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U.S., EU Clash Over Airplane Subsidies

May 31, 2005 at 12:00 AM EST
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RAY SUAREZ: A big trade dispute is escalating between the United States and Europe over whether the two leading aircraft makers, Airbus and Boeing, are getting subsidies. Today the European Union’s top trade official, Peter Mandelson, said the EU will sue the U.S. government for its subsidies to Chicago-based Boeing. That came less than a day after the U.S. announced its filing suit at the World Trade Organization over the EU’s support of French-based aircraft maker Airbus. For more on the case and what’s at stake, I’m joined by Edward Alden, Washington bureau chief for the Financial Times. What precipitated this now?

EDWARD ALDEN: I think it’s largely Boeing’s commercial interests. Airbus is about to launch the A-350, which is going to be a competitor to Boeing’s 787 Dreamliner jet. It’s the first successful new launch by Boeing in a decade. Orders for the 787 are very strong. It’s a long-range, midsize, fuel-efficient jet. And now Airbus wants to build a competitor, and wants European government support for building a competitor, and Boeing has gone to the U.S. government and said, “It’s got to stop now. They’re going to hurt us commercially, and now is the time to escalate this dispute and really pick a fight over this issue.”

RAY SUAREZ: It’s being called one of the largest commercial disputes ever. Is that hyperbole, or are we dealing with those kind of numbers?

EDWARD ALDEN: It’s the largest in the history of the World Trade Organization, no doubt about that. I mean, Boeing is still the largest single U.S. exporter. It’s by far the biggest manufacturing exporter in the U.S., and Airbus is the flagship European champion. So these are critical companies for both the U.S. and Europe. So I don’t think it’s hyperbole to call…at least in the trade world, this is the biggest dispute we’ve ever seen.

RAY SUAREZ: Now, why did it get to this point? Hadn’t the two sides been in a kind of truce recently?

EDWARD ALDEN: They had. They signed an agreement in 1992 which essentially capped the level of support for each side. Both European support for Airbus and American support for Boeing were capped at certain levels. Boeing is essentially unhappy with that deal. Now, since that deal was signed, Airbus has gone from being a distant second to Boeing to being the world’s leader in civil aircraft sales. So as far as Boeing is concerned, they got the raw end of that 1992 agreement, and they no longer want to live by its terms. So the U.S. has torn up that agreement and said, “We’d rather fight this out in the World Trade Organization,” which is another forum to try to adjudicate these kind of disputes.

RAY SUAREZ: Now, Airbus is 35 years old, and hadn’t it always survived on subsidies from national governments? Isn’t it a consortium that was really given its seed money by state money?

EDWARD ALDEN: There’s no question about that. The issue is what you mean by subsidies. The European governments argue that they are essentially investors in the company. They offer up-front support for the launch of each new Airbus model, but then they get repaid in royalties, based on the success of sales. And the European governments argue each of these Airbus models has been successful; we’ve got our money back and more. Therefore, it’s not a subsidy. The U.S. argument is, well, if you couldn’t get a commercial investor to invest up front on those terms, then it is a subsidy, and that, in fact, it’s kind of risk-free money that has allowed Airbus to be daring and a bit innovative in the design of new aircraft models, and has really provided, as far as the U.S. is concerned, an unfair advantage in the competition against Boeing.

RAY SUAREZ: Doesn’t Boeing say, in fact, that they’re not even paying back after the jets are airborne?

EDWARD ALDEN: Well, I don’t think there’s…you know, so far the money has been paid back. The question is whether it’s on commercial terms. And the way the European deals are structured, if one of the Airbus models is to fail, that money doesn’t have to be repaid. The case in point now is the A-380, which is the new jumbo Airbus competitor to the 747. Sales of the aircraft have not been strong. And if it doesn’t sell as well as expected, then Airbus does not have to pay the European governments the full amount of the money it took up front, so that would be a rather clear case of a subsidy, if that turned out to be the situation.

RAY SUAREZ: Under the regulations of the WTO, is what Airbus is doing, what Boeing says Airbus is doing, kosher? Is it okay?

EDWARD ALDEN: Probably not. Probably not. I mean, both sides will present elaborate legal briefs laying out their side. I think on the face of it, the U.S. has a pretty strong case, that this is indeed a subsidy under world trade rules. The question is what happens after the WTO ruling. But I think there’s a pretty good chance the U.S. will win that argument. Of course, the Europeans may also win their argument against Boeing, which is the other side of the coin.

RAY SUAREZ: Well, what is the argument that Peter Mandelson and the EU team are making against Boeing?

EDWARD ALDEN: It’s a bit weaker, but it focuses on two things. One, what they call indirect supports, which is defense money, NASA money that goes into Boeing, because Boeing is also a big defense contractor and the argument is that that has spin-off benefits for their commercial aircraft. The second thing the Europeans will go after is state-level tax breaks for production. Washington State, for instance, is cutting taxes for Boeing quite dramatically to encourage it to build the air frame for the 787 in its Everett plant in Washington, rather than moving that work abroad. The Europeans say that’s a tax subsidy, and we’re going to go after that as well. Their case is harder to make, but I think there’s a chance that they will probably win on some of their points as well.

RAY SUAREZ: Well, does Boeing, when it develops something for the Air Force and comes up with a material or a design of a wing or something, does it become proprietary information? Does it get to keep that stuff?

EDWARD ALDEN: Well, I mean, it has to share it with the Air Force, obviously, and so it’s used in defense aircraft. But yes, I mean, it can be used for their commercial aircraft. There’s no question, I think, that Boeing has used some of the wing designs that have been made in the defense context in their commercial aircraft. But they would argue the Airbus gets the same benefits. Airbus is also a big defense contractor, and presumably receives some of the same kinds of spin-off benefits from its defense work.

RAY SUAREZ: Well, the trade representatives for both sides, the United States and the European Union, have been very, very careful to confine all their remarks to jet aircraft, and say, well, this doesn’t affect all these other things that we’ve fought about in the past. Why have they been so careful to add that kind of language to their public statements?

EDWARD ALDEN: I think there’s always a fear, when you’re talking about a trade dispute of this magnitude, that it will poison other aspects of the economic relationship. Right now both the U.S. and the Europeans are working very hard to conclude what’s called the Doha round of global trade talks. This will be a new world trade agreement that will hopefully reduce tariff barriers and agriculture subsidies, other things they care about. They want to work together on this. So I do think each side has an interest in isolating this dispute and saying, “This is a big dispute, this is an important dispute, but we’re not going to let it poison other aspects of our trading relationship.” That will be a challenge, though, just because these are companies that each side cares about very, very deeply. So the stakes are very high here, even while they are trying to insulate other issues from the effects of the dispute.

RAY SUAREZ: How is the timing seen in the wider air world? Isn’t a big show coming up right now?

EDWARD ALDEN: Yeah, again that’s part of what triggered it. Airbus has asked the four European governments that are part of the Airbus consortium — the UK, France, Spain and Germany — to announce by the middle of June, when the Paris air show takes place, whether they are going to provide this up-front aid for the A-350, the next model that Airbus wants to launch. So a decision is imminent. And basically, what happened this week is the U.S. reached the conclusion that aid is forthcoming. There’s no point anymore in trying to negotiate a settlement. We need to go to the WTO and litigate this matter.

RAY SUAREZ: Edward Alden, thanks for joining us.

EDWARD ALDEN: Thank you, Ray.