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Boeing Vs. Airbus: The Unwinnable WTO Dispute

Between Boeing and Airbus, who will win the long-running transatlantic subsidy battle?

June 26, 2007

Between Boeing and Airbus, who will win the long-running transatlantic subsidy battle?

In October 2004, the United States terminated the Agreement on Trade in Large Civil Aircraft, which it signed with the EU in 1992. This agreement regulated the forms of government support for the civil aircraft industry (such as launch aid in Europe and indirect subsidies in the United States).

At the same time, the U.S. government initiated WTO dispute settlement procedures regarding subsidies to the European aircraft industry.

In response, the EU initiated similar WTO proceedings against the United States. Since then, all attempts to get the two parties back to the negotiating table have failed. Nevertheless, both sides have reiterated their preference for resolving the matter without recourse to the WTO.

However, the swift negotiation of a solution appears unlikely given the current relative market strength of the two rivals, the debate about increased state ownership of EADS — and the uncertainty surrounding the financing of the new Airbus A350. To put it in a nutshell, this transatlantic trade dispute has become bogged down.

And yet, there are a multitude of reasons for optimism about the resumption of bilateral negotiations:

  • Both rivals must be aware that they could also end up as a (partial) loser in this dispute. The WTO could rule that the subsidies have to be repaid. At the very least, it is unlikely that there will be a clear winner, given the huge amounts of aid both sides have received. Two Pyrrhic victories are more likely. The bottom line is that neither side can win this conflict.
  • In this regard, it is also questionable whether subsidies would really be reduced following a WTO ruling. Precedence in the history of civil aviation does raise doubts: In the dispute between Canada and Brazil about subsidies for the makers of regional jets, Bombardier and Embraer, both parties had their cases upheld. As a consequence, little changed in the way subsidies were administered.
  • Many market watchers consider this case to be too complex to be solved by the WTO once and for all. There is also a great danger of harm being done to the WTO itself. Neither the United States nor the EU can have any interest in that. Moreover, WTO decisions are always retrospective. They merely identify when a subsidy was prohibited — and how much it amounted to.
  • It is also doubtful whether the world’s two biggest trading powers can afford such a dispute at the same time as new economic powers in Asia are forging ahead and turning up the heat in competing against the established national economies. Contrary to all the assertions that the subsidy dispute in the aircraft industry is separate from other transatlantic trading issues, it certainly is weighing on bilateral economic relations.
  • Boeing and Airbus have long since ceased to be pure national champions. The international division of labor means that the aircraft makers are purchasing an increasing share of components from suppliers based in their competitor’s country. Thus, even in the case of victory, WTO proceedings can also damage the domestic industry indirectly. Furthermore, both companies have important clients on the other side of the Atlantic.
  • It should not be forgotten that the dispute costs money and ties up management resources that both companies would probably prefer to focus on projects for the future.
  • Given that the growth in air travel is set to continue in the future, there is sufficient sales potential for both manufacturers. If, by contrast, the sector were contracting — and thus the battle were for share of a shrinking market — it would be more difficult to negotiate a settlement.

There will have to be movement by both parties to enable negotiations to be resumed and amicable solutions to be reached. If one side were to set too onerous preconditions, these would make a negotiated solution impossible, as they would brand the other side — were they to accept the conditions — as the loser right from the outset.

In order to reach an acceptable solution, however, both sides must be able to save face. It is therefore worth considering starting new negotiations with a clean slate. That means all past accusations leveled at the other side should be set aside — and the focus of negotiations should be directed towards the future.

The most important substantive objective of a solution outside the WTO would have to be the lasting reduction in subsidies in the aircraft industry. The mistake made in the 1992 agreement of legitimizing subsidies must not be repeated. Certain transitional periods for the phasing-out of subsidies, which should not be too long, ought to help a consensus to be found.

Since the aircraft industry is becoming increasingly international, the search for a lasting solution would be helped by the involvement of third countries that are important players in aircraft manufacturing.

At the same time, a larger number of negotiating parties of course makes it more difficult to find an acceptable solution. That is why bilateral negotiations open to third countries could be an alternative.

Regardless of whether a solution can be found outside the WTO or not, the objective of politicians should be to prevent a subsidy race in the aircraft industry — especially given the invariably high margins in the sector (compared with those of airlines, for example).

Since ending all government assistance to the sector is unlikely, future subsidies should be restricted to basic research.

However, it is an illusion to believe that state influence in the aircraft industries of either the United States or the European Union will decline in the near future, given the specific characteristics of the market.

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