EU subsidies to Airbus versus US military contracts with Boeing

Boeing Airbus Subsidies

EU Subsidies and Soft Loans to Airbus

The EU subsidies to Airbus are not fair, especially not in a modern global economy premised on the principle of free trade and certainly not when undertaken by a group of countries with membership in the World Trade Organization, which prohibits such subsidies. The reason that the WTO prohibits these sorts of government subsidies to private industry is because they distort trade. That is, they tamper with the normal functioning of the market for goods and services, which is here the extremely strategic and high-stakes market for aircraft. They allow one competitor, Airbus, to make its goods artificially affordable to aircraft customers, undercutting truly private firms like Boeing and gaining an unfair advantage in the market.

Europe's history of democratic socialism might allow the EU to frame certain instances of government intervention, such as the nationalization of certain private industries, as traditional features of their political economy. However, the government intervention called for under democratic socialism was directed at distinctly domestic aims such as the inclusion of workers in the management of the economy and the redistribution of wealth.

The government intervention undertaken by the EU here, composed of economic subsidies to a very strategic, export-oriented industry, has little to do with the values or aims of democratic socialism. The subsidies are clearly provided in order to help an infant industry gain an unfair advantage over international competitors which do not receive such government assistance. The subsidies, in fact, are more reminiscent of the state socialism practiced in the former Soviet Union or the mercantilist industrial policies used by Japan, Taiwan, and South Korea in the development of their electronics industries.

US Military Contracts with Boeing: Subsidies or Legitimate Transactions

Military defense contracts between the U.S. government and Boeing do not amount to subsidies as the EU claims (claiming over $23 billion in indirect subsidies) because they involve the government, in return for those funds, receiving a very valuable good or service from Boeing, military aircraft and technology.

The U.S. government is not just giving money to Boeing in order to ensure that it is successful. It provides Boeing with money in exchange for highly sophisticated and expensive-to-produce military technology.

Even the R&D funding given to Boeing is a genuine exchange of benefits between Boeing and the U.S. Department of Defense acting as a market participant. As the nation's leading producer of military aircraft since World War I, Boeing occupies a critical place in the U.S.'s defense establishment. There are many projects which the U.S. defense department must rely on Boeing for, as there are no other private firms or government departments qualified to undertake such projects.

The Current Status of the Airbus-Boeing WTO Dispute

In May 18, 2011, the WTO Appellate Body upheld the Panel's finding that certain EU subsidies to Airbus "caused serious prejudice to the interests of the United States."

These subsidies included financing arrangements provided by EU countries for the development of Airbus aircraft, equity infusions from EU countries to companies within the Airbus consortium, infrastructure improvements, and public land use rights. The Appellate Body found that "the effect of the subsidies was to displace exports of Boeing single-aisle and twin-aisle LCA from the European Union, Chinese, and Korean markets and Boeing single-aisle LCA from the Australian market," causing serious prejudice to the interests of the United States. The Appellate Body then upheld the Panel's recommendation to the EU to "take appropriate steps to remove the adverse effects or & #8230; withdraw the subsidy."

Since the May 18 WTO report, the U.S. And EU have been bickering over the implementation of the report, specifically the EU's "appropriate steps to remove the adverse effects or & #8230; withdraw the subsidy" recommended by the Panel. On December 19, 2011, the EU informed the DSB that it had taken appropriate steps to brings its measures into conformity with its WTO obligation. However, the U.S. claimed that the steps taken by the European Union did not bring it into compliance with the Dispute Settlement Body's (DSB) rulings.

On March 30, 2012, the United States requested the establishment of a compliance panel to supervise the EU's implementation of the May 18 report; the panel was created on April 17, 2012. On August 13, 2012, the Chairman of the compliance panel informed the DSB that the panel, after consultations with the parties, had adopted a timetable in which it expected to issue its report in 2013.

At the Dec 19, 2011 implementation meeting, the United States also requested WTO authorization to take specific countermeasures against the EU since the EU had failed to comply with the Panel's recommendations and rulings. The EU objected to the countermeasures requested by the U.S. And the matter was referred to arbitration. As of January 19, 2012, the U.S. And EU requested the appointed Arbitrator to suspend its work for the time being, presumably until the U.S. implements its countermeasures and the DSB is petitioned by either side to make a ruling on the appropriateness of those countermeasures.

Life after Subsidies for Airbus

In the event that the EU does withdraw its subsidies from Airbus for some reason, Airbus still has many creative options available to obtain financing and enhance its competitive edge in the marketplace. For example, as Boeing has demonstrated in its Japanese partnerships undertaken in the development of the 787 Dreamliner, many private firms such as Mitsubishi and Kawasaki are willing to provide substantial soft loans, $1.5 billion, just for Boeing to hire their firms to build parts of the new plane. That $1.5 billion was certainly appreciated for a project that topped $15 billion in total development costs, with Boeing not looking at profitability until 2020.

These firms seek lucrative business opportunities as valued contractors, but they are more interested in developing the knowledge base to produce aircraft themselves one day, or supply parts to aircraft. Whichever their route, their partnership with Boeing will help develop their country's aircraft industry. Boeing's partnerships, with private firms as well as the U.S. Department of Defense, demonstrate that the ability to mass produce technologically advanced aircraft is a coveted asset in the modern world, with both governments and private firms willing to dole out substantial funds for the privilege of partnership.

Knight, p. 222

http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm

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