For the purposes of our analysis, the first case is the most significant because it suggests
the optimistic scenario in which both sides reach the brink of a trade war, but still find a way to reach a mutually beneficial compromise that limits subsidization. According to Busch’s
argument, the civil aircraft industry exhibits externalities which are internalized within national borders, making each government particularly desirous of subsidizing its national champion to capture these benefits for national welfare.This dynamic, however, leads to a situation in which both sides are made worse off due to overproduction, creating an incentive to enter into an agreement to reduce subsidies. In this case, Europe and the US were able to achieve the Large
Civil Aircraft (LCA) Agreement in 1992, which essentially sought to limit overspending by each
government and reduce international rivalry to achieve a Pareto-superior outcome. Busch
recognizes the apparent difficulty of maintaining such a negotiated equilibrium when each
government still has an incentive to renege on its promise25, but the real problem is that his
model is too simple