Boeing and Airbus

Round one to Boeing

Sep 4th 2009 From Economist.com

The WTO rules on Boeing and Airbus

ON FRIDAY trade representatives of the European Union and America were handed the confidential preliminary findings of the investigation by the World Trade Organisation (WTO) into launch aid advanced to Airbus. The expectation was that the WTO would find that European government aid to Airbus has been in breach of WTO rules, although no formal public announcement was due to be made. A definitive ruling will not emerge for several more weeks, and even then Airbus will have 90 days to appeal if the verdict has indeed been to rule its launch aid illegal. In this the biggest dispute to come up for WTO arbitration, the likely finding will be a comfort to the American government and Boeing, on whose behalf the complaint was made nearly five years ago. Theoretically the WTO ruling, if confirmed and not over-turned on appeal, could cause a trade war between the European Union and America. But there is little appetite for such escalation in the present state of the world economy. Moreover, both Boeing and Airbus are big buyers of parts and suppliers of finished aircraft in each others home markets. So trade friction even confined to the aerospace sector could be counterproductive. From 1992 until 2004 aid to civil aircraft production was governed by a bilateral deal from 1992. That deal limited repayable government launch aid by European governments to Airbus to one third of the development cost of a new aircraft. Indirect aid of various sorts

to Boeing by arms of the American government was limited to 3% of its turnover. The Europeans wanted both sorts of aid considered at the same time, but the Americans held out for a separate WTO ruling on their launch aid complaint, before an Airbus counterclaim on industrial subsidies to Boeing is heard. Boeing walked away from the original 1992 deal when Airbus was planning to launch the double-decker plane now known as the A380, designed to challenge Boeings monopoly of the 400-seat-plus market. In its WTO complaint the US Trade Representatives office said Airbus had received $205 billion in launch aid to develop the product range that now shares half the world market with Boeing. Airbuss counter-argument is that its subsidy is repayable by a levy on every aircraft sold and that this arrangement is transparent. Airbus soon counter-filed, claiming that Boeings latest passenger aircraft, the 787 (which is over two years late and has yet to fly) was the most subsidised aircraft in history, with development work channelled to Boeing from the Department of Defence and NASA, the aerospace agency. For the 787 in particular Airbus claimed that American states and even the Japanese offered subsidies to get a share of the work on the revolutionary all-composite aircraft. A ruling on this Airbus counter-claim is expected in six months or so. After that, both sides will appeal against the verdicts to the trade body. The only analogous dispute was between Brazil and Canada in the late 1990s when both countries were pouring aid into Embraer and Bombardier, respectively their national champions making regional, narrow-bodied passenger jets. In that case, both parties were found to have broken WTO rules, and government assistance carried on more or less as before. The Boeing-Airbus dispute has a much higher profile and it will be difficult to reach a settlement acceptable to both America and the European Union. The irony is that the most likely outcome is some kind of reinvention of the old 1992 bilateral arrangement, laying down clear rules. But crafting such a deal could take years. Howard Wheeldon, an aviation expert at BGC Partners, an investment firm, reckons it will take until 2013 before the various appeals from both sides have been heard and some sort of wirkable compromise

has been agreed.