Financial Times (3.23.10)

Aircraft makers braced for subsidy verdict

By Pilita Clark and Joshua Chaffin

Boeing supporters claim the report will accept that the Airbus A380 (above) received prohibited subsidies

The world’s two largest aircraft makers are preparing for a heated legal and public relations clash this week as global trade officials deliver a final verdict on US claims that Airbus benefited from billions of dollars of illegal subsidies from European governments.

The World Trade Organisation report, expected on Tuesday, is the latest step in a protracted and acrimonious dispute between the EU and the US, which dominated global aircraft production until its Boeing group was overtaken by Toulouse-based Airbus seven years ago.

Boeing has claimed that Airbus relied on heavy subsidies to take away more than 20 per cent of its market share between 1998 and 2003.

Airbus denies this, arguing Boeing has reaped equally generous subsidies from bodies such as NASA and the state of Washington, where its main assembly operations are based.

The dispute has added further rancour to a multi-billion-dollar Pentagon competition between Boeing and Airbus’s parent, EADS, to supply air-to-air refuelling aircraft for the US air force.

Boeing’s allies have argued it would be unfair to award such a lucrative contract to a European company receiving illegal subsidies that hurt a US manufacturer, a claim Airbus and EADS reject.

But Tuesday’s judgment could carry significance well beyond the fierce rivals. Bob Novick, a Boeing legal adviser and former US trade official, argued that it could determine what sort of government support is permissible for countries such as Brazil, Canada, China and Russia as they seek to boost their own civil aircraft industries.

“It will establish clear guidelines for European governments and other countries looking to break into commercial airplane development about what type of state financing is or isn’t appropriate when building airplanes,” said Mr Novick.

In the trade world, the case also stands out for the amount of money at stake. Boeing has accused Airbus of benefiting from nearly $4bn in so-called “launch aid”, government development loans that do not have to be repaid until planes are sold.

If the WTO agrees, then Airbus would have to comply by removing those funds from its books. If not, the US could slap retaliatory tariffs on a host of European goods. “There’s not enough cheese coming out of Europe to cover the amount of retaliation from this case,” said one lawyer involved in the case, referring to past US moves to raise duties on French cheese.

For all the intrigue, Tuesday’s ruling – some six years in the making – will tell only half the legal story since the EU is still awaiting a decision on the related WTO case it launched against Boeing and the US. Both were filed in late 2004, although the EU case has run at a slower pace, with interim findings not expected until June.

So far, the picture has been murky: the WTO delivered a confidential preliminary report on the US case in September last year that ran to more than 1,000 pages. Although many of the US’s claims were not supported, the WTO found that Airbus did receive illegal subsidies, according to several people familiar with the matter.

Still, many of the details remain in dispute. For example, while Boeing’s backers have claimed the report found prohibited subsidies were provided for Airbus’s A380 superjumbo, Airbus supporters say this is untrue.

As well as disagreeing on what the report says, Airbus and Boeing – and their respective legal teams and governments – also have divergent views about its implications.

Boeing’s backers are expecting vindication and then swift redress. They claim that by November, when they estimate the report on the US case will have been translated and a 90-day appeal process exhausted, the losing party will have to comply with any findings of prohibited subsidies without delay.

But Airbus says the dispute will drag on for years and be resolved only by a negotiated settlement, which the EU has already offered repeatedly to the US.

“This is a never-ending story. With appeals coming and going we are years away from final rulings. And in the end we all know we’ll have to sit down and negotiate,” said Airbus spokeswoman Maggie Bergsma.

The Europeans are hoping that a favourable ruling later this year will give them greater leverage at the negotiating table. “At last we will see things in perspective,” Ms Bergsma said. “Let’s see if Boeing’s supporters are still as enthusiastic about WTO compliance when their subsidy report comes out.”