STOCK QUOTES     More market data...

Aircraft subsidies trigger trans-Atlantic trade fight

By David Bowermaster and Dominic Gates
Seattle Times aerospace reporters

BLOOMBERG NEWS Visitors to the Asian Aerospace 2004 show in February in Singapore watch Boeing's three-dimensional animated video on the company's future 7E7 passenger jet.

E-mail this article Print this article Search archive Most read articles Most e-mailed articles

Related stories Politicians jostle for credit on getting tough on Airbus Other links Boeing-Airbus timeline

The Bush administration filed an unfair-trade-practices complaint with the World Trade Organization yesterday, accusing European governments of providing illegal support to Airbus, Boeing's longtime rival. Most of the aid has come in the form of below-market-rate loans to develop new airplanes.

The European Union promptly replied with a WTO complaint of its own that claimed Boeing has received nearly $30 billion of improper support. It specifically cited the $3.2 billion of tax incentives offered by Washington state to bring the 7E7 final-assembly plant here, plus scores of contracts from the Defense Department and the National Aeronautics and Space Administration.

A senior U.S. trade official denied the Washington tax package is improper, but he also hinted that the state perks could be amended if European governments stops loaning Airbus money to develop new planes.

"If the net-net result is that launch aid (to Airbus) is eliminated and Washington state has to make changes to its tax code, that's frankly much better than the status quo," said the official.

The determination of Boeing and U.S. trade officials to curtail government loans to Airbus grew sharply last month when Airbus Co-Chief Executive Noël Forgeard confirmed news reports that the airplane maker is considering launching a new aircraft program in 2006, most likely to counter Boeing's 200-to-250-seat 7E7 due to enter service in 2008.

U.S. and European officials have been trying to bridge their differences amicably since July. By kicking the dispute to the WTO, the two sides signaled they no longer believe compromise is possible.

"The EU and Airbus appear to want to buy more time for more subsidies for more planes," U.S. Trade Representative Robert Zoellick said in a statement. "That isn't fair, and it violates international trade rules. Since we could not agree, the United States decided to pursue resolution through the agreed procedures of the multilateral trading system."

An EU statement countered: "It is a pity that the U.S. has chosen to go to litigation which could destabilize trade and investment, including in Boeing's 7E7 project. ... Aerospace workers can rely on the European Commission to defend their interests."

The U.S. also yesterday pulled out of the 1992 bilateral agreement with the EU that has governed builders of large airliners, contending the Europeans had violated terms of the pact.

Washington state's 7E7 incentives are at the heart of the Europeans' complaint against Boeing.

"The latest and most flagrant violation (of global trade laws) consists in massive subsidies of about $3.2 billion ... in the form of tax reductions and exemptions and infrastructure support for the development and production of Boeing's 7E7," the EU said.

Boeing backers denied that the package, passed by a special session of the state Legislature and signed into law by Gov. Gary Locke in July 2003, is improper.

Robin Pollard, 7E7 project coordinator for the state, said the package "was designed to be consistent with all international agreements."

Robert Hamilton, Gov. Locke's adviser for trade policy, declined to go into specifics about the EU's complaint until he sees the filing.

"I don't think (the EU) could just challenge that whole thing," he said. "They've got to break it out into the different aspects that supposedly make up the $3.2 billion. The legal arguments could differ one from another."

Pollard and others said the tax incentives apply to the state's entire aerospace industry, not just Boeing.

The bilateral agreement What did the 1992 U.S.-EU bilateral agreement allow? It allowed Boeing and Airbus to receive two different forms of government aid: Airbus took direct launch aid equaling up to 33 percent of new airplane development costs. Boeing annually took indirect support equaling up to 3 percent of the total revenue of the U.S. large civil-aircraft industry. Yesterday, the U.S. unilaterally pulled out of the 1992 agreement. What does the WTO prohibit? It bans subsidies that disrupt trade and defines a subsidy as a financial contribution by a government. That includes tax breaks, as well as grants or loans, and subsidies to industries, as well as companies. What subsidies does the U.S. claim Airbus is receiving? • Launch aid. A total of $15 billion over all Airbus programs, including most recently about $3.7 billion to develop the superjumbo A380 that will fly next year. • Regional government support. The U.S. Trade Representative said the A380 has received over $1.5 billion in such aid. What subsidies does the EU claim Boeing is receiving? • Tax breaks and other incentives for Boeing's 7E7 program from Washington state ($3.2 billion), Kansas ($500 million), Oklahoma ($350 million) and around $1.6 billion from Japan. • U.S. military and NASA contracts. The EU claims that since 1992, Boeing has received around $23 billion in this form. • R&D expenditures from NASA and Defense Department programs. In 2003 alone, the EU claims, Boeing received $2.74 billion, including around $2 billion from the Department of Defense and more than $600 million from NASA. • Federal corporate tax breaks, through the use of offshore "foreign sales corporations." The EU claims that since 1990 Boeing has avoided paying more than $1.2 billion. Source: U.S. Trade Representative, EU and WTO documents

That contention drew a pithy retort from Europe. "A more tailor-made, Saville Row-fitting-suit for Boeing you could not find anywhere," said Anthony Gooch, an EU spokesman.

The state tax benefits would be spread over a 20-year period. Boeing backers contend that is far different from receiving billions of dollars of below-market-rate government loans to launch a new airplane, as Airbus does.

"The whole issue here is about assumption of risk," said a senior U.S. trade official who spoke to reporters on background. "Under the terms of (Airbus') launch aid, if the plane is successful, the loans may be paid back at a certain rate, but if it's not successful it may not be paid back at all. That is what is truly distorting."

WTO rules require both sides to hold more talks; if the EU and U.S. can't reach an agreement after 60 days, the U.S. can request a WTO panel be established to make findings on the matter, which can lead to trade penalties.

If the United States gives up on the talks before 60 days have passed, it can request a panel early. It can also extend consultations beyond 60 days if it feels the discussions are productive.

The panel process on average takes about a year to complete.

The issue of launch aid is a timely one. Boeing is highly optimistic about the sales prospect for the 7E7, in part because Airbus has tied up billions of dollars developing the 555-seat A380. That jumbo jet will serve a completely different part of the airplane market when it enters service in 2006.

Boeing does not want European governments to give Airbus new loans so that the latter can quickly develop a competitor to the 7E7.

The 1992 bilateral agreement allows either Airbus or Boeing to get government loans worth up to one-third the cost of developing a new jet.

The U.S. has never extended such loans to Boeing, nor to any other airplane manufacturer. But the U.S. went along with the agreement at the time because European governments were lending Airbus 50 to 75 percent of each new plane's development costs; a one-third subsidy seemed like an improvement.

"Since its creation 35 years ago, some Europeans have justified subsidies to Airbus as necessary to support an 'infant' industry," said Zoellick. "If that rationalization were ever valid, its time has long passed."

Airbus in 2003 delivered more commercial jets than Boeing for the first time in its history.

Seattle Times reporter Alex Fryer and Knight Ridder Newspapers contributed to this report. David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.com

Copyright © 2004 The Seattle Times Company

E-mail this article

Print this article

Search archive

More business & technology headlines...