DS316

1. DS316 Researchers – Pinmook Tanteerasin – Ericka Ward Audena – – Diane Wray Cahen – Farah Zuraika –

2. *Agreements as cited in request for consultations.

3. NO COMPETITION = NO ISSUES • Through the 1970’s –The US had a de facto monopoly in the Large Civil Aircraft (LCA) sector. • 1980’s—The Airbus consortium (created in 1969) began competing effectively in the global market and undermining the US subsidized company’s market share. THE ISSUE • Post Airbus Consortium, the US became concerned about EC competition • Earlier models of Airbus were developed thanks to subsidies paid by the EC. • The EC was equally concerned about subsidies within the US market. • The US provided subsidies through NASA and defense programs. • Both sides were concerned about the usage of subsidies because subsidies skew markets and provide an unfair advantage.

4. THE SOLUTION • Late 1980’s—The EC and the US began bilateral negotiations for the limitation of government subsidies within the LCA sector • 1992—The EC-US Agreement on Trade in Large Civil Aircraft is ratified. • Imposed discipline on government support on both sides of the Atlantic • This agreement was significantly stricter than the WTO rules. • Regulated in detail the forms and limits of government support, prescribed transparency obligations and committed the parties to avoid trade disputes. THE SOLUTION DISOLVES • 2004—The US unilaterally withdrew from the Agreement. • 2004—The US filed a WTO suit alleging the EC gave unlawful subsidies/support to Airbus • The suit filed even alleged unlawful support that both sides had agreed to allow within the provision of the original 1992 agreement. • The US requested formal WTO consultations with the EC regarding alleged subsidies to Airbus by the EC and certain member states. • 2004—The European Union files a complaint against the United States alleging that Boeing received illegal subsidies through military and research contracts and tax breaks.

5. Planes of Primary Focus in WTO Dispute – B787 &A380

6. Airbus Boeing NB: Airbus surge due to record sales of an older model (320), not part of dispute focus

7. US Military Tanker Aircraft Contract worth $35B-$50B Its been out for bid 3 times, so far… • 2003 - Boeing won (767) • Decision overturned after conflict of interest between Pentagon and Boeing revealed • A DoD senior purchasing manager had been negotiating employment with Boeing at the time of the bid (later convicted of criminal conspiracy) • 2004 – US pulls out of 1992 bilateral agreement and files complaint against EC • 2008 - Airbus won a second call for proposals (330) • Joint bid with US firm Northrop Grumman • Decision annulled when the US Government Accountability Office found offers were incorrectly analyzed • 2010 – Bids accepted in July for 3rd time • Northrop-Airbus withdrew from the race in Spring, EU accused USG of bias in favor of the Boeing plane • Now, back in the running, Airbus entered bid without a major partner • Air Force is expected to make its decision by November 12

8. THE OFFICIAL COMPLAINT “According to the request for consultations from the United States, measures by the EC and the member States provide subsidies that are inconsistent with their obligations under the SCM Agreement and GATT 1994. The measures include: the provision of financing for design and development to Airbus companies (“launch aid”); the provision of grants and government-provided goods and services to develop, expand, and upgrade Airbus manufacturing sites for the development and production of the Airbus A380”- WTO IN PLAIN LANGUAGE • EU Member State co-financing of R&D for new Airbus aircraft. • "Member State Financing" or "reimbursable launch investment" • Infrastructure projects built or upgraded exclusively for Airbus • Airbus enjoyed preferential treatment. • Airbus benefits from EU member-State research and technology support • Airbus benefits from preferential loans from the European Investment Bank.

9. Uruguay Agreement Round • Article 1: “Definition of a Subsidy • 1.1 a financial contribution by a government or any public body within the territory of a Member… where a direct transfer of funds … or government revenue that is otherwise due is foregone… a government provides goods or services other than infrastructure or a government makes payments to carry out one of the functions illustrated… or” • (a)(2) income or price support” • (b) and a benefit is thereby conferred. “ • Article 2: “Specificity – to determine whether a subsidy is specific to an enterprise…” • Article 3.1: “Prohibited Subsidies • (1) Subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I. • (2) Subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.” • Article 3.2: “A Member shall neither grant nor maintain subsidies referred to in paragraph 1.” • Article 5: “No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members.” *See Appendix for additional information.

