Large Civil Aircraft: a perspective on the Boeing/Airbus disputes before the World Trade Organisation

Importance of the Boeing/Airbus dispute The dispute between the EU and the US over their respective subsidies to Airbus and Boeing matters greatly. Just as competition between airlines is, or is perceived to be, intense; so too is the competition between manufacturers of the airlines primary product. Thus the term often applied to Boeing/Airbus a dominant duopoly implying perhaps that competition between the two is muted, is misleading. The term dominant duopoly more properly describes the fact that, for the present, Boeing and Airbus remain comfortably the largest worldwide manufacturers of large civil aircraft, serving a global market of enormous financial value. The intensity of the competition between the two and the need for each side to ensure that the other does not enjoy unfair selling advantages can only increase. Airlines must now, more than ever, reduce and control their costs. Since high fuel prices appear now to be normal, airlines must make best use of fuel by operating the newest, most fuel-efficient aircraft they can. In time, and depending on the outcome of another international trade dispute, the costs of compliance with the EUs Emissions Trading Scheme may also encourage fleet renewal. Even as other manufacturers (Sukhoi, Embraer, Bombardier and others) compete for a share of sales of large civil aircraft, the Boeing/Airbus competition will continue to matter for some time to come. The cases brought before the WTO; legal basis The battle before the WTO has been fought by proxy: the United States complained about EU subsidies to Airbus; and the EU has complained about US subsidies to Boeing. Thus the Governments of each side have no particular interest in a

complete or unbiased representation of the cases. From each sides statements, the bitterness of the dispute is plain but the facts are not. Two separate cases have been fought: DS 316 was the complaint by the United States against the European Communities, France, Germany, Spain and the UK (the US complaint about Airbus). DS 353 was the complaint by the European The Communities against the United States (the EU complaint about Boeing).

WTO Panel and Appellate Body had to consider essentially the same legal questions in both cases, deriving mainly from alleged infringements of the Agreement on Subsidies and Countervailing Measures (the SCM Agreement). The questions in issue were: 1. Was there a subsidy? Under Article 1 of the SCM Agreement, a subsidy is deemed to exist if there is (1) a financial contribution by a government or any public body within the territory of a Member or (2) there is any form of income or price support (within the meaning of Article XVI of the General Agreement on Tariffs and Trade 1994) and a benefit is thereby conferred. 2. If there was a subsidy, was it specific? The SCM Agreement regulates

subsidies only if they are specific, which is defined in Article 2 of the SCM Agreement according to various principles, for example, where a granting authority, or the legislation which governs the granting authority, explicitly limits access to a subsidy to certain enterprises; equally, a subsidy which is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority. Equally, subsidies that are contingent, in law or in fact, upon export performance, or upon the use of domestic over imported goods, are deemed to be specific (Article 3 SCM Agreement). 3. If there is a specific subsidy, does it cause adverse effects? Adverse effects can be, according to Article 5(a) of the SCM agreement, injury to the domestic industry of another Member, nullification or impairment of benefits accruing to Members under GATT 1994 (Article 5(b)); or serious prejudice to the interests of another Member (Article 5(c)). Serious prejudice is further elaborated at Article 6 of the SCM Agreement. 4. If the subsidies cause adverse effects, the affected Member may seek consultations with the Member allegedly responsible. If consultations do not resolve the problem, a panel may review the matter and report. This report is subject to appeal to the Appellate Body. The common remedy is for the

