Tuesday, March 23, 2010

The Airbus/Boeing Catfight

The WTO has not yet revealed its official ruling on the legality of the aid provided by EU members to Airbus, although it is suspected that the advance loan system will be judged legal, while some of the aid itself will be judged illegal based on section 4.1 of the Agreement;

4.1. Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal, based on conservative assumptions, has established that there is a reasonable expectation of recoupment, within 17 years from the date of first disbursement of such support, of all costs as defined in Article 6(2) of the Aircraft Agreement, including repayment of government supports on the terms and conditions specified below.

Ever since the US pulled out of the 1992 bilateral pact  which created mandates on government aid to commercial jet manufacturers in 2004, the blame game has been tirelessly played with fingers pointing in no meaningful direction.The US alleges that approximately $205 billion in unfair aid was provided to Airbus by the EU and especially France, Germany, Spain and Britain. The EU alleges that Boeing is receiving aid from NASA and the DOD. Both sides accuse the other of hiding aid in various schemes, such as the US calling part of the aid "overhead" and the EU claiming a €750 million site for the A380 was a multi-purpose site.

The WTO must contend with several issues:
  1. The US and EU have their own definitions of the term "subsidy" each one's likely defined for national favor and an absent objective definition in the text of the 1992 European Union Agreement On Trade In Large Civil Aircraft. Are subsidies from states such as those from Toulouse to Airbus/Washington state to Boeing allowed?
  2. The WTO must determine how to evaluate the adherence of a party to a bilateral agreement in which said party officially withdrew its participation six years ago.
  3. How to enforce the transparency measures set forth in Article 8 of the agreement; " public information will include at minimum the total amount of government support for new development projects and its share of total development costs, aggregate data on disbursements and repayments relating to direct government supports for commercial aircraft programmed, the annual commercial turnovers of the civil aircraft industry"
  4. How to address accusations of price-cutting and other aggressive measures from each side of the Atlantic, since the 1992 Agreement explicitly states that  "Action with respect to "matters covered by the present Agreement" refers to trade actions relating to direct and indirect government support as defined by this Agreement. It does not include actions relating to dumping, intellectual property protection, or anti-trust or competition laws."
The term "subsidy" which is {defined by the unabridged dictionary as "a direct pecuniary aid furnished by a government to .."} at the core of the dispute is not exclusively defined in context of the Agreement, however the following are:

- "indirect government support": financial support provided by a government or by any public body within the territory of a Party for aeronautical applications, including research and development, demonstration projects and development of military aircraft, which provide, an identifiable benefit to the development or production of one or more specific large civil aircraft programmes.
- "direct government support" means any financial support provided by a government or by any public body within the territory of a Party which is provided:
1) for specific large civil aircraft programmes or derivatives or
2) to specific companies-to the extent that large civil aircraft programmes or derivatives directly benefit. 

The challenge will be to determine how far along the 'balance sheet' indirect support transforms into direct support. 

The jet manufacture dispute is an extension of the trade retaliations that began in 2004 with Bush's  protectionism of the US steel industry in exchange for re-election votes in the rust belt. As Florida's orange exports and Harley Davidson's motorcycles suffered, the cost of the policy was deemed bearable, however the aircraft dispute bears a price sticker of up to $3 trillion over the next 20 years. The EU and the US, each believing( or at least claiming) itself to be in the right, incredulously questions the others motive in prolonging the dispute.

Airbus trade adviser Charles Hamilton  points to a possible larger consequence of the conflict;

Unfortunately, these two WTO cases have enabled future competitors to look at how Boeing and Airbus funded their aircraft programs. Under WTO dispute-settlement rules, both parties had to hand over confidential information to substantiate their claims. Watching from the sidelines were "interested parties" such as the Canadians, Brazilians, Chinese, Russians and Japanese. As a result, potential subsidized competitors have their eyes on a share of the Boeing/Airbus market. Boeing and Airbus are now being forced to upgrade their respective 737 and A320 programs to remain competitive and maintain market share. Boeing's misdirected WTO litigation has enabled others to take on the duopoly. 
Hamilton's point is valid albeit the fact that it cannot be ultimately proven until one of the aforementioned spectators pools funds to launch/propel its own jet manufacturing industry. The EU and US have become so accustomed to dominating manufacturing, technology and financial markets that they rarely consider the threat of competition from DC's and LDC's. 

29 minutes ago, the WTO ruled that Airbus received $13 billion in illegal aid from its EU donors, based on a mandate from the 1992 EU-US agreement which prohibits loan subsidies at rates below the market rate. The WTO has ordered that the $13 billion subsidies pinpointed for Airbus' A380 jet must be withdrawn "without delay" and further loans for other smaller aircraft must be withdrawn within 6 months. The full text of dispute settlement and ruling will not be available until sometime in May after requisite bureaucracy.

The ruling will no doubt tilt the bid for the $40 billion Air force tanker project in favor of Boeing as Airbus will struggle to continue funding its R&D. Although the US has won the subsidy battle, the war is not won yet, as the mudslinging will surely proceed until the bidding is closed.

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