May 16, 2018

A trade dispute in the offing?

The World Trade Organization has ruled that the European Union paid Airbus SE billions in illegal subsidies, thereby hurting its competitor Boeing. The ruling brings the end a dispute that began in 2004 of $22 billion over subsidised European financing for Airbus.

Background

Airbus SE is a European multinational corporation that designs, manufactures, and sells civil and military aeronautical products worldwide. Boeing is an American multinational corporation that is primarily known for designing, manufacturing, and selling airplanes. It also manufactures rotorcrafts, rockets, and satellites across the world. It is the largest global aircraft manufacturers.

In July 2004, former Boeing CEO Harry Stonecipher accused Airbus of abusing a 1992 bilateral EU-US agreement providing for disciplines for large civil aircraft support from governments. Airbus is given reimbursable launch investment (RLI), called "launch aid" by the US, from European governments with the money being paid back with interest plus indefinite royalties, but only if the aircraft is a commercial success. Boeing disputed these claims. However, WTO ruled in August 2010 and in May 2011 that Airbus had received improper government subsidies through loans with below market rates from several European countries. In another ruling in February 2011, WTO found that Boeing had received local and federal aid in violation of WTO rules.

This isn’t the first time America and the EU have fought over providing illegal subsidies to companies in their regions. The US has earlier claimed that Airbus receives illegal subsidies in Europe. The trade court in September ruled in Boeing’s favour in another case brought by the EU. For details regarding that case, click here.

World Trade Organization

The WTO was created in 1995 and hears disputes between countries over trade and creates fundamental principles of a global multilateral trading system. It is the only international organization handling the regulations of trade between countries. The organization’s primary objective is to make sure that trade flows as predictably, effortlessly, efficiently, and freely as possible, across nations.

Analysis

The WTO has ruled that the European Union had failed to remove support for the world's largest airliner, the A380, and Europe's newest long-haul plane, the A350, which are both part of Airbus’ fleet. The organization stated that this had caused losses for Boeing and US aerospace workers.

The US Trade Representative (USTR) has accused the Airbus of getting $22 billion in state aid by European nations in order to launch A380 and A350 jets. The USTR noted that this caused losses for Boeing.

Boeing chairman and chief executive Dennis Muilenburg celebrated the WTO ruling and noted in a statement: "Today's final ruling sends a clear message: disregard for the rules and illegal subsidies are not tolerated."

Airbus, meanwhile, has stated that Boeing itself will be under similar scrutiny soon. The company’s chief executive Tom Enders said: "Of course, today's report is really only half the story - the other half coming out later this year will rule strongly on Boeing's subsidies and we'll see then where the balance lies." He was referring to the fact, the same appellate body will soon rule upon the kind of subsidies Boeing received from the American government. He added, “Despite Boeing’s rhetoric, it is clear that their position today is straightforward healthy: they have half the market and a full order book, they have clearly not been damaged by Airbus repayable loans.”

European Union has maintained that the WTO report “rejects the vast majority of the US allegations that the EU had not complied with the WTO findings.” Commissioner Malmström said: "Today the WTO Appellate Body, the highest WTO court, has definitively rejected the US challenge on the bulk of EU support to Airbus, and agreed that the EU has largely complied with its original findings. Significantly, it dismissed the vast majority of the US claims that this support had damaged Boeing's aircraft sales. The EU will now take swift action to ensure it is fully in line with the WTO's final decision in this case. Also, we look forward to the upcoming ruling by the Appellate Body on US compliance with the WTO findings of the massive and persistent government support to Boeing."

The WTO ruling goes beyond a trade dispute between Boeing and Airbus – it is also likely to cause tensions in trade ties between US and Europe. It has opened the door for the American government to impose billions of dollars in retaliatory sanctions on European imports.

“President Trump has been clear that we will use every available tool to ensure free and fair trade benefits American workers,” Robert Lighthizer, the United States trade representative, said after the ruling. “Unless the E.U. finally takes action to stop breaking the rules and harming U.S. interests, the United States will have to move forward with countermeasures on E.U. products.”

“The broader context — of tariffs and unilateral trade measures — is unpleasant and makes this a poorly timed development,” said Richard Aboulafia, vice president of analysis at Teal Group Corporation, a consulting firm in Fairfax, Va. “But there is still the hope of a negotiated settlement and perhaps even a new set of mutually agreed rules.”

Assessment

Our assessment is that the development of large aircrafts requires a huge amount of money. The best source of finance is government. We believe that this is happening not only in the US and Europe, but also in Russia and China, who are both funding major civil aircraft programs.

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