Trying to make sense of WTO ruling

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.

35 Comments on “Trying to make sense of WTO ruling

  1. “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.”

    The 1992 accord was not a GATT agreement. In fact, it was a gentleman agreement between Europe and USA to calm down the tension before the adoption of a new agreement that was suppose to replace the 1979 GATT agreement. But the nogiciations to adopt a new agreement failed during the Uruguay round.

  2. We don’t think Simon is quite correct on this. The whole trade dispute began when the US renounced the GATT agreement in 2004; if Simon were correct, then renouncing the agreement wouldn’t have mattered.

    Anyone have any clarity on this?

  3. I’m not an expert, either. But my understanding is that Simon is correct. To the extent that subsidies are legal or illegal now under WTO rules they were just the same prior to the ending of the 1992 Bilateral Agreement. As with all legal issues it’s what the courts decides that counts. As long as all interested parties forbear to take the matter to court then the legalities of the situation won’t be tested.

    At the simplistic level, Boeing changed their minds and decided that it was now in their interest to take matters to court and persuaded the US government to withdraw from the Bilateral Agreement. I don’t get the impression that Airbus have their hearts in the counteraction, so they presumably prefer the status quo ante. Which may also explain why they didn’t sue Japan.

    • You are right when you say that it is a proper intl bilateral agreement which imposed duties on the participants. But by gentleman agreement, I mean an agreement without recourse to assure compliance. Section 10 and 11 of the agreement can’t be seen as “recourse” like a wto action for example.

  4. I find that when supporters of the KC-30/airbus solution for the next USAF tanker are concerned, they cite “Darleen Druyun”. This was a few years back. As I recall, Boeing paid a $600 million fine and did not take a tax deduction. While this may be morally consoling to some, it is irrelevant to the next phase of the tanker procurement.

    These leaks will clearly have an impact, especially if the EU is found to have unfairly subsidized their “champion”. Military procurements are outside the WTO. Basically, we play by our rules. There is really no obligation to let EADS compete if the Congress decides that the only way for the USAF to get a tanker in the next decade or two is to sole source it to Boeing. EADS will be very, very unhappy, but life will go on. They can take consolation in their A400M project.

    Clearly, this affair is so politically toxic that DOD & the USAF only invite further rancor, protests, controversy, and delay by allowing airbus in the tent. As a practical matter, this ruling will elevate the toxicity level in the political arena to radioactive.

    Will Northrop-Grumman still want to play under these conditions?

  5. Good points, Aurora.
    Iโ€™ve read that the 1992 GATT agreement was agreed to by the US because the EADS/Airbus needed unusual funding to grow into a viable aircraft manufacturer. The 992 GATT agreement certainly canโ€™t be justified under that reasoning anymore?!

    I can’t understand why we ever let EADS into the Air Force tanker deal. What sense does it make for such a large amount of US Tax moneys going to a US competitor, enhancing their ability to be more competitive? Let the EU develop their military industrial complex with their taxes, not ours.

    • Errr… Newsflash, Airbus does already have a very well developed tanker, and one that is arguably further along than Boeing’s product (yeah I know, that’s hard to take). So I as a European am with Leeham on this. Why would you be willing to forego the benefit of EU taxpayers money for the US Air Force? If Boeing eventually manages to come up with a more suitable plane, by all means take it, but do that for the right reasons (i.e. it being more suitable). If Airbus had the more suitable plane, then the fact that it was subsidised by EU taxpayers should be icing on the cake.

  6. OK, we can’t let GarryGR’s comment pass without a little tweak here. If Airbus developed the A330-200 with taxpayer money (as we know it did), why not let European taxpayer money be the root funding on the A330-based KC-30? TIC. (Tongue in cheek.)

  7. Leehamnet, does “tweak” mean rebut; I’m not familiar with that usage? ๐Ÿ™‚ I don’t see that going to my point, at any rate. The point being that the US tax moneys would, of course, help EADS further develop their defense side of the house. By the way, I’m all for the EU spending more of their GDP (taxes) on defense and sharing the load. From what I’ve read, the US still outspends the EU by a large margin, on defense; another reason I think the US should keep especially large defense contracts in the US. At any rate, I believe Aurora stated above that defense contracts are not subject to the WTO (probably at the EUโ€™s insistence?).

  8. Ashton Carter, the new DOD Asst Sec for Acquistion, went on the record last week saying that the industrial base would be factored into acquisition decisions (imagine that, the law has always required that for major acquisitions!). There is a significant difference between manufacturing tankers and assembling tankers that are manufactured in Europe.

    Beyond that, I suspect the senior leadership at the USAF and the leadership in DOD realize that if they put the airbus into the mix again the result will be inevitable: protest, delay, hate, discontent, and…yes…war without end.

    This WTO preliminary decision could be an opportunity to sole source for either the KC-767, the KC-777 or (my preference) a mix of both.

    Forget that “split buy” nonsense that John Murtha was trying to sell.

