WTO dispute threatens to drag on

In the latest development on a long-running transatlantic dispute over illegal aircraft subsidies provided by governments across the Atlantic to European plane-maker Airbus and its US arch-rival Boeing, the appellate body of the Geneva-based World Trade Organisation (WTO) this Wednesday delivered its final ruling on case DS316 which has been characterised by the media as a softening in stance over illegal subsidies provided by the United Kingdom (UK), French, German and Spanish governments to aid the development of aircraft programmes at Airbus, including the A380 superjumbo which allegedly received US$4 billion of launch aid.

The US and EU were both quick in claiming victories over the ruling, just as when the WTO panel report was first circulated to the trade body’s member states on 30th June last year.

Chicago-based airframer Boeing called the WTO Appellate Body report “a landmark decision” while the United States Trade Representative (USTR), which was the complainant when it first formally filed a complaint against European governments over illegal subsidies provided to Airbus in October 2004, called the appellate body report a “definitive victory” for the US.

“This is a clear, final win for fair trade that will level the playing field for America’s aerospace workers. The WTO has concluded that launch aid and other illegal Airbus subsidies distorted the market, harmed U.S. industry and now must end. The administration – particularly the Office of the U.S. Trade Representative – and the Congress are to be commended for their long-standing efforts in this case to enforce global trade rules. We join them in calling for immediate compliance with this landmark ruling,” Boeing chairman, president and chief executive Jim McNerney declared.

“This report confirms for decades the European Union and its member states, France, Germany, Spain and the United Kingdom, have provided massive amounts of market-distorting launch aid and other subsidies that are inconsistent with WTO rules,” general counsel of the US Trade Representative Tim Reif conceded.

Image Courtesy of Jon Ostrower at flightblogger

Interestingly, Boeing now says the WTO appellate body has found the amount of illegal subsidies that Airbus received to be US$18 billion, down from the WTO panel report’s US$20.4 billion, which includes “$15 billion in launch aid” and “$3 billion in non-launch aid subsidies”.

“Airbus and its government sponsors have tried to justify their illegal subsidy practices by claiming that Boeing benefitted equally from government R&D contracts. But the WTO in March categorically rejected that argument, dismissing 80% of the EU’s claims against the United States and confirming the huge competitive advantage Airbus has as a result of massive illegal government subsidies,” Boeing executive vice president (EVP) and general counsel J. Michael Luttig stressed.

Airbus and the European Union (EU), meanwhile, in turn claimed that the WTO appellate body rejected 90% of the US claims, most importantly the WTO appellate body “reversed the Panel’s finding that three of the past government loans were prohibited subsidies, thereby finding that none of the past loans were prohibited”, the largest aircraft manufacturer in the world said in a statement.

Moreover, in contrast to Boeing and the US’s contention that European governments and Airbus must take steps to remedy the US$18 billion worth of improper aids, Airbus contends that the final ruling will not have an adverse impact on its practices, whereas Boeing counters that Airbus must fall into compliance with the ruling within 6 months from now onwards.

“We see no significant consequences for Airbus or the European support system from today’s decision, as the WTO has now fully and finally rejected most of the US claims. Therefore, the WTO findings are likely to require only limited changes in European policies and practices,” Airbus’ head of public affairs and communications Rainer Ohler asserted.

“The WTO has rendered its final verdict, and now Europe must comply within 6 months,” Boeing executive vice president (EVP) and general counsel J. Michael Luttig countered.

A point which is noteworthy is, even the different interpretations of the media into the WTO Appellate Body’s report are a controversial issue itself, ranging from claims that “the WTO Appellate Body overturned the WTO Panel’s view that launch aid provided by European governments to Airbus was illegal” to “WTO gives Airbus a mixed win” among many others, which, if not looking at the WTO Appellate Body’s summary of key findings meticulously, would likely result in misinterpretation or misunderstanding on the final ruling.

Most importantly, the WTO Appellate Body clearly stated that ‘the Appellate Body today upheld the Panel’s finding that certain subsidies provided by the European Union and certain Member state governments to Airbus are incompatible with Article 5(c) of the SCM Agreement because they have caused serious prejudice to the interests of the United States. The principal subsidies covered by the ruling include financing arrangements (known as “Launch Aid” or “Member state financing”) provided by France, Germany, Spain, and the UK for the development of the A300, A310, A320, A330/A340, A330-200, A340-500/600, and A380 LCA projects’.

