In his recent article in European Affairs, Airbus consultant Charles Hamilton asserts that, five years after the U.S. filed a case with the World Trade Organization against European government subsidies to Airbus, “nothing has changed.”While it’s true that Airbus has not stopped asking European taxpayers for more money, something very important has indeed happened since the U.S. filed its case: the WTO has issued a landmark ruling. While the EU has appealed the ruling, the appeals process is coming to an end, and a final, post-appeal ruling is close at hand. It will establish an important precedent for the global aerospace industry that subsidies such as launch aid are illegal.
Hamilton reprises the Airbus theme that the WTO also has found the U.S. government guilty of subsidizing Boeing through contract work with NASA and the Department of Defense. That interim report is still confidential, but the media is reporting leaks indicating that most of the EU’s charges were dismissed -- including most of the charges regarding NASA and DoD research contracts. According to these reports, the WTO found $2.6 billion of impermissible subsidies on the U.S. side – an amount that pales in comparison to the $20 billion in illegal subsidies that the WTO found on the European side to help Airbus.
In his piece, Hamilton deems the litigation’s results inconclusive (they are not) and argues that the disputes should have been resolved through negotiations (as the WTO always encourages governments to do). What he omits to mention is that the U.S. government made a serious effort to negotiate a resolution of the dispute prior to filing its case in 2006, but saw its overture fail in the face of European intransigence on the issue of launch aid. At that point, the U.S. government had no choice but to file suit. Airbus and its sponsor governments simply refused to end launch aid, which is a clear violation of WTO rules.
The WTO rulings, according to Hamilton, “may have had the effect of expanding the feud” because the U.S. side now argues that the non-compliant subsidies the WTO reportedly has identified on the U.S. side are smaller than Europe’s subsidies. That’s true and actually a conclusion drawn from the WTO rulings to date. The U.S. government is not making this up.
Furthermore, if there is any “escalation” going forward it will be because Airbus and its government sponsors defy -- rather than comply – with the ruling against their subsidies. Let’s hope that is not the case. In our view, WTO rulings must be respected if there is to be a semblance of fairness and order in the global trading system.
Hamilton notes that Airbus CEO Tom Enders told the Financial Times that it was “absurd” to think that China, Russia and others will play by WTO rules in fostering their growing aerospace industries. In citing that quote, Hamilton seems to suggest that because Airbus expects others to skirt the rules, it believes it should be allowed to do so, too. That is really an incredible stance for a global company that has everything to gain from a healthy global trading system. If that attitude were to prevail, markets would end up with a global free-for-all rather than a stable system of rules-based, fair trade.
Hamilton showcases a potential solution to the long-standing Boeing-Airbus dispute: a deal where governments on both sides of the Atlantic provide reimbursable launch aid to their respective aerospace companies. This idea, developed by David Pritchard, a professor at the State University of New York in Buffalo, makes the point that governments in Europe and the United States are facing serious budget deficits that make it harder to fund traditional government R&D programs. If, instead, governments were to adopt a system of repayable loans, they would get their money back, and the playing field would be evened, he notes. We’re not sure how Airbus feels about that idea, but at Boeing we are pretty certain that the U.S. Congress, (particularly the incoming Congress), would quickly dismiss any suggestion along these lines. Moreover, Boeing is not interested in receiving government assistance of a sort that the WTO has ruled illegal. We think private-sector companies should fund their own product development. We have always funded commercial airplane development with our own money, and we think Airbus should do the same.
In November, Airbus’ parent, EADS, reported net cash on hand of $14 billion. With such a strong cash position, why does Airbus feel it needed to ask European taxpayers for some $4.5 billion to help it build the A350, its next generation wide body passenger plane? The answer seems obvious, at least to us. Airbus wants the injection of funds so it can continue a business model that relies on the financial benefits of illegal subsidies to achieve growth.
Airbus officials always downplay the significance of launch aid as nothing more than a government loan that is paid back, with interest. Actually, the loans have not always been paid back; even when they have, they been made available on terms that no commercial lender would ever provide. Imagine borrowing several billion dollars at a very low, non-commercial interest rate, and not having to make a single payment for several years, and then having to pay it back only as you delivered product to customers. Imagine, too, having a lender who says that you don’t have to pay it back at all if your product fails in the marketplace. That is the kind of deal Airbus has had with its government sponsors.
Launch aid is a huge subsidy, and the WTO in its June ruling said it amounts to a clear violation of WTO rules and has harmed the U.S. aerospace industry. The appeals process will grind to a conclusion in the coming weeks, and when it does we hope that Airbus and its sponsor governments will comply.
The other case, involving the European complaints against U.S. practices, will not conclude until later in 2011. When it does come, we are confident that the U.S. government will respect its WTO obligations and respond appropriately -- just as it did when the WTO ruled that previous U.S. tax treatment of income from exports was inconsistent with global rules. Certainly we at Boeing would not stand in the way of any changes deemed necessary on the U.S. side. We have great respect for WTO rules and the WTO dispute-resolution process, which we believe has worked remarkably well in sorting through the difficult issues posed by the Boeing-Airbus subsidy dispute.
The rulings in these two cases, once finalized, will be crystal clear, and they will provide important guidance to the global aerospace industry about what governments can and cannot do in supporting their aerospace sectors.
Ted Austell is Vice President, Executive, Legislative & Regulatory Affairs at Boeing.
Perspectives is an occasional forum of The European Institute reflecting member views on topical issues.