The WTO ruled that Airbus has failed to fix the harm done to Boeing from European government loans used to develop its A380 and A350 jets. The U.S. said it will seek to initiate tariffs against the European Union.

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Another smoldering trade dispute between the U.S. and Europe is heating up after the World Trade Organization (WTO) ruled Tuesday that Airbus hasn’t fixed the harm done to Boeing from the illegal government subsidies used to launch its A380 and A350 jets.

After this final ruling on an appeal of an almost 14-year-long case, the next step could see the U.S. apply economic sanctions to the European Union (EU).

The U.S. Trade Representative (USTR) immediately warned that if the EU fails to quickly address the ruling, it will seek authority to impose billions of dollars in punitive tariffs on European goods.

“President Trump has been clear that we will use every available tool to ensure free and fair trade benefits American workers. This report confirms once and for all that the EU has long ignored WTO rules,” USTR Ambassador Robert Lighthizer said. “Unless the EU finally takes action to stop breaking the rules and harming U.S. interests, the United States will have to move forward with countermeasures on EU products.”

President Donald Trump is already at loggerheads with EU leaders over proposed U.S. tariffs on European steel and aluminum imports.

Though a negotiated settlement over the Airbus subsidies remains possible, there’s also a risk of an open trade war.

Boeing Chairman and Chief Executive Dennis Muilenburg declared victory Tuesday.

“Today’s final ruling sends a clear message: disregard for the rules and illegal subsidies is not tolerated,” Muilenburg said.

A lawyer close to the case on the U.S. side said the ruling “is truly the final decision in the litigation,” and the threat of tariffs could force European governments to rein in their financial support for Airbus.

“The difference now is that there are actual economic consequences,” he said. “That usually focuses the mind.”

The implication is that the U.S. will use the decision and the threat of tariffs in any settlement negotiations.

However, a person close to the case on the European side dismissed the idea that the long-running case is nearly over, predicting the legal maneuvering “will continue for years to come” and in the end bring no significant change.

“This is the latest part of the saga. It’s for sure not the last one,” he said.

A parallel WTO case against Boeing ­— focused on the subsidies it receives from Washington state — is lagging nine months behind the Airbus case.

Airbus Chief Executive Tom Enders in a statement said the ruling “is really only half the story … The other half coming out later this year will rule strongly on Boeing’s subsidies and we’ll see then where the balance lies.”

Enders added that “the current geopolitical climate for trade is worrying, and industry players should not fuel it with unproductive disputes that undermine fair competition worldwide.”

A dollar figure for retaliatory tariffs

One part of Monday’s appellate-panel decision was favorable for Airbus, in that it reversed a 2016 ruling that required the European jetmaker to fix the harm from subsidies for its popular single-aisle A320 jet family and the medium-size widebody A330. The passage of time has made those older subsidies moot, the ruling said.

That left Airbus on the hook only for the loans that launched the A380 superjumbo jet and the newest A350 jet.

The European expert declared that “a very thin victory for Boeing.”

However, the U.S. can now initiate action.

The WTO report specifies that the Airbus subsidies harmed Boeing through lost sales of large widebody jets to Cathay Pacific, Emirates, Singapore Airlines and United, as well as lost market share in the EU, Australia, China, Korea, Singapore and the United Arab Emirates.

The U.S. lawyer said that in prior submissions to the WTO, the U.S. estimated the harm to Boeing from all the Airbus subsidies was “between $7 billion and $10 billion annually.”

It’s unclear what amount of tariffs the U.S. will seek over those two remaining jet programs.

Getting that authorization entails a discussion with the WTO, during which the EU will be allowed to challenge the U.S. proposed damages. At the end of the process, as in the penalty phase of a trial, the WTO will weigh Boeing’s lost sales and lost market share against the EU counterarguments and decide on the monetary amount.

Boeing said Tuesday this process should be fast enough to allow the U.S. to impose tariffs “as early as 2019.”

The European expert suggested it will take much longer — “at least 18 months” — implying the final decision in the case against Boeing would figure in any settlement.

If tariffs are imposed, they are unlikely to be applied to airplanes. The U.S. can choose whatever products it believes will put the biggest economic squeeze on the European countries. That could be agricultural goods, autos or anything else that will hurt jobs in Europe.

Negotiating a way out

Clearly, the months it takes to quantify the allowed U.S. retaliation will also be a period of intense political negotiations between the U.S. and the EU.

“The leverage of retaliation will drive the negotiation,” the U.S. lawyer said.

For its part, the EU side will offer to adjust its financing for airplane development so as to comply with WTO rules.

The Airbus news release Tuesday suggested that bringing the A350 and A380 launch aid loan programs into line with WTO requirements would require only “minor action” and “tweaks” to the terms of the loans.

Airbus General Counsel John Harrison said Tuesday the jetmaker “will do what is necessary to correct any errors,” without being specific.

The U.S. lawyer said the advantage in this negotiation lies heavily with the American side. He said it will fall to the U.S. to accept or reject any EU offer of compensation.

Trade war or settlement?

Two extraneous issues will have an impact on how this Airbus case plays out.

One is the impact of the parallel case against Boeing. The WTO ruled last year that the Washington state business-tax rate reduction — worth about $800 million to Boeing since 2004 through 2016 — is an illegal subsidy and that Boeing has failed to fix it.

A ruling on the U.S. appeal of that ruling is due in about nine months. If it loses, Boeing will be in the same position Airbus is in now.

However the two sides differ wildly in interpreting the scope of the penalty Boeing might face if it does lose.

Boeing argues that the level of subsidy Airbus has received with launch aid loans dwarfs Boeing’s savings from the state tax breaks.

In contrast, Airbus argues that every 787 Dreamliner sale was illegally subsidized and will warrant a penalty. So in a news release Tuesday, Airbus said that any potential U.S. sanctions are “likely to be minor” compared to what could come of the European case against Boeing.

A senior Airbus executive and trade lawyer in January warned that if the U.S. imposes tariffs, the EU “will retaliate with megatons to the U.S.’s kilotons.

Logic might dictate that a final settlement of this aerospace-industry dispute between the U.S. and the EU would have to await resolution of both cases.

But perhaps not, because the second issue is the current political climate under Trump.

He has moved aggressively on trade issues with little regard for rules and precedent, and without recourse to international institutions.

For instance, the administration justified the proposed aluminum and steel tariffs as a matter of national security without any attempt to bring a case to the WTO.

The Commerce Department likewise aggressively pursued Boeing’s case against Canadian jetmaker Bombardier over its CSeries jet, before that case went down in flames earlier this year.

Airbus CEO Enders in January accused Boeing of “ruthlessly surfing on this ‘America-First’ wave.”

Yet the Airbus case long predates Trump and has played out over years strictly according to the slow-moving international rules.

That it’s coming to a head at this moment of a U.S. hard line on global trade policy lends an unpredictable edge to any settlement negotiations and elevates the risk of a trade war.