stold from the Germans.

        The only reason the United States got to take full use of what it got was because it’s universities, businesses, and factories were all intact afterwards.

        1. Yikes

          Interesting justification for theft in war being made permanent in peace, except the United Nations established international law that such war crimes are punishable. Of course the USA didn’t sign up to that part. I find your morality interesting, reminds of of Dick Cheney.

          1. JBird4049

            I am not saying it was all good. I am just saying that making the United States as the big bad in technology theft as everyone was doing the same especially if it meant not losing the war. Full scale wars tend to push everything else but survival away, and many actions once done are impossible to reverse.

            A war in which for the Americans, which had proportionally far fewer losses than any of other serious combatants, a day with a thousand casualties was Tuesday and losing a small fleet, convoy, or naval battle was July. Or for the British, Germans, and the Japanese a city bomb, and in the latter two routinely destroyed often with tens of thousands dead. Joe and Jane Citizen of any country would have lost it if legal, or even ethical, reasons prevented the theft and use of anyone else’s resources for their country.

            So that being so, just how could the inevitable wholesale theft of knowledge by all be reversed? The scientists, workers, even the lowest level users on all sides had the essentials in their heads. Was the United States going to order the British the computer technology they got from the Americans? The Radar technology that the Americans got from the British? Or was everyone going to deport all those knowledgeable refugees to their country of residence from before the war? Sorry Einstein. It’s back to Germany!

            It would have been good if the original inventors had gotten the revenue that they should have, but nobody bothered to do so. This is rambling post, but I guess I wrote it because I don’t understand what makes the United States, in this instance, particularly sinful?

    5. Oh

      Nobody wants to buy them now but in a few years they will just like cars from S. Korea were looked upon as inferior to Japanese ones but now they they’re deemed to be just as good and better value for the money.

    6. Lambert Strether

      > the Chinese simply don’t play fair

      I think “play fair” is a little vague, because the boundaries of the field on which the “play” takes place are not clear. Does the Opium War factor in, for example?

  3. Dirk77

    When I worked there, it seemed that Boeing was always on the cutting edge of bad corporate ideas. So it’s baffling to me that it’s taken them so long to have their guts carved out by China. I mean, the peer pressure at the corporate country club I infer is rather intense. But I appreciate it as my pension from them is now in a seaparate autonomous account. That is no guarantee it will be truly insulated but it helps.

    1. John Wright

      I have worked in the electronics industry in Northern California for many years and watched the outsourcing of manufacturing and some design overseas.

      I believe that many in the industry have realized that moving manufacturing and design overseas has helped to create some very worthy competitors.

      Some years ago, I was told of a company that wanted a low end product for an existing product line.

      The company negotiated with a Chinese company and rebranded one of their inexpensive products, but only after the Chinese company was told of design changes/improvements.

      As I was told, the USA company realized they had helped bring a competitor up the learning curve and would not do it again.

      I remember reading that the telecom companies also went into China with assembly plants and found they did not see the revenue they projected because they “trained new competition” that opened their own facilities.

      Probably there will be considerable lower-level resistance inside Boeing to moving assembly/design to China, but the “big picture” executives will rule the day.

      People will get with the program, as one technician who was being laid off about 20 years ago related to me. “They told me I could leave that day, or get more pay by training my overseas replacement for two weeks.”

      He stayed the additional two weeks.

      1. JBird4049

        People will get with the program, as one technician who was being laid off about 20 years ago related to me. “They told me I could leave that day, or get more pay by training my overseas replacement for two weeks.”

        This has been happening in the United States since the 80s. I am surprised we have workers, knowledge, or equipment left to be stolen, sold, given away, or thrown away for our Blessed Elites’ God Mamon.

        I expect the Chinese to be fools as, for a very old civilization, they are surprisingly parochial and shortsighted, but seeing my fellow Americans throwing everyone else, including most Americans, into the compost pile because “greed, for lack of a better word, is good” makes me want to drink.

        Once you impoverish and enrage the population of a nation as large as the United States what does anyone expect to happen? To everyone else?

