European Affairs

True, this war will not take place on a battlefield but in the civilized forum established by the WTO to resolve disputes among its member nations. But the fact is, the challenges posed by this case far exceed the limited capacity and the fragile authority of the WTO disputeresolution tribunals. Struggle as they may, the tribunals will not be able to render a decision that commands respect and compliance from the losing party. (Indeed, both parties may be declared losers.) The dispute will not be resolved but will continue for years, creating disorder and confusion in the marketplace and very likely leaving everyone worse off.


Normally it is considered a good thing when parties to a conflict can be brought before an impartial tribunal to resolve their differences. But some conflicts aren’t fit for adjudication. Suppose the Arab-Israeli dispute could be brought before the World Court: would the Court be able to declare who’s right and who’s wrong? Would the political leaders of the two nations be able to secure compliance with the Court’s judgment? Were U.S. courts able to resolve the slavery question? Why have the states given up on trying to determine who is “at fault” in divorce cases? Some phenomena just can’t be sifted into legal rights and wrongs. A court that tries to do so puts its legitimacy at risk, as the U.S. Supreme Court has recognized by refusing to rule in cases involving “political questions” that it considers beyond its competence.

For over 20 years Boeing has asserted that its audacious European competitor Airbus has enjoyed support from several European governments, largely in the form of substantial loans on terms more favorable than Airbus would be able to obtain in the financial markets. Airbus has countered that Boeing became the world’s dominant civil aircraft manufacturer after World War II by virtue of massive U.S. government contracts for military planes and that its development of new civil-aircraft models benefits from new technologies that the government funds in contracts from the Pentagon, NASA and other agencies. (Boeing is the second-largest U.S. government- contractor.) “How could private investors ever be persuaded to risk huge sums to compete with the formidable Boeing, with its U.S. government supported R&D?” Airbus asked. If there was to be international competition in the high-risk, capital intensive market for large civil aircraft, Airbus claimed, government aid for the new entrant would be necessary. And who could deny the desirability of competition in a $200 billion market that affects the cost of transportation throughout the world?

The WTO’s rules give a member country a right to complain in the Dispute Settlement Body against another country that has conferred a benefit on one of its industries through financial contributions of any kind, when the result is serious prejudice to the commerce of the complaining country. After years of argument and consultations, the United States, at Boeing’s urging, sought a ruling by the Dispute Settlement Body that Europe’s support for Airbus is not in compliance with the WTO’s rules. The EU countered the same day with a demand for judgment on the propriety of U.S. support for Boeing.

If we look at the complexities of the aircraft subsidies case, the intense national commitments underlying it, and the limited authority of the WTO’s Dispute Settlement Body, it becomes clear that an effort to declare the rights and wrongs of government behavior affecting this industry will not resolve the long-simmering controversy. Instead it will demonstrate that the case is beyond the capacity of the WTO tribunals. The conflict will be broadened and intensified, and respect for the WTO’s dispute resolution program diminished. Here are some reasons why:

The facts are too complex for the forum. Seeking information to support their charges, the U.S. and EU governments have exchanged thousands of detailed questions, covering hundreds of pages. EU questions probe the contracts Boeing had over the past three decades with NASA, the department of defense, and the National Institute of Science and Technology, and the benefits that may have carried over to Boeing’s civil aircraft. The demands include such esoterica as contract documents relating to “Project 95-12-0024 (An Agent-Based Framework for Integrated Intelligent Planning-Execution)” and “Project 98-01-0168 (Hot Metal Gas Forming).” And, seeking evidence of government tax incentives to Boeing, the EU seeks details on its tax payments to Snohomish County, to the City of Everett, to Washington state, to Kansas and to the Federal Government. The EU also submitted questions to Japan, where major Boeing aircraft components are produced, and to 49 countries that have imported Boeing aircraft.

