US vs. EU. Airbus – Boeing Subsidies Case. (Pending)

1. US vs. EU.Airbus – Boeing Subsidies Case.(Pending) Kurt Kasun Tarek Khedr Michelle Lammers Sandrine Mabya

2. US vs. EU: Airbus – Boeing Largest Legal Case in WTO history. US feels money given to Airbus is illegal. EU feels Boeing has benefited from unfair support

3. Commercial Jetliners • Chicago Based Boeing • France Based Airbus • Only two manufacturers of large commercial jetliners.

4. Why Such a Big Deal?? • Control of the market • Illegal Subsidies • WTO is being tested • Canada and Brazil

5. The 1992 Agreement • Under the 1992 agreement, the US had recognized Airbus, founded in 1970 with support from several European countries • On October 6, 2004, the US complained to the WTO that the European governments have broken trade rules with its government loans to Airbus, including $ 3.2 Billions for the super jumbo A 380

6. The U.S. Boeing Case • The U.S. claimed in its WTO complain last October that Airbus had received more than $15 Billion in government loans amounted to illegal subsidies under global trade rule. • The US and EU decided last December to try for a settlement of the aircraft issue outside the WTO to avoid bruising their 400 Billion-a-year trade relationship.

7. The U.S. Boeing Case • As part of the agreement, both US and EU accepted that neither carrier will seek launch aid during three-month negotiations. • The launch aid was spelled out in the 1992 agreement. Under the deal, the European governments could finance one-third of the cost of any aircraft Airbus develops • However the negotiations will have to settle the tricky question of which of these subsidies will be prohibited, actionable or permitted

8. The U.S. Boeing Case • Unfortunately, the US has withdrawn because of the attempt from the EU to broaden the scope of negotiations • At stake may well be Boeing $22- Billion-a-year commercial aircraft business, which for the first time in 2003 sold fewer passenger jets than Airbus

9. The U.S. Boeing Case • Airbus overtook Boeing in 2003, becoming the first manufacturer in the world’s $ 50 billion airliner market. • The U.S. argued that the growth of the Airbus indicates that there is no more need for aid that was justifiably at the startup industry

10. The U.S. Boeing Case • Europeans have justified subsidies to Airbus as necessary to an infant industry • Boeing has long asserted that Airbus has an unfair advantage because it gets government money and now that it does not need money because it took the lead in the commercial aerospace business in 2003 delivering 305 commercial planes while Boeing delivered 281,whereas Boeing in 1999 had delivered more than 600 planes.

11. The Airbus Side • In October 2004, the United States said Airbus received more than $15 billion in government loans since 1967, helping it overtake Boeing as the world's largest airplane maker by sales. • According to U.S. estimates (also hotly disputed), Airbus has used $15 billion in subsidies to build its global aircraft market share from 30 percent to near 60 percent.

12. The Airbus Defense • Airbus has been receiving "repayable launch aid" in the form of commercial loans that it pays back to the government as it sells airplanes • The Airbus launch aid causes less trade distortion than the Boeing aid, according the industry analysts

13. Airbus Challenges Boeing Subsidies • R&D subsidies: $20B • From 1992, Boeing has received R&D grants worth more than $20 billion, mostly through NASA and the Pentagon. • Tax break subsidies: $3.2B • Washington state will give Boeing tax incentives worth $3.2 billion over 20 years. • Infrastructure improvement subsidies: $4.2B • Washington State has dedicated $4.2 billion in subsidies for physical improvements of Boeing plants and infrastructure.

14. Boeing Subsidies, cont. • Foreign Sales Corporation: $200M annually • Up to now, Boeing receives about $200 million a year through a federal tax loophole called the Foreign Sales Corporation program, which has been ruled in violation of WTO rules. • Japanese Launch Aid: $1.6B • Boeing has received Japanese launch aid of $1.6 billion thus far to build the wings for its new 787 Dreamliner. In contrast to the E.U. investment in Airbus, none of these subsidies needs to be repaid

