The WTO ruled Monday that the business-tax reduction granted by Washington state to Boeing in 2013 for the forthcoming 777X jet is a prohibited subsidy. Experts on both sides say the reality on the ground is unlikely to change even if that’s upheld on appeal.
The World Trade Organization (WTO) ruled Monday that the extension of the business-tax reduction that Washington state granted to Boeing in 2013 for the forthcoming 777X jet is a prohibited subsidy.
The term “prohibited” signifies the WTO’s strictest legal category, denoting a subsidy that cannot be allowed to stand. If the ruling is upheld on appeal, action to remove the subsidy would be required.
Yet even then, in a testament to the excruciating frustration of the WTO process, legal experts on both sides of the case say the outcome will almost certainly leave Boeing’s bottom line untouched — and Washington state’s tax coffers none the richer.
“You can remove a subsidy in a hundred different ways that don’t in any way impact the benefit Boeing might get,” said Bob Novick, a former general counsel to the U.S. trade representative and now an outside counsel to Boeing on the WTO dispute.
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A lawyer on the European side of the case, who asked not to be identified because he spoke before the ruling is being officially made public, agreed that Boeing is unlikely to suffer financially.
Monday’s ruling is new. It’s a separate case from the two original WTO lawsuits: the one filed by the U.S. in 2004 over the Airbus “launch aid” and the countersuit Europe filed in 2005 over the state tax breaks to Boeing as well as research grants it got from NASA and the Department of Defense.
The European lawyer recalled that when the WTO initially ruled in 2010 that government loans to Airbus to launch its A380 superjumbo jet were prohibited subsidies, Boeing crowed about the outcome and demanded that Airbus either repay or restructure the loans.
That A380 ruling was reversed on appeal a year later. Now, Boeing’s biggest tax break is on the same chopping block.
“The tables are turned. Boeing’s been tagged,” said the European lawyer. “But nothing is actually going to change.”
Michael Luttig, Boeing’s general counsel, agrees.
“After any appeal,” Luttig said, “we fully expect Boeing to preserve every aspect of the Washington state incentives.”
And while an Airbus press release hyped the ruling as “a knockout blow to Boeing’s record-breaking subsidies” and demanded that the Washington state tax breaks “be withdrawn immediately,” Airbus chief executive Fabrice Bregier conceded that he has ” little faith in the US compliance with the WTO rulings.”
WTO pounces on one clause
The latest ruling certainly means Boeing and Washington state will have to do something if it withstands appeal.
The problem is a clause that was inserted into the 2013 tax-break legislation to protect jobs in this state: It says the extension of the business and occupation (B&O) tax reduction out to 2040 will be terminated if the state determines “that any final assembly or wing assembly … has been sited outside the state of Washington.”
“That’s what killed them,” said the European lawyer.
The WTO interpreted that to mean the law expressly favors local production over imports — the definition of a prohibited subsidy.
For example, the 787 Dreamliner’s wing was built in Japan, yet this clause would punish Boeing if it outsourced the wing of the 777X.
Of course, that clause was inserted because of the state’s experience in providing similar tax relief to win local assembly of the 787. (There was no similar clause in the 2003 legislation that established the original aerospace tax breaks for the 787.)
Boeing did build that previous jet in Washington state and took the tax breaks, then five years later decided to put a second 787 assembly plant in South Carolina.
The biggest Dreamliner, the forthcoming 787-10 model, will be exclusively built in South Carolina.
So next time around, in 2013, state legislators required that, to qualify for the tax breaks, Boeing must build the 777X here and only here.
But that contravened the WTO ban on governmental support that explicitly stipulates work has to be local, and so triggered this ruling.
“Fast track” case
In the 2005 case against the U.S., the trade body ruled the original 2003 tax breaks illegal, requiring some action to fix the adverse effects on Airbus. But they were not found to be “prohibited” and so don’t have to be withdrawn.
In the parallel U.S. case against Airbus at the WTO, the specific loans it used to launch new airplanes were found illegal because the terms of the loans were too favorable. But the appeal process established that they are not “prohibited.”
So Airbus was required only to fix the terms of those loans. In September, the WTO ruled that it had failed to comply even with that, a finding that Airbus is currently appealing.
Those original cases have dragged on for more than a decade with no perceptible change in behavior by either of the airplane makers.
The new 777X case is in WTO terms a “fast track” case because it’s narrowly targeted: It pertains only to the Washington state subsidies for the 777X and must determine only if they are prohibited or not.