The U.S. questions march with footnoted precision through decades of ordinances, laws, and decrees in Germany, France, Spain, the UK and the European Union (and the European Community, its predecessor) that have benefited Airbus through funding, facilities, research, technology transfer or contracts. Seeking to build a big conclusion on many small facts, it wants to know, for example, whether the city of Bremen, Germany, extended a runway at its airport to accommodate cargo flights carrying Airbus components and whether the Andalusian regional government in Spain subsidized Airbus through a grant of 61.9 million for an investment project in the municipalities of Sevilla and La Rinconada.

The three-person WTO panel deciding the dispute has a maximum of nine months to absorb the mountain of evidence it will receive. It must decide not only what governmental benefits Airbus and Boeing received but whether and how much those benefits supported their large civil airliner production, as distinguished from their other activities. It must then decide an entirely separate question: whether the benefits caused “serious prejudice” to the commerce of the complaining country. This question will require the panel to immerse itself in skirmishes of competition between the two aerospace goliaths as they pursued sales to dozens of airlines throughout the world over several decades. Did the aid Airbus received for its model A310 enable it to take sales from Boeing’s 767? Was the Airbus benefit offset by benefits Boeing had received on its competing model? Was the sale influenced not by price but by technology features, or brand loyalty, or product support or geopolitics? Most experienced trial lawyers would be quick to warn their clients that it simply may not be possible to secure an accurate and fair decision on these vast factual questions in the time allotted.

The WTO’s rules are not sophisticated enough to provide adequate guidance for the tribunal. The rules provide no guidance on whether technology gained through work on government contracts and then put to commercial use amounts to a subsidy or whether it is the sort of future competitive benefit any company gets by learning from its past projects. Nor do the rules supply any guidance on whether launch-aid to permit competition against a dominant sole-supplier causes “serious prejudice” to the other government. The panel wrestling with the claims in this case will not be free to improvise rules where none exist in the text of the written agreement governing subsidies. All panels are explicitly admonished by the WTO Agreement not to “add to or diminish” the rights and obligations specified in that text. The panel will be flying blind on significant legal questions.

History shows that governments do not comply with WTO decisions in cases involving large economic stakes and strong national interests. It has become common for countries losing a case in the WTO to restructure their offending laws superficially and claim compliance. This forces the complaining country to go back to the WTO for a ruling that the compliance is not adequate, and then for an additional ruling authorizing it to impose trade sanctions against the violator.

Some lessons can be learned from the five-year conflict between Brazil and Canada over subsidies for production of smaller passenger airplanes – “regional” or “commuter” jets. Each accused the other of subsidizing its manufacturer in order to gain more export sales. WTO panels found both of them in violation and directed them to withdraw the offending subsidies. Each country made cosmetic changes and continued to make major export sales that benefited from subsidies. Five years after the start of the controversy, after eight sets of briefs and hearings, it was not clear that the subsidies had genuinely been withdrawn. In fact, one WTO panel found Canada still in violation and authorized Brazil to add an additional twenty percent to the normal level of retaliatory tariffs because of Canada’s intransigence.

So intense was domestic feeling in both countries that political leaders could not acknowledge that their country had been found wrong in the WTO. Instead, each accused the other of bad faith. Brazil suspended meat exports from Canada on the ground of mad cow disease, and Canada did the same, even though there was no documented case of tainted meat going in either direction. Brazil also threatened to ban imports of Canadian fertilizer and even to suspend all trade agreements with Canada. Far from confining and resolving the deeply felt dispute on airplane subsidies, the WTO proceedings had the effect of expanding it.

In the U.S.-Europe dispute over large airliners, a much larger industry is involved, concerning companies with longer, deeper and more sophisticated ties with their governments. If the U.S. were directed by the WTO to withdraw the benefits it confers on Boeing through military and space contracts, how could that be done in practice? Who would be able to police whether the hundreds of contracts Boeing receives will help it at some time, and perhaps in some unknown way, in its civil aircraft production? How could the U.S. government withdraw the know-how Boeing already possesses as a result of research on new materials or new designs for a space platform or a missile? And if the EU is directed to withdraw its loans for new aircraft development, who can doubt that it will devise new forms of financial assistance for its prized aircraft industry? In short, there is no reason to think that “compliance” with WTO admonitions to cease improper subsidies would yield anything other than halfway measures, sophistic arguments and repeated WTO reviews. There is also a serious danger that sparks from the WTO legal proceedings will ignite political fires in the U.S. and Europe and impair cooperation between the two countries on their overriding economic and security problems.

