Increasing protectionist rhetoric puts the benefits of air connectivity at risk

In the wake of the Great Depression in the 1930s, protectionism ran riot as many countries sought to ringfence their national economy and employment levels. The United States’ response, for example, was to tighten its monetary policy and increase its import taxes.

The result of such activity around the world was a decline in overall international trade of about 66% between 1929 and 1934, according to the US Department of State’s Office of the Historian.

Despite the obvious lesson, many observers are now seeing echoes of the 1930s’ beggar-thy-neighbor outlook in the decisions and policies of several governments around the world.

Trade restrictions

The US-inspired ban on large electronic items being carried in the cabin on select flights from certain airports has the potential for severe commercial distortions, for example.

At the same time, US tourism is already feeling the effects of the proposed US travel ban. 

Travel search engine, Hopper, says that flight search demand from international origins to the US dropped 17% overall between Trump’s inauguration and the announcement of the travel ban, compared with the final weeks of the Obama administration.

A visa row between the European Union and the US is overshadowing the summer peak season

Demand to the US fell in 94 of 122 origin countries where Hopper has significant data.

It could get worse. A visa row between the European Union and the US is overshadowing the summer peak season. 

The US requires visas for citizens of four East European countries and Cyprus. But the EU is insisting that all its members should be treated equally and therefore these five nations should also enjoy the benefits of the visa-waiver program.

The Trump administration’s focus on improving infrastructure, reducing regulatory complexity, and moderating taxes are positives for the industry. But many other policies have been categorized as anti-globalization.

The US withdrawal from the Trans-Pacific Partnership has already been pushed through

On the campaign trail, a significant tariff on Chinese imports was mooted and the administration has already announced its intention to renegotiate the North American Free Trade Agreement. The US withdrawal from the Trans-Pacific Partnership has already been pushed through.

In Europe, the United Kingdom’s exit from the European Union and the popularity of nationalist politicians elsewhere on the continent seemingly mirrors this development.

Richard Corbett, a UK Member of the European Parliament, highlights the fact the UK has the largest aviation network in Europe, and the third largest in the world. “This is not simply a matter of convenient travel—it is a vital economic sector, creating a million jobs, bringing in tax revenues, and facilitating business links for our exporters,” he notes.

“Airlines based in Britain can operate flights from, say, France to Germany without the aircraft ever touching down at a British airport. 

“They can operate within Italy between Milan and Naples. easyJet, now the UK’s largest airline, wouldn’t even exist if it hadn’t been for the EU.”

Corbett notes other complexities arising from Brexit, including Britain’s membership of the European Aviation Safety Agency (EASA). Leaving the EU will mean leaving the agency, unless Britain can negotiate otherwise. 

If Britain leaves the Customs Union, customs formalities and checks will add complexity and cost

Maintaining membership, however, means accepting EU law, something the UK Government has pledged not to let happen. 

In addition, there will be a need to reconfigure immigration at UK airports, where there will presumably no longer be an EU channel. “Besides passengers, there are consequences for freight,” Corbett adds. “If we leave the Customs Union, customs formalities and checks will add complexity and cost.”

Heathrow is the UK’s largest airport as well as a major hub for international airlines and so both airport and airlines could be especially affected.

Trade restrictions

The World Trade Organization’s (WTO) World Trade Statistical Review 2016 shows that between mid-October 2015 and mid-May 2016, WTO members applied 154 new trade-restrictive measures.

This equates to 22 measures per month, up from 15 measures per month in the previous corresponding period.

Trade-restrictive measures include new import or export tariffs—or increases in these tariffs—as well as the establishment of more complex customs procedures and other measures.

Although there were also trade-facilitating measures in the October 2015–May 2016 period, their application was lower than the pace of removal of previous restrictions.

In other words, trade-restrictive measures are increasing.

At this point in time what we don’t need is the slamming of the door on trade

During the latest WTO review period, the overall stockpile of restrictive measures grew 11%. The review states that of “the 2,835 trade-restrictive measures recorded for WTO members since 2008, only 708, or 25%, had been removed by mid-May 2016. The rate by which WTO members have been eliminating trade restrictions remains too low to make a dent in the stockpile. The total number of restrictive measures still in place today stands at 2,127.”

Roberto Azevêdo, the WTO’s Director General, told the UK’s Financial Times: “At this point in time what we don’t need is the slamming of the door on trade. Quite the contrary, we need to get trade going.”

Aviation benefits

That sentiment is echoed by IATA’s Director General and CEO, Alexandre de Juniac. “We seek borders that are open to people and to trade,” he says.

“Without that, the positive impact of connecting people, goods, markets, and ideas through air transport cannot be realized.

“I believe aviation is the business of freedom,” he continues. “It liberates people to live better lives. So we are deeply concerned with political developments pointing to a future of more restricted borders and protectionism.

"These deny the benefits of globalization to which aviation has made an enabling contribution.”

