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US vs. EU. Airbus – Boeing Subsidies Case.

(Pending)

Kurt KasunTarek Khedr

Michelle LammersSandrine Mabya

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US vs. EU: Airbus – Boeing

Largest Legal Case in WTO history. US feels money given to Airbus is illegal. EU feels Boeing has benefited from unfair support

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Commercial Jetliners

Chicago Based Boeing France Based Airbus Only two manufacturers of large commercial jetliners.

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Why Such a Big Deal?? Control of the market Illegal Subsidies WTO is being tested Canada and Brazil

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The 1992 Agreement Under the 1992 agreement, the US had

recognized Airbus, founded in 1970 with support from several European countries

On October 6, 2004, the US complained to the WTO that the European governments have broken trade rules with its government loans to Airbus, including $ 3.2 Billions for the super jumbo A 380

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The U.S. Boeing Case The U.S. claimed in its WTO complain last

October that Airbus had received more than $15 Billion in government loans amounted to illegal subsidies under global trade rule.

The US and EU decided last December to try for a settlement of the aircraft issue outside the WTO to avoid bruising their 400 Billion-a-year trade relationship.

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The U.S. Boeing Case As part of the agreement, both US and EU

accepted that neither carrier will seek launch aid during three-month negotiations.

The launch aid was spelled out in the 1992 agreement. Under the deal, the European governments could finance one-third of the cost of any aircraft Airbus develops

However the negotiations will have to settle the tricky question of which of these subsidies will be prohibited, actionable or permitted

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The U.S. Boeing Case Unfortunately, the US has withdrawn

because of the attempt from the EU to broaden the scope of negotiations

At stake may well be Boeing $22- Billion-a-year commercial aircraft business, which for the first time in 2003 sold fewer passenger jets than Airbus

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The U.S. Boeing Case Airbus overtook Boeing in 2003,

becoming the first manufacturer in the world’s $ 50 billion airliner market.

The U.S. argued that the growth of the Airbus indicates that there is no more need for aid that was justifiably at the startup industry

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The U.S. Boeing Case Europeans have justified subsidies to Airbus

as necessary to an infant industry Boeing has long asserted that Airbus has an

unfair advantage because it gets government money and now that it does not need money because it took the lead in the commercial aerospace business in 2003 delivering 305 commercial planes while Boeing delivered 281,whereas Boeing in 1999 had delivered more than 600 planes.

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The Airbus Side In October 2004, the United States said

Airbus received more than $15 billion in government loans since 1967, helping it overtake Boeing as the world's largest airplane maker by sales.

According to U.S. estimates (also hotly disputed), Airbus has used $15 billion in subsidies to build its global aircraft market share from 30 percent to near 60 percent.

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The Airbus Defense Airbus has been receiving "repayable launch

aid" in the form of commercial loans that it pays back to the government as it sells airplanes

The Airbus launch aid causes less trade distortion than the Boeing aid, according the industry analysts

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Airbus Challenges Boeing Subsidies

R&D subsidies: $20B From 1992, Boeing has received R&D grants worth more

than $20 billion, mostly through NASA and the Pentagon. Tax break subsidies: $3.2B

Washington state will give Boeing tax incentives worth $3.2 billion over 20 years.

Infrastructure improvement subsidies: $4.2B Washington State has dedicated $4.2 billion in subsidies

for physical improvements of Boeing plants and infrastructure.

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Boeing Subsidies, cont. Foreign Sales Corporation: $200M annually

Up to now, Boeing receives about $200 million a year through a federal tax loophole called the Foreign Sales Corporation program, which has been ruled in violation of WTO rules.

Japanese Launch Aid: $1.6B Boeing has received Japanese launch aid of $1.6 billion

thus far to build the wings for its new 787 Dreamliner.