But “fast track” is a relative term.
After this initial finding, Boeing will appeal. If it loses on appeal, then there is a compliance phase, then a ruling on whether it has complied, and a potential appeal to that ruling.
Even if Boeing lost at every step, the process would probably take at least two more years to play out, said Novick, former general counsel to the U.S. Trade Representative.
Still, it should be over long before the first 777X is due to be delivered in 2020.
EU Trade Commissioner Cecilia Malmström claimed Monday that the new ruling “makes illegal” the B&O tax reduction portion of Washington state’s incentive package for all Boeing airplanes delivered through 2040 and estimated the impact at $5.7 billion.
Boeing came up with a much lower estimate of the maximum potential damage, about $1 billion.
That’s based on its assessment that the ruling, if it withstands appeal, would affect only 777X deliveries and that the tax reduction would therefore be worth “no more than $50 million a year” over 20 years.
If Boeing were to lose its appeal at the WTO, and the B&O tax break for the 777X were finally confirmed as “prohibited,” $50 million a year is hardly insignificant. Yet Boeing believes there are ways of avoiding any hit to its bottom line at all.
For example, Boeing has already built the huge facilities for making the 777X fuselage and wing in Everett. It’s spending $1 billion on the composite wing center alone.
“The facilities are on the ground. We’ve spent the money,” said Ted Austell, Boeing vice president for trade issues.
Those facts on the ground establish that the state has all the 777X work it asked for. So the Legislature could perhaps choose to excise the incriminating clause from the law and settle for a verbal guarantee that Boeing isn’t going to go to another state and build another $1 billion facility — which wouldn’t make economic sense anyway.
Since 2013, state legislators have been pushing for more accountability from Boeing, not less. But as Austell put it, “Sometimes governments use these WTO decisions to do what’s politically unpalatable.”
Austell added that if the state needs job guarantees, Boeing could write those into its labor contracts with the unions. The WTO has no role in adjudicating contracts, only laws.
The European lawyer points out one more reason why Boeing doesn’t have much to fear.
The 2003 agreement between Boeing and the state of Washington that set up the original tax-break regime — of which the 2013 agreement for 777X was merely an extension — states that “in the event of a change in law, or any other act, event or circumstance,” that would materially diminish the benefit to Boeing, then the state must make the jet maker whole with some other commitment “having economic effect equivalent” to the tax breaks.
Given that, the European lawyer said that even though Boeing has lost this round, he sees no useful final outcome. Instead, he sees the entire process as damaging all concerned because it highlights for countries like Canada, China and Russia that the WTO rules against government subsidies are toothless.
“It only shows the inability of the U.S. and Europe to stand together to defend their traditional place in the market,” he said.
He added that aircraft-manufacturing companies in China are surely paying close attention to the Airbus/Boeing dispute and must enjoy “watching two kids slugging it out in the sandbox as (they) prepare to take both of their lunch moneys.”
In a statement Monday, Airbus CEO Bregier cited the same competitive threats and said the WTO fight “will only encourage other aerospace producing countries to feel totally free to subsidize their local industries.”
And Airbus Group chief executive Tom Enders said only some kind of settlement between Europe and the U.S. will hold off that looming competition.
“This WTO battle is a battle of the past which benefits only the armies of lawyers both sides employ,” Enders said. “I continue to think that the only way out of the ridiculous series of disputes initiated by the US is to agree on a set of globally applicable rules for the support of the civil aircraft industry, which would benefit both sides of the Atlantic.”
Yet Boeing for now insists upon its pound of flesh.
Even though it’s just lost this first round in the new 777X case, Boeing won the last round in September in the original case against Airbus, which after a dozen years finally has an endpoint in sight.
If Airbus loses its appeal in that recent ruling saying it has not complied with the court’s requirements to fix its launch-aid loans, then by the middle of next year the U.S. could be authorized to instigate trade sanctions against the European Union.
Novick eagerly anticipates that outcome as justifying the long WTO fight.
“When the U.S. receives the authorization to take countermeasures, nobody is going to be calling it toothless,” Novick said.
Outside experts remain skeptical.
Bainbridge Island-based aviation-industry analyst Scott Hamilton of Leeham.net says a trade war with Europe would hurt not only Airbus and Boeing but U.S. suppliers such as GE, Honeywell and Spirit AeroSystems that supply both plane makers.
Even with an incoming Trump administration seeming to want to flex its trade-deal muscles, Hamilton said he expects “common sense will prevail” and that the WTO process will eventually fizzle out.