      2. drumlin woodchuckles

        This was made possible by keeping the decision secret from the targeted technician(s) until the last moment before implementation. If the company had told these technicians several years ahead of time that ” in several years time we will give you the choice of leaving immediately or working for two weeks to train the overseas replacement we will replace you with” . . . . that the technician(s) in question would have saved up two weeks worth of living expenses so as to be able to surprise the company with their own last-second refusal to train the replacement for two weeks pay when the time came.

        Which is why the company never told these technicians about this “train your replacement” plan several years in advance. I sincerely hope this technician was able to withhold certain key information from his trainee. Even better would be if he had been able to give his new trainee certain subtle dis-information and dis-training would which lead to downstream decay in the foreign replacements’ performance sometime after the replacement was made. Hopefully to the detriment of the company which pulled that stunt.

      3. Young

        I had to do it twice. I trained my Indian replacement for my world-leader high-tech employer.
        Ten years later, trained my Chinese replacement for my other world-leader employer.

  4. human

    Other countries… [might] worry about the [scale of the cumulative] losses,” notes Setser, but not the Chinese government, which simply socializes the losses at the national level, and writes them off.

    Hmmm …

  5. Peter

    Auerback’s entirely right on this. But I disagree completely: Boeing and Airbus should sign suicide pacts. The capitalists are selling China the rope to hang them with – and please, China, do hang them! While you’re at it, keep developing the green tech the species needs to survive.

  6. Ptb

    “Considering” a move overseas sounds like an indirect way of asking for more special treatment in the two companies’ respective home markets. Which they will probably need – the market for airliners might be overextended even without the Boeing fiasco.

  7. shinola

    “Airbus and Boeing could therefore be making short-term decisions with negative long-term consequences for their future profitability.”

    So what? – that seems to be SOP for exec’s these days. By the time the SHTF, IBGYBG.

    1. drumlin woodchuckles

      It is not “Boeing” and “Airbus” as such which are making these decisions. It is actual human executive persons inside offices in buildings called “Boeing” and “Airbus” who are making these decisions.

      In the current Forced Free Trade environment, if those executives making those decisions will make more personal money with in order to retire richer with by relocating the bussiness to China, they will relocate the bussiness to China. If it goes extinct after they have taken their personal money and run; it is no longer their problem to care about. So they won’t care about it.

  8. Keith newman

    My main take-away from Marshall’s post is that China is harnessing the power of fiat money to develop its economy. Why shouldn’t all countries do that? It seems to me ideological blinders are preventing it except perhaps in military expenditures in the U.S. All caveats regarding human rights, inequality, corruption, environment, etc., apply of course.

    1. Chad boudreau

      It is a lot easier to catch up than forge ahead.

      That is, inventing new knowledge is hard.

      Still, solid point :)

  9. vomkammer

    There is an alternative reading.

    Airbus has plant in Tianjin since 2010. The information that China managed to extract from it did not make the COMAC C919 a competitive aircraft.

    So, Airbus and Boeing may think now that the risks of setting a plant in China are less than expected.

    Civil aviation is a particular industry. There is a lot of know-how in the design offices and in the supply chains. This know-how cannot be copied from a manufacturing plant.

    1. cbu

      Same thing with the conventional auto industry, however, it’s a totally different story with high speed rail, ship-building, and telecommunications, for which China has caught up. China’s electric vehicle industry also seems promising. I think Comac’s ARJ21 and C919 are good enough to be competitive on China’s domestic market.

  10. Pookah Harvey

    “Airbus and Boeing could therefore be making short-term decisions with negative long-term consequences”.
    Isn’t that the neoliberal business model?

    1. georgieboy


      It is also the publicly-held stock company model, whereby management and boards compute risk/reward far out enough to match their personal enrichment deadlines, no more.

    2. Oh

      Neoliberals concentrate on the next quarter’s earnings; these companies are pr0bably eyeing the cheaper labor in the plants in China. I can see that as their main incentive.

  11. Steven

    Combine the insights of this post with MMT and you have a winner. With a few qualifications:
    1. success (wealth creation?) should be measured by the ability of the nation, with perhaps a few of its closets friends, to support and defend itself – NOT by how fast the number of zeros in the financial portfolios of its citizens grows;
    2. nor should it be measured by how (temporarily?) cheaply Western consumers can continue the consumption of the cars, televisions, etc that powers the growth of those portfolios.

