The Airbus-Boeing Dispute: A Strategic Trade Theory Approach

We present a game-theoretic approach that addresses the trade dispute between Boeing and Airbus. We consider the US and EU governments’ simultaneous decision to provide launch aid. Our analysis demonstrates that launch aid has a positive effect on economic welfare by promoting innovation and spillovers, but has a negative effect on welfare due to competition-distortion. All of these factors affect each governments’ incentives to provide launch aid. For example, if the competition-effect is sufficiently high, only one government may provide subsidized finance. Overall, a level of launch aid is preferable to none, but whether welfare is maximized by both governments, or only one government, providing launch aid, depends on the relative spillover and competition effects.