The subsidies controversy has little relation to the current realities of the large civil aircraft industry. For some years this controversy was about Boeing, a U.S. manufacturer that enjoyed no direct government support but had military contracts, competing against Airbus, a European manufacturer that had no military contracts but received direct government loans. In recent years those conditions have changed dramatically, and the changes continue:

  • Is Boeing still a U.S. manufacturer when it has outsourced to Japan the entire wing assembly of its new 787 and will procure well over half of the components from abroad?
  • On the other side, is Airbus still a European manufacturer when nearly half of its new A380 will be produced in the United States? When the wings for its A320 will be produced in China?
  • Should the WTO worry about Boeing suffering from the direct supports Airbus receives when Boeing has apparently received $3.2 billion from Washington state, along with tax abatements in Kansas and Illinois, and its Japanese wing supplier is receiving massive funds from the Japanese government to offer the low price Boeing demands?
  • And should the WTO worry about Boeing’s benefits from government contracting when Airbus’ parent, EADS, has adopted the Boeing model and become a major aerospace and military contractor for European governments?

The purpose of the WTO’s rules is to enable businesses to compete in global markets free of government interventions that favor one competitor over another. And the Dispute Settlement Body is intended to provide expeditious interpretation of the rules so businesses, and those who invest in them, will face fewer risks from government actions that distort the marketplace. The WTO is a great success. But it is important to face the reality that its rules and institutions, drawn up to cover virtually all commercial activity, will not work effectively in regulating government behavior in the large civil aircraft industry. The industry is too concentrated, too large, too complex and too deeply interwoven with overriding government policies to be governed by the rules that serve the general marketplace.

Trade negotiators and scholars have long recognized the fragile and limited nature of the WTO dispute resolution system and have worried that the “wrong case” could discredit it. The 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 is crying out for such an exercise of judgment.

Boeing and Airbus enjoy a comfortable duopoly in a major global industry. Both had record sales last year: Airbus sold more planes than Boeing while Boeing had greater dollar revenues than Airbus. Each is a winner. But as they share the benefits of a thriving market, they also face some common challenges. Both face the continuing task of bringing together dramatic new technologies and large amounts of capital to make new generations of large civil aircraft. Both have probably gone farther than most businesses prefer in making themselves dependent on national governments. And government-support measures that once seemed sensible now seem anachronistic as the companies have become truly global enterprises.

All these challenges are parts of the largest one: in their competitive rush to beat each other by sourcing offshore to lower costs and secure customers, how can they avoid fostering new competitors? Does Boeing want its wing manufacturer in Japan to become an independent aircraft-maker (perhaps with government assistance)? Does Airbus expect that those producing its A320 in China will be blind to the vision of becoming an autonomous player in this market? Are U.S. and European economic and security interests served by the transfers of critical technology (often government-funded technology) needed in order to turn foreign companies into suppliers of major components?

The companies and the governments that advocate for them in the WTO all have a common interest in keeping their industry healthy.What better time could there be for working to secure that goal than the present juncture when both companies are thriving and both governments are paying attention to their welfare? That goal will not be achieved by quixotically asking trade-law experts in the WTO to decide the rights and wrongs of decades-old practices. In fact, looking to the law for an answer is merely distracting all the players from the urgent practical challenges they face in a technologically dynamic, globalizing industry.

Under 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 industry.

Robert Herzstein is a Washington lawyer and former Under Secretary of Commerce for International Trade. In the early 1990s he advised Airbus on efforts to reach a U.S.- Europe agreement regulating aircraft subsidies


This article was published in European Affairs: Volume number 7, Issue number 1-2 in the Spring/Summer of 2006.