Wall Street Journal (Sept. 15, 2010)

Boeing Received Illegal Aid, WTO Says

By JOHN W. MILLER and DANIEL MICHAELS

GENEVA—The World Trade Organization ruled in a preliminary finding that Boeing Co. received illegal subsidies from the U.S. government, to the detriment of European aircraft maker Airbus, according to people familiar with the case.

Supporters of Airbus and Boeing each claimed victory. Europeans said the ruling slammed Boeing and the U.S., but Boeing's defenders said only a fraction of the funding in question was held to violate WTO rules.

The WTO, in its confidential report on a case filed by the European Union, found that some funding provided by the Department of Defense and the National Aeronautics and Space Administration constituted actionable subsidies, the people familiar with the case said.

The EU convinced the WTO that Airbus suffered adverse effects from the subsidies, which the EU said totaled more than $16 billion. It is unclear how much was found to be illegal.

Exact terms of the WTO's finding, which covered 1989 to at least 2004, remain confidential.

Support to Boeing from Washington state was also deemed an actionable subsidy, according to the people familiar with the case.

U.S. trade officials questioned the European claim of victory. "There seem to be a number of significant inaccuracies" in statements from Europeans, said Nefeterius McPherson, spokeswoman for the office of the U.S. Trade Representative.

Any actionable subsidy would need to be ended, assuming the finding survives potential appeals by the U.S.

The EU claimed in its filing that Boeing received roughly $23.7 billion in illegal subsidies from state, local and federal sources in the U.S.

The WTO on Wednesday sent its ruling on government help for Boeing to officials from the U.S. and EU, the two parties fighting this six-year-old dispute, the most expensive in WTO history.

For now, the 1,500-page report is available only to government officials. They dropped by the WTO's lakeside headquarters in Geneva to pick up their copies.

The question for trade officials, and the two rivals, is how Wednesday's decision will stack up against the sweeping condemnation the WTO published last year of billions in low-interest loans Airbus received from European governments, known as launch aid. That was a blow to Airbus and it is unclear whether the rebuke of Boeing and the U.S. is as severe, WTO officials said.

Boeing on Wednesday lashed out at the EU and Airbus for continuing the loan programs that were condemned by the WTO. "To date, Airbus and its government sponsors have defiantly resisted abandoning launch aid," Boeing said in a statement.

Airbus, a unit of European Aeronautic Defence & Space Co., claimed vindication in the WTO's latest findings and moved to look ahead. "Now that two reports are on the table, time has come to stop assigning blame," said Airbus spokesman Rainer Ohler. "Only when we stop litigation and start negotiating will we be able to create a basis for the future level playing field in global aircraft manufacturing, which is not just a trans-Atlantic issue."

Executives at Boeing and Airbus say they would welcome a framework that covers emerging rivals in Canada, Brazil, Japan, Russia and China.

John Clancy, an EU spokesman said regarding the Boeing ruling, "We're pleased we now have the second piece of the puzzle."

Under trade law, countries are supposed to cease subsidies the WTO rules illegal, or face trade sanctions from the country that is the victim of the subsidies. The sums in these two cases are so massive, trade officials say, that Wednesday's report is more likely to be a bargaining chip in future negotiations over acceptable state support of plane makers.

The ruling could also influence a tender the U.S. Department of Defense has put out for as many as 179 tanker airplanes for roughly $30 billion. Both EADS and Boeing are competing for the contract.

Members of the U.S. Congress weighed in on the case Wednesday with statements that varied according to their links to Boeing and Airbus.

Sen. Richard Shelby, a Republican from Alabama, said the preliminary ruling "clearly states that Boeing was involved in practices prohibited" by the WTO. EADS wants to build tanker planes for the U.S. Air Force in Mobile, Ala., and Sen. Shelby, a member of the defense appropriations subcommittee, has been a strong supporter of EADS in the U.S. He added: "it is clear that [Boeing supporters] can no longer rationally claim that this trade dispute is one-sided."

Sen. Sam Brownback and Rep. Todd Tiahrt, both Republicans from Kansas, where significant portions of Boeing planes are built, defended the U.S. aerospace giant. "None of the alleged subsidies to Boeing have anywhere near the market-distorting effects of the launch aid the EU provided to Airbus," the two said in a joint statement.

Boeing and Airbus worked under a 1992 deal on state aid until the U.S., with Boeing losing market share, renounced the pact in 2004 and took the EU to the WTO over support to Airbus. The EU retaliated by filing its case against U.S. help for Boeing.

European officials say that Boeing received some $16 billion between 1989 and 2004 from the Pentagon and National Aeronautics and Space Administration. Boeing has also received at least $4 billion in tax breaks from the states of Kansas, Washington and Illinois, and billions in other types of aid, the EU says.

The WTO panel found that roughly one-quarter of the $10.4 billion in research aid from NASA, and only a portion of the $2.2 billion in tax breaks from Washington state to be illegal subsidies, according to a U.S. source familiar with the case.

The general rule for evaluating the legality of a subsidy is whether the favor benefited a specific company or industry, and hurt a rival company.

Research and development aid, for example, is often exempted, but not necessarily, if the research is never published, is not conducted by a university and is used solely for commercial purposes.

Tax breaks are acceptable if they're justified.