    Again, I expect this thing to go radioactive very quickly.

  9. Aurora, do you have “Boeing” tattoed on your butt? Is there even one little ounce of objectivity in your body? =:-)

  10. I do believe that WTO rules do supersede whatever agreement that 2 countries (political bodies) would make. After all, they do have to take into account Japan, Russia (are they or are they not party to the WTO), China, Brazil, Canada etc. Otherwise it would be an open and shut case in which neither party would have been found guilty. I mean how can you make an agreement and then 14 odd years later, complain that the other party was breaking the rules, even though they had not gone out of the bounds of this agreement? I am sorry but the U.S. seems rather petulant about launching a case based on this. Talk about playing by the rules. I have never seen this agreement but the U.S. claims it was only supposed to be valid until Airbus was self sufficient. Is this actually written in the agreement? If so, how was it defined? If it isn’t even in the agreement, then I don’t see why the U.S. is complaining. It is there own fault for signing such an agreement. Wouldn’t you think?

    • You sign an agreement, and when you no longer think it answers to your needs, you withdraw from it. It’s not a marriage, so there is no need to get upset about it. C’est la vie, as they would say in Toulouse.

      The WTO rules would supersede the agreement, but in order for the WTO process to start someone needs to complain. Since there were only two entities with grounds to complain (US/EU, as the only WTO members producing large civil airliners), and these two had agreed not to complain, the WTO did not get a look into it until the agreement was abandoned by one party.

      • Agreed, if it no longer suits you, you withdraw from it. Something that married people commonly do today. There was provision for withdrawing from the agreement but withdrawing from the agreement is not the issue.
        Why retroactively complain about all the financing done during that period and before, when you had an agreement with someone allowing them to do just that?

        Sure one is entitled to do so but one does look wrathful, pedantic or spiteful by doing so. Something like a bad divorce.
        Or like the child who agrees to play a game but does not like the rules after playing it for 12 or so years and then decides to complain about it.

  11. Last point for the day!
    If the U.S. were to include such language in the tanker procurement per Mr. Dicks et al, thus banning or eliminating Airbus/EADS/Northrop-Grumman from the competition, would not these parties then have the option to protest, once (assuming) Boeing is also found to be breaking the rules?! It would merely further prolong the whole mess, I would think. Something that all involved seem to want to avoid. Isn’t it ironic?!

    • Not really, since there would not be any room for an official protest.

      I’d think the US govt would be stupid to bring the WTO into the tanker procurement, since they should rather occupy themselves with getting the best plane for their soldiers, rather than throwing more pork into the barrel, but that’s just me.

      • Everybody else is dancing about in fear of another series of protests and delays, yet you alone feel there is no room for a protest. Interesting.

  12. This is a military procurement and falls outside the province of the WTO, just like the A400M. The congress can direct a sole source. (I guess you could protest in the national assembly at the UN or the EU parliament or something.)

    • Correct in that it does not fall under the auspices of the WTO but Northrop-Grumman, even if you feel they are only a front, are an american company that has participated in the previous phase of this contract competition. I doubt that the american political landscape is quite prepared to cut out one company in order to award, without competiton, the contract to the company that was involved in a scandal considering this very contract.
      Quite the dead horse you insist on flogging there.

  13. Aero Ninja. Just for you, let’s put that “scandal” in perspective.

    A former USAF employee and a Boeing employee were found to have violated the law, were prosecuted, and convicted. The entire process was done in accordance with the law, was public, and transparent.

    However, we have one of the airbus governments quashing an investigation into one of their major defense congractors over bribery involving the sale of fighter jets to a mideast country. That government decided that pursuing this investigation would jeapordize further sales. Characterizing this as a cover up would be an understatement. However, I would be certain that it would qualify as a “scandal”.

    Then we have that same government purportedly involved in a nasty piece of business whereby a convicted murderer is released from prison, ostensibly for “humanitarian” grounds, but with each passing day comes embarrassing disclosures–from their own country’s media–about business interests playing a key role. Is this a “scandal”?

    Now I fully expect the airbus camp to bristle if not fulminate over the comparisons, but when you want to discuss transparency, accountability, and legitimacy, you must be very careful not do do it from inside your glass house.

    As I noted above, Boeing paid a huge fine and elected not to even take the tax deduction for the fine, which they were perfectly entitled to do under law. This incident was irrelevant to the last tanker go-around, and it will be irrelevant to the next round–assuming that it even goes to a competition.

    Thus endeth the lesson.

    • Whatever. That Boeing did not take a tax deduction on the fine they paid is irrelevant to the point at hand, as is your rant about the actions of certain Airbus governments that have nothing to do with neither the tanker competition nor the WTO preliminary finding. The point I was making is that Northrop-Grumman is an american company and will have excellent grounds, not only to protest but also for a lawsuit, if the american government locks them out of a competition that they had already participated in.

      Thanks for your “lesson”. I have filed it in the appropriate container.