Aviation supports some 63 million jobs and $2.7 trillion in economic generation—figures that will grow to more than 99 million jobs and close to $6 trillion in economic generation by 2034, if aviation can grow unhindered by restrictive government policies.

IATA lobbies vociferously about the benefits of aviation. The next few years may reveal the extent to which policy makers are listening

Moreover, aviation’s encouragement of free trade helps make products cheaper and provides consumers with more choice, thereby stimulating broader economic growth.

It’s not just jobs and revenues that aviation makes possible. From connecting remote communities and delivering urgently needed medicines in times of crises, to enabling visits to family and friends and facilitating world tours by the latest music sensation, air transport makes the modern world tick.

IATA lobbies vociferously about the benefits of aviation. The next few years may well reveal the extent to which policy makers are listening.

On the bright side

In the US, optimists point to potential tax cuts and additional government spending boosting GDP growth. A stronger US would have a ripple effect on the world economy. And Sean Spicer, the White House Press Secretary, has hinted that curtailing air connectivity is not on the agenda. 

In February 2017, referring to Norwegian Air’s plan to purchase more than 100 Boeing aircraft and to hire more US workers, he noted that “there is a huge economic benefit that lies in that deal right now.”

Norwegian’s business model has been the topic of fierce debate in the US and so this show of support was seen as significant. 

Brian Havel, Distinguished Research Professor of Law, Director of the International and Comparative Law Program, and Director of the International Aviation Law Institute at DePaul University’s College of Law, confirms that he sees “no indication of any reconsideration of Open Skies policy” in the US.

It would be in the UK’s interest to maintain as much of their current arrangements as possible

He is more circumspect about the prospects for European aviation following Brexit, however.

“It would be in the UK’s interest to maintain as much of their current arrangements as possible, and I believe something could readily be negotiated to that effect with the US,” he says. 

“The more challenging negotiation will be with the EU and that is a difficult dynamic to predict. The relationship between the UK and the EU is likely to be quite strained over the next two years, which can complicate even the most straightforward negotiation. 

“The EU may also wish to use aviation as a bargaining chip to achieve concessions in other sectors.”

A worst-case scenario is the UK leaving the EU’s single aviation market and its corresponding treaties—such as the Open Skies agreements with the US and Canada—with no replacements in place when Brexit happens, or after the expiry of any transitional periods.

Airlines are generally in a good position to adapt to changes in traffic flows by moving capacity to other routes

Watson Farley and Williams Partner, Jeremy Robinson, who specializes in EU and UK competition law across all sectors, most notably aviation, says that although this isn’t a likely scenario, “plainly it is one to be conscious of.”  

“In that situation, UK-EU aviation connectivity may be reduced, in some cases quite significantly, as traffic rights may depend on how far prior UK-EU Member State bilateral agreements remain in force and workable once Regulation 1008/2008 no longer applies in the UK,” he suggests. 

“Airlines are generally in a good position to adapt to changes in traffic flows by moving capacity to other routes. As need be, some ownership restructuring can be undertaken.”

Robinson believes that air transport’s difficulty is that it fosters globalization while maintaining a protectionist structure for itself. 

It does not appear to be advantageous for the UK to have to renegotiate air services agreements

“Against that background, the great achievement of the EU’s aviation policy has been to create an open aviation area within the EU, then extend that, piecemeal, to the EU’s near neighbors and agree Open Skies arrangements with more distant partners such as the US and Canada,” he says.

“The best position is for the existing arrangements to continue and be deepened, until one day, aviation can operate as a genuinely global industry. 

“From today’s perspective, it does not appear to be advantageous for the UK to have to renegotiate air services agreements, particularly with the EU. 

“That said, if the UK’s liberalizing aviation policy instincts can be spread further around the world, that will be positive, but we will not know that for many years.”

Liberal policies

Robinson accepts that a reversion to protectionism generally may dampen the appetite for liberal aviation policies, if not start to reverse them. 

“Also, concerns in parts of some societies about large-scale population migration could conceivably translate later into a policy objective to control how easily people move, and aviation does of course facilitate the movement of people,” he says.

But he insists these are theoretical constructs only. “I do not currently think there is a direct link between protectionism generally and a possible reversion to more protectionist aviation policies,” he says. 

Were globalization to be scaled back, the consequences for aviation would likely be severe

“Perhaps the opposite—the clear advantages to economies from air connectivity should be a powerful argument to governments tempted to put short-term political gain before long-term benefit.”

Havel is equally adamant that “globalization is an extraordinarily difficult process to deter.”

“There may be a curtailment or even backsliding in some places, but overall I expect that the world decades from now will be much more integrated than it is now,” he concludes. 

“Were globalization to be scaled back, the consequences for aviation would likely be severe. 

“Instead, I expect that aviation will continue to see growth in those markets where demographics and economics would predict it, subject to occasional downturns related to business cycles and fuel costs.” 

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