Member responsible to remove the adverse effects of the subsidy or withdraw the subsidy. The US complaint about Airbus alleged over 300 separate instances of alleged subsidisation, over a period of almost forty years, by the European Communities and by France, Germany, Spain and the UK for large civil aircraft developed, produced and sold by the company known today as Airbus SAS. There were five categories of complaint: 1. Launch Aid or Member State Financing; 2. Loans from the European Investment Bank; 3. Infrastructure and infrastructure-related grants 4. Corporate restructuring measures; 5. Research and technological development funding. The US claimed that each of the challenged measures was a specific subsidy, and that the EC and the four Member States caused adverse effects to US interests. The US also claimed that seven of the challenged LA/MSF measures were prohibited export subsidies contrary to Article 3 of the SCM Agreement. The EU complaint about Boeing comprised ten categories of measures which were alleged to be subsidies inconsistent with the SCM Agreement. These categories included: 1. Various tax and non-tax incentives provided by the State of Washington and the City of Everett, in connection with the location of the 787 assembly facility in Everett; 2. Property and sales tax breaks provided by the City of Wichita and interest payments by the State of Kansas on Kansas State Development Bonds; 3. Tax and non-tax incentives provided by the State of Illinois, the City of Chicago and Cook County in connection with the relocation of Boeings headquarters; 4. Payments and access to government facilities, equipment and employees provided to Boeing pursuant to R&D contracts and agreements entered into under eight NASA aeronautics R&D programmes; 5. Payments and access to government facilities, equipment and employees provided to Boeing pursuant to R&D contracts and agreements entered into

under 23 Department of Defense (DOD) Research, Development, Testing and Evaluation programmes; 6. Payments and access to government facilities, equipment and employees provided to joint ventures/consortia in which Boeing participated under the Advanced Technology Program; 7. Waivers/transfers of intellectual property rights under NASA and DOD R&D contracts and agreements entered into with Boeing; 8. NASA/DOD independent R&D and bid and proposal reimbursements; 9. Department of Labor 787 worker training grants; and 10. Tax breaks exemptions under legislation relating to Foreign Sales Corporations and the Extra territorial Income Exclusion Act and successor acts. The EU claimed that the total subsidies amounted to $19.1 billion between 1989 and 2006, more than half of which was accounted for by the value of the alleged NASA R&D subsidies. The EU claimed that the US caused adverse effects in the form of serious prejudice; gave prohibited export subsidies and had violated agreed obligations concerning support to the large civil aircraft sector as set forth in a 1992 bilateral Agreement between the US and the EU on trade in large civil aircraft. Outcomes The Panel in both cases partly upheld and partly dismissed the two sides complaints. In the EU complaint about Boeing, the EU alleged damage of $19.1 billion, whereas the Panel estimated only $5.3 billion. The EU and the US both appealed the Panels ruling on points of law and legal interpretation. The Appellate Body substantially upheld the Panels findings as regards specific subsidies and serious prejudice. Similarly, in the US complaint about Airbus, the Appellate Body did uphold key Panel findings, but rejected others. The outcome is therefore a mixed picture for both sides. Unsurprisingly, this allows each side to claim victory over the other. There is a sense that the EU complaint about Boeing fared better than the US complaint about Airbus, both before the Panel and before the Appellate Body. Airbus faced more measures that were found to be illegal subsidies than Boeing. By

contrast, the numerous EU measures that were found to have been legal may therefore continue for the future.

The economic outcome equally seems to favour Airbus: the effect on Boeing of the subsidies to Airbus that were found to be illegal appears to have been greater than the effect on Airbus of the subsidies to Boeing: Airbus lost 118 aircraft sales, compared to Boeing losing 348 aircraft sales. The future In recent years, Airbus seems to have been winning the battle of orders and deliveries with Boeing. The WTO Appellate Bodies rulings seem on balance to However, the position is complicated by the favour Airbus continued success.

introduction of the EU ETS for aviation. The present dispute between the EU on the one side and a coalition of unwilling countries (including the USA, China and Russia) is manifesting in part in retaliation against Airbus, with several reports of Chinese airlines cancelling orders for Airbus aircraft worth $12 billion. Airbus reports that this cancellation imperils 1000 jobs in Airbus Europe as well as another 1000 jobs in the supply chain. If the ETS dispute is not resolved, Airbus apparent WTO victory may be in vain. Gates and Partners 20 March 2012