The case between the US and EU over the ways these two airlines are funded is the largest case in WTO history. The amount of money that the US is accusing Airbus of receiving is more then 15 billion dollars, making Airbus the dominant airline company world wide. The U.S. filed a complaint at the WTO on Oct. 6, claiming that more than $15 billion in government loans since 1967 to France-based Airbus amounted to illegal subsidies under global trade rules. The EU countered, saying Chicago-based Boeing has benefited from unfair support of as much as $23 billion. The EU alleges Boeing has gotten $23 billion through state-level tax breaks, military research assistance and Japanese aid to suppliers since 1992.
Boeing, which is based out of Chicago, and Airbus which is based out of France are the only two manufacturers of large commercial jetliners. Boeing, which controlled about 73 percent of the market in 1993, has seen its share erode to 48 percent. Airbus sold 305 aircrafts in 2003 compared with Boeing's 281, and the U.S. says government aid to Airbus that was once justified to help an ``infant industry,'' is no longer needed. Airbus overtook Boeing in 2003 to become the leader in the $50 billion-a-year airliner market. Airbus is now working on an A350 jet to undercut Boeing's planned 250-seat 7E7 jetliner that will be introduced in 2008.
The illegal money that each side is accusing the other of benefiting from, is enabling both sides to build bigger and more powerful jetliners in hopes to control the commercial jetliner market. The WTO Agreement on Subsidies and Countervailing Measures disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. Under the agreement, a country can use the WTO’s dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty on subsidized imports that are found to be hurting domestic producers. The world trade organization is not equipped to handle such a large dispute between its leading powers. Most likely the WTO would find both parties guilty of illegal subsidies and would levy sanctions on both. Washington and Brussels would likely ignore the verdict, badly damaging the credibility of the WTO. The last similar dispute to go to the World Trade organization was in the 1990s, when Canada and Brazil traded accusations over subsidies for Bombardier and Embraer , makers of regional jets (seating up to 100 passengers) in the respective countries. The WTO found both parties guilty. Neither country applied sanctions. Subsidies continued to flow.
In 2003, Airbus replaced Boeing for the first time as the market leader in commercial aviation. Since then, U.S. and European Union trade officials begun to dispute over subsidies for the two jet companies.
Kerry accused the Bush administration of not being tough enough Subsidy dispute had been simmering for years, spoiling over at times Stonecipher was pressured into the move by investors earlier in the year The dispute would be the largest yet to go to the WTO
The fallout was presented as the lead story on the front page of the Financial Times and made major headlines in other publications EU says willing to cut launch aid for new Boeing 380 if the US gives cast-iron guarantee that states of Washington and Kansas will stop their subsidies to Boeing
The US is perplexed by Mandelson’s request for clarification
US has expressed a willingness to continue talks as long as the terms of the January agreement are kept The WTO has no police force--Little has changed since the WTO decided against both Brazil and Canada The money Airbus has received is much larger and the nature of the money has more shielded it from market risks ($3.5B vs. $15B)
JADC-consortium of the heavy industry divisions of Mitsubishi, Kawasaki, and Fuji. They are believed to be accepting $1.5B in launch aid. BDC—Boeing Design Center started in Moscow in 1998. There efforts have resulted in the streamlining of many processes.
P pt2.spring 2005.airbus and boeing (pending 2005)
US vs. EU.Airbus – Boeing Subsidies Case. (Pending) Kurt Kasun Tarek Khedr Michelle Lammers Sandrine Mabya 1
US vs. EU: Airbus – Boeing Largest Legal Case in WTO history. US feels money given to Airbus is illegal. EU feels Boeing has benefited from unfair support 2
Commercial Jetliners Chicago Based Boeing France Based Airbus Only two manufacturers of large commercial jetliners. 3
Why Such a Big Deal?? Control of the market Illegal Subsidies WTO is being tested Canada and Brazil 4
The 1992 Agreement Under the 1992 agreement, the US had recognized Airbus, founded in 1970 with support from several European countries On October 6, 2004, the US complained to the WTO that the European governments have broken trade rules with its government loans to Airbus, including $ 3.2 Billions for the super jumbo A 380 5
The U.S. Boeing Case The U.S. claimed in its WTO complain last October that Airbus had received more than $15 Billion in government loans amounted to illegal subsidies under global trade rule. The US and EU decided last December to try for a settlement of the aircraft issue outside the WTO to avoid bruising their 400 Billion-a- year trade relationship. 6
The U.S. Boeing Case As part of the agreement, both US and EU accepted that neither carrier will seek launch aid during three-month negotiations. The launch aid was spelled out in the 1992 agreement. Under the deal, the European governments could finance one-third of the cost of any aircraft Airbus develops However the negotiations will have to settle the tricky question of which of these subsidies will be prohibited, actionable or permitted 7
The U.S. Boeing Case Unfortunately, the US has withdrawn because of the attempt from the EU to broaden the scope of negotiations At stake may well be Boeing $22- Billion-a-year commercial aircraft business, which for the first time in 2003 sold fewer passenger jets than Airbus 8
The U.S. Boeing Case Airbus overtook Boeing in 2003, becoming the first manufacturer in the world’s $ 50 billion airliner market. The U.S. argued that the growth of the Airbus indicates that there is no more need for aid that was justifiably at the startup industry 9