While one may argue that the WTO appellate body did overturn that launch aids provided to the A380 constitute prohibited export subsidies, a careful look at the WTO Appellate Body’s statement would indicate that the launch aid provided by France to the A380 programme was inextricably excluded in the phrase, which further implies the launch aids provided by the French government to the A380 programme were still illegal and nevertheless significant and market-distorting, let alone the aids provided by the French state towards the A380 superjumbo programme may understandably be the largest in amount due to the major workshare that France has on the very large airplane (VLA) project.

“Moreover, the Appellate Body disagreed with the Panel’s views on when subsidies can be considered as being de facto contingent upon anticipated export performance. Consequently, the Appellate Body reversed the Panel’s findings that the financing provided by Germany, Spain and the UK to develop the A380 was contingent upon anticipated exportation and thus a prohibited export subsidy under Article 3.1(a) and footnote 4 of the SCM Agreement,” the summary of key findings of WTO Appellate Body’s report reads.

Furthermore, the WTO Appellate Body confirmed that these illegal launch aids led to lost sales and caused harm to Chicago-based Boeing.

“The Appellate Body found that the effect of the subsidies was to displace exports of Boeing single-aisle and twin-aisle LCA from the European Union, Chinese, and Korean markets and Boeing single-aisle LCA from the Australian market. Moreover, the Appellate Body confirmed the Panel’s determination that the subsidies caused Boeing to lose sales of LCA in the campaigns involving the A320 (AirAsia, Air Berlin, Czech Airlines, and easyJet), A340 (Iberia, South African Airways, and Thai Airways International), and A380 (Emirates, Qantas, and Singapore Airlines) aircraft,” the WTO Appellate Body emphasised.

In addition, being “incompatible” and “inconsistent” with the WTO rules directly implies that it causes “serious prejudice to the interests of another member” according to the World Trade Rules Article 5 (c).

Therefore, per the World Trade Organisation (WTO)’s agreement on subsidies and countervailing measures (SCM Agreement), the launch aids provided by the UK, Germany and Spain governments are not “prohibited subsidies” but rather “actionable subsidies”, of which the latter, while not prohibited, “are subject to challenge either through multilateral dispute settlement or through countervailing action, in the event that they cause adverse effects to the interests of another Member”.

Image Courtesy of Reuters

Coupled with Airbus’ intention to continuously press on for using launch aids to fund the development work of the A350 XWB, as well as Boeing’s insistence for Airbus to fall into full compliance with WTO rules, any hope in ending the transatlantic spat is nothing but dashed and this long-running battle which has already become the largest dispute in WTO’s history, is poised to drag for many years to come.

“We now can and will continue this kind of partnership on future development programmes,” Airbus chief executive Tom Enders commented, referring to the A350 XWB programme.

“Europe must end all practices held illegal by today’s decision – particularly launch aid; government loans for the A350 and future products must be on proven commercial terms,” Boeing executive vice president (EVP) and general counsel J. Michael Luttig said.

“I understand why Airbus and its sponsor governments now want to negotiate. For 40 years they have relied on massive injections of launch aid, which today were confirmed to be illegal. We’re not interested in a settlement that would allow a continuation of illegal launch aid – the most pernicious, market-distorting subsidy of all. Airbus currently has more than $17 billion of cash on hand. It can well afford to bring itself into compliance with the WTO ruling and thereafter develop airplanes without illegal aid from European governments. The WTO rules, combined with the ruling in this case, give clear guidance on what governments can and cannot do to support their respective aerospace industries. These rules will govern all market participants and help ensure that competitions are won or lost based on the merits of the respective product offerings rather than on government subsidies,” Luttig continued.

Meanwhile, Aspire Aviation believes given Airbus’ refusal to fall into compliance with the WTO rules within the 180 days or 6 months timeframe, the US Trade Representative is very likely to file a protest particularly focused on launch aids provided for the A350 XWB program, which is designed to compete with Boeing’s revolutionary 787 Dreamliner, in addition to continuously challenge the legitimacy of the A380 launch aids by UK, Germany and Span governments which are “actionable subsidies” but significantly distort the competition and shield Airbus from assuming the enormous risk that developing a US$20 billion programme like the A380 carries had the programme been financed in the financial market.

Last but not least, in light of the emerging competitors in Canada, Russia and China, while the Commercial Aircraft Corporation of China (Comac) C919 does not currently pose a threat as serious as Bombardier’s CSeries does (“Comac C919 threat overblown“, 19th Apr, 11), further prolonging an already protracted trade dispute threatens to set an improper precedent and that with Airbus’ parent European Aeronautics, Defence & Space Systems (EADS) holding a €20 billion cash pile (“EADS records small Q1 loss; 2011 a bright year for Airbus“, 16th May, 11), falling into compliance with WTO rules for both sides remains the most effective and efficient option to set the record straight.