Trade representatives for the United States and the European Union yesterday announced a big political push to settle within three months the trade dispute over subsidies to Boeing...

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Trade representatives for the United States and the European Union yesterday announced a big political push to settle within three months the trade dispute over subsidies to Boeing and Airbus.

The two sides said they would seek a bilateral agreement rather than litigate through the World Trade Organization (WTO).

They agreed that the ultimate goal is “to end subsidies” and decided on the definition of a subsidy that will be used in the negotiations. They also agreed to freeze all new subsidies and litigation for the three-month period.

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Yet while officials praised the agreement as “concrete and substantive” progress, the negotiations ahead look like they will be difficult.

One of the trickiest details will be the status of the $3.2 billion Washington state tax-incentive package that last year caused Boeing to pick Everett as the final assembly site of the 7E7.

The United States wants to stop all future subsidies while protecting that package for Boeing. The Europeans want the 7E7 incentives on the table during the talks ahead.

In October, the United States walked away from the bilateral agreement that had previously governed subsidies to commercial aircraft manufacturers and launched the WTO dispute-settlement process.

Tomorrow was the deadline for beginning the next step in the WTO litigation process. Yesterday’s agreement halted that timetable.

In a news briefing, Peter Mandelson, EU Commissioner for Trade, made clear the political impetus to avoid that escalation.

“If pursued the whole distance, this gladiatorial clash would have succeeded in giving a Pyrrhic victory to both sides,” Mandelson said, according to a prepared statement.

“The poison spread by the conflict would have spilled into other aspects of the trans-Atlantic relationship,” Mandelson added. “The world’s got enough problems to deal with at the moment without adding this to the already slightly frayed state of relations between us and the U.S.”

Bush to visit Europe

The agreement comes just weeks before a high-profile visit to Europe by President Bush. “The timing could not be better,” said the EU’s new ambassador to the United States, John Bruton.

U.S. Trade Representative Robert Zoellick said he was pleased with the outcome but warned that “there is much work to be done.”

Boeing Chief Executive Harry Stonecipher, who initiated the U.S. moves against Airbus subsidies early in 2004, also welcomed the move as an important step.”

Yesterday’s agreement stipulates that the negotiations will use a WTO definition of a subsidy that specifically covers any arrangement whereby “government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits).”

State’s tax package

In short, Washington state’s tax package is a subsidy.

A senior U.S. trade official close to the negotiations, speaking on condition he not be identified, said he assumes that this is one of the government supports that will be discussed over the next three months.

The negotiating stance he laid out would preserve current subsidies but preclude any further support.

“Our position going into these negotiations is that whatever was in the pipeline, for the (Airbus super-jumbo) A380 or the 7E7, whether it qualifies as a subsidy or not, should be grandfathered in,” the U.S. official said. “Our position is no subsidies for the A350.”

The A350 is a proposed new Airbus jet that will compete head-on with Boeing’s 7E7.

A source close to the negotiations on the European side, who also requested anonymity, gave a starkly differing view.

“The understanding we have is that the 7E7 would be included in any disciplines agreed in the next three months,” he said.

Robert Hamilton, chief trade representative in the Governor’s Office, said it is too early to speculate about a possible withdrawal or reduction of the state’s tax-incentive package.

An agreement to negotiate “doesn’t mean you are going to get there,” he cautioned. “It’s good that they are talking, but it’s a long, long way off from really knowing what the outcome will be.”

“I’ve seen so many of these things fall apart,” Hamilton said. “The devil is in the details.”

State officials estimate that last year’s tax legislation is worth $3.2 billion to Boeing in tax credits stretching out over the next 20 years.

Robin Pollard, who coordinates the 7E7 project for the state, said that for now her office would continue to ensure that the 7E7 tax legislation is fully implemented.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com


Boeing overcharges

detailed in audit

WASHINGTON — Boeing overcharged the U.S. Air Force by $10.3 million on a $792 million contract to upgrade NATO surveillance aircraft, an audit by the Defense Contract Audit Agency found.

The Pentagon inspector general requested the audit as part of a review of contracts negotiated by former Air Force acquisition official Darleen Druyun, who went to work for Boeing two months after the contract was signed and has since been imprisoned for violating conflict-of-interest laws.

Boeing has agreed to return about $8.6 million that was a “duplication of cost,” and is contesting the additional $1.7 million, Air Force Assistant Secretary for Acquisition Marvin Sambur said Monday.

“We are still in the process of negotiating,” he said.

Sambur said the overcharge, related to pricing of subcontracts, probably wasn’t connected to Druyun, though the review that found it was prompted by Druyun’s conviction.

Bloomberg News