The U.S. Boeing Case Europeans have justified subsidies to Airbus as necessary to an infant industry Boeing has long asserted that Airbus has an unfair advantage because it gets government money and now that it does not need money because it took the lead in the commercial aerospace business in 2003 delivering 305 commercial planes while Boeing delivered 281,whereas Boeing in 1999 had delivered more than 600 planes. 10
The Airbus Side In October 2004, the United States said Airbus received more than $15 billion in government loans since 1967, helping it overtake Boeing as the worlds largest airplane maker by sales. According to U.S. estimates (also hotly disputed), Airbus has used $15 billion in subsidies to build its global aircraft market share from 30 percent to near 60 percent. 11
The Airbus Defense Airbus has been receiving "repayable launch aid" in the form of commercial loans that it pays back to the government as it sells airplanes The Airbus launch aid causes less trade distortion than the Boeing aid, according the industry analysts 12
Airbus Challenges BoeingSubsidies R&D subsidies: $20B From 1992, Boeing has received R&D grants worth more than $20 billion, mostly through NASA and the Pentagon. Tax break subsidies: $3.2B Washington state will give Boeing tax incentives worth $3.2 billion over 20 years. Infrastructure improvement subsidies: $4.2B Washington State has dedicated $4.2 billion in subsidies for physical improvements of Boeing plants and infrastructure. 13
Boeing Subsidies, cont. Foreign Sales Corporation: $200M annually Up to now, Boeing receives about $200 million a year through a federal tax loophole called the Foreign Sales Corporation program, which has been ruled in violation of WTO rules. Japanese Launch Aid: $1.6B Boeing has received Japanese launch aid of $1.6 billion thus far to build the wings for its new 787 Dreamliner. In contrast to the E.U. investment in Airbus, none of these subsidies needs to be repaid 14
Request forConsultations Possibly precipitated by politics of 2004 US presidential election US files first in early October, followed hours later by the European Communities counter filing Both site subsidies inconsistent with obligations under the SCM Agreement and GATT 1994 US principally sites “launch aid” EC sites: State and local subsidies NASA, DOD, and other R&D subsidies FSC/ETI subsidies 15
Détente inJanuary On January 11 both sides agreed to negotiate the phasing out of subsidies over a 90-day period Agree to create “fair market competition” for the development and production on large civilian aircraft made in the US and the EU Efforts motivated in part to sooth relations in preparation for Bush’s European tour 16
Ides of MarchSpell High Drama On March 18 the spurious details of contentions discussions between Zoellick and Mandelson are made public The US went public first The EU wants to conclude the talks quickly so it can start on the A380 to compete against Boeing’s new 787 USTR voices displeasure over EU seeking to broaden the terms of the January agreement EU wants to include Japanese subsidized production of Boeing 787 fuselage EU wants to bring FCS into the deal US also accusing EU of backtracking on commitment to cut subsidies EU wants ‘Cast-Iron’ guarantee 17
Are CoolerHeads Prevailing? March 21, Mandelson: “The ball is in America’s court…I’m looking for clarification of the US position.” “US threats are premature and unnecessary.” Zoellick: “From my last conversation with Mandelson, I do not see the probability of reaching fulfillment in the time we set forth.” The clock is ticking…one week away from the deadline 18
Resolution Scenarios Agree to extend consultations beyond 11 APR deadline WTO oversee further consultations in Geneva Either side could ask for a panel of judges to hear the case Dynamics make an out-of-court settlement unlikely High tech, high-paying jobs at stake for both Boeing in tough shape rocked by scandal and losing market share Airbus has been a tremendous successful industrial policy for the EU Perhaps they could agree to binding arbitration by a third-party (John Major and Frank Carlucci or Cap Weinberger) Odds are WTO would find both guilty and levy sanctions on both Teal Group analyst that the outcome may depend on who is able to show it has been hurt 19
Broader Issues Outsourcing becoming increasingly global Much of the Boeing 787 is being constructed with the JADC Both Airbus and Boeing outsource to Asia and Latin America making the case global and raising the stakes Large portions of engineering for Boeing handled by Russian BDC Concerns that the conflict will infect the rest of the trade agenda, Doha Round If sanctions are levied and ignored, the credibility of the WTO would be damaged $400 Billion trade relationship between the US and EU is at stake 20
Sources “Boeing chief hopeful on U.S., EU subsidy talks,” Thomas Mulier, Bloomberg News, February 18, 2005 “Not an Issue for the WTO” Peter Mandelson, Washington Post, 1 April 2005 “The Big Blowout; Why the Airbus-Boeing case could wreck the WTO, and how to stop it,” Jeffrey E. Garten, Newsweek International, April 4, 2005 “An ill-timed spat,” The Economist, March 26, 2005 “Why the Airbus-Boeing case would wreck the WTO, and how to stop it,” Jeffrey E. Garten, Newsweek, March 27, 2004 “See you in court,” The Economist, March 16, 2005 “Russians rally to Boeing’s cause,” Nick Cook, Financial Times, April 2, 2005 “Boeing-Airbus talks fall apart,” James Wallace, Seattle Post-Intelligencer, October 1, 2004 EU Demands Clarification on Boeing-Airbus,” Constant Brand, AP, March 21, `2005 21
Sources “Boeing vs. Airbus: Time to Escalate,” Stanley Holmes, BusinessWeek Online, March 22, 2005 “US Seeks Return to Boeing-Airbus Talk,” Dow Jones Newswires, March 21, 2005 “Battle over Boeing, Airbus shows thorny relations,” Dow Jones Newswires, March 21, 2005 U.S.,E.U. Take Boeing, Airbus Dispute WTO. The Seattle Post- Intelligencer, October 7,2004 Blustein, Paul. U.S. Files Grievance Over Airbus With WTO:E.U. Responds With Boeing Complaint. October 7, 2004 International Trade; U.S., E.U Complain of Aircraft Subsidies. October 28,2004 http://www.bloomber g.com/apps/news 22
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