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2 Comments

  1. FlannelDoormat March 31, 2008 @ 9:38 am

    This article is very dry. I find your editorials to be much more interesting.

  2. OceansOfThought March 31, 2008 @ 5:34 pm

    we represent a diverse crowd. Sometimes it shall be dry, often where a stand is neccessary without quibble. The conclusion states it all. Proof of Harm is neccessary and with all the various back and forth, proof of harm is missing.

On Boeing vs AirBus

Executive Papers Comments (2)

Executive Summary

After years of waggling, Airbus and Boeing have finally gotten their respective governments to take their case to the WTO. A full trade war is about to erupt, one that threatens to undermine the WTO itself; if either the US or the EU does not comply with a ruling. While the issues are complex and a true outcome would have far reaching implications for all parties involved, this paper will attempt to fall on one side of the issue:

It is our contention that Boeing should win the dispute with Airbus at the WTO. This summary will attempt to show that Airbus deals in duplicity, strong-arming tactics that are above the conventional leverage and its supporting governments even admit to their own subsidies. Within the narrow confines of this framework, we shall only examine whether Boeing or Airbus should win, and not whether Boeing or Airbus is correct about what the other is doing.

Origins of the Dispute

The origin of the dispute links back to the 1980’s when Airbus received a majority of it’s funding from the European governments and Boeing received tax breaks, incentive R&D programs, and direct military contracts. In 1992, the US and EU made an agreement to not fund Launch Aid, by placing limits on support by governments on large civil aircraft [1]

  • Limits would apply to 33% of the cost of developing new aircraft.
  • Limited/Eliminated civilian application of military financed programs, or entities.
  • Loans would be paid back in 17 years and repaired at no less than government cost of borrowing.
  • 4% support cap of firm’s total revenue of large commercial jet sales.

The matter reached a high point as there were shifts in the dominance of Boeing. Boeing had been losing market share for decades to Airbus, but in 2003, Airbus finally sold more planes than Boeing by recovering faster than Boeing after Sept 11[2]. Boeing contends that it is the launch aid that Airbus is receiving that is enabling it to gain market share.

The Law/ Treaties on hand

SCM – PART 1 – Article 1&2 : Definition of a Subsidy 1.1For the purpose of this Agreement, a subsidy shall be deemed to exist if:(a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as “government”), i.e. where:(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);(ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits) ;

(iii) a government provides goods or services other than general infrastructure, or purchases goods;

(iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments

2.1 Specificity

In order to determine whether a subsidy, as defined in paragraph 1 of Article 1, is specific to an enterprise or industry or group of enterprises or industries (referred to in this Agreement as “certain

enterprises”) within the jurisdiction of the granting authority, the following principles shall apply:

(a) Where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific.

———————————————————

The US contends that the EU is violating several tenants of the WTO agreement (See Tenants.), by giving Airbus launch aid. The EU contends that the launch aid was necessary to aid a struggling industry which is prime component of the EU infrastructure.

US WTO articles violated by EU

  • § US claims EU violates:
  • § Article 3 – (which subsidies are prohibited and Effects of subsidies)
  • § Article 5 – (No member should cause adverse effects to another through subsidies)
  • § Article 6 – (Serious prejudice – exists if total ad valorem of subsidy exceeds 5% and if subsidies cover operating loss).

To fully understand why this is important is to understand what is a subsidy. The SCM – Part 1, Article 1 gives the definition of a subsidy.(SCM-PART 1) So in truth, Airbus has to be found guilty of violating Article 3, before any other ruling can take effect. Because the contracts are so large, and there is billions of dollars at stake, the violations of Article 5 and Article 6 would be automatic.

EU Violation Specifics

Launch aid. (see Chicago Tribune report page)

Airbus launch aid is in violation of each section of the SCM agreement. It involves

1) Direct transfer of funds by Loans,

2) Airbus is not required to repay the EU if it does not sell the A380 at a profit[3].

3) Launch Aid is direct aid because it’s not infrastructure.

4) The EU directly funds Airbus launch aid thru collection from several governments who would normally compete, to the tune of 4 billion dollars.[4]

Conclusion: Launch aid meets the four criteria to be a non approved subsidy and therefore brings the EU into violation of the Article 3 of the agreement.

1992 Agreement Violation

In May 2005, there were talks to resolve the dispute. The talks eventually broke down, but one of the points of break down was over the fact that the EU would reduce its subsidy of the A350 to 30% or less. (Economic Brief 2005). This implies it was above 30%, which is in violation of the 1992 agreement.

Matters of Consideration

While the WTO is not an official court of law, one can file matters for its consideration. One such matter is the EU leveraging Turkey’s entrance into the EU by suggesting if it does not chose the A380 over Boeing, there could be ramifications with its petition for entrance into the EU. This could constitute a non-tariff trade barrier

Other Matters of Consideration [5]

This is a listing of the evidence found, in writing, of what the EU had either been doing, or admitted to doing for AirBus.

