By Aimee Turner in London & Graham Warwick in Washington DC
After months of preparation, the World Trade Organisation (WTO) is poised to hear the dispute between Europe and the USA over subsidies for Airbus and Boeing, But, on the eve of Farnborough, there has been a pause. Both sides have their finger on the trigger, while talking up the prospects for a negotiated settlement.
But the hammer could come slamming down if, as looks likely, Airbus unveils its revamped A350 at Farnborough backed by development financing from the governments of France, Germany, Spain and the UK. The USA will almost certainly pull the trigger if there is any talk of launch aid for an “A370”, or additional support to offset the impact of A380 production delays.
The gun was cocked at May’s ILA show in Berlin, where the four “Airbus ministers” agreed in principle to provide launch aid for the A350, which after an almost total redesign is certain to cost significantly more to develop than originally budgeted. “The USA has made it clear for over two years now that launch aid for the A350 is unacceptable. Increasing the amount of launch aid already committed to the A350 only makes the problem worse,” says the office of the US Trade Representative (USTR). “We will litigate our WTO case to completion if necessary.”
Pulling the trigger would set in motion the WTO process for hearing and ruling on the rival cases against subsidies brought by Europe and the USA. All the information assembled by both sides has been entered into the record, and all it will take is for one of the parties to ask the WTO to proceed. On the eve of Farnborough, and despite talk of some small progress in behind-the-scenes negotiations, that step looks almost certain. That could lead to initial submissions in September, decisions by the dispute settlement panels by the middle of next year and, following appeals, final rulings before the end of the year.
Washington stepped on to the path towards litigation in late 2004, when it unilaterally withdrew from the 1992 EU/US bilateral Agreement on Trade in Large Civil Aircraft. This limited government support, direct and indirect, to 33% of the development cost an airliner. While the USA had viewed launch aid, in the form of repayable loans, as a tolerable means of financing Airbus during its early years, by 2004 the European manufacturer was besting Boeing in orders and deliveries and Washington decided it was time to cut off its supply of government support.
After a failed attempt at negotiating a new bilateral agreement to eliminate subsidies, the US Trade Representative took its grievance to the WTO in Geneva. The European Commission retailed with its own accusations of government subsidies for Boeing, and this resulted in formation of the first dispute settlement panel.
There followed what in WTO parlance is called the “Annexe 5” process – equivalent to the discovery phase in a lawsuit. Each side requested information from the other, funnelling their questions through a WTO-appointed facilitator. Crucially for what was to follow, the EC blocked the Annexe 5 process until it had negotiated conditions.
Under Annexe 5, either party can refuse to provide requested information, although this could later predjudice their case when it is heard by the disputes panel. Accusing Washington of obstructiing efforts to gather information to support its case, Brussels in January filed a new complaint and requested the formation of a second panel.
Second complaint
The EC, in its second complaint, wanted more information on US defence contracts and NASA research and development funding for Boeing. The USA, in response, filed a second complaint against alleged subsidies that had materialised since its first complaint, notably a training grant to Airbus UK from the Welsh Assembly.
Brussels then requested an Annexe 5 process for its second complaint, but the US side – using the EC’s tactic during the first information-gathering phase as justification – refused to participate. This brought the dispute to its current precipice. With the three-person panel of trade experts already in place to hear the first dispute, all the WTO is waiting for is one of the parties to request the naming of the second panel.
The US side believes the WTO will name the same three people to the second panel, allowing the cases to be handled in parallel. So everything is primed and ready to go. “We are on the precipice of appointing a second panel, which we think will be the same group,” says a US source. “All time limits have expired procedurally. Either side could now ask for the panel to be composed, and the panel would then be free to set its schedule. We see the panels being composed before or around Farnborough.”
Meanwhile, talks have been taking place between the two sides. “The USA and EU have been having technical discussions,” says another US source. These discussions have been at staff levels, but the principals at the EC and USTR have also been involved. US trade representative Susan Schwab has already made three trips to Brussels since being sworn in early this year, Boeing points out.
Exit ramp
“Negotiations can take place at any time. There is always an exit ramp on the highway of litigation,” says the second US source, adding: “The last set of discussions, earlier this year, were more productive than at any previous time.” But both US sources say any progress towards a negotiated settlement is slow and stress the recent talks were only “marginally” more productive.
While the parallel paths of litigation and negotiation have moved at their own pace, the commercial aircraft business environment has changed dramatically since the USA launched its attack on state aid. Boeing has bounced back strongly, buoyed by record orders for its new 787 widebody. While Airbus orders and deliveries have held up, it has been forced to completely redesign its competitor to the 787, and 80% owner EADS has been plunged into financial and management crisis by the newly revealed delays to A380 production.
While Airbus, EADS and their shareholders wrestle with the prospect of higher than expected expenditure on an A370 overlapping with lower than forecast income from the A380, Washington is on guard for any signs of government support, whether in the form of launch aid or a bail-out. In particular, the US side is wary of any move by Brussels to promote negotiation and delay litigation while continuing to commit government funds to Airbus.
Brussels, for its part, continues to argue that member states are actually net beneficiaries of the European system of financing research and development with low-interest loans repayable through royalties on sales. Since the LCA agreement took effect in 1992, says the EC citing publicly available documents, Airbus has borrowed less than €4 billion ($5 billion) and repaid more than €5 billion – and it continues to repay loans at annual rate of €300-400 million.
The US side, predictably, urges caution in interpreting the EC’s figures, arguing that, since Airbus has been the recipient of government support from its formation in 1970, any monies repaid after 1992 have to include royalties on loans provided before the LCA agreement took effect.
While Washington has challenged several infrastructure projects undertaken by European governments specifically for Airbus, direct support in the form of launch aid remains the disputed subsidy to which the US side is implacably opposed. The EC, for its part, has targeted indirect support for Boeing in the form of NASA and Pentagon contracts, as well as state tax breaks and other incentives.
Negotiated solution
On the eve of Farnborough, Brussels is striking a conciliatory tone. “We have always said we are committed to a negotiated solution. Smaller aircraft disputes have led to nowhere, and that precedent has influenced the idea that a negotiated solution is the best way forward. The question is, do you want to determine the rules yourself or do you want a WTO panel to do it for you,” says a senior EC source.
“A negotiated solution would creatively address the aircraft industry as it will develop in the next 25-30 years with the emergence of China and Russia as manufacturing powers,” the sources says. Welcome words, perhaps, but Washington views the EC’s concept of a subsidies agreement including China, Russia, Japan and others as simply a tactic to delay outlawing launch aid by setting the bar for a negotiated settlement impossibly high. “It’s like your daughter saying I won’t learn to drive until you buy me a Porsche,” says a US source. “We need an agreement on launch aid now.” ■
Source: Flight International
