Boeing/Airbus Dispute.

1
Boeing/Airbus Dispute.
Yasunobu Takagi Greg Vaughn Michael Ward
2
Background

• Boeing and Airbus have a worldwide duopoly in
  large civil aircraft (LCA), planes with more than
  100 seats
• In 2005, Airbus booked orders for 1,111 new
  commercial airplanes, while Boeing claimed 1,029
• Their nearest competitor, Bombardier, totaled
  only 150 orders

3
WTO Agreement

• Agreement on Subsidies and Countervailing
  Measures
• (i) a financial contribution
• (ii) by a government or any public body within
  the territory of a Member
• (iii) which confers a benefit.
• All three of these elements must be satisfied in
  order for a subsidy to exist.

4
Subsidies Specificity

• Subsidy must be applied to an individual company
  or sector to be subject to the rules of the SCM.
  
• Four types of specificity
• Enterprise-specificity. A government targets a
  particular company or companies for
  subsidization
• Industry-specificity. A government targets a
  particular sector or sectors for subsidization.
• Regional specificity. A government targets
  producers in specified parts of its territory for
  subsidization.
• Prohibited subsidies. A government targets export
  goods or goods using domestic inputs for
  subsidization.

5
Subsidy Categories

• Prohibited Subsidies
• Based on export performance
• Local content subsidies
• Actionable Subsidies
• Injury is established
• Serious prejudice
• Ag Subsidies are Legal

6
Two Historical Agreements

• 1979 GATT Agreement on Trade in Civil Aircraft
• 1992 EU/U.S. Bilateral Agreement
• Ceilings set at 3 for indirect support
• Ceiling set at 33 for repayable royalty-based
  loans (Launch aid)

7
Why bother?

• Sales of Airbus aircraft has exceeded Boeing
  since 2002 and deliveries have exceeded Boeing
  since 2003.
• Both companies took distinct paths in the
  development of their next aircraft.

8
Relevant Provisions

• Agreement on Subsidies and Countervailing
  Measures (SCM) 3, 5, and 6
• GATT Article XVI1

9
Airbus-Boeing Dispute

• Launch Aid
• A380 received 3.7 billion, Airbus has requested
  1.7 billion for the A350
• The U.S. is challenging A350 launch aid as well
  as the launch aid for earlier models.
• EIB Financing
• Airbus received over 700 million Euros to develop
  the A380.

10
Airbus-Boeing Dispute cont.

• Infrastructure Support
• Specific infrastructure created for use
  developing aircraft.
• Debt Forgiveness
• Equity Infusions and Grant
• Research and Development Funding

11
Airbus-Boeing Dispute cont.

• Airbus Filed Compliant citing U.S. support of
  Boeing through military spending.
• Treatment from states (WA, KS, MO) also cited.

12
Dispute Timeline

• October 6, 2004 U.S. filed request for
  consultations
• November 4, 2004 Consultations held, failed to
  resolve the issue.
• January 11, 2005 EU/U.S. agreement on terms to
  end subsides in large commercial aircraft
• May 31, 2005 Panel Request filed.
• June 13, 2005 DSB Deferred Panel Establishment

13
Dispute Timeline (2)

• July 20, 2005 DSB Established the Panel
• October 7, 2005 Deputy Director Jara composed
  the panel
• January 31, 2006 U.S. Requested Additional
  Panels.
• February 2006 Press Conference-officials
  reconfirmed ongoing differences.

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U.S. Position

• Launch aid distorts the market because it takes
  the risk off of Airbus and puts it onto E.U.
  taxpayers
• Airbus also has received 1 billion in government
  subsidized financing, on top of direct launch
  aid, for several models of aircraft, including
  700 million alone for the A380
• Other countries may be tempted to use launch aid

15
U.S. Position cont.

• EU defends launch aid as an offset to defense
  spending for Boeing
• According to the USTR, Airbus and its parent
  companies, EADS and BAE Systems have comparable
  revenues from defense spending
• BAE Systems is in the top-ten of suppliers to the
  Department of Defense, and the top defense
  contractor in the U.K.
• EADS is the number one defense contractor in
  Europe and the second largest defense contractor
  in the world

16
U.S. Position cont.

• Infrastructure improvements for the sole use of
  Airbus include
• 751 million to create landfill for Airbus
  Hamburg production site
• 182 million for an industrial park next to
  Airbus headquarters in Toulouse
• 125 million from Spain to upgrade manufacturing
  sites

17
U.S. Position cont.

• EU states provide funding to Airbus for research
  and development through grants which Airbus uses
  for commercial research
• In addition, before the European Union would
  approve the 1997 merger between Boeing and
  McDonnell Douglas, they required Boeing to
  license patents developed with government
  assistance to Airbus, while Airbus does not have
  to do the same for Boeing

18
EU Position

• Regarding 1992 EU/US Agreement on LCA
• Disciplines
• Limitation of direct government support for the
  development of new aircraft to 33 of the total
  development costs.
• (? mainly applied to EU)
• Limitation of indirect government support to 3
  of the nations LCA industry turnover.
• (? mainly applied to US)

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EU Position cont.

