WTO Airbus ruling, and issues of multilateralism, fair trade, and subsidies and countervailing measures

by M. Ulric Killion

An Airbus A380 from Singapore Airlines; Photo/Mike Clarke/Agence France-Presse — Getty Images.

On Friday, Aug. 4, 2009, in reference to ongoing dispute between the United States and the European Union (EU), the World Trade Organization (WTO) rendered a decision, or more accurately, a preliminary report setting limits on government support for civil aircraft makers. The dispute, more particularly, addresses the dispute between Boeing (in the United States) and Airbus (in the European Union).

However, there are economists and industry analysts that now perceive the earlier relevancy of this dispute as having waned over the past years. According to Nicola Clark (New York Times, Five-Year Dispute on Aircraft Claims Loses Its Urgency, Sept. 3, 2009),

But it is coming, economists and industry analysts say, too late to make much difference. . . While the findings may be a watershed in a case that, by many measures, is the largest and most expensive to be heard by the global trade body, analysts say the dispute’s relevance has faded as new airplanes are increasingly being designed and built in several countries.

And even if the W.T.O. forcefully declares Europe’s support for Airbus illegal, the process of resolving both claims would take many more years before any actions could be taken.

Some analysts also say it would be hypocritical to provoke a trade war over subsidies for airplanes after hundreds of billions of taxpayer dollars and euros were given to failing banks and automakers on both sides of the Atlantic in the last year.

With Airbus and Boeing globalizing production even more — and other countries like China and Japan expanding their domestic industries — several analysts say the Americans and Europeans would be better off seeking a negotiated settlement.

‘Lots of governments are interested in having a piece of the civil aircraft construction business, so much of the aircraft produced today is not manufactured in the country with the nameplate,’ said Gary Clyde Hufbauer, a trade specialist at the Peterson Institute for International Economics. ‘This introduces a whole new level of complexity’ (Clark, 2009).

Moreover, Clark (New York Times, 2009) also observed that companies such as Boeing and Airbus by virtue of increasing industry competition now routinely outsource a larger share of their manufacturing to international partners, while also increasingly relying on suppliers from other countries.

On Sept. 5, 2009, the WTO did issue its ruling that the EU provided illegal subsidies to Airbus for its aircraft. From the perspective of the United States and Boeing, and according to House Democrat (Representative/State of Washington) Norm Dicks, the ruling confirms the 2004 U.S. complaint that “all Airbus aircraft have received illegal subsidies and that these have caused material harm to Boeing.”

As Agencies (WTO rules for US in case over Airbus subsidies, Sept. 5, 2009) reported, “The WTO handed its interim ruling to the US and European Union, but didn't reveal the results partly because of the sensitive company information contained in it. Both Washington and Brussels confirmed they received the ruling.” Moreover, given that the WTO ruling is an interim decision, the EU can appeal the ruling. An appeal by the EU means that Boeing and Airbus will have to wait until next year for a decision, which prompts many analysts to suggest that the ongoing disputes will more likely eventually resolved by direct negotiations between the two companies, rather than a final decision by the WTO.

In the interim, following the issuance of the WTO ruling or preliminary report finding “that Airbus received illegal subsidies for the $13 billion A380 superjumbo jet and several other airplanes, hurting Boeing in the battle for sales,” both Boeing and Airbus, actually, declared a victory. As earlier stated, for U.S. Representative Dicks, it is a “broad ruling in Boeing’s favor.”

Nicola Clark and Christopher Drew (W.T.O. Says Aid to Airbus for A380 Was Illegal New York Times, Sept. 4, 2009) reported, “[Norm Dicks] said that the W.T.O. found that a substantial amount of the low-cost loan money, known as launch aid, that European governments provided to develop the A380 jet was illegal and should be repaid by Airbus. Mr. Dicks said a panel of experts from the trade organization found that other series of Airbus planes — the A300, A310, A320, A330 and A340 — also benefited from similar improper subsidies.”

Then there is the EU’s perspective of a victory; as “The Europeans stressed, however, that the W.T.O. had rejected many of the specific arguments that were in the complaint” (Clark and Drew, 2009). Consequently, the WTO’s preliminary ruling is more or less a victory for Chicago-based Boeing. This is because the Airbus company (whose parent company European Aeronautic Defense and Space Company N.V. is partnered with Northrop Grumman Corp.), which also perceives the preliminary ruling as a victory, can appeal the ruling, and will probably do so. A consideration for both companies is an appeal process that will extend the finality of this dispute for yet another year. In this respect, economists and industry analysts may rightly perceive this dispute as eventually subject to finalization only by direct negotiation between the two companies.

The history of the dispute between Boeing and Airbus dates back to 2004. The issue of government support for civil aircraft makers, such as Boeing and Airbus, still enjoys modern relevance. This is because the issue uniquely focuses on the discussion of unilateralist trade policies by developed countries and economies. In 2004, the WTO trade regime witnesses an increase in protectionist trade activity by both developed and developing countries and economies. For instance, during this earlier period, developing countries such as China, South Korea, Brazil, Mexico and others were increasingly employing unilateralist approaches to trade. In addition, during the same period, there were developed countries such as Australia, Canada, the EU, and even the United States also employing protectionist trade policy (internal citations omitted) (Ulric Killion, Modern Chinese Journey to the West, Chapter 9, (2006)).

In particular, in terms of the United States, Section 301 of the Trade Act of 1974 has always presented a major problem in fostering multilateralism. This is mostly due to the mandatory retaliation action provision of the Trade Act that, actually, lends to, if not promotes, unilateralism in trade. There is also the then and continuing relevancy of governments subsiding aircraft producers such as Boeing and Airbus. This is because the case of the EU subsidizing the manufacture of Airbus aircraft would present the largest subsidy case in WTO history. The United States earlier argues that EU members have subsidized Airbus through financing at sub-market rates, assumption/forgiveness of debts, equity infusion, and/or other grants. All of which, from the perspective of the United States, violated the WTO Agreement on Subsidies and Countervailing Measures (SCM). As a result, as early as 2005, the United States’ request for a WTO panel was partly triggered by the EU’s commitment of $1.7 billon in launch aid for Airbus (Killion, 2006).

In the end, the dispute between Boeing and Airbus also appears hardly likely to resolve the greater issues of multilateralism versus unilateralism in trade, free and fair trade versus protectionism, and the issues of government subsides in trade and violations of the WTO Agreement on Subsidies and Countervailing Measures (SCM). This is a long contested trade dispute that problematically now presents both opponents, or the two companies, as perceiving a reading of the preliminary ruling as a victory. As such, the WTO’s ruling is far from resolving the greater issues surrounding the origins of this 2004 dispute.

Copyright © Protected - All Rights Reserved M. Ulric Killion, 2009.