  • Transcript of a debate in Britain’s House of Lords showed that Airbus received $797 million in loans on the A330 airplane through 1997 but had made no repayments in the decade since the first loan.
  • The European Commission posted a note on the WTO’s Web site stating that aid provided by Spain for the Airbus A330 and A340 airplanes qualified as subsidies.
  • Marshall Plan – 60 years after the Marshall Plan, Germany has loaned the money… several times to benefit Airbus.

Disproving the EU claims.

The Airbus Argument is more nuanced, however, its nuisance that makes it easier to disprove. There are some that believe that because the US filed the dispute, it had the weaker side to negotitiate. [6]

  • § EU claims US violates:
  • § Article 3 (which subsidies are prohibited and Effects of subsidies)
  • § Article 5 (a) and (c)
  • § (5 a – subsidy causes adverse injury to domestic industry of another member. 5 c- subsidy causes serious prejudice to interests of other member
  • § Article 6.3 (a) (b) and (c) serious prejudice and subsides to cover firms/industry operating loses.

The EU Dispute with Boeing has three main arguments.

  1. Boeing has significant tax breaks, especially from Washington state.
  2. R& D incentives from the government
  3. Military Contracts.

Washington State Tax Breaks 2003

EU claims that the Washington State Tax breaks are a subsidiary. I submit that under Article 2, it is a specific subsidy because it targets the Aerospace industry specifically, which is a violation of Article 2. However; Airbus has no case. Under the WTO, A party must prove to be harmed by the subsidy. Since Airbus is claiming harm, which cannot even happen yet, its Article 3 Claim fails.

Boeing does not get “the first dollar of benefit” from the state incentives until 2008, Stonecipher noted. If Airbus and the European Union had waited until 2028, he added, they might have a case.[7]

The facts of the law are not in dispute; the law takes effect in 2008, and was signed in 2003. The WTO can’t rule on something that hasn’t happened yet.

Other states

  • As a further counter point to Airbus argument, Airbus benefits from similar (and currently in effect) tax incentive programs in the states of FL, MS and LA; it strangely doesn’t consider these programs subsidies.

Boeing Defense Contracts & RD

Defense Contracts

Boeing’s defense revenues (2003) = $23.7 billion, Airbus’ revenues were $23.8 billion. [8]

Unlike Airbus, Boeing has to actually sell its planes before it gains revenue or its costs are lowered. This is the very definition of a Sale, not a Grant which is what Airbus received to develop aircraft first. Boeing receives no such grants to specifically develop its airplanes. Also, Boeing and Airbus compete equally with the US defense Market, unlike many European markets which are closed to Boeing.

R&D

Furthermore, in order to gain approval from the EU for its merger with McDonnell-Douglas Boeing has agreed to license all US Government funded patents which could be used in commercial aircraft — thereby allowing any competitor to use those patented products. And in fact, some products that have resulted from US funded R&D work have ended up on Airbus planes before they got onto Boeing planes.[9]

In another sign of the EU actually giving Airbus another leg up in the market place, The EU would not approve the McDonnell-Douglas/Boeing merger (1997) unless Boeing granted Airbus full access to its government funded programs and patents.

The Proof of Harm

One of the guiding principles for disputes at the WTO is proof of harm. Airbus has increased its market share from 20% to 50% since 1992, and is currently beating Boeing in sales and planes delivered.

Added to this fact, since the merger of McDonnell-Douglas, Airbus has been benefiting from Boeing’s research as much if not more than Boeing. It would be hard for Airbus to prove that Airbus has been harmed by any supposed subsidy.

Conclusion

It is clear that Boeing should be the winner of the WTO agreement. Airbus’s counter claims are without merit, proving instead that they benefit from some of the same things that they accuse Boeing off, and in retrospect, have no standing, because they cannot prove harm.

In contrast, Boeing can prove harm because of Launch aid, and European trade practices. thru EU merger rules, Boeing’s loss of market share and other practices including non-traffic barriers to trade.

____________________________________________________

Additional References

In some cases, sources are multiple and not directly footnoted.

Ex. Airbus has sold more planes than Boeing is a statistical fact that can be found anywhere.


[1] Launch aid – – Financing with no or low interest and repayment is tied to, and entirely dependent on, sales of the financed aircraft. (The unfriendly skies, Boeing vs Airbus)[2] The unfriendly skies, (Boeing vs Airbus)http://www.internationaltraderelations.com/Team.Spring%202006.Monday.Airbus%20(Team%202)..ppt

[3] Economic Brief: Airbus vs Boeing http://www.pinr.com/report.php?ac=view_report&report_id=310&language_id=1

[4] Boeing: Tax breaks no bargaining chip http://seattlepi.nwsource.com/business/197093_subsidy28.html

[5] Chicago Tribune Special Report

[6] Economic Brief: Airbus vs Boeing http://www.pinr.com/report.php?ac=view_report&report_id=310&language_id=1

[7] Boeing: Tax breaks no bargaining chip http://seattlepi.nwsource.com/business/197093_subsidy28.html

[8] Department of Commerce

[9] U.S. Representative to EU Morningstar on U.S.-EU Relations http://useu.usmission.gov/Article.asp?ID=707BBDED-7486-474D-9832-5FADB350DE60

OceansOfThought @ March 31, 2008

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