• 1992 Terms and Conditions
• All EU government loans for Airbus has been made
  entirely within the letter and the spirit of the
  1992 Agreement.
• US has never disputed this fact, instead,
  asserted that this agreement has outlived its
  usefulness.

20
EU Position cont.

• 1992 Terms and Conditions
• Boeing has NOT complied with the limitation of
  indirect support to 3 of the nations LCA
  industry turnover.
• Boeing avoided more than 1.2 billion in federal
  taxes through the use of off-shore FSC.
• This is direct government subsidies prohibited by
  international rules.

21
EU Position cont.
EU Government loans for Airbus

• Not all Airbus launched w/ government subsidies
• Boeing has NOT launched any new programs by its
  own fund since 1990.
• Boeing investment
• only 2.8 billion of its fund
• Airbus investment
• 9.4 billion of its fund

22
EU Position cont.

• EU launch investment
• Launch investment will be repaid at an interest
  rate no less than the government cost of
  borrowing and within no more than 17 years based
  on 1992 Agreement
• Airbus has repaid EU government more than 6.7
  billion, which accounts for 40 of total amount
  Airbus has received
• Boeing will NOT have to repay US government,
  including NASA and Defense Department

23
EU Position cont.
The real reason behind the US decision is not
that much the EU subsidies to Airbus, but the
fact that commercially, Airbus is a huge
success and that the Boeing fears
competition. -Peter Mandelson, EU Trade
Commissioner
24
Conclusions

• Both Boeings and Airbus subsidies most likely
  violate WTO rules
• The WTO will probably find both countries at
  fault
• Neither side will benefit from a trade war
  between the U.S. and EU
• Boeing and Airbus are strong enough to compete
  against against each other without subsidies
• The U.S. and EU should both discontinue subsidies

25
Sources

• USTR. Trade Facts Summary of EU Subsidies in
  U.S. WTO Case. http//www.ustr.gov/assets/Document
  _Library/Fact_Sheets/2005/asset_upload_file486_776
  6.pdf
• USTR. Trade Facts BAE Systems and EADS Major
  Defense and Space Contractors in the EU and the
  United States. http//www.ustr.gov/assets/Document
  _Library/Fact_Sheets/2005/asset_upload_file151_776
  5.pdf
• Gillie, John. Airbus Victory Rings Hollow.
  Knight Ridder Tribune Business News. 18 Jan 2006
  P.1
• Betts, Paul. Canada Puts a Twist in Aerospace
  Subsidy Row. Financial Times London. 2 Feb
  2006 P.18
• SpeedNews. Commercial Aircraft Orders and
  Deliveries December 31 , 2005.
  www.speednews.com/lists/05od.pdf
• European Association of Aerospace Industries.
  http//www.aecma.org/Position/TradeJan02.pdfsearc
  h'199220Bilateral20EUUS20Agreement
• http//en.wikipedia.org/wiki/Airbus
• General Agreement on Tariffs and Trade. Article
  XVI.
• World Trade Organization. Agreement on Subsidies
  and Countervailing Measures. Articles 3, 5, and
  6.

26
Sources

• Airbus. Boeing 787 / Trade issues EADS and BAE
  Systems are supporting a negotiated solution.
• http//events.airbus.com/dynamic/media/press_rele
  ase.asp1725
• Europa. EU-US Agreement on Large Civil Aircraft
  1992 key facts and figures.
• http//europa.eu.int/rapid/pressReleasesAction.do
  ?referenceMEMO/04/232formatHTMLaged0language
  ENguiLanguageen
• Europa. EU/US Agreement on Terms for Negotiation
  to end Subsidies for Large Civil Aircraft.
• http//europa.eu.int/rapid/pressReleasesAction.do
  ?referenceMEMO/05/4typeHTMLaged0languageEN
  guiLanguageen
• EurActiv. Madelson EU is ready for the biggest
  legal dispute in WTOs history.
• http//www.euractiv.com/Article?tcmuritcm29-140
  198-16typeNews