Tuesday, March 16, 2010

More on the Suspension Clause

As discussed previously on the blog, seeNext Round of U.S./EU Talks,” one of the action items for the ongoing United States/European Union second stage negotiations is the modification or elimination of their 2007 Air Transport Agreement’s suspension clause. Under Article 21(3) of the Agreement, 2007 O.J. (L 134) 4, the U.S., along with any individual EU Member State, may suspend some (or all) of the treaty’s rights if they are dissatisfied with the progress of negotiations after November of this year. (Note: The right of an individual EU Member to suspend rights pertaining to its own territory is a post hoc interpretation by the EU Council of Ministers. Cf. European Commission, COM (2009) 229 final (May 15, 2009)). The ostensible reason for the suspension clause was to ensure the U.S. would stay committed to further liberalization in order to “balance out” concessions. Critics, primarily from Spain and the United Kingdom, charged that the 2007 Agreement provided greater benefits to U.S. airlines, specifically unrestricted access to London Heathrow, while failing to provide comparable concessions to EU airlines such as cabotage rights and foreign investment opportunities.

Whether or not the 2007 Agreement lacks parity is a complex question that can be addressed another time. The more immediate question is what, if anything, ought to be done concerning the 2007 Agreement’s suspension clause. Presumably, neither party desires an aviation trade war. If the U.K., for example, were to return Heathrow to the status quo ante the 2007 Agreement and limit access to only United Airlines and American Airlines, the U.S. could quickly retaliate by rescinding the oneworld Alliance’s recently won (tentative) antitrust immunity. Even if the U.S. refuses to budge on cabotage and foreign investment (which appears to be the case given the current political climate in the U.S.), EU airlines already have a considerable amount of time and resources invested in the current state of concessions. Every major EU carrier—Air France-KLM, British Airways (BA), Iberia, and Lufthansa—are part of a transatlantic airline alliance; all of them provide scheduled services to points in the U.S.; and none of them are looking to return to the days of tightly managed bilaterals with highly circumscribed traffic rights. All of them likely desire more concessions from the U.S. at some point in the future, but surely they, along with negotiators in the EU, know that a trade war would retard progress toward deeper liberalization.

Despite the potentially disastrous consequences which could follow an invocation of the suspension clause, eliminating it entirely is easier said than done. In the context of negotiations leading up to the 2007 Agreement, allowing for ex post suspension secured ex ante concessions. The U.K. (and perhaps Spain) would not have supported the 2007 Agreement had the suspension clause been absent. The U.K.’s reasoning is simple to understand: by assenting to the Agreement, it was sacrificing certain competitive advantages for its flag carrier (BA) in the form of increasing competition between points in the U.S. and Heathrow. The political costs were simply too high unless the U.K. could hold out the possibility that there was more to come for its flag carrier, specifically cabotage and foreign ownership rights. Why would the U.S., which may not be interested in acquiring further concessions from the EU, agree to allow the suspension clause? The political costs were comparably lower. U.S. airlines were poised to benefit under the 2007 Agreement; removing access restrictions at Heathrow and other airports in the EU created new commercial opportunities. While ex post suspension looms, the ex ante concessions for U.S. airlines—which included more than just Heathrow access—made the tradeoff palatable.

Now that both sides are back to the negotiating table, why would the U.K. and other Member States agree to allow the suspension clause to be modified or removed? Removal, though desirable from the standpoint of maintaining commercial certainty, seems unlikely. If the competitive position of BA or other major EU carriers diminishes under the 2007 Agreement, invocation (or threat of invocation) of the suspension clause will appear politically attractive. This is especially true if the EU Member States no longer believe there is any real possibility that the U.S. will make further concessions necessary to enhance EU carriers’ competitiveness. Further, the suspension clause is already in; getting it out—which appears to be more a U.S. priority than an EU one—will require new concessions from the U.S. But, as noted, the U.S. is not interested in making the sorts of concessions certain EU Member States (and their airlines) appear most interested in. The EU Member States have no immediate reason to accept removing the suspension clause.

Modification remains possible, however. The earliest the suspension clause can be invoked is November 2010. If notice of suspension is given at that time, the earliest any suspension would take effect is at the start of the International Air Transport Association’s March 2012 Traffic Season. See Agreement, supra, art. 21(3) (stating that a notice of suspension “shall take effect no sooner than the start of the [IATA] traffic season that commences no less than 12 months after the date on which the notice of suspension was given”). One possibility is that the U.S. could offer a new timetable for further negotiations in exchange for delaying the right to invoke the suspension clause, perhaps for an additional three year period. This would help maintain commercial certainty for both parties’ airlines and perhaps remove some of the latent hostility which accompanies the suspension threat. A similar possibility is that the time between a notice of suspension and the suspension’s effect could be expanded with the requirement that consultations and further negotiations, perhaps through the Agreement’s Joint Committee, would have to take place first. This would provide another avenue for keeping up negotiations, albeit under an ominous cloud.

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