No immediate effect from WTO ruling

Update, Sept. 6: There is a report out of Germany that the WTO found state loans to Airbus to be acceptable. The conflicting information and enigma goes on.

Update, 2:00pm: The New York Times says 70% of the USTR/Boeing complaint against Airbus was rejected by the WTO. The link is contained in the NY Times reference below in the list of articles.

News Flash, 11:35 AM: Reuters is now quoting EU sources that the WTO didn’t hand the US and Boeing the victories that have been claimed:

BC-TRADE/AIRCRAFT-EU-WTO (URGENT)

WTO did not rule Airbus aid illegal – EU sources

BRUSSELS, Sept 4 (Reuters) – Comments that the World Trade Organisation on Friday backed a U.S. complaint against European Union aid to plane maker Airbus are wrong and misleading, EU sources with knowledge of the WTO ruling said.

“The ruling is not a black-and-white case. It simply is not a great victory for the United States,” one source told Reuters on condition of anonymity.

“The claim that the WTO ruled that subsidies given (by the EU) to Airbus for their A380 plane were illegal is wrong and misleading.”

Reuters reported earlier from Washington, citing a person familiar with the case, that the WTO had ruled that billions of dollars in European loans to help Airbus develop civilian aircraft were an illegal subsidy under world trade rules.

Another EU source said aid given by Brussels to the European plane maker for its A350 aircraft was “not mentioned in the (WTO) report and so would not have to be repaid”.

He was speaking after the WTO issued a pivotal, but highly confidential, ruling on subsidies given by the EU to Airbus that stands to impact the global aircraft sector.

The Hill, Aug. 31: This specialty web publication follows Congress and has this long analysis of the prospect of the WTO ruling on the tanker competition, published in advance of the Sept. 4 report.

Key articles on the WTO dispute:

Reuters, Sept. 3: This one is a good recap of implications, reported in advance of the WTO staff report.

Financial Times, Sept. 3: Another good story in advance of the ruling about the broader implications of the US/Boeing win.

AP via Business Week: This story presents a good analysis on how the WTO ruling could hurt both Airbus and Boeing.

Reuters, Sept. 4: This is a great Fact Box recapping all the issues involved.

Reuters, Sept. 4: Boeing’s Defense unit says the Pentagon will have to decide what, if any, affect the WTO action will have on the tanker competition, according to this Reuters report.

The Economist, Sept. 4: Here’s a European take on the WTO trade dispute.

SkyNews (Europe), Sept. 4: As expected, the UK said it will go forward with plans to loan Airbus more than $500m for the development of the A350.

Bloomberg News, Sept. 4: This report says the WTO did find illegal subsidies were provided on the A380, conflicting with the Reuters report above.

Bloomberg News, Sept. 4: It didn’t take long for a Boeing supporter to tie the WTO report to the KC-X tanker bid. Note on comment on this issue below the jump at the end of our assessment:

U.S. Air Force Tanker Bid Should Consider WTO, Rep. Dicks Says
2009-09-04 19:22:06.212 GMT

By Gopal Ratnam
Sept. 4 (Bloomberg) — The U.S. Air Force must tailor its new refueling tanker bid by considering today’s World Trade Organization’s ruling that Airbus SAS received some illegal subsidies, Representative Norm Dicks, a Democrat from Washington state, said in a statement.

“It would be inconceivable for the Defense Department to issue its request for proposals for the new Air Force refueling tanker without including a provision which recognizes the ruling issued today by the WTO panel,” Dicks said in the statement.

“The U.S. government cannot reward illegal market actions that have harmed U.S. manufacturers.”

The Hill, Sept. 4: This specialty web publication follows Congress and has this long analysis on the possible effect of the WTO report on the tanker competition.

Aviation Week, Sept. 4: Reporter Robert Wall, one of the most insightful aviation journalists, is based in Europe and has this very good report on the WTO conclusions.

New York Times, Sept. 4: The NYT says the WTO found some but not all Airbus aid was illegal and that “most” of the financial aid to Airbus was legal.

Financial Times, Sept. 4: This London-based story has some specificity on the illegal launch aid attributed to the A380.

Reuters, Sept. 4: This article focuses on the affect of the WTO ruling on the pending KC-X tanker competition.

Our Take:

There won’t be any immediate practical affect from the World Trade Organization staff report that Airbus benefited from improper subsidies in the development of its entire line of aircraft. The immediate affect will be political and public relations points.

Merrill Lynch in Europe issued its own opinion ahead of the WTO staff report that concludes the same, entitled “WTO Outcome: Much ado about nothing.” ML issued a Buy on EADS.

The staff report, to be issued Sept. 4, has to be reviewed by the European Union and the US Trade Representative (USTR). Both sides can comment on the report and ask for revisions, a process that could take months. After the staff reviews comments and requests, a new report has to be issued for the WTO to review it, which procedurally could lead to more revisions but in practice has not been the case. Once the WTO endorses the staff report, the decision could be appealed, a process that could add years before a decision becomes effective. Once the decision is effective, the winning party is then able to impose sanctions if the losing party fails to comply with the ruling.

But imposition of sanctions is not a given, and on whom the sanctions are imposed is a bizarre part of the WTO rules. Sanctions do not have to be imposed on the losing party’s affected company–in this case, Airbus. The USA could impose sanctions on the French wine industry or German Bratwurst imports. Likewise, if the EU prevails in its counter-complaint over Boeing subsidies (as expected) in a staff report due within six months, the EU could impose penalties on Washington State apple exports. Or either side could elect not to impose any penalties at all, as was the case in a WTO ruling that Canada and Brazil both violated export subsidy rules in support of Bombardier and Embraer regional jets.