10. Uruguay Agreement Round • Article 6.3: “Serious prejudice … may arise in any case where one or several of the following apply: • (a)  the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member” • (b) the effect of the subsidy is to displace or impede the exports of a like product of another  Member from a third country market” • (c) the effect of the subsidy is a significant price undercutting by the subsidized product … “ • (d) the effect of the subsidy is an increase in the world market share of the subsidizing Member…” • Article 6.4: “…It has been demonstrated that there has been a change in relative shares of the market due to the disadvantage of the non‑subsidized like product … [when] • (a) there is an increase in the market share of the subsidized product” • (b) the market share of the subsidized product remains constant in circumstances in which, in the absence of the subsidy, it would have declined” • (c) the  market share of the subsidized product declines, but at a slower rate than would have been the case in the absence of the subsidy” *See Appendix for additional information.

11. GATT 1994 Articles III:4, XVI:1 & XXIII:1 • Article III:4. “The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use...” • Article XVI:1. “If any contracting party grants or maintains any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into, its territory, it shall notify the CONTRACTING PARTIES in writing of the extent and nature of the subsidization, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory and of the circumstances making the subsidization necessary…” • Article XXIII:1. “If any contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the Agreement is being impeded as the result of • (a) the failure of another contracting party to carry out its obligations under this Agreement, or • (b) the application by another contracting party of any measure, whether or not it conflicts with the provisions of this Agreement, or • (c) the existence of any other situation, the contracting party may… make written representations or proposals to the other contracting party or parties which it considers to be concerned. Any contracting party thus approached shall give sympathetic consideration to the representations or proposals made to it.” *See Appendix for additional information.

12. The measures that are the subject of the US complaint may be grouped into five general categories… (i) “Launch Aid” or “Member State Financing” (ii) Loans from the European Investment Bank (iii) Infrastructure and infrastructure-related grants (iv) Corporate restructuring measures (v) Research and technological development funding

13. Now for the Debate

14. Boeing contends that Airbus was built on illegal subsidies. • The benefits of illegal launch aid: "But for the provision of (launch aid), Airbus would not have been able to launch any of its existing range of (jets), that is, the A300, A320, A330/340, A340-500/600 and A380, as and when it did.“ • Without launch aid: Airbus "would not have achieved the market presence it did." It would have been a "much different, and we believe a much weaker, (large jet) manufacturer." The U.S. commercial-jet industry "at a minimum, ... would have had a larger market share.“ • Harm to Boeing: "Boeing suffered substantial lost sales during the period 2001-2006.“ • Harm to the U.S.: "The governments of France, Germany, Spain, and the United Kingdom have caused serious prejudice to the United States' interests.”

15. Airbus defends its actions... • The main allegation is that the EU Member State co-financed R&D for new Airbus aircraft • EU provided reimbursable launch investment, not subsidies • Expressly agreed upon under the 1992 bilateral EU-US Agreement. (Used on 3 of the 9 Airbus aircraft launched since 1990) • It provides for government funding to Airbus repaid with interest (loan rates of return are cost to government plus 1%, and interest and principal is repaid on deliveries before the programs break-even). • However, Boeing has received grants, subsidies, and tax credits from several state and local governments

16. Boeing alleges • There are 12 questionable loans provided by the European Investment Bank (“EIB”) to various Airbus entities between 1988 and 2002. • The US also argues that Airbus benefited from preferential loans from the European Investment Bank (EIB). Airbus responds • Loans provided are not questionable. • Airbus paid its loans plus 40% more than received. • The EIB has indeed provided loans to Airbus but it has done so in full conformity with its lending rules and policy on conditions strictly similar to that of loans to other clients. • For instance, the EIB has provided loans to European airlines for the purchase of Boeing aircraft, as well as to several other large US companies for investments in the EU.

