For nearly six years, the European Union and United States have locked horns in a legal dispute at the World Trade Organisation (WTO) over whether support they provide for their civilian aircraft manufacturing industries complies with WTO rules. As they gear up for key rulings due to be handed down in the weeks and months ahead, Europolitics outlines the key issues under consideration in the Airbus and Boeing subsidy cases.

AIRBUS

In the US case against the EU, the main bone of contention is the loans that four European governments have made to Airbus since the company was founded in 1970 to help it develop new models like the A330, A340 and A380. Dubbed ‘launch aid’ by the US and ‘repayable launch investment’ by the EU, these loans involve the French, German, Spanish, and United Kingdom governments financing up to 33% of the cost of developing a new model. These loans must be repaid in their entirety - but only after sales of that new model hit a certain figure. Moreover, the interest rate Airbus pays on these loans is lower than what it would get from private lenders. The EU defends these loans, noting that after 100% of the loan is paid back, EU governments still receive extra payments from a levy that is imposed on the sale of each plane of the model being financed. Consequently, the EU says, Airbus has since 1992 paid European governments back €6 billion or 40% more than it received from them originally.

The US would like this loan mechanism to be deemed prohibited under WTO rules. This would prevent Airbus receiving new loans through this mechanism, notably to finance Airbus’ A350 model, which is due to make its first flight in 2011. The A350 will be in direct competition with the 787 model that Boeing is developing. The EU takes comfort from the fact that the WTO, in its June 2010 panel report, excluded financing for the A350 from the scope of the case.

The US also objects to €1B of aid that the French, German and Spanish governments gave Airbus from 1989-2001 to develop infrastructure at Airbus’ production sites in Bremen, Hamburg, and Toulouse. It contests equity infusions to Airbus worth billions of euros made by France and Germany between 1987 and 1999. And it alleges that $1B of Research and Development (R&D) aid provided by the EU, French, German, Spanish, and UK governments between 1986-2005 was made in breach of WTO rules. As a result these supports, the US claims there were ‘adverse effects’ to US interests, with Boeing losing out on aircraft sales and market share.

BOEING

In the other case, the EU asserts that Boeing received WTO-incompatible subsidies worth $23.7B between 1989 and 2004 from US federal, state and local governments. The largest chunk of this aid, $16.6B, came from two federal agencies: the National Aeronautics and Space Administration (NASA) and Department of Defence (DOD). The EU alleges that under the guise of ‘military’ contracts, the DOD gave R&D aid and transferred patents and knowledge to Boeing’s civilian aircraft business. Another complaint relates to $2.2B in tax breaks the US government gave Boeing which the EU claims promoted Boeing exports in a WTO-incompatible way. In addition, the EU objects to a $4B package of tax breaks and infrastructural investments provided by the State of Washington where Boeing’s main production facilities are based. This includes funds to widen a highway near the Boeing factory in Everett, close to Seattle. The EU is challenging smaller support packages provided by local and state governments in Kansas, where some Boeing components have been assembled, and Illinois, where Boeing’s corporate headquarters is located. The EU hopes to prove that this support has caused adverse effects to Airbus in the form of lost sales and market share and depressed prices.

One argument the EU has put forward - thus far unsuccessfully - is that the WTO should view all financial support to Airbus and Boeing in the context of a bilateral agreement the EU and US signed in 1992 precisely to avoid such disputes. For example, it says that the Airbus loans mechanism which the US now objects to was clearly authorised in the bilateral agreement. The US withdrew from the accord in 2004 just before filing the WTO case, causing the EU to immediately file a case in retaliation. The EU argues that a bilateral agreement on aircraft subsidies is preferable to slugging it out at the WTO. The US does not exclude such a solution but in practice, talks on a new agreement are unlikely to start until the two WTO cases are concluded, which will take many more months - possibly even years.

Worth mentioning is the equally epic battle being waged for almost a decade to win a $50B US government contract to supply the US Air Force with refuelling tanker planes. Here, the battle is being fought by Airbus and Boeing directly, rather than indirectly via the EU and US governments. Airbus’ parent company EADS was awarded this contract in February 2008. Boeing successfully appealed against this decision, causing the DOD to hit the reset button on the competition. The DOD has vowed to treat both companies fairly. It says it will not factor in the WTO cases either way when deciding to whom to give the contract, one of the largest in aviation history. A decision is due around October 2010.

Timeline

October 2004: Airbus and Boeing cases filed

June 2010: WTO panel report on Airbus

September 2010: WTO preliminary report on Boeing due

Autumn 2010: Award of $50B DOD tanker contract due