WTO slams EU over illegal Airbus subsidies

SEATTLE – A World Trade Organization dispute compliance panel ruled Thursday that the European Union has fallen dramatically short of remedying the harm to Boeing caused by about $22 billion in illegal government subsidies to rival Airbus. The decision opens a path for the U.S. to implement trade sanctions against EU products and services.

Ted Austell, Boeing vice president for trade issues, summarized the report as saying “the EU and Airbus did essentially nothing at all to come into compliance” after the WTO in 2010 found the European jet-maker had received illegal subsidies from France, Germany, the U.K and Spain. The subsidies came largely in the form of “launch aid” – upfront loans provided on noncommercial terms to fund Airbus’s development of new jet programs.

“The language used in this WTO report is that but for the support provided by the European governments, these airplanes would not be in the marketplace” and Airbus wouldn’t have its 50 percent share of the civil airplane market, Austell said.

Boeing Executive Vice President and General Counsel Michael Luttig went further.

“Airbus itself likely would not even exist without illegal launch aid,” he said in a statement, adding that “Airbus’ existence continues to depend upon illegal, trade-distorting government subsidies in the form of launch aid.”

Austell said the WTO found that Airbus used about $15 billion in launch aid to develop all its planes up to the A380 superjumbo, plus about $2 billion in other subsidies.

In a surprise step, the WTO ruling published Thursday also ruled illegal nearly $5 billion in additional government subsidies that Airbus used to launch its latest jet, the A350 – even though those subsidies were granted after the original case was filed.

The WTO decided that the launch aid for the A350, which now poses a significant competitive threat to Boeing’s 787 and 777 programs, was virtually identical to the earlier subsidies and should be covered by the same ruling.

“It is apparent that the A350XWB could not have been launched and brought to market in the absence of launch aid,” the WTO report said.

In assessing the competitive harm done, the report said that as a result of the Airbus launch aid, Boeing lost 50 orders in the 787 and 777 large aircraft category, 54 orders in the 747 very-large category and 71 orders in the 737 narrowbody jet category.

And it cited Boeing’s loss of market share to Airbus in the EU, Australia, India, China, South Korea and Singapore.

Austell also pointed to the Airbus A380 program, which faces potential closure unless the jet-maker gets significant new orders in the next couple of years – a situation Boeing also faces with the 747.

However Austell said if the A380 is terminated, Airbus’s ability to walk away from its launch aid loans on that program without fully repaying them is an unacceptable advantage.

“Programs like the A380 need to have a commercial consequence,” he said. “The last thing we want is for Airbus to pirouette away from that loan obligation and have no economic consequence on the balance sheet.”

The EU is likely to appeal the new ruling, extending what has been an agonizingly slow legal process surrounding the case. It’s now been more than a dozen years since the U.S. first dragged the EU before the WTO dispute settlement panel.

However, the ruling brings the WTO one step closer to authorizing the U.S. to take countermeasures – potentially imposing billions of dollars in tariffs on goods or services from the EU.

In a statement, Boeing Chairman and Chief Executive Dennis Muilenburg called the ruling “a victory for fair trade ” that “finally holds the EU and Airbus to account for their flouting of global trade rules.”

The U.S. trade representative, Ambassador Michael Froman, called the ruling “a sweeping victory for the United States and its aerospace workers.”

“We will not tolerate our trading partners, even our closest trading partners, ignoring the rules at the expense of American workers,” Froman said.

In an email following the USTR news conference, Airbus Senior Vice President Rainer Ohler derided the U.S. case against Airbus, saying that the “results measured either by their own goals when this case began or by impact today, are pathetic.”

Ohler said that “only tiny tweaks” will be required to make the A350 launch aid terms compliant with WTO rules.

“The European public-private partnership model with reimbursable loans emerges stronger than ever, and Boeing’s cynical abuse of the U.S. military industrial complex is condemned by the WTO in ever harsher terms,” he said, referring to the EU’s parallel countersuit against Boeing.

Ohler mocked the Boeing 787 as a “subsidy-liner” and said the U.S. jet-maker “has laid the biggest egg in subsidy history” with the $8.7 billion in tax breaks from the state of Washington for the 777X.

Thursday’s ruling, though, zeroed in on the Airbus subsidies.

It has been six years since the world trade body ruled that European government subsidies to Airbus were illegal.

A year later, an appeals panel reduced the charges somewhat, but retained major findings against Airbus. It still required the EU to remedy the harm done to Boeing and to U.S. aerospace manufacturing.

In December 2011, Airbus claimed it had “implemented the WTO findings” and was now in “full conformity with WTO obligations” related to funding it received from EU governments.

An Airbus spokesman said at the time that the European plane-maker needed only “limited changes” in its policies and practices, a claim Boeing vigorously rejected.

The new WTO report undercuts the European claim, stating that only two out of 36 actions Airbus listed in 2011 when it claimed it had met its obligations qualified as steps toward compliance.

It concludes that “the European Union and certain member states have failed to take appropriate steps to remove the adverse effects or withdraw the subsidy.”

Meanwhile, a countersuit the EU brought against the U.S. – including the lion’s share of the tax breaks the state of Washington granted in 2003 to its aerospace industry – is moving in parallel.

In that case, the WTO ruled five years ago that a much lower level of Boeing subsidies were also illegal. However, the EU filed that suit more than a year after the U.S. filed its case against Airbus and the final outcome is still lagging.

A ruling on whether the U.S. has complied with the remedies demanded in that ruling is expected by next spring.

Bob Novick, former general counsel to the U.S. trade representative during President Clinton’s administration, insisted the two cases are as comparable as an elephant is to a mouse.

Boeing was found guilty of receiving about $2.7 billion in subsidies, including NASA research grants and state subsidies like the Washington state tax breaks.

Novick, now a managing partner at Wilmer Cutler Pickering Hale & Dorr and outside counsel to Boeing on the WTO dispute, argued that the impact of those subsidies is tiny compared with the impact of the billions Airbus received upfront every time it developed a new plane.

Boeing must fund new jet development programs out of profit from existing programs.

“The nature of launch aid, the effect it has had in allowing Airbus to build all of its airplanes, and the harm the WTO found it caused to Boeing are not matched by anything even alleged by the EU that the U.S. gave to Boeing,” Novick said.

Luttig, the Boeing general counsel, said that “whatever happens in the European cases against the United States,” Airbus now needs to end its launch aid programs.

But an Airbus company spokeswoman said the EU will appeal Thursday’s ruling.

She said the only details Airbus needs to address are whether the interest rate benchmark for its government loans corresponds to commercial market terms.

“We are confident that we will win that point on appeal,” the spokeswoman said.

“Airbus wants common sense to prevail: these disputes can only end in a balanced, mutual agreement,” she said. “Whatever Boeing will say, nobody will have to go to the bank. There have never been any repayments and there never will be, it is not in the spirit of WTO.”

If the EU appeal were to fail, the U.S. could move toward imposing retaliatory tariffs.

If the WTO approved retaliatory action – which could be more than $10 billion – the U.S. government would then consult with industry to determine the products or services to target for maximum political impact in the EU with least harm to the U.S.

“That’s not a superfast process,” said Austell. “But it’s a well-defined deliberate process.”

Political reality is that an actual trade war cannot begin in earnest until the breakdown of negotiations between the EU and U.S.

Serious negotiations haven’t even begun and are unlikely until the case against Boeing reaches the same stage as this one against Airbus.