Wednesday, December 6, 2006

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The gift that keeps on giving for protectionism

Ah, the Democratically-controlled Congress -- is there any step towards economic liberalization that they won't block?

Don Phillips, "U.S. Withdraws Plan on Foreign Investment in Airlines, Disrupting Open-Skies Treaty," New York Times, December 6, 2006:

The Bush administration withdrew a plan on Tuesday to give European airlines more freedom to invest in American airlines and to participate in management decisions, bowing to opposition expected to deepen in a Democratic-controlled Congress.

The decision deals a blow to greater cooperation between United States and European airlines. Europe had made the investor rule a condition for putting in place the so-called open skies treaty with the United States, which is needed to allow airlines based in Europe or the United States to fly with little or no restrictions to each other’s territories. Such flights are now often subject to government-to-government negotiations.

The open skies treaty, which has been agreed to by the United States and the European Union, is far more important on both sides of the Atlantic than the separate foreign ownership rule. Europe could easily allow the open skies treaty to take effect at any time, but it has made such an issue of tying the two together that it now faces embarrassment if it appears to give in.

Yet Tuesday’s development is probably not the end of the negotiations that govern international air accords, said Mary Peters, the transportation secretary, whose agency issued the ruling....

The European transport commissioner, Jacques Barrot, told the Associated Press that the European Union was disappointed with the decision, saying that scrapping the foreign ownership rule had been an essential element in concluding a deal on the separate open skies issue.

Nonetheless, Mr. Barrot said negotiators planned to meet again shortly.

The foreign ownership rules would have changed a series of administrative decisions that have been interpreted to strictly limit the ability of any European airline investor to participate in the management of an American airline. European airlines said the rules were so strict that a United States citizen with a single share of stock would have a greater say in airline management than the European airline investor.

The rules have led European airlines to sell their interests in American carriers. Even if the Bush administration had approved the proposed rules, foreigners would still have been limited to 25 percent of voting equity in United States airlines.

Aviation specialists say Europe will probably approve the open skies accord in 2007, even if there is no action on the foreign ownership rules, because Europe stands to gain even more than the United States.

The foreign ownership proposal had been strongly opposed by influential members of Congress, unions and several major airlines led by Continental. British Airways was also cool to the idea because it would have allowed the open skies rules to go into effect, giving other airlines greater access to Heathrow Airport, which it dominates.

Representative James Oberstar, a Democrat from Minnesota who is expected to become chairman of the House Transportation and Infrastructure Committee, commended Ms. Peters for her decision. Mr. Oberstar said Ms. Peters chose to do the right thing in the face of strong pressure from the administration and from the European Union.

I was curious about he substantive reasons why unions were opposing this particular agreement, seeing as the sweatshop argument did not seem credible.

You see some of the union arguments by clicking here and here. As near as I can determine, the primary reason for opposition is based on simple protectionism akin to the Dubai Ports World episode-- they simply do not want to see foreign ownership and control of U.S. carriers.

As for the benefits of an Open Skies arrangement? One union head argued that since the benefits are likely to be realized in the medium to long-term, there's no real cost to scuttling the arrangement.

Gonna be a long two years.....

UPDATE: This FT story by Doug Cameron and Andrew Bounds provides some more context for the Open Skies agreement:

The grounded open-skies deal was only half the prize sought by both sides. Ending most market-access restrictions would have triggered a second round of talks aimed at creating an Open Aviation Area (OAA), with more alignment of safety, security and competition policy and, perhaps, investment and ownership rules....

Governments and airlines have sought for two decades to find a way to replace the 1944 Chicago Convention which governs the industry. This requires new routes to be negotiated on a bilateral government-to-government basis for airlines that are “nationally” owned and controlled.

That was the opportunity presented by the OAA between the US and EU, and one closely-watched by regulators in other trade regions. Mary Peters, the US transportation secretary, admitted this week that the thorniest issue of all – foreign ownership and control of US airlines – remains politically unpalatable.

Congress rejected a move to raise the 25 per cent ceiling on voting rights by foreign investors in 2003, and the incoming Democratic majority appears in no mood to move on the issue.

Ms Peters is also unwilling to sacrifice progress in other areas – such as solving the broader congestion in the US transportation system – by alienating Congress.

