INTERNATIONAL AIR TRANSPORT LIBERALIZATON IN EAST ASIA: A REGIONAL APPROACH TO REFORM JASON R. BONIN (B.A. (Hons), J.D., University of Florida; LL.M. (Adv.) (cum laude), Universiteit Leiden) A THESIS SUBMITTED FOR THE DEGREE OF PH.D. IN LAW FACULTY OF LAW NATIONAL UNIVERSITY OF SINGAPORE 2012 [This Thesis is Current as of December 2012] ACKNOWLEDGEMENTS I owe an immense debt of gratitude to a number of people and institutions, whose critical feedback and support have made this study possible. While I have attempted to be as inclusive as possible in acknowledging this debt, the list is certain to be underinclusive. I therefore apologize at the outset to those who are not mentioned by name. Any mistakes in facts or judgment remain exclusively my own. My thanks must first go to the National University of Singapore (NUS). Its generous support, in the form of a magnanimous Research Scholarship and ample research facilities, has made this dissertation possible. In particular, the staff of the CJ Koh Law Library has provided a tremendous amount of support in retrieving information, in accessing the occasional resource found outside the university system, and even acquiring new resources for my research. Both Normah and Zana of the Graduate Division Office have made being a student at NUS genuinely hassle-free. Principal among the individuals who have guided me through the research process has been my supervisor, Professor Alan Tan Khee-Jin. His comments and suggestions along the way have been an immense help in scoping the project and have added valuable insights into the process of creating a cohesive whole. A number of other faculty members have also been instrumental in shaping this project. In particular, Professors Robert Beckman of the Faculty of Law and Anthony Chin Theng Heng of the Faculty of Economics provided valuable insights during my Doctoral Candidature Qualifying Examination i (DCQE); Professor Andrew Simester has proven a pillar of support and guidance as both convenor of the Graduate Research Seminar and in his personal capacity; Dean Simon Chesterman has also been particularly supportive, first as Vice Dean of Graduate Studies and currently as Dean of the Faculty of Law. In addition, the support of, among others, Professors Stephen Girvin, Andrew Halpin, Gary Bell, Michael Ewing-Chow, Michael Dowdle, Arif Jamal, and Daniel Puchniak has made a positive contribution to my life at NUS Law. The list could, of course, go on. I have also enjoyed the friendship and support of a number of fellow travelers during what can admittedly be an otherwise lonely journey. They include Umakanth Varrotil, Abhik Majumdar, Benjamin Vincents, Gatot Soemartono, Juliette Duara, Guy Manchuk, Luu Huong Ly, Trinh Hai Yen, Tan Hsien-Li, Benoit Mayer, Prabhakar Singh, Federico Lupo Pasini, Sheng Tian, and Lee Jae Woon. Finally, my thanks go out to my wonderful family, who have shown patience, love, and understanding throughout, as they have in all of my endeavors. To my parents, Karen and Michael, thank you for instilling in me a sense of curiosity and for constantly encouraging me to pursue my dreams. And to my wife, Erline, who has shown an incredible amount of patience and support during the past several years. This thesis would not have been possible without you. ii TABLE OF CONTENTS ACKNOWLEDGEMENTS i SUMMARY vii LIST OF TABLES ix TABLE OF ABBREVIATIONS xi PART I – PROLEGOMENA CHAPTER 1: THE ROLE OF REGIONALISM IN EAST ASIAN AIR TRANSPORT LIBERALIZATION 3 1. INTRODUCTION 3 2. LIBERALIZATION AND THE POLITICS OF PARTICIPATION AND EFFICIENCY 11 2.1. The Benefits and Limits of Efficiency in International Aviation Markets 15 2.2. The Challenge of Participation in the Transition to Global Aviation Markets 29 3. REGIONALISM AS AN INSTITUTION FOR REGULATORY REFORM 36 3.1. Regionalism and the Efficiency Norm 37 3.2. Regionalism and the Participation Norm 42 3.3. Regionalism and the Transition to a Global Aviation Market 49 4. LIBERALIZATION, COMPETITION LAW, SMALL COMMUNITY SERVICES AND THE QUESTION OF REREGULATION 54 5. CONCLUSION 57 PART II – TRANSITIONS CHAPTER 2: EMBEDDED LIBERALISM, COMPROMISED: THE DEVELOPMENT OF THE POSTWAR ORDER OF THE AIR 63 1. INTRODUCTION 63 2. THE PARIS CONVENTION AND THE EMERGENCE OF AN INTERNATIONAL LEGAL FRAMEWORK 64 2.1. The Paris Convention and the Emergence of a Multilateral Legal Structure 66 2.2. Economic Nationalism and the Partitioning of the Skies 71 3. THE POSTWAR PERIOD: CHICAGO AND THE FAILURE OF MULTILATERALISM 74 3.1. The Normative Underpinnings of the International Order of the Air 76 3.2. Chicago and the Failure to Conjoin Form and Purpose 80 3.2.1. The Freedoms of the Air as Units of Exchange 81 3.2.2. Impasses in Opportunities: Liberalism, International Regulation, and the Primacy of Local Traffic 85 3.3. The Transit and Transport Agreements: Plurilateralism as 91 iii Compromise 