15. Request for Consultations • Possibly precipitated by politics of 2004 US presidential election • US files first in early October, followed hours later by the European Communities counter filing • Both site subsidies inconsistent with obligations under the SCM Agreement and GATT 1994 • US principally sites “launch aid” • EC sites: • State and local subsidies • NASA, DOD, and other R&D subsidies • FSC/ETI subsidies

16. Détente in January • On January 11 both sides agreed to negotiate the phasing out of subsidies over a 90-day period • Agree to create “fair market competition” for the development and production on large civilian aircraft made in the US and the EU • Efforts motivated in part to sooth relations in preparation for Bush’s European tour

17. Ides of MarchSpell High Drama • On March 18 the spurious details of contentions discussions between Zoellick and Mandelson are made public • The US went public first • The EU wants to conclude the talks quickly so it can start on the A380 to compete against Boeing’s new 787 • USTR voices displeasure over EU seeking to broaden the terms of the January agreement • EU wants to include Japanese subsidized production of Boeing 787 fuselage • EU wants to bring FCS into the deal • US also accusing EU of backtracking on commitment to cut subsidies • EU wants ‘Cast-Iron’ guarantee

18. Are Cooler Heads Prevailing? • March 21, Mandelson: • “The ball is in America’s court…I’m looking for clarification of the US position.” • “US threats are premature and unnecessary.” • Zoellick: “From my last conversation with Mandelson, I do not see the probability of reaching fulfillment in the time we set forth.” • The clock is ticking…one week away from the deadline

19. Resolution Scenarios • Agree to extend consultations beyond 11 APR deadline • WTO oversee further consultations in Geneva • Either side could ask for a panel of judges to hear the case • Dynamics make an out-of-court settlement unlikely • High tech, high-paying jobs at stake for both • Boeing in tough shape rocked by scandal and losing market share • Airbus has been a tremendous successful industrial policy for the EU • Perhaps they could agree to binding arbitration by a third-party (John Major and Frank Carlucci or Cap Weinberger) • Odds are WTO would find both guilty and levy sanctions on both • Teal Group analyst that the outcome may depend on who is able to show it has been hurt

20. Broader Issues • Outsourcing becoming increasingly global • Much of the Boeing 787 is being constructed with the JADC • Both Airbus and Boeing outsource to Asia and Latin America making the case global and raising the stakes • Large portions of engineering for Boeing handled by Russian BDC • Concerns that the conflict will infect the rest of the trade agenda, Doha Round • If sanctions are levied and ignored, the credibility of the WTO would be damaged • $400 Billion trade relationship between the US and EU is at stake

21. Sources • “Boeing chief hopeful on U.S., EU subsidy talks,” Thomas Mulier, Bloomberg News, February 18, 2005 • “Not an Issue for the WTO” Peter Mandelson, Washington Post, 1 April 2005 • “The Big Blowout; Why the Airbus-Boeing case could wreck the WTO, and how to stop it,” Jeffrey E. Garten, Newsweek International, April 4, 2005 • “An ill-timed spat,” The Economist, March 26, 2005 • “Why the Airbus-Boeing case would wreck the WTO, and how to stop it,” Jeffrey E. Garten, Newsweek, March 27, 2004 • “See you in court,” The Economist, March 16, 2005 • “Russians rally to Boeing’s cause,” Nick Cook, Financial Times, April 2, 2005 • “Boeing-Airbus talks fall apart,” James Wallace, Seattle Post-Intelligencer, October 1, 2004 • EU Demands Clarification on Boeing-Airbus,” Constant Brand, AP, March 21, `2005

22. Sources • “Boeing vs. Airbus: Time to Escalate,” Stanley Holmes, BusinessWeek Online, March 22, 2005 • “US Seeks Return to Boeing-Airbus Talk,” Dow Jones Newswires, March 21, 2005 • “Battle over Boeing, Airbus shows thorny relations,” Dow Jones Newswires, March 21, 2005 • U.S.,E.U. Take Boeing, Airbus Dispute WTO. The Seattle Post- Intelligencer, October 7,2004 • Blustein, Paul. U.S. Files Grievance Over Airbus With WTO:E.U. Responds With BoeingComplaint. October 7, 2004 • International Trade; U.S., E.U Complain of Aircraft Subsidies. October 28,2004 • http://www.bloomber g.com/apps/news