    Auerbac’s choice of the future for the Western airline industry as a potential object of concern is, however, interesting. It suggests he hasn’t been reading Naked Capitalism’s warnings about that industry’s planet-killing potential.

  12. Eclair

    I’m catching up on NC post reading this morning and had just finished the post from earlier this week, “Work of the Past …” before I read this one. Autour’s study of the widening wage gap increases between workers with low and high education levels, which, as commenters there pointed out, were seen as almost natural phenomena, no agency involved, segues nicely into this post. And, resulted in my thinking about the rise of so-called ‘toxic masculinity.’

    When I moved to Long Beach, California in the ’80’s, I lived just a few miles from the then-thriving McDonnell-Douglas assembly plant. Driving by, you could see the end product planes, still an unpainted dull metallic gray, sitting in a row on the tarmac. Crews would then paint on the distinctive livery of the purchasing airline and the new plane, in glowing color, would be rolled out. The CEO of the airline would arrive, have his tie cut off (don’t ask!) and take delivery of the new plane in a ceremony that involved the proud workers.

    For a short time, I worked there, hiring training pilots. The esprit-de-corps in the plant was infectious. People were immensely proud to be working there and had a vested interest in each plane as it rolled off the assembly line. (There was a growing concern with workers going out for Friday lunch and never coming back; or returning and then falling asleep inside the wings or engine cowlings, but that was at the end, when workers knew the company was contracting.)

    I was there when the company sold plants in San Diego and older guys with years of experience came up to Long Beach to work as temporary contractors. Then the LB plant closed.

    All those employees, mainly white males, who had good jobs, worked hard, crafting a product they were proud of, that flew all over the world (spewing carbon dioxide, but that’s another tale), owned a nice little house, took family vacations, cut adrift.

    Our nation’s lack of an industrial policy not only strips workers of their jobs, their sources of income and their pensions, but takes away their dignity, their reason for getting up in the morning. It strips away the bonds they have forged with their co-workers and smashes the pride they had in their product. It emasculates them. And, what is left becomes poisoned and toxic, turns to hate and despair.

    1. Oh

      We do have an industrial policy – go to war for the oil companies to name one objective. Our government concludes pacts to force other countries to buy our grain, pharma, planes, medical equipment etc. etc.
      Unfortunately, this plicy do not translate into manufacturing in this countries because these companies chase cheap labor elsewhere around the world.

    2. Howard Beale IV

      The CEO of the airline would arrive, have his tie cut off (don’t ask!) and take delivery of the new plane in a ceremony that involved the proud workers.

      Someone apparently picked up on the Trail Dust in Dallas of cutting the tie off anyone who walked into their establishment. When I was there many moons ago, I saw H. Ross Perot’s cut tie hanging as one of their “victims”….

  13. Steven Greenberg

    China is still primarily a state-dominated economy, which eschews the disciplines of a free market economy.

    This is the most hilarious quote I think I have ever seen on Naked Capitalism.

    If your competitor’s strategy is having them eat your lunch, rather than criticize that strategy, maybe you might consider learning a thing or two from it.

    1. Inode_buddha

      “Money has no motherland; financiers are without patriotism and without decency; their sole object is gain. ”

      Attr. Napoleon Bonaparte

      (the Rothschilds and Medicis were infamous for funding both sides of European conflicts)

  14. mauisurfer

    China is doing what Japan did with automobiles and consumer electronics after WW2.
    Toyota was once warehouse with a dormitory, and the workers found out if they were going to work today by looking out the window to see if there was smoke coming from the warehouse chimney.
    And I am glad it happened, my 1995 Toyota Tacoma is better and cheaper than anything made in USA. Also true for my 2004 Mazda3.
    The contributors to this blog seem to have no regard for USA consumers.
    Yes my local clothing store closed down long ago, but they never had my size pants anyway. Walmart does, Costco does, and for far less $.
    Do you really think that Boeing deserves our support? Do you really think they have acted responsibly?
    I think Boeing is just another oligarch, like VW, that will do anything to increase profits.

    1. thesaucymugwump

      “Yes my local clothing store closed down long ago, but they never had my size pants anyway. Walmart does, Costco does, and for far less $.”