ANOTHER UPDATE: The Los Angeles Times' Paul Thornton has more on the killing of this deal (hat tip: Virginia Postrel). He also addresses the national security concern -- as I suspected, it's about as well-placed as the Dubai Ports World fiasco:
A "homeland security risk"? All the DOT's proposal would have allowed is non-citizens to hold executive positions in airlines that oversee purely economic decisions (think fares, routes and aircraft purchases). The proposal explicitly -- I repeat, explicitly -- walled off non-citizen managers from having any say in an airline's security. In fact, the DOT proposal would have left the 25% foreign ownership cap completely intact; it even had the blessing of the Department of Defense....

But the anti-foreign ownership and Open Skies troupe in Congress isn't appealing to our economic sensibilities. If they did, doubtless they'd lose (imagine running for re-election on "I voted to increase ticket prices on transatlantic flights!"). Instead, their arguments have a xenophobic tinge, relying on our assuming that non-citizens are somehow less trustworthy than Uncle Sam's own kids to run an airline. Economics aside, that's the biggest problem with Oberstar and the protectionist crowd.

posted by Dan on 12.06.06 at 08:43 AM


I'm more sympathetic than you towards protectionist sentiments (e.g. my post below), but even I can spot this as a dumb move. That said, how does this have anything to do with a "Democratically controlled congress?"

"bowing to opposition expected to deepen in a Democratic-controlled Congress..."

Since when does this Administration bow to opposition? Did they do so during the Social Security debate, or that over the Federal Marriage Amendment? Both were lost causes, yet that did not dim their advocacy. Even in the truly stupid Dubai deal, they were bowing more to Republicans than to Democrats. We now have an oppostion party in Congress, but that did not stop the administration from rushing through the Gates nomination. You (and the text) are falsely attributing this blockage to a Democratic majority that doesn't even exist yet, and towards which the current admin. has shown no inclination to bow.

posted by: foolishmortal on 12.06.06 at 08:43 AM [permalink]

Beyond security concerns (legitimate or not) the airline industry has been hammered with job losses and pay/benefit cuts for most of a decade.

Do you expect blue collar workers to just roll over and die? Can they all work at Wal-Mart?

Trade is going to progress but we need to do something to smooth over the damages, this being the richest country in the world and all that.

Bush could care less. Apparently the Dems care a little.

posted by: save_the_rustbelt on 12.06.06 at 08:43 AM [permalink]

What "foolishmortal" said.

Dan, you could at least wait until the Dems leave some fingerprints on a protectionist outcome rather than helping the Republicans' with their "look what the Dems are making us do" whining.

posted by: withrow on 12.06.06 at 08:43 AM [permalink]

The question is what about this foreign ownership agreement is supposed to be bad for the interests of union members?

The argument, as best I can tell, is that airlines have been increasingly outsourcing maintenance functions to foreign facilities. That's bad for the unions' members in a straightforward way. The union also believes that permitting increased foreign ownership will accelerate this trend. I don't, however, understand why they think this ... do they really think US executives feel they have some patriotic duty to avoid outsourcing that European executives will cast aside?

posted by: Matthew Yglesias on 12.06.06 at 08:43 AM [permalink]

foolishmortal and withrow,

If Bush, who hates bowing to opposition, has decided to concede this issue before the official changeover, how much more intense will Democratic opposition be after the changeover?

And for the record, do you really like the President to be so antagonistic towards the opposition?

posted by: kwo on 12.06.06 at 08:43 AM [permalink]

Ditto to foolish mortal. I'm also a bit curious about why Oberstar is against it. I don't know anything about him, other than that evidently he recently commended Ms. Peters.

posted by: ptm on 12.06.06 at 08:43 AM [permalink]

Just curious - if we outsource maintenance who does the quality controls? FAA or not?

posted by: save_the_rustbelt on 12.06.06 at 08:43 AM [permalink]

Do you expect blue collar workers to just roll over and die?