Although the US and Boeing say that this Airbus conclusion means Airbus cannot use launch aid for the A350, the EU and Airbus have already rejected the nexus. France, Germany and the UK are prepared to provide about $5bn in launch aid.

The immediate benefit to the US and Boeing over the WTO staff report on Airbus is that both will have major public relations and political points to promote. Boeing and its Congressional supporters will use the staff report to beat Airbus about the head over A350 launch aid, but since the staff report has no force until ratified by the WTO itself–which, as noted, will be years away due to almost certain procedural appeals–Airbus will go ahead with launch aid. Airbus has also previously told us that any such aid will conform to WTO rules and not be structured under the now-renounced 1992 GATT agreement that governed launch aid from the A300 through the A380.

Boeing and its Congressional supporters will use the staff report to argue, as they did while the case was pending, that the Defense Department should not award the USAF contract for the KC-X aerial tanker replacement for the Boeing KC-135 to a company that acted illegally. Even though Northrop Grumman is the prime contractor with the USAF should the contract be re-awarded to Northrop, the airplane on which the KC-30 is based is the Airbus A330-200, one of those aircraft identified in the US complaint as benefitting from illegal subsidies. As far as Boeing and its supporters are concerned, the name on the side of the KC-30 is Airbus and not Northrop Grumman.

EADS said during the previous competition that all launch aid for the A330-200 has been repaid.

Boeing and its supporters need to be careful about how much they bear down on the tanker issue. When the WTO renders its staff report on the EU complaint over Boeing subsidies, and if as expected Boeing is found in violation of WTO rules, too, Northrop and its supporters can be expected to counter that Boeing behaved illegally as well. Taking this argument to its absurd and illogical conclusion, the only one left building a heavy jet tanker is the Russians, which hasn’t been party to any WTO action on this front.

Talk about sending US jobs overseas….

14 Comments on “No immediate effect from WTO ruling

  1. If there is to be an immediate impact, it will be because of EADS thumbing it’s nose at a negative ruling, and trying to lobby it’s way out of it. It’s already indicated that it intends to just pretend it never happened.

    The negative that exists is that there will be an andyi airbus tanker backlash in congress.

    If that doesn’t happen in the face of airbus recalcitrance, I’d be surprised.

    But as I have always predicted, the WTO will not rule against airbus. Not in any meaningful way. It will only appear to be a pro Boeing decision, but it will remain forever tied up in a Belgian knot as A-350 proceeds apace, and Boeing bleeds R+D money.

  2. A WTO ruling against Airbus means little for commercial aircraft, as there will be a countervailing WTO judgement against Boeing – Solomon’s justice.

    But the ruling means the end of the KC30 for the USAF. Airbus and NG should have been able to smell this one coming when the Boeing challenge was upheld.

  3. Northrop Grumman will protest–more loudly than they have alrady–that the WTO finding will have no impact whatsoever. However, I can see where this will cause their board more than a little consternation and concern. If the process is as lengthly as you indicate, can they afford to wait this out and take all the political heat? And there will be political heat–even more than we’ve seen to date.

  4. It is mostly wrong to invest such vast amounts of time and money into endless legal battles.
    Boeing was ill advised to do so.
    Far better had it been to invest their money and time into constrution of better aircraft.
    In the long term such an investment is far more likely to pay out.
    To avoid such a useless trade war at WTO and still give Boeing equal opportunities, the US government could have been providing the same amounts of subsidies to Boeing as the EU allegedly provided to Airbus.

  5. I still can’t understand why any WTO ruling should impact the kc-30.
    Both Boeing and Airbus and their representatives have demonstrably broken the law and they have all been fined and jailed. why should this court case be any different.
    Of course, the US can (and should) demand a limit on outsourcing, but it’s not like Boeing’s products are anything like All American.

    and what specifically is the problem about the euro govt’s subsidizing the american tanker.

  6. Trying to make sense of and trying to keep score of the significance of these leaks to the news media remind me of the big fuss made by KC-30 supporters crowing that “most of Boeing’s claims tanker protest were dismissed” by the GAO last June 2008. Frankly, one of the GAO findings was enough to trash the entire source selection for the tanker. In this vein consider the NYT report that the WTO dismissed “70%” of the U.S. complaints. If the NYT report is even close to correct, who knows that that other “30%” contains?

  7. Let me get this straight. All this fuss from the press, the blogs and the politicians, over a document that none of them have access to?!?!
    Can we get an order for a dose of reality and common sense please?

  8. And that isn’t even anywhere near to final. I also fail to understand why everybody calls it a ‘preliminary ruling’, while the WTO terminology is ‘interim report’ (see their website). The distinction matters. I think the whole discussion could benefit from:

    a) a clearer understanding of the WTO process (which will probably involve some horse-trading at the end, once the report on the EU complaints has come out); and
    b) waiting for the final report to appear.

    Not particularly realistic, I know, but wouldn’t it be nice?

  9. If the WTO did infact note that repayable launch aid — the raison d’etre of Boeings claim — can be an acceptable option for financing aircraft, then surely that must be a huge setback for the US.

  10. IF they WTO said that RLI is acceptable, that would indeed be a huge set back for the U.S. If they did not, and RLI is found in ANY way to be illegal, then that would be a HUGE win for the U.S.

    We just don’t know for sure at this point and all this is preliminary.

    However, I would hope that this will provide the incentive for a comprehensive settlement. There are new players in the game now on both sides. This may be the best chance to get an agreement that everyone can accept and live with.

  11. This is typical of Boeing and its political puppets, spin the facts and push out misinformation. What will be an illegal subsidy is when Boeing is given the Tanker Contract due to this strategy and their Tankers are late to schedule and Boeing passes large cost overruns to us taxpayers for a tanker less or maybe equal capabilies to Northrop’s Tanker.

  12. Pingback: Trying to make sense of WTO ruling « Leeham News and Comment

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