World Naval Developments

By Norman Friedman

The Air Force still has not bought any more than the first 20 B-2s, and the stealthy missile was killed in favor of something mare austere-which itself my prove too expensive. Northrop seems to have bought Grumman in a leveraged takeover, in hopes that the company's remaining products, such as the E-8 JSTARS radar airplane, would survive the war in Washington. Although that guess has not been too far off the mark, Northrop apparently was weak enough to become ripe for takeover.

Last year, Boeing and McDonnell Douglas announced that they would merge, and the Justice Department recently approved the plan. Concern then emerged from an unexpected quarter. The European Commission, the governing body of the European Union (where Boeing sells many of its airliners) announced that it, too, would be examining the merger for its possible "anticompetition" aspects. In July, the Commission announced its opposition. Everyone who read its statement understood that it meant that Airbus Industrie, Boeing's only major competitor, was unhappy. Boeing's view was that McDonnell Douglas was so minor a factor in the world airliner market that the Commission's argument was absurd.

These dry economic points mask something much deeper. Much of Europe is deep in recession. Americans would argue that the problem is very rigid labor policies, which offer both high wages (including employer payments for benefits) and often, guaranteed jobs (in most countries it is virtually impossible to fire employees after six months). As a consequence, both in France and in Germany, few have the courage to start up new businesses, for fear that they cannot adjust costs as they go. The Netherlands is said to have solved the problem, but apparently only by creating large numbers of temporary and part-time jobs outside the regulated system. Such insecure jobs are attractive only because the alternative is full unemployment (in the United States, critics of the economy describe the rise in temporary jobs as a symptom of national failure).

The natural reaction to economic trouble is to blame foreigners, who sell at lower prices because they pay lower wages. Americans often blame Asians; Europeans tend to blame us and the Asians, and in high-technology areas they often concentrate on the United States. Boeing holds two-thirds of the world airliner market, Airbus most of the remaining one-third. Neither subsidies nor, sometimes, direct governmental pressure, have solved the Airbus problem. Too many European airlines still find Boeing's product superior-or perhaps more reasonably priced.

From this point of view, the merger was an opportunity Airbus and its supporters could not afford to miss. They knew the merger would occur; it was too advantageous for Boeing to back out. In that case they could impose penalties, the most interesting being to block Boeing from the European market, thus improving prospects enormously for the home team.

At this writing, Boeing was trying to solve the problem by withdrawing from exclusive supplier agreements with European airlines. In normal times, that might have been enough to save face. But these are not normal times. The new French Socialist government entered office on a promise of jobs, but it may well find it impossible to deliver. Foreigners, particularly Americans, may seem very attractive scapegoats. For that matter, the European Commission itself is less than popular. The rush toward integration-toward making the Commission into a real government-seems to have stalled. Hopes that unifying the European currencies would revive the "European project" may well be dashed. Maybe a declaration of economic war will make the Commission and the Union popular once more.

From a U.S. point of view, the Commission's action is a violation of sovereignty, a very serious attack. Because Europe exports so heavily to the United States, the government has a wide variety of weapons at its disposal. It already has sharpened some of them in response to past European attacks-for example, on American beef sold in Europe.

But, the reader will object, all of this is mere economics. It cannot have much to do with issues of war and peace. Again, however, history offers another depressing twist. Most people think of the series of stock market crashes beginning in 1929 as the cause of the Great Depression. However, the crash (which was part of a larger series around the world) triggered a serious recession, which was beginning to end in 1931. As countries suffered serious unemployment, governments found it convenient to blame foreign imports. If the locals had to buy their own countries' products, more people would be put to work. The way to do so was to keep out cheap imports. The U.S. weapon in this economic war was the Smoot-Hawley Tariff Act. What actually happened was trade warfare: everyone built up tariffs to kill off that terrible international commerce. The measures worked; international trade collapsed; no one really benefited. Without barriers, a partial recovery in part of one country would have helped others because the recovering area would begin to import. Other recoveries, touched off by this one, would have stimulated yet other areas. With the barriers, recovery anywhere could not go far enough. The problem was not unexpected. President Herbert Hoover vetoed SmootHawley, but Congress knew that "protecting the American people" would be popular, so it passed the measure over the veto.

Those who survived the Great Depression took it for granted that free trade would make for an expanding world economy and, ultimately, for their own prosperity. Certainly, countries paying very low wages would enjoy temporary advantages, but on the whole it was better to lift all of them than to risk the effects of renewed trade war. At least those ideas governed until very recently. Countries do practice some protectionism, often to foster new industries, but on the whole they feel that they have to apologize for such measures. The new World Trade Organization exemplifies the current common wisdom.

Trade war between the United States and the European Union carries a frightening whiff of the 1930s. Many see the high U.S. stock market as grossly overpriced, just as the Japanese market was before it crashed in 1989. The Japanese suffered a bad recession, but nothing like the Great Depression, because they were still able to lift themselves by trading with healthier economies. As in 1929, a crash in the U.S. market would be extremely unpleasant, but it need not be disastrous. On the other hand, trade warfare coupled with a crash could well cause another Great Depression.

Perhaps a few will recall that the Depression seemed to lead to a world war.


Norman Friedman is a prominent naval analyst and the author of more than thirty books covering a range of naval subjects, from warship histories to contemporary defense issues. He is a longtime columnist for Proceedings magazine and lives in New York City.

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