17. Airbus defends • The US also claims that a number of infrastructure projects were allegedly built or upgraded exclusively for Airbus, or that Airbus enjoyed preferential treatment. • However, unlike infrastructure projects in the State of Washington (which were designed for Boeing and for which Boeing benefited from preferential treatment), Airbus pays a market-based rent and clearly did not benefit from any preferential treatment for these projects, or they were for the use of the general public. Boeing alleges • The Mühlenberger Loch industrial site, the lengthened runway at the Bremen airport and many other facilities constitute the provision of specific goods and services other than “general infrastructure” and are subsidies for Airbus. • Construction of manufacturing and assembly facilities in several locations in Germany and Spain are specific subsidies. 

18. Airbus defends • Associated with 1989 restructuring of Deutsche Airbus (linked to EIB; German transfer of shares to Daimler Benz Group) • The 1998 Settlement of Outstanding Repayment Obligations owed the German Government by Deutsche Airbus does not constitute a subsidy • The 1998 settlement was made on market terms Boeing alleges • There are a number of suspicious investments. The acquisition of 20% equity interest by Kreditanstalt für Wiederaufbau of Deutsche Airbus in 1989 and the subsequent sale in 1992 was for considerably less than its market value.  • Four capital contributions by the French government and Crédit Lyonnais to Aérospatiale between 1987 and 1994 constitute specific subsidies to Airbus. • Both of the aforementioned cases are demonstrations of usual investment practice of private investors and therefore each capital contribution is a specific subsidy. 

19. Airbus defends… • As regards research and technology support in the EU - such activities are always 50:50 co-financed by the industry • The EU abides by the cap provided in the bilateral EU-US agreement for such support • HOWEVER, the amounts budgeted by NASA and the Department of Defense for R&D support to Boeing's LCA business are estimated to be 10 times higher. • In the US, not a cent of R&D support is repaid by Boeing. Boeing alleges • Grants have been provided by the French government R&TD grants between 1986 and 2005 • German Federal government R&TD grants from the Bavarian authorities under the OZB and Bayerisches Luftfahrtforschungsprogramm, from the Bremen authorities under the AMST programmes, and from the Hamburg authorities under the Luftfahrtforschungsprogramm • Loans under the Spanish government PROFIT and PTA programmes • UK government grants under the CARAD and ARP programmes, are specific subsidies. 

21. The EC must halt all subsidies… • The measures at issue in this dispute are more than 300 separate instances of alleged subsidization, over a period of almost forty years, by the European Communities and four of its member States, France, Germany, Spain and the United Kingdom, with respect to large civil aircraft (“LCA”) developed, produced and sold by the company known today as Airbus SAS.  • Launch aid has been granted on top of other forms of government support that Airbus receives: tax relief, government-sponsored R&D and government-paid infrastructure projects. • The U.S. case documents in detail the substantial harm European subsidies to Airbus have caused to U.S. companies. European launch aid violates the WTO Subsidies Agreement and is a market- distorting subsidy that is unique to Airbus. A permanent and complete end to launch aid is necessary to ensure free and fair competition in the large commercial airplane market. • The EU’s claims against the U.S. are grossly overstated. Most of the alleged “subsidies” to Boeing are legitimate U.S. payments for services rendered. Others concern forms of government support that are common to both companies and are consistent with WTO rules.

22. Details of the US subsidies to Boeing challenged by the EU • State and Local Subsidies—States of Washington, Kansas, Illinois: incentives, including tax incentives, relocation assistance and other advantages, to the US LCA industry • Federal Subsidies - NASA, Department of Defense and National Institute of Standards & Technology, US Department of Commerce • US Department of Labor—transfers economic resources to the US LCA industry on terms more favorable than available on the market • The Aerospace Industry Initiative, High Growth Training Initiative, funds for the training of aerospace industry workers associated with the Boeing 787. • Federal tax incentives—The US Government transfers economic resources to the US LCA industry through the federal tax system, and in particular through the following tax measures: • Sections 921-927 of the Internal Revenue Code (prior to repeal) and related measures • Establishing special tax treatment for "Foreign Sales Corporations" ("FSCs“) • FSC Repeal and Extraterritorial Income Exclusion Act of 2000; and • American Jobs Creation Act of 2004.

