1. Speech of Professor Philip Lawrence
State Legislatures Leaders Forum, Swedish Parliament, Stockholm
27/08/05
Good Morning Madam Deputy Speaker, Your Excellency and Ladies and Gentlemen
What a pleasure it is to be here at this excellent conference in the beautiful city of
Stockholm.
My aim today is to shed some light on the Airbus/Boeing WTO dispute and to try to capture
what the dispute is really about. I should say straight away that I believe the real reason for
the dispute to be fundamentally different from the reasons usually stated in the public
domain.
To speak even-handedly and objectively about this dispute is challenging, as it represents a
vexed and highly sensitive issue between the US and EU. The Airbus/Boeing dispute
encapsulates much that is central to the values and political ideology of both political
systems. Also, added spice exists because Airbus is very much at the heart of so called “old
Europe”. Since the Iraq war relations between the US and France and Germany have not
been good. Indeed, reading comments in the US media about France over the last two years
one has been hard pressed to realise that the US and France are allies.
In many ways the subsidy argument represents an Anglo-Saxon versus a Continental view of
business practice, different values are clearly evident in the contrasting approach to the role
of government in the economy. Although, in the US case the theory of laissez faire is often
not evident in American business practice, especially in any sector to do with defense.
On top of this political fracture there is also the fact that the aircraft industry of both the EU
and the US is of great strategic importance; 100s of 1000s of skilled jobs, high technology
and billions of dollars of exports are at stake, not to mention national security and
international prestige. The sector is hugely important in commercial terms, with business
worth 2 trillion US$ available in the next 18 years or so. So obviously this is a pivotal issue
for both sides.
History
Airbus is 35 years old. When the business began no one outside of Toulouse gave it much
credence. In the US Boeing ignored it, while MDC simply saw the opportunity to sell some
components for use on the A300. However, Airbus’s first aircraft (the A300) was a rather
brilliant concept. Particularly in the post-1973 oil crisis environment a wide-body twin-
engine aircraft made eminent economic sense because of its lower fuel consumption. Market
conditions were difficult, but soon the A300 was outselling both the DC-10 and the
Lockheed Tri-Star. This prompted the first round of legal agreements on aircraft subsidies as
the US objected to the financing on a deal Airbus did with Eastern Airlines. The result was
the 1979 GATT Agreement on Trade in Civil Aircraft (TCA).
In 1981 Lockheed exited the civil business and in the 1980s MDC began to struggle. After
the A300 Airbus added the A310 at the end of the decade and then in the late 1980s the

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A320. US alarm bells were ringing as Airbus market share moved up to around 30%. And
intensive US diplomatic efforts were made to block the launch of the A320 and the
A330/340. US policy now became clear. First, intensified use of the GATT subsidy rules on
a multilateral front, secondly, bilateral negotiations with individual Airbus governments and
third parties. Potential Canadian partners on the A320 were also warned off with an offer
they couldn’t refuse from the US Government.
The US Acts against Airbus
By the late 1980s Airbus was a significant political issue in the US. A critique of Airbus’s
shortcomings began to crystallise in both the DoC and the industrial companies. Airbus’s
success was viewed almost solely as the result of unfair subsidies, allowing the manufacture
of aircraft that had little or no market. A Boeing executive, Thomas Backer, advised that
Europe should stick to making trains!! The US began to look for legal controls on Airbus
funding.
In 1988 the German government approved a FOREX scheme to protect Deutsch Airbus from
fluctuations in the value of the dollar. The scheme appeared to violate the explicit GATT
prohibition on export subsidies. The US won a case before the GATT Subsidies Dispute
Panel in January 1992. Then in 1992 the EU and the US began to negotiate a deal on civil
aircraft funding.
The EU and the U.S. signed the EU/U.S. Bilateral Agreement on Trade in Large Civil
Aircraft in July 1992. On the European side, concessions ultimately reduced the permitted
level of direct governmental support on aircraft programs down to 33 percent of program
costs, subject to full repayment on a royalty basis over a term no longer than 17 years.
Funding for Airbus aircraft development was also to be subjected to a “critical project
appraisal”, to evaluate whether the program had a viable commercial basis. On the US side,
it was conceded that indirect supports were significant in assisting the aerospace industry
and, in similar fashion to direct subsidies, ought to be the subject of regulation. This indirect
support consists of NASA and DoD R&D funding. Although in addition Boeing has
benefited from other types of cash payments and a variety of tax breaks, one of which has
already been ruled illegal by the WTO.
The “1992” held sway for 12 years and permitted EU governments to provide repayable
grants for the A340-500/600 and the A380 programs. Throughout the tenure of the
agreement the US grumbled and groaned as Airbus market share inexorably increased. Yet
the government support provided in Europe was clearly in line with the terms of the 1992
agreement. A380 caused particular chagrin in the US, where a strongly held view took hold
that there was no market for such a large aircraft. Meanwhile in the early 21st
century
Airbus’s market share first equalled and then surpassed that of Boeing, reaching 53% in
2004. This was a bad time for Boeing, which from 1997 to 2003 lurched from crisis to crisis.
This culminated in 2003 with the arrest of the company’s Finance Officer and a senior
USAF procurement official, Darleen Dryun. Subsequently the CEO, Phil Condit had to
resign. Condit paid the price not just for scandals, but also for failed product and political
strategy. During his tenure Boeing prepared a WTO case, but Condit was unable to decide
whether to proceed.

