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U.S. officials riled by EU's Airbus loans

By David Bowermaster and Alex Fryer
Seattle Times reporters

Deputy U.S. Trade Rep. Peter Allgeier

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Deputy U.S. Trade Representative Peter Allgeier will travel to Brussels next week to formally communicate U.S. unhappiness with the existing rules to the European Union and to propose overhauls, the sources said.

Neither Boeing nor government officials want to ignite a trade war with Europe, but many stakeholders believe tweaking the 12-year-old rules would not be sufficient and both sides should start from scratch with a new aviation agreement further limiting subsidies.

Under the existing "agreement on trade in large civil aircraft," European governments can provide loans to Airbus of up to 33 percent of the cost of developing a new airplane.

The same limit applies to U.S. loans for Boeing. Boeing receives no such federal loans, although Airbus contends that U.S. defense contracts, in effect, subsidize Boeing's commercial-airplane development.

The early success of Boeing's 7E7 is a big reason the long-simmering issue is heating up now. Boeing wants to prevent European governments from providing Airbus with a new injection of funds that would enable Airbus to quickly develop a replacement for its aging A330 that could challenge the 7E7.

"This is a preemptive strike," said one source.

Yesterday Secretary of Commerce Donald Evans and Sen. Patty Murray joined the fray. Talking to reporters after a speech at the U.S. Chamber of Commerce, Evans said the Bush administration is considering the best way of confronting the issue of subsidies, and whether to press Europe to revisit the 1992 agreement.

"I think it's too early to say, but we're talking with (Boeing), mulling about the issue. We share their concern, we think they're legitimate concerns," he said.

Murray delivered a speech yesterday decrying "massive, market-distorting subsidies" for Airbus. She called on the administration to withdraw from the 1992 bilateral accord.

Airbus is spending more than $10 billion to develop the 555-seat A380, so it would be hard-pressed to finance another new plane on its own. It has received $2.5 billion in government loans for the A380.
 
The 7E7, with 200 to 250 seats, is aimed at a part of the market served by the A330. Boeing has received 62 orders for the 7E7 since April, and believes it will have 200 orders by the end of the year and 500 orders by 2007.

Because the A330 will be a 21-year-old design by the time the 7E7 enters service in 2008, Boeing believes the 7E7 will have the technological edge.

Boeing Chairman Harry Stonecipher promised in January to "raise the rhetoric" on the issue of European subsidies for Airbus. To the Sunday Times of London on July 4, Stonecipher characterized the Airbus approach to developing a new plane this way: "(a) We have decided to launch a new airplane; and (b) we are sending our guys over with a truck to pick up the cash."

U.S. Trade Representative Robert Zoellick recently told his European counterpart, Pascal Lamy, that the 1992 bilateral agreement was out-of-date, according to Defense News, an industry trade magazine.

Boeing "does not want Europe to add more financing for an alternative to the 7E7 or to fix difficulties with the A380," Zoellick said.

Republican Rep. George Nethercutt, who is seeking Murray's Senate seat, met with the chief counsel of the U.S. Trade Representative (USTR) yesterday for a briefing on the subsidy issue, according to a Nethercutt aide.

Nethercutt would like the administration to negotiate changes to the current agreement before pulling out.

"We think it behooves us to work this through the USTR before we go nuclear," the aide said.

Material from Reuters and Seattle Times reporter Dominic Gates is included in this report.

David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.com.

Alex Fryer: 206-464-8124 or afryer@seattletimes.com.