European Affairs

Perspectives: Moving Beyond the Boeing-Airbus WTO Dispute     Print
By Charles A. Hamilton

In 2006 European Affairs carried an article by lawyer and former Under Secretary of Commerce for International Trade Robert Herzstein titled “Don’t Expect the WTO to Resolve the Boeing-Airbus Dispute.” His article was prophetic: nearly five years later, fundamentally nothing has changed.

 

In the intervening years, the World Trade organization has issued two “panel reports” -- a “finalized” finding in June concluding that repayable European loans to Airbus had illegally subsidized its aircraft programs and then an “interim finding” in September 15 concluding that The Boeing Company had received illegal subsidies in the form of non-repayable grants through contract work for NASA and the Department of Defense.

 

In other words, the two panels ended up finding both sides guilty for doing what they have both been doing for decades in support of their industries. Summing up the situation, Airbus chief Tom Enders told the Financial Times recently, “Let’s be honest about it. The simple truth is…none of us…has been growing without any government support.”

The result of all this litigation in the one of the biggest and most expensive cases in WTO history is that both parties have lost. The effect of a “Thirty Years War” between these two feuding firms has produced an inconclusive result at great cost to both. (The U.S. and Europe should have known better. WTO dispute-rules warn that “before bringing a case, a member [government] shall exercise its judgment as to whether action under these procedures would be fruitful.” The large civil aircraft case cried out for such an exercise of judgment when the U.S. authorities made the decision to initiate the first case on behalf of Boeing.)

The outcome has followed the scenario forecast in Herzstein’s. In both cases, the facts were extremely complex. It proved impossible for the three-member panels (with limited staff support) to absorb the mountain of encyclopedic evidence they received from U. S. and European trade attorneys in time to decide either case in the planned nine-month time frame. And, far from resolving years of acrimonious charges on aircraft subsidies, the WTO proceedings may have had the effect of expanding the feud. There has been a natural escalation in which the U.S. side reacted to being found guilty by retorting that its subsidies were not as great as Europe’s and therefore not as serious. At the moment, neither party is interested in negotiating. It appears that the process will continue to grind through the WTO dispute resolution process (which so far has been a non-resolution process).

The two cases have been pursued so bitterly that now even the media suffers from subsidy fatigue. But the companies and the governmental bureaucracies that advocate for them before the WTO in Geneva have a common interest in keeping their own businesses healthy. And there are other costs associated with litigation rather than negotiation: when a case goes to court, the discovery process requires exchanges of questions and facts amounting to hundreds of pages of corporate information. Invariably, outside interested parties can use the opportunity to learn more about these two giant manufacturers’ internal workings – for example, how they fund their programs and run their marketing campaigns. In this instance, such observers were potential competitors in countries such Canada and Japan and some BRICs (Brazil, Russia and China). The result has whetted ambitions and appetites in these countries to consider entering what is currently a duopolistic market for large civil-aircraft. These potential new competitors know that demand for these larger aircraft promises to amount to $3 trillion over the next twenty years.

As Mr. Enders told the Financial Times, “If we talk about China, if we talk about Russia or others, does anyone…believe that they will step back and say: ‘Now we understand the WTO rules, we will play exactly by the rules.’ Absolutely not, so this is why I call this an absurdity.”Absurd or not, for all intents and purposes the WTO has spoken, calling into questions the two financial support systems that have enabled Boeing and Airbus, as national champions, to maintain their leadership and strategic value. So that “verdict” is in.

But the world has changed since 2004 when the two dispute cases were filed. Those days of easy money are a thing of the past. Austerity is spreading throughout Europe; in the U.S., NASA and Department of Defense budgets are being cut back. How are both sides in this very important, very capital-intensive industry going to fund future programs to meet demand from customer airlines and the flying public?

Looking ahead, an interesting paper recently released by the Canada–United States Trade Center at The State University of New York Buffalo that examines the implications of the WTO cases puts forward this thesis: that the mounting current pressures on U.S. non-repayable grants and other R&D assistance may require the U.S. government to shift to some form of “repayable launch aid” (RLA) in order to assist the aircraft industry to maintain its competitiveness in the global market place. The article (“A Case for Repayable Launch Aid: Implications for the US Commercial Aircraft Supply Chain” by Dr. David Pritchard) makes the point that this or some similar forward-looking approach would limit the self-contradictory process of Boeing trying to “have it both ways.” Right now, Boeing enjoys non-repayable R&D and government grants from the U.S. government, while at the same time benefiting from the very generous RLA programs of Japan and other countries. But at the same time it is attacking in the WTO the very similar European RLA funding that Airbus is receiving.

Dr. Pritchard makes the case that if the non-repayable grant programs for Boeing are no longer sustainable as a result of global austerity, some RLA could be put in place instead – and that would level the playing field. For the U.S. government, Dr. Pritchard notes, a key advantage of an approach along these lines would be the possibility of receiving back interest and royalties on future RLA, possibly in amounts exceeding the loans originally given to the suppliers -- in contrast to the past program of subsidization and the government support given to the U.S. industry in the form of tax incentives that are never paid back.

Of course, as Dr. Pritchard notes in his conclusion, there may be little incentive for the European Union to negotiate a new agreement along these lines unless there is some change in the current situation in which the U.S. abrogated the EU-US 1992 Agreement on Large Civil Aircraft – a unilateral action taken by the U.S. in order to clear the way for bringing its claim to the WTO.       Furthermore, any such idea of a multi-lateralized agreement, as discussed in some circles, can seem somewhat unrealistic in the light of the probable reluctance of China or others to sign an agreement until their commercial aircraft industries reach maturity.  

Finally, in any search for a resolution of this dispute, both sides need to step back and consider the possible fresh start proposed by Gary Hufbauer, a Senior Fellow at the Peterson Institute for International Economics. In a private paper, entitled “Swamped in Subsidies,” he starts with the point that at present there are only two companies in the world capable of designing and integrating the manufacturing of large civil aircraft – Boeing and Airbus. Both of these national champions are critically important to the future economic and technical security of the transatlantic alliance and the West. There is much they can do together in non-competitive ways – and thus focusing on competitiveness in today’s global economy instead of basing their future on entitlements of the very sort that are coming under political and fiscal pressure. It is a viewpoint compatible with the thrust of Mr. Herztein’s prophetic paper in 2006, which concluded in these terms: “Under the WTO subsidy rules, the companies and the governments are all sinners, but the WTO’s judges will not be able to redeem them with some almighty hand. Instead, if the companies themselves work at it, they may find they can create a great future for their technologically dynamic, global industry.”

Charles A. Hamilton is President of Charles A. Hamilton Associates LLC, an international trade consulting practice in Washington, D. C.. He serves as a consultant to Airbus on trade matters.

Perspectives is an occasional forum of The European Institute reflecting member views on topical issues.