The EU reportedly introduced new issues into the negotiations and appeared to take advantage of a leadership transition on the U.S. side.

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In a fit of diplomatic brinkmanship, talks between the United States and the European Union to resolve the dispute over government subsidies to Airbus and Boeing yesterday broke down acrimoniously.

People close to the U.S. side of the talks said the European Union (EU) had introduced new issues and appeared to want to take advantage of a leadership transition on the American side. Former U.S. Trade Representative Robert Zoellick already has moved to the State Department.

His successor was named Thursday, U.S. Rep. Rob Portman, R-Ohio, but it is subject to Senate confirmation.

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After direct talks yesterday between Zoellick, who is still managing the U.S. side of the talks, and Peter Mandelson, his European counterpart, the United States abruptly announced deadlock.

That brought to a premature halt the 90-day negotiating period announced by the two sides in mid-January. The United States is seeking to end subsidies provided by the EU to Airbus for development of new commercial airliners; the EU contends Boeing receives comparable subsidies from the federal government and Washington state.

With talks broken down, the United States is insisting that the Europeans maintain the temporary freeze on new subsidies agreed to in January. If not, the United States will reinstate its World Trade Organization (WTO) legal suit, inevitably prompting the same action by the EU and an open trade war.

“The U.S. is willing to hold to the standstill terms of the agreement that preclude further subsidies,” said Richard Mills, spokesman for the U.S. trade representative. “But if the EU either breaks or refuses to extend the terms, we will return to litigation.”

Publicly, the U.S. side expressed resolve and the Europeans surprise. Speaking privately, officials on each side decried the gamesmanship of the other.

“The EU dug in with Zoellick leaving,” said a person close to the U.S. side of the talks, “This was done to call their bluff.”

An EU official described the U.S. move as “a completely irrational and incomprehensible response to a difficult but ultimately ordinary negotiation.”

Boeing issued a statement saying that “the apparent breakdown of the negotiations regarding aircraft subsidies is of great concern.”

“The January U.S.-EU agreement to work together to negotiate an end to subsidies was a source of encouragement to Boeing,” the statement said. “We are disappointed to learn that the EU is not willing to end them.”

Prompted by Boeing, the United States last year initiated a political push to stop all future subsidies to Airbus for the launch of new aircraft models.

The immediate threat was the prospect of European governments subsidizing development of a planned Airbus jet, the A350, that will compete directly against Boeing’s new 787.

The European response was to accuse Boeing of taking subsidies in the form of Washington state and federal tax breaks, defense funding and subsidies to suppliers.

After more than six months of trade-war rhetoric and the filing of suit and countersuit before the WTO, in January the two sides agreed to intensive talks aimed at a bilateral agreement that would avoid legal action.

According to a U.S. official close to the talks, yesterday’s breakdown was precipitated by a European request to add to the negotiations two new issues: support from the Japanese government for Boeing’s 787 program through subsidies to Japanese suppliers; and the repeal of U.S. corporate-tax provisions, known as Foreign Sales Corporation and Extraterritorial Income Exclusion, that benefit Boeing.

“Despite our best efforts, it’s clear that the European Union is unwilling to eliminate launch-aid subsidies,” said Mills, of the U.S. Trade Representative’s Office.

“Over the last two months they’ve been backtracking,” he said. “It’s now demonstrated conclusively that they are not prepared to follow through.”

The European side expressed astonishment at the U.S. action.

“Peter Mandelson is completely surprised that such a statement should be given to the press,” said Anthony Gooch, spokesman for the European Commission’s U.S. delegation. “It doesn’t correspond to what he took from the discussion with Bob Zoellick today.

“There are clearly difficult issues at stake but (Mandelson) doesn’t recognize the portrayal of the state of play as offered by the U.S. side,” Gooch said. “If Mr. Zoellick is announcing that the negotiations are at an end, Mr. Mandelson has not been informed of this development.”

Zoellick last month became deputy secretary of state, under Condoleezza Rice. On Thursday President Bush nominated Portman to succeed Zoellick as U.S. trade representative.

An EU official said that Mandelson and Zoellick had a one-hour teleconference yesterday, which Mandelson assessed as “a very thorough discussion” that left open the option of further talks.

That wasn’t how Zoellick saw it. A person close to the U.S. negotiators described the turn of events as high-level gamesmanship with the U.S. determined not to blink.

While the United States is clearly playing hardball, this may not be the end of the negotiations. It is unlikely that the breakdown is irretrievable.

Nevertheless, all brinkmanship can potentially lead over the brink.

The two sides are now staring, unblinking, at a trade war.

Dominic Gates: 206-464-2963 or