      You must be both not so old and not so tall. I’m both. Nike used to make XL t-shirts that fit me, but now its XXLs are too small. I have one Nike t-shirt from at least thirty years ago and it fits perfectly, so my body isn’t what changed.

      And if you don’t realize that Walmart quality is far below what one would have found in US clothing stores thirty years ago, there’s nothing more to say.

      1. mauisurfer

        Walmart and Amazon sell the same socks, t shirts, and pants.
        And so does Hanes if you order direct online.
        I don’t think any of them are made in USA.
        I used to buy fine cotton t shirts made in L.A (CA)
        They are no longer in business because they cost $20, and Hanes now sells for $5 online.
        Walmart quality varies, so do their prices.
        I know what I want, and am glad to buy it for less anywhere that sells it.

        1. drumlin woodchuckles

          You deserve to be as poor as the people who work for Walmart or Amazon or the people who make Walmart’s clothes.

          If you are not that poor yet, I hope you become that poor, as you deserve.

        1. JBird4049

          I can understand where this comes from but it is a false economy. As I used to work retail, as well as has an interest in clothing generally and American particularly, I can say that the quality in fabric, fit especially in accurate measurements, the range in sizes, and how it sew, buttoned, and so on has steadily declined since about 1980. Whatever one is going to buy from Walmart, J.C. Pennys(it’s still around right?) or directly from the manufacturer, it will not last as long or be as functional as something bought forty years ago. My work shoes kept getting more cheaply made and the prices remained about the same for decades.

          Further, as wages have been declining and jobs less dependable, as when those clothes makers shipped the factories overseas, people have been forced to buy cheap, garbage clothes that ultimately cost more even though they were cheaper to buy; it is almost impossible to repair these rags because they will just fall apart, nor can you resole many shoes as you could in the past because they are made as cheaply as possible with methods that preclude resoling or even easy repair; just go out and spend more money on expensive crap.

          So saying that it is good that impoverished Americans have to by cheap clothing, that are cheaply made because that is how the manufacturers make a profit any profit, is a mistake.

  15. Altandmain

    Most of the CEOs don’t care about the worker that works for them.

    They largely see them as something to exploit so that they can get their big stock options bonus. Boeing is no different, nor is Airbus.

    From the CEO’s point of view, they outsource, they transfer technology, and for a few years, the profits will be good. Then when the full extent of the failure becomes apparent, they will be gone anyways, having cashed in on their stock options and a new CEO will be there to take the fall.

    It’s the MBA culture run amok and it has been responsible for a large amount of the damage done to the middle classes of the Western world. They are creating future competitors and destroying their own communities.

    A while back, Eamonn Fingleton noted this problem – only for Japan.

    The Chinese have long wanted to develop their own domestic aerospace industry. An example of one area that China needs to master is the jet turbine blade manufacturing. It’s an extremely difficult part of making a competent aircraft, as higher inlet temperatures mean more efficient aircraft.

    The difference is that China takes a more long term view of what is in the best interest of their nation, however flawed and corrupt the CCP may be. The US ruling oligarchs are a naked kleptocracy that milk their population.

    1. Lambert Strether

      > Most of the CEOs don’t care about the worker that works for them

      Most of the CEOs don’t care about are actively hostile to the worker that works for them

      Fixed it for ya.

      1. Yuri X

        A few people in the US benefit from the global economy the CEO and the inner circle.
        The workers who work for them obviously suffer from the global economy. Hence the record income inequality and the hostility noted above. By initiating the so called trade wars Trump is trying to stop this process.

  16. thesaucymugwump

    “China has unquestionably modernized”

    To paraphrase Bill Clinton, that depends upon the definition of “modernized.” China will always be the preeminent communist country, but Deng and others realized that China could earn big bucks by playing a capitalist game, as long as Chinese businessmen do not interfere with the government.

    Airbus and Boeing are merely the latest suckers to believe that China will ever change. Der Spiegel noted years ago that Chinese engineers were videotaped in the middle of the night taking measurements of Germany’s Transrapid train. Today China has the best technology from all major train manufacturers, with short-sighted entities such as the state of California seriously considering buying Chinese trains (before the new governor canceled the project, of course).

