“We had expected that the United States would have finally complied in good faith with its international commitments and would have abided by the World Trade Organization (WTO) rulings that clearly condemned U.S. subsidies to Boeing. We are disappointed that this does not seem to be the case. So the U.S. leaves us with no […]
“We had expected that the United States would have finally complied in good faith with its international commitments and would have abided by the World Trade Organization (WTO) rulings that clearly condemned U.S. subsidies to Boeing. We are disappointed that this does not seem to be the case. So the U.S. leaves us with no other choice but to insist on proper compliance before the World Trade Organization. We are confident that this process will finally lead to a level playing field in the aircraft sector.”
— EU Trade Commissioner Karel De Gucht —
(BRUSSELS) — The European Union concluded Tuesday, Sept. 25 that the United States has failed to meet its obligations in the Boeing dispute considering the American aircraft manufacturer is still receiving subsidies despite Washington’s claim to have stopped the handouts.
The EU’s claim came one day after the U.S. Trade Representative’s office announced that it had complied with a WTO Dispute Panel ruling which found that U.S. federal and state governments granted between $5 billion and $6 billion WTO-incompatible subsidies to Boeing between 1989 and 2006. Subsidies granted after this date were estimated to be at least $3.1 billion.
The Dispute Settlement Body of the WTO gave the U.S. six months to withdraw these illegal subsidies or remove their adverse effects, meaning the U.S. had until Sept. 23 to comply. On Sept. 24, the United States notified the European Union that it had taken a number of actions withdrawing the subsidies or removing their adverse effects. After reviewing the measures, however, the EU considers that the U.S. has not complied with the ruling because it maintains a series of subsidies which cause adverse effects to the interests of the European Union.
By rejecting U.S. claims to have eliminated illegal subsidies to Boeing, the EU opens another chapter in a legal saga dating back nearly a decade. For years, Boeing has asserted that its European competitor, Airbus, has enjoyed support from several European governments, largely in the form of favorable loans. Airbus has countered by asserting 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.
Additionally, Boeing’s development of new civil aircraft models benefits from new technologies that the government funds through contracts with the Pentagon, NASA and other agencies. Since October 2004, the EU and the U.S. have been contesting each other’s government’s support to their aerospace industries at the World Trade Organization. As a result, the seven-year trade battle has swung back and forth in what has come to be known as the world’s biggest trade dispute, with markets involved estimated to be worth $2 trillion.
The purpose of the WTO trade rules is to enable businesses to compete in global markets free of government interventions that favor one competitor over another. They give a member country a right to complain in the WTO-Dispute Settlement Body against another country that has benefitted one of its industries through financial contributions of any kind, resulting in serious prejudice to the trade of the complaining country.
If a member does not comply with WTO recommendations in order to bring the practice within the guidelines, then trade compensation or sanctions may follow. This could be in the form of duty increases or suspension of WTO obligations. 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.
Prior to the WTO challenges, U.S. and EU government support to their aircraft producers had been regulated by the so-called “Bilateral EU-U.S. Agreement on Trade in Large Civil Aircraft.” This agreement, concluded in 1992, allowed each party to provide a certain level of support to their respective aircraft industries. In October 2004, though, the United States announced its withdrawal from the 1992 agreement and filed a challenge at the WTO of all EU support ever granted to Airbus. In turn, the EU responded with a parallel WTO challenge of U.S. government support to U.S. aerospace industry (i.e., Boeing). The two WTO challenges, the “Airbus case” (U.S. challenge of EU support for Airbus) and the “Boeing case” (EU challenge of U.S. support to Boeing) have been running more or less in parallel ever since.
The battle of the aircraft
Washington and Brussels have both won WTO rulings that the other paid billions of dollars of illegal subsidies to the aircraft industry. Both have claimed victory at every step of the way. Both have accused the other of doing worse. In reality, Boeing and Airbus are confronted with similar challenges: both face the continuing task of bringing together new technologies and large amounts of capital to make new generations of large civil aircraft. Both have made themselves heavily dependent on national governments.
In the “Airbus case,” the WTO panel made its report public in May 2011. The WTO ruled that the EU and four of its members states had conferred more than $18 billion in subsidized financing to Airbus and that European government launch aid had been used to support the creation of every model of large civil aircraft produced by Airbus. The EU presented a series of actions destined to comply with the WTO ruling in December 2011. The U.S. nevertheless found that the EU had not removed its WTO-inconsistent subsidies and had, in fact, provided new ones. Consultations between the two parties failed to resolve the dispute, and in March 2012, the U.S. Trade Representative Ron Kirk announced that the United States is requesting the establishment of the WTO compliance panel to address the European Union’s failure to remove WTO-inconsistent subsidies to Airbus.
Exactly the same is now happening with the “Boeing case.” The parties have 15 days to enter into consultations to resolve any disagreement. Thereafter, the EU has the right to establish a panel to review the issue of U.S. compliance. The EU has already notified the WTO of its intention to request that the Dispute Settlement Body grant authorization “to take countermeasures” against the United States for an approximate value of $12 billion annually because of the U.S. failure to withdraw subsidies in the dispute involving “Large Civil Aircraft.”
Most experts, though, think a negotiated settlement between the two parties is more likely as the legal appeals and counter-appeals become increasingly entangled. The U.S. has its own bargaining chip in the form of the WTO ruling against EU subsidies to Airbus. And a deal may well pave the way to a wider agreement on subsidizing large civil aircraft involving China, Japan, Brazil, Canada and Russia.
The more general problem is that it may well be impossible to build big airplanes without governmental help because the industry is so capital intensive. Although the WTO has been successful in regulating commercial activity as a whole, it is much more difficult to regulate government behavior in the large civil aircraft industry. This industry is too concentrated and too deeply interwoven with overriding government policies to be governed by the rules that serve the general trade.