23. The WTO Decision

24. Case DS316 Complainant US  Boeing Respondent EC  Airbus Loser: Both & Neither • The panel found that the “Launch Aid”/LA was a subsidy in every case that it was given to Airbus with the exception of the A350 which was dismissed due to lack of evidence. • The panel found that loans provided by the European Investment Bank (“EIB”) to various Airbus entities were subsidies, but that none of these subsidies was specific, and therefore this claim by the US was dismissed from further consideration. • The panel found that infrastructure upgrades in specific EC countries “constituted the provision of specific goods and services other than “general infrastructure” and were specific subsidies. • The panel found investment practices that were inconsistent with the usual investment practice and such practices were in fact subsidies. • The panel found that most of the R&D grants by the EC to Airbus were subsidies. • The panel concluded that Airbus would have been unable to bring to the market the LCA that it launched as and when it did but for the specific subsidies it received from the European Communities and the governments of France, Germany, Spain and the United Kingdom. • The panel rejected the US argument that the specific subsidies in this dispute provided Airbus with significant additional cash flow and other financial resources on non-market terms which allowed it to price its aircraft more aggressively than it would otherwise be able to without those subsidies.

25. Case DS316 Complainant US  Boeing Respondent EC  Airbus Loser: Both & Neither • Overall, the panel concluded that the United States had established that the effect of the specific subsidies found was • (i) displacement of imports of US LCA into the European market; • (ii) displacement of exports of US LCA from the markets of Australia, Brazil, China, Chinese Taipei, Korea, Mexico, and Singapore; • (iii) likely  displacement of exports of US LCA from the market of India; and • (iv) significant lost sales in the same market, and that these effects constituted serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement.  • However, the panel concluded that the United States had not established that the effect of the specific subsidies found was • (i) significant price undercutting; • (ii) significant price suppression; and • (iii) significant price depression.  • In addition, the panel concluded that the United States had not established that, through the use of the subsidies, the European Communities and certain EC member States cause or threaten to cause injury to the US domestic industry.

26. Case DS316 Complainant US  Boeing Respondent EC  Airbus Loser: Both & Neither • Taking into account the nature of the prohibited subsidies, the panel recommended that the subsidizing Member granting each subsidy found to be prohibited withdraw it without delay, specifying that this be within 90 days.  • The panel recommended that the EC/EU take “take appropriate steps to remove the adverse effects or ... withdraw the subsidy” without making specific suggestions. • July 2010, the EU appealed on the grounds of “legal interpretation”. • August 2010, the United States appealed to the Appellate Body certain issues of law covered in the panel report and certain legal interpretations developed by the panel. • September 2010, the Chairman of the Appellate Body notified the DSB that it would not be able to issue its report within 60 days due to the considerable size of the record and the complexity of the appeal.  • The Appellate Body will hold oral hearings in the appeal in November and December 2010, and will provide thereafter an estimate for circulation of the report.

27. Boeing’s CEO statement in response to WTO Decision DS353 "Given the shape of today's opinion, as it has been reported, the WTO findings against the US are likely to require few changes in U.S. policies and practices. One of the two principal matters that the WTO is reported to have cited as inconsistent with its rules was long ago remedied by the Congress: general US export tax policy embodied in FSC/ETI.   As to the second principal matter – NASA research – we are heartened to read that, contrary to statements earlier today from European sources, three-quarters of the subsidies at issue were found to be wholly compliant with WTO rules. "Today's ruling underscores our confidence in the WTO processes and dispute-resolution procedures.  We applaud the body for its work and continue to look to Airbus/EADS and the EU to recognize that in today's global market, it is essential that everyone play by the rules and abide by the WTO requirements.   Playing by the rules, for Airbus/EADS, means withdrawing their still-outstanding A380 prohibited launch aid subsidy and financing the A350 on commercial terms.“

28. Rules-based international trade is fundamental to a healthy, competitive business environment. It is especially important in these times of economic uncertainty that the WTO hold governments to the international trade agreements they have signed. By issuing strong, clear decisions in these cases, the WTO will set important precedents for all governments that wish to compete in the global aerospace market. Source: WTO.org

