Dispute Over Aircraft Subsidies Back on WTO Docket
Dispute Over Aircraft Subsidies Back on WTO Docket

Globalization has given us access to new products, opened our eyes to new cultures, and helped us to share valuable information across borders, but sometimes the competition between companies from different countries can result in international legal disputes. One longstanding argument between the United States and the European Union (EU) is over government subsidies to aircraft manufacturers, specifically the American firm, Boeing, and the EU company, Airbus.

On May 30, 2005, the office of the United States Trade Representative (USTR) announced that it would file a request with the World Trade Organization (WTO) to move forward with a trade dispute case against the EU.1 The EU responded on May 31, 2005 by filing its own case against the U.S.2 One EU official publicly stated his fear that the case may end up being “the biggest, most difficult and costly legal dispute in the WTO’s history.”3

Both the U.S. and the EU claim that the other government is subsidizing their domestic aircraft manufacturing industry. Subsidies are basically payments or other benefits given to a company by a government.4 Many subsidies are illegal according to the rules agreed to by the members of the World Trade Organization (WTO) because they create an unfair competitive advantage.5

This is a complicated case, and both sides have compelling arguments as to why the other side is breaking the rules. The U.S. claims that the EU is giving Airbus illegal subsidies in the form of “launch aid,” a term describing a system of low interest loans granted by EU countries to Airbus.6 In addition to low interest rates, launch aid loans are favorable because they only have to be repaid once the specific aircraft are sold. The U.S. has argued that these loans give Airbus an unfair advantage in the marketplace, allowing Airbus to sell its aircraft at artificially low prices and to take risks knowing that the EU government will be there to provide financial assistance.

The EU counters that Boeing has received a great deal of help from the United States. Arguing that U.S. subsidies to Boeing dwarf the launch aid given to Airbus, the EU points to Boeing military contracts, research and development grants, state (e.g., Washington, Missouri) incentive programs such as tax breaks for plant location, tax breaks given to Boeing divisions overseas, and a sizeable list of other tax benefits and financial aid.7 In comparing assistance given to Boeing and Airbus, the EU further argues that the Airbus situation is less problematic since the loans must be repaid when the aircraft are sold, while the Boeing subsidies are mostly in the form of grants.8

Although the current dispute centers on two new aircraft, the Boeing B787 “Dreamliner” and the Airbus A350, both mid-size, long distance passenger jets, U.S. complaints over Airbus subsidies go back to 1985. In 1992 the U.S. and EU came to an agreement that limited subsidies, but this failed to end the practice entirely.9 In 1995, the WTO Agreement on Subsidies and Countervailing Measures came into effect, leading to new negotiations between the two parties.

Discussion over the current dispute began in 2004 as the EU was considering granting subsidies for the Airbus A350 aircraft. Early negotiations did not prove fruitful, and the U.S. responded by seeking formal consultations with the EU, according to WTO rules, on October 6, 2004; the first stage of a WTO dispute involves consultation with the opposing government. On January 11, 2005, the U.S. and EU agreed to a framework that would eliminate new aircraft subsidies and forestall litigation until April 11, 2005.10 This framework started to unravel in March of 2005 when, according to USTR, the EU backed off on its promise of ending all new subsidies and began to talk only of a reduction of subsidies. After Airbus announced early in May that it would apply to four EU Member States for launch aid, the January 11 framework was no longer workable.

The exact timing of the USTR action has itself generated debate. Both sides agree that the U.S. action was related to the June 9-13 Paris air show. The USTR claims that it was forced to act immediately because the United Kingdom was planning to announce at the show a $700 commitment of launch aid to Airbus.11 EU Trade Chief Peter Mandelson, seeing the move as an attempt to harm the launch of the A350, expressed that “The timing of this US move today is interesting, I gather that it is designed to get special dispute machinery in place for June 13th in order to rain on Airbus’ parade at the Paris air show.”12

Moving forward, perhaps the only area of agreement is that negotiations are the best way to solve the problem. Responding to the USTR action, Boeing, writing in support, stated that: “We agree with USTR that a negotiated settlement is preferable and hope serious U.S.-EU discussions will continue as litigation proceeds.”13 While expressing his frustration, Mandelson did agree that discussion was preferable to legal action: “I predict that the outcome will not be clear, it won’t be clean cut, and at that stage after all that expense, time, effort and money, we will come back and sit down and negotiate the way forward, just as we should be doing now.”14
The next step is the formation of a panel of experts to hear the case. Formally established by the WTO’s Dispute Resolution Body (DSB), panels follow the process as set forth in the Understanding on Rules and Procedures Governing the Settlement of Disputes.
15 This includes hearing arguments from each side, both from written briefs as well as oral presentations made during formal hearings, considering expert testimony, and eventually agreeing on a final report that is sent to the DSB. The entire process can last more than a year, with more time needed if one of the two sides appeals the ruling. A negotiated settlement is possible at any time and may be the most likely conclusion of the matter. Because some of the subsidies in question are quite important to both Boeing and Airbus, many analysts are suggesting that neither side would be pleased with a ruling that would discontinue all the benefits in dispute. 16

Questions for Discussion

  • Should governments be allowed to subsidize companies like Airbus and Boeing?
  • Why do you think WTO members agreed to prohibit certain kinds of subsidies?
  • What do you think are some advantages and disadvantages of formal litigation in trade disputes? Negotiated settlements?
  • In addition to the two aircraft companies, the EU and the U.S., can you think of any other interested parties? How might these groups be affected by a WTO decision?

1 “United States Takes Next Step in Airbus WTO Litigation,” USTR Press Release, May 30, 2005.

2“EU Resumes WTO Case Against Boeing,” EU Press Release, May 31, 2005, posted on the World Wide Web at http://europa.eu.int/comm/trade/issues/respectrules/dispute/pr310505_en.htm

3 “EU Reopens Boeing WTO Case,” CNN.com, May 31, 2005.

4See, generally, WTO materials on subsidies, posted on the World Wide Web at http://www.wto.org/english/tratop_e/scm_e/scm_e.htm

5See Agreement on Subsidies and Countervailing Measures, posted on the World Wide Web at http://wto.org/english/docs_e/legal_e/24-scm.pdf

6For a list of EU practices deemed illegal by the U.S., see “Summary of EU Subsidies in U.S. WTO Case,” USTR, May 31, 2005.

7“EU Resumes WTO Case Against Boeing,” EU Press Release, May 31, 2005.

8Constance Brand, “Gloves are off as EU files counter case at WTO over Boeing,” Associated Press Worldstream, May 31, 2005.

91992 Agreement Between the European Communities and the Government of the United States of America Concerning the Application of the GATT Agreement on Trade in Civil Aircraft on Trade in Large Civil Aircraft.

10 “U.S. to Pursue Airbus Case,” Chicago Tribune, May 31, 2005.

11“United States Takes Next Step in Airbus WTO Litigation,” USTR Press Release, May 30, 2005.

12“EU ‘Confident’ as Resumes WTO Action Against US in Air Row,” Agence France Presse, May 1, 2005.

13Boeing Statement on U.S. Government Decision to Seek WTO Panel, May 30, 2005, posted on the World Wide Web at http://www.boeing.com/news/breakingnews/2005/050530a.html

14 “EU ‘Confident’ as Resumes WTO Action Against US in Air Row,” Agence France Presse, May 1, 2005.

15See complete text at http://www.wto.org/english/docs_e/legal_e/28-dsu.pdf

16Elizabeth Becker, “U.S. to Begin Trade Case Over Airbus,” New York Times, May 31, 2005.

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