This Reuters report tries to make sense of the conflicting claims by the EU and Americans over who won what in the finding issued Friday by the WTO three judge panel.
Here is a somewhat different version of the Reuters report with additional detail.
Other stories of note:
Bloomberg has this report about the massive amount of aid the US pumped into various industries and how this might affect the Airbus WTO finding.
EurActiv.com provides this European perspective, including a suggestion that negotiations to settle the dispute could begin in March.
Metal Miner, a trade publication that follows the metals industries (of no small importance to airplanes), has this take on the WTO stuff, in the same format of our take below.
Below is our take on the whole matter.
A few days have passed and the initial frenzy over the WTO finding that Airbus benefited from illegal aid has died down. Still, since the finding itself has not been made public and we’re all reacting to leaks and “briefings” of partisan interests, trying to make sense of the finding is challenging at best.
As long-time readers of this column know, we predicted Airbus would be found to have “sinned” against WTO rules. We also predicted, and continue to do so, that Boeing will likewise be found to be have benefited from “illegal” subsidies as well.
We also predicted that Boeing’s political supporters in Congress would use the WTO finding against Airbus to argue that the Pentagon should not award the KC-X tanker contract to the Northrop Grumman/EADS/Airbus bid to provide the A330-based KC-30 to the USAF to replace the aging Boeing KC-135s. Sure enough, US Rep. Norm Dicks (D-Boeing/WA) was first out of the box to sing this song, followed by US Rep. Todd Tiahrt (R-Boeing/KS). Equally predictable, US Sen. Richard Shelby (R-Northrop/AL) said the finding should be irrevelant to the competition.
Setting aside all the politics of the matter, what does the finding mean? We try to make some sense of it below.
What is the affect of the finding? As we wrote Friday morning in advance of the delivery of the finding, there is little immediate effect beyond the political and public relations points scored by Boeing and its political supporters. The parties have the right to comment on the finding, submit responses and seek a review by the WTO three-judge panel that issued the finding. After this review, the report–revised or not, depending on whether the panel accepts or rejects the party submissions–goes to the WTO for ratification of the finding. After this decision, the parties could appeal. Only after all appeals are exhausted will the WTO authorize the complaining party (in this case, the US) to impose tariffs should it elect to do so.
Can the US impose sanctions on Airbus now? Not according to WTO rules. The full appeal process must be completed first. If the US (or conversely, the EU should the WTO also rule in favor of its complaint about Boeing) jump the gun and impose sanctions, then the US (or EU) will be in violation and counter-sanctions could be imposed.
Is it definite that Airbus will be penalized in this event? No. The EU and the US could negotiate a new agreement that will render all complaints moot. Absent this, there is no requirement that either the US or the US impose tariffs on Airbus or Boeing, although this is an option. The tariffs may be imposed on any industry based in the home country of the guilty party, whether this industry has anything to do with Airbus or Boeing or even aerospace. French wines, German bratwurst or Washington State apples or Alabama cotton could be the targets of tariffs. This is one of the absurdities of the entire case. Or no penalties at all might be imposed. This was the case in a WTO complaint and counter-complaint between Canada and Brazil over improper export subsidies for the Bombardier and Embraer regional jets. The WTO found both sides acted illegally but neither side imposed penalties.
If nobody imposes penalties, what’s the point of a WTO complaint? Good question. The lawyers get rich. Is this a good thing?
The US politicians said this was a huge win for Boeing and the US. Was it? Like President Clinton’s notorious saying, “it depends on what the meaning of ‘is’ is,” it depends on what the meaning of ‘huge’ is. Leaked information claims the WTO rejected 70% of the USTR/Boeing complaints and that some launch aid to Airbus was legal. But without details, we don’t know what this means. We also don’t know how many of the 70% were frivolous, thrown in like the proverbial kitchen sink, or how many were found to be off-base on their merits. If the 70% figure is accurate, or mostly so, that means 30% of the complaints were upheld. As in baseball or football, it doesn’t matter much if most of the calls went in your favor but on the final out of the game the call went against you. You lose. On the other hand, if indeed the WTO panel found, as reported, that certain launch aid is permissible and other types of aid was not, then it’s not a clean win for the USTR and Boeing.
Does Airbus have to repay or refinance or restructure the aid that the WTO found to be illegal? Certainly not until all appeals are exhausted and the case is final. As the to root of the question, we’re actually not sure. We’ve been given conflicting information on this and have to get some clarity. The USTR and Boeing certainly think so.
How long will it take for everything to be final? It could be several more years.
Does this prevent aid to the A350? According to leaks, the answer is No. According to the leaks, the WTO specifically carved out application of the finding to the A350 because during the panel’s review, Airbus hadn’t sought launch aid and the member states hadn’t offered it. This is only a recent event. The USTR has said it will challenge launch aid for the A350; Airbus told us some time ago that any launch aid will be structured to comply with WTO rules.