    The aircraft horse has already left the barn. China’s C919 is a 737 clone which will allow China to stop buying smaller airliners, with many countries naively buying it to save money. Obtaining Airbus and Boeing technology will allow China to do the same for larger airliners.

    If you want a real laugh, read the articles written by libertarians about how Americans will always be more productive than Chinese, so allowing China into the WTO and giving it PNTR will not hurt us in the long run.

  17. VietnamVet

    The basic problem in the West is that the neo-liberal ideology has merged with human greed to form an economic/political system that is divorced from reality. At least the Party in China has Russia as an example and must deal with the real world to stay in power less they lose their mandate to rule. America has its exceptionalism. China has its chauvinism. My opinion is that the iPhone sales cratered there for one reason; Trump’s trade war. Boeing’s boneheaded decision to add a fatally flawed fly-by-wire system to the 737 Max without telling anyone and with no training deserves prison time for Chicago executives for manslaughter. They won’t go to jail and the last manufacturing American led industry will die away. Mid-America is a colony to global oligarchs and their bi-coastal lackeys. The only way to turn our fate around is to restore democracy and government by and for the people.

  18. St Jacques

    Some bloke said “The capitalists will sell us the rope with which we’ll hang them with”, Smart man.

    1. strat

      “When it comes time to hang the capitalist they will rush forward to sell us the rope”

      “The last capitalist we hang will be the one that sells us the rope”

      ” Revolutions without firing squads are worthless”

      V Lenin

      1. St Jacques

        I’ll be careful in checking my quotes next time. And one day I may actually read some of his stuff. errr Maybe. Cheers

  19. mauisurfer

    I thought this site was full of readers of Michael Hudson.
    The basic problem with USA balance of payments is our foreign wars.
    In all of the Pentagon Papers that later came out of McNamara’s regime, there’s no discussion at all of the balance-of-payments cost of the Vietnam War. This is what was driving America off gold. At Chase Manhattan from 1964 until I left, every Friday the Federal Reserve would come out with its goal, its weekly statistics. We could trace the gold stock. Everybody was talking about General de Gaulle cashing in the gold, because Vietnam was a French colony and the American soldiers and army would have to use French banks, the dollars would go to France and de Gaulle would cash it in for gold.
    Well, Germany actually was cashing in more gold than de Gaulle, but they didn’t make speeches about it. So I could see that the war spending was going to drive America off gold. There were three people, known as the Columbia Group, saying the Vietnam War was going to destroy the American monetary system as we know it. The group was composed of Terence McCarthy, my mentor; Seymour Melman, a professor at Columbia University’s School of Industrial Engineering where Terence also taught; and myself. We would basically go around the New York City giving speeches.

    My first article that I wrote for publish was at Ramparts Magazine, called “The Sieve of Gold,” about how the Vietnam War was going to force America off gold, which it did, of course, in 1971 when President Nixon in August stopped the gold. Meanwhile, I took my balance of payments study to New York University’s Business School and they said, “Oh this is great! We’ll publish it.” So I was able to immediately get it published.

    That led me to be invited to give a lecture at the Graduate Faculty of the New School for Social Research in New York. At the time I was analyzing the Vietnam War, I had to analyze copper prices. Every soldier in Vietnam used one ton of copper per year, I think that it’s as if they were fighting each other with ingots of copper. So I was forecasting copper prices by looking at the troop build-up, one ton of copper per army person, and forecasting that the price of copper would go up. So I was known for a while as Mr. Copper. As I said, Anaconda was Chase’s main client, and Kennecott was the client of Citibank, and they’re a group of commodity people in Wall Street that just love copper. I love copper and when one head of the group said, “Aluminum is a shit metal,” I felt the same way that copper is nice.

    lots more here

    1. orange cats

      Getting tired of the Uber trashing. Public transportation is shit in the sf bay area, meaning it’s expensive and it takes hours to get where you want to go. Plus the assaults on your psyche and equanimity are continuous, and this is from my (large) grown son who doesn’t drive and is forced to endure the hellish commute to his job which makes his workday 11 hours.

      Everyone who shames Uber users needs to turn over their tax returns and prove they use public transport every day or put a cork in it. Of course Uber is siphoning off public transit users, wtf.

