The World Trade Organization (WTO) reiterated Friday that Washington state’s business tax reduction, worth $800 million to Boeing through 2016, is an illegal subsidy. The U.S. will appeal, a process that will take about a year.
The World Trade Organization (WTO) on Friday ruled that the U.S. has suitably addressed all but one piece of the European Union’s case alleging that Boeing receives illegal subsidies.
As the years-long legal process enters its final chapters, the lingering trouble lies in the biggest slice of Washington state’s aerospace tax incentives.
A WTO panel adjudicating U.S. compliance with previous rulings found that, while all other Boeing subsidies have been remedied, the state’s aerospace business tax rate reduction — worth about $800 million to Boeing since 2004 through last year — remains illegal and must still be fixed.
The ruling by the compliance panel is another legal step in an international trade dispute that has played out slowly over more than a decade: The U.S. sued the European Union in 2004 over Airbus subsidies and the EU filed a countersuit in 2006 over subsidies to Boeing.
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The U.S. will appeal Friday’s ruling and the appeal won’t be decided for about another year. Only then might Boeing have to consider what it can do to bring the Washington state tax subsidies into WTO compliance.
U.S. government and Boeing officials spun the outcome as a victory because the other 28 state and federal funding programs challenged as subsidies in the dispute, amounting to an alleged $10.4 billion in subsidies to Boeing, have been addressed and are now resolved.
“The panel found that 28 of the 29 programs were consistent with WTO rules,” the U.S. Trade Representative said in a statement.
Boeing General Counsel Michael Luttig in a statement said that “today, the EU and Airbus suffered yet another resounding defeat.”
Airbus officials had an opposite interpretation, with chief executive Tom Enders calling the ruling “a great victory.”
State tax reduction problematic
Ted Austell, Boeing vice president for trade issues, said the lone issue now outstanding in the WTO case against the company — the Washington state aerospace Business & Occupation (B&O) tax rate reduction — represents “only the smallest sliver” of the original claims.
Boeing estimates this tax incentive has been worth about $700 million between 2004 and 2015. Data released this month by Washington state show Boeing saved another $101 million from that tax reduction in 2016.
This tax rate reduction is only part of the state incentives that benefit Boeing.
Last year, Boeing saved a total of $242 million from the total package of state tax incentives, including B&O tax credits for property leases and investments in pre-production equipment and a sales and use tax exemption.
However, these other tax incentives are no longer an active part of the WTO dispute panel’s remit. It’s only the $800 million Boeing has saved from the B&O rate reduction that is still in dispute.
This compares with $22 billion in Airbus launch aid — government loans used to fund development of new airplanes — that remain in dispute following the corresponding ruling last September in the parallel WTO suit against the EU.
That case, filed more than a year before the case against Boeing, is closer to an endpoint.
Bob Novick, former general counsel to the U.S. Trade Representative and now outside counsel to Boeing, said the appeal in that case against the EU should be decided this year, after which the U.S. government can begin the process of taking retaliatory trade measures.
“The U.S. is headed for the right to retaliate,” said Novick. “It’s coming very soon.”
If the Washington state B&O tax reduction is found to be out of compliance after the appeal, “We’ll take a hard look and see what we need to do,” Boeing Vice President John Demers said in an interview.
Whatever the outcome, Washington state would not be off the hook for the money it forgives Boeing in tax incentives. The original 2003 agreement between Boeing and the state mandates that if the tax breaks have to be withdrawn for any reason, the state must replace them with an economically comparable arrangement acceptable to Boeing.
Airbus claims victory
Airbus spun the new ruling against its U.S. rival as much wider than Boeing claimed. The European jetmaker said incentives from the state of South Carolina for the production of the 787, FAA research funding and additional NASA and Defense Department research money were all ruled to be subsidies.
In response, Boeing Vice President Austell dismissed the Airbus position as a deceptive legalism.
He said the panel ruled these other subsidies had not caused adverse effects on Airbus — and so they are not illegal under WTO rules.
Austell said the sole subsidy ruled to have had adverse effects and not already remedied by the U.S. was the Washington state B&O tax reduction.
Friday’s WTO ruling says that Washington tax reduction specifically caused “lost sales of the A320neo and A320ceo in the Fly Dubai, Air Canada, and Icelandair sales campaigns” between 2013 and 2015.
Airbus said that meant it lost “at least $16 billion worth of sales to Boeing.”
It also said that since Boeing first claimed in 2012 to have come into compliance with the original ruling, Boeing has continued to receive subsidies “resulting in an additional loss of sales of at least 300 aircraft, with an estimated value of $15-20 billion.”
The EU also filed a another WTO case in 2015, challenging the additional $8.7 billion in tax incentives granted in 2013 by the state of Washington to ensure Boeing built the forthcoming 777X jet in Everett.
With the original 787 tax reductions now confirmed as illegal and needing to be addressed, presumably that second EU case over the 777X tax breaks will have a similar outcome.
Boeing’s stance is that it wants to force an end to Airbus launch aid loans, and will push its case to the bitter end in order to do so.
In contrast, Airbus clearly just wants the WTO dispute to go away.
Fabrice Bregier, chief operating officer of Airbus, denounced the whole process as a “seemingly never-ending dispute.”
“Airbus looks forward to the day that this ridiculous dispute can be put to bed,” Bregier said.
The dueling WTO cases over subsidies to Airbus and Boeing are likely to reach some kind of conclusion during the presidency of Donald Trump, which lends a new element of uncertainty as to the outcome.
On the one hand, if the WTO hands the U.S. a ruling that authorizes trade sanctions against Europe, Trump might be expected to wield that club aggressively given his recent vehement criticism of the trade relationship with the EU.
On the other hand, it would be ironic if Trump were to use the WTO as his vehicle for righting trade wrongs, given his isolationist stance and discarding of international agreements.