TCS Daily

They are the Champions

By Carlo Stagnaro - December 13, 2004 12:00 AM

The term "national champions" used to refer to sports heroes proudly waving their country's flag on a victory podium. Nowadays, the reference has radically changed. "National champions" are businesses large enough to deserve government support. At least, this is the common view in Europe.

The underlying idea is that a large corporation is a sort of national estate that should be defended against foreign competition. Should the national champion lose a significant segment of the market, the thinking goes, unemployment follows, not to mention the loss of know-how and, ultimately, economic independence.

Luckily, economics is not about nations, it is about individuals. It is individuals, through voluntary actions and the way they allocate their own money, who make the difference between a national champion and a national dog. Or, to be more precise, this is what happens in a free market. If a business is able to meet consumers' needs, it will prosper. Otherwise, it will fail. In fact, some people may opt for a product which is more costly or worse than others, just because it is manufactured in their own country. But generally, and almost always in the long run, consumers' choice is dictated by efficiency ("the best product at the lowest cost") rather than by national pride. After all, national pride has a cost: unless you are so lucky as to live in the same country as an efficient producer, you must recognize a value that you are willing to sacrifice in order to read on the label of your product, "made in your country".

Again, all of this applies to an idealized free market. It may be an interesting historical question, whether such a free market has ever existed, and where. As a matter of fact, state interventionism is an important variable in world markets - in Europe more than elsewhere. In many EU countries, the cost of "national pride" (or continental pride, so to speak) is covered by the state, through subsidies or ad hoc regulation. Subsidies allow a business to ask a lower price from consumers; regulation may keep competitors away (this is the case of environmental and labor regulation, which is often conceived as a way to stop imports from the developing world). Sometimes regulation is even more explicit: foreign investors are not allowed to buy shares of domestic enterprises. For example, the energy market is heavily protected in most European countries: Italy and Spain are reluctant to let √Člectricit√© de France enter the national markets, and France will not let foreign companies compete against EDF within its borders.

EDF is a typical national champion. The French are very proud of the efficiency of their energy system. Their grandeur shows itself when a blackout hits a neighbor country. But also as far as the Kyoto Protocol is concerned, this energy policy may look like a good choice: France relies heavily on nuclear power (which accounts for almost 80 percent of the energy consumed), thus it emits comparatively less greenhouse gas than any other European nation. What is not said is that the hidden costs of the process may be very high. Without a deep liberalization of the sector, the French don't know how much would they pay for energy in a competitive environment. They don't know how much of their tax money goes to keep EDF working.

But the quintessential national champion is not EDF. It is the French-German aircraft maker, Airbus, which in fact is the European champion. Airbus has received billions in subsidies and special loans over the years. Why does the EU support Airbus? The most obvious reason is that Airbus is a European company, while its chief competitor, Boeing, is an American one. But it isn't enough that Europeans would spend huge amounts of money just to bully their American friends. They might also want to boost the economic performance of the company. But the company is already doing very well (over 50 percent of large civil aircraft is built by Airbus). A third reason is that Airbus is an "infant industry" so it needs help - never mind that Airbus has been a leading company on the market for 35 years.

"If Airbus had never existed, those (not just) 'human' resources would have allowed the development of other sectors," explains French economist Pascal Salin, a former president of the Mont Pelerin Society. "As Airbus' technical success is reached thanks to state subsidies, that means that the aircraft's value is lower than the value of the resources spent in the productive process. In other words, Airbus has led to a continuous destruction of wealth. Economic policy, after all, is precisely about getting visible advantages by paying a price that remains hidden."

Interestingly enough, US Trade Representative Robert Zoellick filed a complain at the World Trade Organization, arguing that the company has been the recipient of illegal state subsidies. "This is about fair competition and a level playing field," Zoellick said. He may aim at creating a truly competitive environment for the Chicago-based Boeing. But as far as his only target is to limit EU subsidies to Airbus, he's working in the European citizens' best interest, both as passengers and as tax payers.


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