What about other manufacturers? Are they affected? They could be. Bombardier is developing the CSeries, a 110-149 seat jet that will compete with the lower end of the A320 and 737 families. The company’s funding plan mimics that followed by Airbus (one-third from government launch aid), so clearly this funding model should be affected. China is funding development of the ARJ21 90-seat jetliner and has ambitions for a 150-200 seat Comac 919 jet that is squarely in the A320-737 market. China, as a member of the WTO (be careful what you ask for), would have to comply, too. Japan’s Mitsubishi is developing the 70-90 seat MRJ and Kawasaki wants to develop a 150-seat jet. The Japanese government provided $1.5bn to the so-called Japanese Heavies (Mitsubishi, Kawasaki and Fuji) for their role in the Boeing 787 development and any government funding for the domestic development of a jet would have to comply with WTO rules. Russia is trying to revive its aerospace industry, and is test-flying the Suhkoi 100-seat Superjet. As a WTO member, it would have to comply. All these countries were interested parties in the EU-US dispute. Clearly, this is why they were.
Wait-Japan helped fund the 787? Is this part of the EU complaint against Boeing? Stupidly, no, and we never understood why the EU and Airbus didn’t go after this–other than Airbus didn’t want to offend the Japanese and queer any potential sale of the A380 there. A fat lot of good this motive has achieved.
Will this ruling hurt the Northrop/EADS/Airbus effort to win the KC-X contact? It certainly doesn’t help. During Round Two, Boeing’s Congressional supporters cited the pending WTO complaint and said “illegal” activity should not be rewarded with a contract. Now that the quotation marks around illegal are gone (but also recognizing that the WTO process still has a long way to run), this only adds to the politicians’ case. Of course, this principal ignores Boeing’s past illegal activity in the tanker history in which two people went to jail, and also in the Lockheed Martin trade secrets theft by a Boeing employee and even application of this principal would thereby disqualify Boeing. It also ignores the prospect that Boeing will be found to have engaged in illegal activity if the EU prevails in its counter-complaint, with findings due perhaps within six months–right in the middle of the KC-X competition for Round 3. By these standards, the USAF should buy the Russian aerial refueling tanker. Russia wasn’t involved in the WTO dispute, so it’s the only party with clean hands.
Should the Pentagon consider the WTO findings? We don’t think so, mainly on the basis of what we outlined in the preceding paragraph and on the assumption Boeing will be found by the WTO to have sinned, too. These are off-setting penalties, in our view. But beyond that, according to a party with a dog in this hunt, “successive presidents and Congresses of both parties have rightly determined that ongoing WTO cases are irrelvant to US defense acquisition, and have correctly refused to penalize US warfighters by holding their needs hostage to an international administative process.”
So now what? The WTO process continues. The EU and USTR have the right to comment on the finding. Clearly the EU will argue the adverse findings are in error. The USTR will argue the findings on the rejected 70% (or some portion of them) are in error and will offer rebuttal to the EU’s comments. Eventually the report goes for ratification, followed by appeals. Years will pass.
In the meantime, the Pentagon will issue its Draft RFP for the KC-X competition Round 3 (the draft should come by October 1). Boeing’s supporters in Congress will try to include a requirement that the WTO finding be considered. Northrop’s supporters will oppose it. If the requirement stands, then presumably when Boeing is also found to have sinned, then what? The Members of Congress who are meddling on this point have to be careful what they ask for. They could further muck up a procurement that has been mucked up from the start.
What do you think about all this? Long-time readers know that we never quite understood how aid that was legal to Airbus and Boeing under the 1992 GATT accord could now be considered illegal under the WTO rules. Maybe they aren’t, if leaks about the finding on this point are correct. We have to wait until the finding becomes public to find out the answer to this question. We also long-held the position that Airbus and Boeing probably pushed the envelope until it ripped on aid and that’s why we believed throughout all this time that both sides will be found to have engaged in activity illegal under WTO rules.
As long-time readers also know, we totally oppose government aid of any kind to anybody, whether it’s launch aid or tax breaks or whatever. We consider it corporate welfare, plain and simple. We believe Airbus, especially given its parity with Boeing since the mid-1990s, doesn’t need state support and should be going to the commercial markets like Boeing. If Airbus complains that the 787 is “the most subsidized aircraft” ever, let it replicate the production financing model followed by Boeing for the 787 and get the nations to support the industrial partners (as Boeing did in Japan and presumably Italy) and not take the money directly. Since Airbus didn’t include this aspect in its WTO complaint, then it’s fair game.
We don’t like them, but as long as tax breaks are granted by countries and states to attract business, they ought to be available equally to both sides.
If there is any benefit to this whole debacle, we think in the end it will be how it is applied to the emerging competitors in Canada, Japan, China and Russia–and any other country, too. This is one of those unintended consequences, but in this case this probably is a good one, not a bad one. And it was hardly the motive when the USTR and Boeing pressed the issue in 2004.