America and Europe are edging toward their biggest trade dispute ever – and America shouldn’t blink. The dispute involves competition between Boeing and Airbus, which has toppled Boeing as the world’s largest producer of commercial jets. In 2004, Airbus will deliver about 315 jets compared with Boeing’s 285. Some industry analysts expect Airbus to maintain its lead over Boeing until at least 2008. Despite this success, the European Union still supports government subsidies for Airbus. The subsidies must stop, and if the Europeans can’t be convinced, Congress should protect Boeing from predatory competition.

Created in 1970, Airbus reflects Europe’s ambitions and pride. The French, Germans, and British didn’t want to cede the global aircraft market to America. Given the huge investments needed to develop planes, Airbus couldn’t have survived its early years without subsidies. The Bush administration says Airbus has received $15 billion in “launch” subsidies for its planes. Total subsidies are hard to determine because they took many forms. Whatever the figure, enough is now enough.

It’s true that many of Boeing’s problems are self-inflicted. The company has been grossly mismanaged. It faces countless charges involving corrupt practices in winning military contracts. In the commercial jet market, Boeing lost dominance, in part, by under investing in new planes and technologies. Its last genuinely new plane was the Boeing 777, a long-distance aircraft launched in 1990. From 1998 to 2001, Boeing spent $9 billion buying back its stock. The money would have been better used investing in the future. Boeing’s prospects are also darkened by the weakness of some big customers (American Airlines, Delta).

It’s also true that the Airbus-Boeing competition is a good thing. It forces both companies to make better planes. Much of Airbus’ success is honestly won with quality products. Its planes, unlike Boeing’s, have common cockpits. This enhances airlines’ flexibility in using pilots and saves on training costs.

But there’s also another truth: Europe has an industrial policy to put Boeing out of the commercial-jet business. “We will give Airbus the means to win the battle against Boeing,” former French Prime Minister Lionel Jospin once said. Unsurprisingly, Europe is shrinking as a market for Boeing planes. In 2000 about 23% of Boeing’s deliveries went to Europe. In 2004 the figure is about 15%. Large new European orders are vanishing. For whatever reasons – political pressures, nationalism, low prices from Airbus – European airlines are moving away from Boeing.

The latest Airbus-Boeing competition involves two future planes: the A380 from Airbus, which would be the largest commercial jet ever, with potential seating of 555; and the Boeing 7E7, carrying about 250 passengers up to nearly 10,000 miles and promising lower operating costs. The two planes, expected to go into service in 2006 and 2008, respectively, reflect contrasting views of the future of air travel. Airbus thinks airlines will need bigger planes to handle more traffic; Boeing expects airlines to accommodate growth by flying more routes with slightly smaller planes.

Development costs of the A380 are estimated at $10.7 billion; direct “launch aid” from European governments covers about 30% of that. Although Boeing hasn’t revealed the 7E7’s development costs, it has obtained some subsidies from states and Japanese subcontractors. Confusing the controversy further is a 1992 U.S.-European agreement that permits some, though not all, of these various subsidies.

It’s time to stop the subsidy game. The Bush administration proposed a pragmatic bargain: all past subsidies would be forgiven; future subsidies would be banned. Airbus plans a direct competitor plane to the 7E7 (to be called the A350) and wants more subsidies. These would be prohibited. If Boeing countered the A380 with an improved version of its jumbo 747, it would be barred from subsidies. Interestingly, Airbus has admitted that it doesn’t need more subsidies. So, why is anyone arguing about this? The solution is not to submit rival complaints to the World Trade Organization.

It is to ditch subsidies. If European governments defend subsidies, they’re making a statement to Boeing: You’re competing with government treasuries; you can’t win.

In a fair market, both Airbus and Boeing can survive in the commercial-jet business. But Boeing will have a hard time surviving against a state-supported competitor. If the Europeans won’t disavow subsidies, Congress should protect Boeing. It should bar Airbus from selling planes to airlines that fly inside America. Presumably, Europe would bar Boeing from selling there. Let’s admit it: this is an awful solution. It would diminish competition and raise costs for airlines and passengers. It would risk a wider trade war that both America and Europe might lose. But it may be necessary to run these risks to send Europe a clear message: If you target our major companies, we will target yours.