Given that Americans do not seem to be very good at running airlines (Gordon Bethune excepted) and that foreigners do, the answer would seem to be to allow foreigners to own airlines here and create more jobs in the airline industry.

posted by: temoc94 on 12.06.06 at 08:43 AM [permalink]

As a Democrat, I am absolutely embarassed by this.

posted by: DRR on 12.06.06 at 08:43 AM [permalink]

Remind me again who Drezner supported in the last election? Republicans or Democrats?

posted by: A.S. on 12.06.06 at 08:43 AM [permalink]

"Even in the truly stupid Dubai deal, they were bowing more to
Republicans than to Democrats."

FM is right - it's a bit premature to be blaming this on Democrats. The real blame lies in Republicans who don't really believe in free trade. Ditto the Dubai deal - obviously that can't be even remotely blamed on the Dems, but on Republicans who caved into hysteria rather than properly riding out the storm and doing the right thing. This is a Republican leadership class that holds nothing dear, but was it really all that different under Reagan? I suspect not - what difference there was, was not in the elected officials per se but in the environment in which they existed (i.e., this was a party coming off the bottom, not one that had enjoyed power for a time). The other difference was
Reagan's ability to marshall political forces so as to put wind in the sails of his policy initiatives. Reagan believed what he believed, passionately, even when no one else did. Bush adapts to circumstance. While pragmatic, that's not leadership.

posted by: Mister Snitch! on 12.06.06 at 08:43 AM [permalink]

Given the rate of return of the US airline industry over the last 2 decades, I suspect we are doing Europe a favor by not letting them invest....

The decline of the free trade agenda has nothing to do with partisan factors and everything to do with economics. It seems to me that much of the welfare benefits from free trade in the last decade have accrued to investors as opposed to working folk.

Yes, I suppose it is great that you can go to Wal Mart and buy 6 pairs of socks for 3 bucks, but that is a pretty small consolation if your skilled manufacturing job is headed overseas.

Free trade has been pushed on people like a zealous religion with little thought to the disruptions it causes to people's lives. As someone who supports free trade, I think we need to be a little less ideological and lot more practical. We need to tie free trade agreements with efforts to improve skills and job opportunities for workers in disrupted industries here at home. We need to help ensure that our citizens have the tools they need to compete and win. Otherwise, the free trade agenda is going to be a victim to populist protectionism.

I suspect if fewer economists had tenure (the last bastion of socialism in America) they might be a bit more sensitive to the downsides of free trade.

posted by: SteveinVT on 12.06.06 at 08:43 AM [permalink]

This hilarious. Denial is a beautiful thing. Just keep your heads in the sand and soon it will be all over. The statement that Gates was runshed through Congress says it all. Hey doumbass, the appointment was rushed through Congress by the Dems. Where the hell have you been? The ports deal would have passed with a just a little support from the Dems. Yes Virginia, this is the Dems fault. Start taking responsibility. Idiots!

posted by: TomU on 12.06.06 at 08:43 AM [permalink]

So let me get this straight... The Republican-controlled Congress rejected the plan to allow foreign investors to exercise more than 25% of voting rights over American airlines back in 2003. In the subsequent three years, with Republicans controlling Congress and the Presidency, the policy stays stalled. Realizing that the plan wasn't going to pass the Republican Congress and that it probably wouldn't fare any better in the incoming marginally-Democratic Congress, the Administration abandons the proposal. And you blame the failure of the plan on Democratic protectionism?

C'mon, Dan, we've come to expect something better than that sort of knee-jerk parisanship out of your blog. I'm sure you'll have plenty of real Democratic protectionism to complain about over the next couple of years. But as a serious student of the American policy process, you should know better than to embrace an ideologically-comforting explanation without checking on the facts.

I hope that your haste to blame the failure of the Open Skies initiative on Democratic protectionism rather than Republican xenophobia doesn't lead you to overlook the ongoing Republican efforts to sabotage the incoming Democratic majority with legislative and fiscal time-bombs (e.g. ). If you aren't paying attention to the legislative maneuvering going on now, how do you expect to correctly apportion blame for future policy failures?

posted by: bah on 12.06.06 at 08:43 AM [permalink]

"It gonna be a long two years"

We are not getting the senate back any time soon. So its going to be much longer than two years. Because Dole screwed up so horribly, it is probably going to be a 56-59 democratic sweep of the senate.

posted by: ken on 12.06.06 at 08:43 AM [permalink]

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