      1. drumlin woodchuckles

        Well, the refugees from unbearable public transportation in SF bay area should use real taxis then, driven by regulated companies hiring regulated makers of some sort of living.

        Those who take Ubers deserve to end up as poor as the Uber drivers will end up being.

        How much taxes would the San Franciscans have to pay to buy themselves a user-friendly public transit system? Would it be more taxes than the Bay Areans could ever afford to pay?

  20. St Jacques

    There’s not that much left that the West has a clear technical advantage and by Gold, are the western elite hell bent on making out like bandits from selling that out. Hey Trumpet, here’s something to really worry about…are you there?


  21. rd

    The Chinese leadership has a simple contract with the Chinese people: they get to be in charge as long as they deliver serious economic growth.

    China is a rapidly aging society, so they have one shot, right now, to get that economic growth, and the leadership will let nothing stand in the way. The easiest way to get that growth is to beg, borrow, or steal technology transfer.

    To expect anything else from the Chinese would be foolhardy because this is existential to them.

    1. orange cats

      The Chinese leadership has a simple contract with the Chinese people: they get to be in charge as long as they deliver serious economic growth.

      I couldn’t agree more with this. Hearing so much about the new middle class in China does not prepare you for the dire visible poverty in a Chinese metropolis (Shanghai) to say nothing of the countryside. Every young Chinese person I met and worked with had two goals: marriage and money. Why wouldn’t this be so?

      Actual conversation I had with a Western expat living in China:

      Her: “I hate this place. All the Chinese care about is money!”
      Me: “I guess you won’t be sticking around much longer then?”
      Her: “I can’t leave. The money’s too good.”

  22. ewmayer

    “The idea of national champions, built up via state dirigisme, according to classic liberal economic doctrine, ultimately ensures that economic efficiency and commercial considerations get squeezed out. Rent-seeking and corruption become institutionalized, goes the argument, so these national champions ultimately will not be able to compete in the global marketplace.”

    Funny how said (neo)liberal economic doctrine peddled by the likes of Friedman actually worked out – it was the countries which offshored their manufacturing and embraced financialization as the path to prosperity which suffered the worst rent-seeking and corruption. Classic economics-by-dogma: 180 degrees wrong, destructive of entire societies, but still dominating what gets taught in econ departments, because the latter are essentially funded by the rent-seekers.

  23. RBHoughton

    “Build where your biggest customer lives” is new. The old rule was build where your raw materials come from. If you are producing a means of transport that can be delivered anywhere it makes sense. The new idea does not relate to capitalism or competition but to trade protection and sanctions – its clearly cannot be long-term and will survive only until the current quarrel between the Anglosphere and the rest of the planet is resolved one way or the other.

    The author overlooks the lengths that western finance (central banks / IMF / World Bank) will go to hobble competitors and corral small national economies into support. Look at Argentina. Look at Brazil. The surprise is its still possible to mislead the people with a straight face and have a sufficient number of them believe you and vote for you.

    The author seems to hope that things will go on unchanging forever and ever amen. That does not happen in the real world. We went off the rails two centuries ago and for over a century we were able to maintain our tricky financial system without too much fraud by having everyone securitise their assets and expose them to the man with the largest accumulation of paper money. That is now well know and countries are recognising the bad deal it is and seeking for alternatives.

  24. Sound of the Suburbs

    China was fully on board and had adopted most Western ideas until they discovered the West had no idea what they were doing.

    2008 wasn’t enough and they were still on board.

    Western demand had fallen off a cliff after 2008 and they then made all the classic neoliberal mistakes.

    They used the debt fuelled Western growth model that leads to a Minsky Moment, which they did see coming before they hit it.

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.

    China looks the same as everywhere else. This typical, neoliberal, chronic misallocation of bank credit means their Minsky Moment now looms large.

    Chinese bankers had inflated the Chinese stock market with margin lending in 2015.

    Set the scale to 5 years to see what happens to the Chinese stock market as their bankers inflate it with margin lending.

    The wealth is there one minute and gone the next, it wasn’t real wealth.

    China is no longer on board as they know the Western ideology and economics are fundamentally wrong.

  25. Patrick

    Sounds like Western ideological commitment to free markets is making them uncompetitive at the national level.

    Ironic that a zealous commitment to competition may lead them to lose.

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