3.4. Multilateralism Beyond Chicago: ICAO and the ‘Missing Chapters’ 95 3.5. National Ownership and Control in the Multilateral Context 99 4. ‘MULTILATERALISM THROUGH BILATERALISM’: BERMUDA I, THE INTERNATIONAL AIR TRANSPORT ASSOCIATION, AND THE CRYSTALLIZATION OF THE REGULATORY ORDER 103 4.1. The International Air Transport Association and Multilateral Regulatory Controls 104 4.2. Bilateral Regulation of Entry, Route and Capacity Issues 106 4.3. Reciprocity and the Crystallization of National Ownership and Control Rules 112 5. CONCLUSION 115 CHAPTER 3: TRANSITIONS AND PARTIAL TRANSFORMATIONS OF THE INTERNATIONAL ORDER OF THE AIR 117 1. INTRODUCTION 117 2. THE BREAKDOWN OF THE POSTWAR ORDER OF THE AIR 118 3. REWRITING THE BALANCE: COMPETITION AND COLLABORATION ON THE TRANSATLANTIC 121 3.1. The United States: Deregulation and Its Export Abroad 123 3.1.1. The Domestic Transformation 124 3.1.2. National Interests and International Liberalization 131 3.2. The European Union: Towards a Regional Aviation Market 148 3.2.1. The Internal Dimension: Integration in ‘Packages’ 149 3.2.2. The External Dimension 163 3.3. The EU-US Agreements: Towards and Open Aviation Area or the Failure of a Program? 174 4. BROADER REFORMS: MULTILATERAL AND PLURILATERAL INITIATIVES FOR A NEW ORDER OF THE AIR 180 4.1. Global Scripts in Multilateral and Plurilateral Initiatives 181 4.1.1. A GATS Approach to Air Transport 181 4.1.2. The International Civil Aviation Organization 184 4.1.3. MALIAT: An APEC Plurilateral Initiative 190 4.1.4. The EU-US Agreement as Plurilateral Initiative 193 4.1.5. The 2010 US Draft of a Multilateral Convention on Foreign Investment in Airlines 194 4.2. From International Markets to Global Aviation Market: Finding a Balance 198 5. SPECIAL INTERESTS AND PRIVATE SECTOR INITIATIVES 200 5.1. From Inter-Line to On-Line: The Role of Global Alliances 200 5.2. The International Air Transport Association and the ‘Agenda for Freedom’ 204 6. CONCLUSION 208 CHAPTER 4: EAST ASIAN REGIONALISM AS A PILLAR OF INTERNATIONAL AIR TRANSPORT REFORM 209 1. INTRODUCTION 209 2. FROM TAKERS TO MAKERS: THE GROWING IMPORTANCE OF EAST ASIA IN GLOBAL REGULATORY CHANGE 211 iv 2.1. From Pre-War to Independence 212 2.2. Liberalization in East Asia: A Plurality of Approaches 216 3. FROM INDEPENDENCE TO INTERDEPENDENCE TO INTEGRATION: REGIONAL AIR TRANSPORT ARRANGEMENTS IN EAST ASIA 221 3.1. The Association of Southeast Asian Nations 222 3.1.1. From Vientiane to Brunei via Manila: Implementing ASEAN Open Skies 224 3.1.2. Towards an ASEAN Single Aviation Market? 237 3.1.3. External Relations and Dialogue Partners 246 3.1.4. Flexible Paths for ASEAN Air Transport Markets: Networked Regionalism and ASEAN Minus X 248 3.2. Northeast Asia: The Possibility of Trilateral Cooperation 252 3.3. Broader East Asian Cooperation 255 4. CORPORATE INTERESTS AND GLOBAL NETWORKS: THE ROLE OF ALLIANCES IN LIBERALIZATION AND INTEGRATION 262 4.1. Liberalization and the Restructuring of the Air Services Market 263 4.2. Regional Growth and the Global Alliance 266 5. EAST ASIA AND THE GLOBAL RE-ORDERING OF THE AIR 269 6. CONCLUSION 272 PART III – STRATEGY CHAPTER 5: THE INSTRUMENTS OF MARKET ACCESS AND OWNERSHIP AND CONTROL REFORM 277 1. INTRODUCTION 277 2. MARKET ACCESS: TRAFFIC RIGHTS AND OPERATIONAL FLEXIBILITY 278 2.1. Open Skies and the ‘Full Market Access’ of Nation-Bound International Air Transport 280 2.2. Beyond Full Market Access I: Seventh Freedom Traffic 291 2.2.1. Air Cargo Services 292 2.2.2. Passenger and Combination Services 297 2.3. Beyond Full Market Access II: The Question of Cabotage 300 2.3.1. The Question of Legal Constraints on Cabotage 302 2.3.2. The European Community and the Trans-Tasman: Two Models of Exchange 307 3. OWNERSHIP AND CONTROL: ALTERNATIVE FORMS OF THE MULTINATIONAL AIRLINE 312 3.1. Multinationalism and the Chicago Convention: Multinational Registration and the International Operating Agency 314 3.2. Community Interests and International Air Transportation 322 3.2.1. ‘Communities of Interest’ among Developing Countries 322 3.2.2. Community Carriers and Economic Integration 326 3.3. Towards a Universal Right of Establishment 332 4. REGULATORY ARBITRAGE AND MARKET ACCESS AND RIGHT OF ESTABLISHMENT LIBERALIZATION 339 5. CONCLUSION 342 CHAPTER 6: MANAGING THE TRANSITION TO OPEN AVIATION MARKETS 344 v 1. INTRODUCTION 344 2. CO-OPTING REFORM THROUGH TRANSITIONAL ARRANGEMENTS 347 2.1. Extending Relaxations Across One or More Periods 351 2.2. Price Bands 356 2.3. Capacity Shares 361 2.4. Traffic Rights 364 2.5. Differentiation by Economic Geography 367 2.6. Asymmetric Liberalization 374 3. RECIPROCITY AS A GUIDE FOR EXCHANGE: SPECIFIC, DIFFUSE, AND BEYOND 380 3.1. Specific Reciprocity: Transfers Within and Between Industries 382 3.2. Moving from Specific to Diffuse Reciprocity 386 3.3. Political Cooperation Beyond Reciprocity 393 4.