In contrast to the E.U. investment in Airbus, none of these subsidies needs to be repaid

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Request for Consultations Possibly precipitated by politics of 2004 US presidential election US files first in early October, followed hours later by the European

Communities counter filing Both site subsidies inconsistent with obligations under the SCM

Agreement and GATT 1994 US principally sites “launch aid” EC sites:

State and local subsidies NASA, DOD, and other R&D subsidies FSC/ETI subsidies

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Détente in January

On January 11 both sides agreed to negotiate the phasing out of subsidies over a 90-day period

Agree to create “fair market competition” for the development and production on large civilian aircraft made in the US and the EU

Efforts motivated in part to sooth relations in preparation for Bush’s European tour

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Ides of MarchSpell High Drama On March 18 the spurious details of contentions

discussions between Zoellick and Mandelson are made public

The US went public first The EU wants to conclude the talks quickly so it can start on

the A380 to compete against Boeing’s new 787 USTR voices displeasure over EU seeking to broaden the

terms of the January agreement EU wants to include Japanese subsidized production of Boeing

787 fuselage EU wants to bring FCS into the deal

US also accusing EU of backtracking on commitment to cut subsidies

EU wants ‘Cast-Iron’ guarantee

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Are Cooler Heads Prevailing?

March 21, Mandelson: “The ball is in America’s court…I’m looking for

clarification of the US position.” “US threats are premature and unnecessary.”

Zoellick: “From my last conversation with Mandelson, I do not see the probability of reaching fulfillment in the time we set forth.”

The clock is ticking…one week away from the deadline

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Resolution Scenarios

Agree to extend consultations beyond 11 APR deadline WTO oversee further consultations in Geneva Either side could ask for a panel of judges to hear the case

Dynamics make an out-of-court settlement unlikely High tech, high-paying jobs at stake for both Boeing in tough shape rocked by scandal and losing market share Airbus has been a tremendous successful industrial policy for the

EU Perhaps they could agree to binding arbitration by a third-party

(John Major and Frank Carlucci or Cap Weinberger) Odds are WTO would find both guilty and levy sanctions on both Teal Group analyst that the outcome may depend on who is

able to show it has been hurt

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Broader Issues Outsourcing becoming increasingly global

Much of the Boeing 787 is being constructed with the JADC Both Airbus and Boeing outsource to Asia and Latin America

making the case global and raising the stakes Large portions of engineering for Boeing handled by

Russian BDC Concerns that the conflict will infect the rest of the

trade agenda, Doha Round If sanctions are levied and ignored, the credibility of

the WTO would be damaged $400 Billion trade relationship between the US and

EU is at stake

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Sources “Boeing chief hopeful on U.S., EU subsidy talks,” Thomas Mulier, Bloomberg

News, February 18, 2005 “Not an Issue for the WTO” Peter Mandelson, Washington Post, 1 April 2005 “The Big Blowout; Why the Airbus-Boeing case could wreck the WTO, and how

to stop it,” Jeffrey E. Garten, Newsweek International, April 4, 2005 “An ill-timed spat,” The Economist, March 26, 2005 “Why the Airbus-Boeing case would wreck the WTO, and how to stop it,” Jeffrey

E. Garten, Newsweek, March 27, 2004 “See you in court,” The Economist, March 16, 2005 “Russians rally to Boeing’s cause,” Nick Cook, Financial Times, April 2, 2005 “Boeing-Airbus talks fall apart,” James Wallace, Seattle Post-Intelligencer,

October 1, 2004 EU Demands Clarification on Boeing-Airbus,” Constant Brand, AP, March 21,

`2005

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Sources “Boeing vs. Airbus: Time to Escalate,” Stanley Holmes, BusinessWeek

Online, March 22, 2005 “US Seeks Return to Boeing-Airbus Talk,” Dow Jones Newswires,

March 21, 2005 “Battle over Boeing, Airbus shows thorny relations,” Dow Jones

Newswires, March 21, 2005 U.S.,E.U. Take Boeing, Airbus Dispute WTO. The Seattle Post-

Intelligencer, October 7,2004 Blustein, Paul. U.S. Files Grievance Over Airbus With WTO:E.U.

Responds With Boeing Complaint. October 7, 2004 International Trade; U.S., E.U Complain of Aircraft Subsidies. October

28,2004 http://www.bloomber g.com/apps/news