30. Uruguay Agmt Article 1: 1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if: • (a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as "government"), i.e. where: (i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees); (ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)[1]; (iii) a government provides goods or services other than general infrastructure, or purchases goods; (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; or (a)(2) there is any form of income or price support in the sense of Article XVI of GATT 1994; and (b) a benefit is thereby conferred. 1.2 A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II or shall be subject to the provisions of Part III or V only if such a subsidy is specific in accordance with the provisions of Article 2. Article 6.3: “Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply: (a)        the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member; (b)        the effect of the subsidy is to displace or impede the exports of a like product of another  Member from a third country market; (c)        the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression or lost sales in the same market; (d)        the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted.” Article 6.4: “For the purpose of paragraph 3(b), the displacement or impeding of exports shall include any case in which, subject to the provisions of paragraph 7, it has been demonstrated that there has been a change in relative shares of the market to the disadvantage of the non‑subsidized like product (over an appropriately representative period sufficient to demonstrate clear trends in the development of the market for the product concerned, which, in normal circumstances, shall be at least one year).  “Change in relative shares of the market” shall include any of the following situations:  (a) there is an increase in the market share of the subsidized product;  (b) the market share of the subsidized product remains constant in circumstances in which, in the absence of the subsidy, it would have declined;  (c) the  market share of the subsidized product declines, but at a slower rate than would have been the case in the absence of the subsidy.”

31. GATT 1994 III:4. ”The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product. “ XVI:1.        “If any contracting party grants or maintains any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into, its territory, it shall notify the CONTRACTING PARTIES in writing of the extent and nature of the subsidization, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory and of the circumstances making the subsidization necessary. In any case in which it is determined that serious prejudice to the interests of any other contracting party is caused or threatened by any such subsidization, the contracting party granting the subsidy shall, upon request, discuss with the other contracting party or parties concerned, or with the CONTRACTING PARTIES, the possibility of limiting the subsidization.” XXIII:1.” If any contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the Agreement is being impeded as the result of • (a)        the failure of another contracting party to carry out its obligations under this Agreement, or • (b)        the application by another contracting party of any measure, whether or not it conflicts with the provisions of this Agreement, or • (c)        the existence of any other situation, the contracting party may, with a view to the satisfactory adjustment of the matter, make written representations or proposals to the other contracting party or parties which it considers to be concerned. Any contracting party thus approached shall give sympathetic consideration to the representations or proposals made to it.”

32. Historical Background EU – US Agreement on Large Civil Aircraft 1992: key facts and figures, Boeing Government Operations, http://www.boeing.com/aboutus/govt_ops/wto.html European Communities — Measures Affecting Trade in Large Civil Aircraft, World Trade Organization B Background for Boeing http://www.ustr.gov/about-us/press-office/fact-sheets/2010/june/fighting-unfair-trade-practices-winning-wto-key-findingshttp://www.centreforaviation.com/news/2009/01/09/boeing-and-airbus-face-mass-aircraft-deferrals-and-cancellations/page1mega380liner.blogspot.com/2007_12_23_archive.htmlhttp://www.theage.com.au/articles/2007/04/30/1177788002519.htmlhttp://www.cameronnewland.com/fuel-economy-boeing-vs-airbus/http://boeing.mediaroom.com/index.php?s=43&item=1423Background Information, "Airbus Subsidies". Boeing Corporate Offices. Boeing WTO: http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm http://seattletimes.nwsource.com/cgi- bin/PrintStory.pl?document_id=2012243954&zsection_id=2003750727&slug=wto01&date=20100630 Tanteerasin – Ward Audena – Wray Cahen – Zuraika

33. Background for Airbus • www.wto.org • trade.ec.europa.eu • www.ustr.gov • www.airbus.com • www.boeing.com • www.eads.com • www.euronews.net/2010/09/16/airbus-and-boeing-each-claim-wto-victory/ • www.boeing.com/aboutus/govt_ops/docs/wto/What_the_WTO_Held.pdf • www.airbus.com/en/worldwide/americas/ • www.airbusmilitary.com/ www.airliners.net/aircraft-data/ http://online.wsj.com/public/resources/images/airbus-boeing-pop06092005104216.gif http://www.boeing.com/randy/images/future_ip.jpg http://www.airbus.com/fileadmin/media_gallery/files/press_centre/Airbus_report_on_Boeing_Subsidies_-May_2010.pdf The WTO Decision Boieing.com WTO: http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm Tanteerasin – Ward Audena – Wray Cahen – Zuraika