A dozen years after the U.S. first dragged the European Union to the WTO, the trade body ruled Thursday the EU hasn’t done enough to remedy the harm done by Airbus subsidies. Boeing declared victory while Airbus scoffed.
A World Trade Organization (WTO) compliance panel ruled Thursday that the European Union has fallen dramatically short of remedying the harm to Boeing from illegal subsidies to Airbus.
The decision opens a path for the U.S. to implement trade sanctions against the EU — potentially imposing billions of dollars in tariffs on its goods or services.
In an early-morning news teleconference, the U.S. Trade Representative, Ambassador Michael Froman, called the ruling “a sweeping victory for the United States and its aerospace workers.”
“We will not tolerate our trading partners, even our closest trading partners, ignoring the rules at the expense of American workers,” Froman said.
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Yet Airbus officials and some independent analysts shrugged off the ruling as another empty step in a tortuous proceeding that’s going nowhere — very slowly.
It’s now more than a dozen years since the U.S. first dragged the European Union (EU) before the WTO dispute-settlement panel, and the EU will almost certainly appeal the new ruling.
Scott Hamilton, Bainbridge Island-based aviation expert with Leeham.net, said he would be “shocked if tariffs are imposed on any Airbus or Boeing products and it would be stupid to impose tariffs against unrelated industries.”
Still, Ted Austell, Boeing vice president for trade issues, declared the ruling a comprehensive legal beating for Airbus. He summarized the WTO report as saying “the EU and Airbus did essentially nothing at all to come into compliance” after the trade organization found the European jet maker had received illegal subsidies from France, Germany, the U.K. and Spain.
The subsidies came largely in the form of “launch aid” — upfront loans to fund Airbus’ development of new jet programs.
Boeing says Airbus used about $15 billion in launch aid to develop all its planes up to the A380 superjumbo, plus about $2 billion in other subsidies.
In 2010, the WTO ruled those loans illegal because the European governments gave Airbus the money on highly favorable, noncommercial terms.
In a surprise step, Thursday’s WTO ruling also declared illegal nearly $5 billion in additional government loans that Airbus used to launch its latest jet, the A350, which competes with Boeing’s 787 and 777 airplanes.
Though those loans were granted after the U.S. filed its original case, the WTO decided they should be covered by the same ruling.
“It is apparent that the A350XWB could not have been launched and brought to market in the absence of launch aid,” the WTO report said.
In assessing the competitive harm done, the report said that, as a result of the Airbus launch aid, Boeing lost 50 orders in the 787/777 large-aircraft category, 54 in the 747 very-large jet category and 271 in the 737 narrowbody-jet category.
In a statement, Boeing Chairman and Chief Executive Dennis Muilenburg said the ruling “finally holds the EU and Airbus to account for their flouting of global trade rules.”
In response, Airbus Chief Executive Tom Enders said Muilenburg “should be careful throwing stones at us while he himself sits in a glass house.”
“Boeing might later be hit by a rock when the next WTO ruling comes,” Enders added, referring to the EU’s parallel countersuit against Boeing.
In an email after the U.S. Trade Representative’s news conference, Airbus Senior Vice President Rainer Ohler derided the WTO process as “pathetic,” saying it has so far produced no material result for Boeing.
He said “only tiny tweaks” will be required to make the A350 launch-aid terms compliant with WTO rules.
Ohler praised the European “public-private partnership model,” based on providing reimbursable loans, as “stronger than ever.” In contrast, he was cynical about the U.S. alternative of government funding.
He characterized Boeing as tapping “the U.S. military-industrial complex” for money. Ohler also mocked the Boeing 787 as a “subsidy-liner” and said the U.S. jet maker “has laid the biggest egg in subsidy history” with the $8.7 billion in tax breaks for the 777X from the state of Washington.
Inescapably, though, Thursday’s ruling zeroed in on the Airbus subsidies.
It has been six years since the world trade body ruled that European government subsidies to Airbus were illegal.
A year later, an appeals panel reduced the charges somewhat, but retained major findings against Airbus and required the EU to remedy the harm done to Boeing.
The new report undercut the European claim that only “limited changes” in its practices will suffice to fix its funding model. Only two of 36 actions Airbus took toward meeting its WTO obligations qualified as steps toward compliance, the report said.
Austell, of Boeing, pointed to the Airbus A380 program as a clear example of how launch aid distorts the market.
The A380 program faces potential closure unless the jet maker gets significant new orders in the next couple of years — a situation Boeing also faces with the 747. If the A380 is terminated, Austell said, Airbus’ ability to walk away from its launch-aid loans on that program without fully repaying them is an unacceptable advantage.
“Programs like the A380 need to have a commercial consequence,” he said. “The last thing we want is for Airbus to pirouette away from that loan obligation … and have no economic consequence on the balance sheet.”
Countersuit vs. Boeing
Meanwhile, a countersuit the EU brought against U.S. for subsidies to Boeing is moving in parallel. In that case, the WTO ruled five years ago that a much lower level of Boeing subsidies were also illegal.
Boeing was found guilty of receiving about $2.7 billion in subsidies, including NASA research grants and state subsidies such as the 2003 tax breaks granted by the state of Washington.
However, the EU filed that suit more than a year after the U.S. filed its case against Airbus, and its outcome is still lagging. A ruling on U.S. compliance with the remedies demanded in that ruling is expected by next spring.
Bob Novick, former general counsel to the U.S. Trade Representative during President Clinton’s administration, insisted the two cases are as comparable as an elephant is to a mouse.
Novick, now a managing partner at Wilmer Cutler Pickering Hale & Dorr and outside counsel to Boeing on the WTO dispute, argued that the impact of those subsidies is tiny compared with the impact of the billions Airbus received upfront every time it developed a new plane.
“The nature of launch aid, the effect it has had in allowing Airbus to build all of its airplanes, and the harm the WTO found it caused to Boeing are not matched by anything even alleged by the EU that the U.S. gave to Boeing,” Novick said.
Michael Lutting, Boeing executive vice president and general counsel, said that “whatever happens in the European cases against the United States,” Airbus needs to end its launch-aid programs.
But a European source close to the Airbus case, who asked not to be identified, characterized the whole WTO process as a waste of time and money that will not produce any enforceable outcome.
This person said Boeing has merely succeeded in proving the toothlessness of the WTO to the Chinese, the Russians and other competitors.
He pointed out that Canada recently poured $2 billion directly into Montreal-based Bombardier’s new CSeries jet program, unafraid of any consequences at the WTO.
Richard Aboulafia, aviation analyst with the Teal Group, agreed.
“It’s a nice moral victory. It validates what Boeing has been saying. But how does it produce anything tangible?” he asked. “It won’t change much.”
Leeham.net’s Hamilton was even more cynical. “Only the lawyers get rich,” he said.
An Airbus spokeswoman said any appeal of the ruling will likely center on the narrow issue of whether the interest rates for its government loans correspond to commercial terms.
“We are confident that we will win that point on appeal,” the spokeswoman said. “Whatever Boeing will say, nobody will have to go to the bank. There have never been any repayments and there never will be. It is not in the spirit of WTO.”
Assuming an EU appeal failed and the WTO approved retaliatory tariffs — which could potentially amount to more than $10 billion — the U.S. government could then move to slap tariffs on EU products or services.
Political reality is that a trade war would not begin without serious negotiations between the EU and U.S.
Such negotiations are unlikely until the case against Boeing reaches the same stage as the one against Airbus and all appeals in both are exhausted.