This article was originally published in Blakes Bulletin on International Trade, July 2005
Article by Ken Purchase, ©2005, Blake, Cassels & Graydon LLP
The U.S. and the E.U. are on the verge of a trade war over large aircraft subsidies. As they stand poised to lob metaphorical grenades at each other, one hopes they’ll notice that they’re not actually standing very far apart. On June 13, the U.S. and E.U. blocked each other’s requests for the formation of a World Trade Organization (WTO) Panel to rule on the legality of E.U. subsidies to the Airbus A350/380 projects and U.S. subsidies to the Boeing 787 project. Both countries can now require the establishment of panels at the next meeting of the Dispute Settlement Body.
Subsidies are an integral part of large civil aircraft manufacturing and their disciplining has been the subject of negotiations and simmering trade disputes for decades. The WTO’s Subsidies Agreement specifically refers to an anticipated agreement on civil aircraft subsidies but 20 years later an agreement remains elusive while the rhetoric continues to fly across the Atlantic unabated.
Airbus is developing the A350, a mid-sized airliner that will compete directly with Boeing’s 787 Dreamliner, and is seeking approximately US$1.7 billion in launch aid in the form of repayable loans from European governments.
The Legal Challenges
The U.S. has vowed to seek not simply the cancellation of launch aid going forward, but the return of funding already provided, including some US$3.7 billion in launch aid for the Airbus A380 super jumbo aircraft, deliveries of which are expected to begin in the fall. In addition to launch aid, the U.S. will challenge:
- financing of design and development through the Investment Bank;
- E.U. and Member financial assistance for the upgrading and expansion of airbus facilities;
- the forgiveness and assumption of debt by the E.U. and Member States for past Airbus launch aid;
- equity infusions and grants through government owned or controlled banks; and
- financing of Airbus related research and development.
The E.U. in turn has promised that, if the U.S. proceeds, it will have no choice but to proceed with its claim, resulting in the "biggest, most difficult and costly legal disputes in the WTO’s history" according to E.U. Trade Commissioner Peter Mandelson.
The E.U. challenge will target:
- tax exemptions, infrastructure and personnel subsidies by Washington state totalling more than US$7 billion;
- NASA and Defense Department grants totalling more than US$20 billion; and
- benefits exceeding US$200 million annually through the FSC/ETI tax program, which the WTO has already ruled illegal.
Both sides claim the other’s programs are export or import-substitution subsidies, which are strictly prohibited by the WTO’s Subsidies Agreement, or in some cases actionable subsidies, which are illegal if they cause specified adverse impacts.
The dispute’s implications extend well beyond the borders of the principal combatants. The repayment of E.U. subsidies could establish a disruptive precedent for government programs around the world and the industries relying on them were a panel to make such a recommendation. The WTO Panel examining Australian subsidies to the automotive leather industry ordered the Australian manufacturer to repay the grants it received but the ruling was never reviewed by the Appellate Body and subsequent disputes have avoided such intrusive remedies.
WTO review of the subsidizing effects for civilian aircraft of NASA funding and military contracts would likely stray into sensitive information the American government would be unwilling to divulge. Failing to provide requested information, however, could lead a Panel to draw adverse inferences against U.S. programs and increase the likelihood of finding a WTO violation.
Regardless of the outcome, the ruling would have significant applicability to other nations’ programs and particularly for countries with aerospace industries like Canada and Brazil, in particular. Indeed, Canadian programs and the industries relying on them may ultimately be more affected by any ruling than Airbus or Boeing. Past subsidy rulings have significantly constrained Canadian programs and Canada, to its credit, has a history of restructuring and restricting programs to ensure WTO compliance.
It is a poorly kept secret that both Airbus and Boeing are massively subsidized. Coupled with the WTO being a "plaintiff-friendly court", it is quite likely that both the E.U. and U.S. would "win" their challenges. Whatever such a victory might achieve, it would not resolve the dispute; the aerospace industry is simply too important to the U.S. and E.U. for meaningful compliance with a significantly unfavourable ruling to be a realistic option.
The more likely outcome is both sides receiving authorization to impose potentially massive retaliatory duties on each other’s imports. The end result is that the massively trade-distorting subsidies will continue and will be remedied with additional massively trade-distorting duties, often in sectors completely unrelated to the dispute.
Then they will have to sit down and negotiate a settlement.
Instead of taking this principled stroll away from the trade-liberalizing objectives of the Agreements they invoke, the U.S., E.U. and the rest of the world would be far better served if they just sat down and directed their energies towards negotiating today, leaving the WTO’s next subsidy ruling for tomorrow, or later.
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