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The WTO
The Airbus/Boeing case, which is now opening in Geneva, is being heard against a legal
framework created at the end of 1994 when the WTO was created. The ASCM rules go back
to the GATT era and are designed to protect members against export subsidies or other
subsidies, which cause a competitor serious prejudice or injury. As neither side is claiming
that the other has an export subsidy the case will turn very much on whether the respective
funding systems can be shown to cause serious harm to the competition. But the point is that
this avenue has been available to the US side since 1994 and could have been used to try to
block the launch of two major programs. The US was entitled to give 12 months notice to
abrogate the 1992 Agreement and then could have proceeded with a WTO case. By simply
moving unilaterally to a WTO case while the 1992 still prevailed, the Bush administration
took a much more aggressive course than was strictly necessary. I say the Bush
administration, but we should be clear that this case is almost certainly 100% the work of
Boeing who is the architect of the legal move. So why move now when such a move in the
1990s would have been much more damaging to Airbus? Indeed, it now seems that if we
look at the new A350 Airbus is much less in need of government support than previously.
The Cause of the Dispute
The key to this case is the US defense market. After the Boeing scandals of 2003, which saw
the company locked out of the space launch market, many commentators argued that the
US’s highly concentrated defence market had to be opened up to competition. In 2003
Boeing had agreed a huge contract with the DoD for the lease of 100 767 tankers. The deal
was worth US$27bn, more than Boeing’s total civil aircraft turnover. Moreover it saved the
ageing 767 from extinction. But the deal was blocked in light of the scandals mentioned
above and the muck raking campaign of Senator John McCain. In the meantime EADS, the
Airbus parent, had also bid to supply USAF with tankers. However, to be blunt the EADS
bid was treated with contempt by officials who were clearly to close to Boeing to be truly
objective. But after the scandal it was imperative for the DoD that a proper process be
followed to evaluate the competition.
In the Fall of 2004 Boeing moved its case at the WTO. The case and its surrounding
publicity has been an effective tool for blackening the name of Airbus and EADS in
Washington D.C. Formal legislation has even been moved to outlaw defense procurement
from countries that the US is challenging at the WTO. In other words the WTO move has
been a brilliant strategy to bury the bad news about Boeing and to galvanise anti-
EADS/Airbus feeling in Washington. A second benefit has been to sow confusion in the EU
about the question of public funding for the new A350. This is the key reason for the WTO
case.
Solution
Many of you may be sceptical about my analysis. But consider this: EADS and the EU have
signalled their willingness to negotiate a deal. The whole launch aid package is on the table
to be negotiated away. Yet the US is persisting with the case. What Boeing cannot accept is
a solution that would make many in Washington D.C. see that EADS and Airbus are taking
an utterly reasonable and helpful approach. The US administration needs to realise that
Boeing’s agenda at the WTO is harmful to trans-Atlantic relations, which the EU is very
committed to improving. The Western alliance is too important to be blown off course by a

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possible trade war caused by the special pleading of one industrial company. Especially one
that is now exporting US technology and jobs to a competitor state in Asia.
Thank you for your attention
Q and A