  14. Aurora, fines paid are not tax deductable per the IRS code, not because Boeing elected not to take the tax deduction.

  15. @AeroNinja

    “Everybody else is dancing about in fear of another series of protests and delays, yet you alone feel there is no room for a protest. Interesting.”

    I am not saying there won’t be a protest and delays. I am saying there won’t be a protest and delays because of WTO issues. If I were the USAF I’d just prolong the life of the current tanker fleet to about 2050, at the rate they are going that appears to be a reasonable, if somwhat optimistic expectation for their replacement. ๐Ÿ˜‰

    • Errr… Let’s look at the facts, and not CNN.

      Boeing did not elect not to deduct, it elected not to try to not deduct. Whether the try would have succeeded is an open question. The letter from the DoJ makes it clear that it is up to the IRS to decide whether compensatory claims (about 90% of the fine) could be deducted or not. They maybe deductible. They may not be.

      http://finance.senate.gov/press/Gpress/2005/prg071406d.pdf

      It is clear that the matter is ‘the belief’ of Boeing lawyers that part of the fine is tax deductible. I believe that if I had only asked her, Angelina Jolie would have married me, instead of Brad. That does not make it true.

      “However, Boeingโ€™s lawyers believed the settlement was tax deductible.”

      http://finance.senate.gov/press/Gpress/2005/prg072606.pdf

      The latter by McCain et.al. is political posturing/aimed to keep DoJ civil servants on their toes. Take your pick.

      Below are the 2008 rules by the IRS, which are very clear, but I do not know what the rules were in 2006.

      “Penalties and fines. […]
      On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. These fines or penalties include the following amounts.
      Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding.

      Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code.

      Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal.

      Forfeited as collateral posted for a proceeding that could result in a fine or penalty.”

      http://www.irs.gov/publications/p535/ch11.html

  16. Taxpayer, let’s use the NYT then.

    http://www.nytimes.com/2006/08/02/business/02boeing.html

    There was concern a the time that Boeing would be able to legitimately use part of the fine as a deduction. They elected not to do so for many reasons. However, as the article shows, there was confusion even in Congress as to what they could, or could not do at time.

    The issue is moot since no deductions were taken or attempted. Just as the “scandal” that precipitated the debate over the fine is now moot.

  17. Quite moot. Which makes one wonder why you felt the need to bring it up in the first place, and why you get upset on being corrected about it, or why indeed you still misrepresent it as “elected not to do so for many reasons. “, when it was really “elected not to try to do so for reputational reasons.”? It has nothing to do with the WTO case.

    As for “confusion in congress”, is that the news item before or after “night follows day”? ๐Ÿ˜€

  18. Agreed, its moot. I won’t raise it again if others don’t.

    But I think it would be most non-controversial to agree with Scott’s point that an adverse ruling aginst EU subsidies/RLI won’t help the airbus tanker bid?

    • It may surprise you that I do not agree. Oh sure in the PR light it looks bad, but the Pentagon and Northrop-Grumman were able to contain the rabid attack animals that Boeing continuously sent out during the last competition. I suppose it is all a matter of timing. Does the Pentagon get this thing sorted in the next 6 months? Yes then Northrop-Grumman and Airbus are damaged. If it takes longer than 6 months (any takers on this getting settled faster?), then the preliminary findings for the EU vs US case will be released. Anybody besides Aurora want to bet that the WTO will find against the US as well. Which would put the US in an interesting predicament. Being a Government found guilty of illegally funding one of their major companies, while running a competition for an aerial refueling tanker whereby a competing company has been banned for receiving illegal subsidies. It is so Monty Pythonesque.

  19. It is typical how Boeing fans and B’s political puppets are readily jumping on the bandwagon and clocking overtime trying to milk this cow called ‘subsidies’. It is also laughable how Dicks and Cantwell are painting this issue black and white, pushing Boeing towards some sort of moral high ground. We don’t know precisely any details of the preliminary judgement, what has been rejected or what hasn’t, nor if this judgement will be part of the final report. However from the numerous leaks in the links above, it seems that WTO found that RLI is not a state programme and that in principle RLI is an acceptable form of funding. What I hope was rejected, was US’ claim that the EU pumped $205billion (a truly preposterous amount) into Airbus, which harmed Boeing and MD. When only recently, Boeing’s troubles with the 787 were widely blamed on MD’s corporate culture. Looks like some people want to have it both ways.
    But what has started this WTO action? 2004 provided a very fertile ground with the Presidential election campaign and the launch of the 787. Which presidential-hopeful wouldn’t support their biggest exporter against the evil Airbus and the EU, in a clearly political move? Stonecipher giving all sorts press conferences pointing an accusing finger at Airbus while sitting on a fat package of $billions from Japan, Italy and the Washington state, not to mention numerous federal programs to assist Boeing. Can one tell me of a large aerospace company, capable of executing large aircraft development programmes, completely independent of the local and federal government? The Governments will always be involved as aviation is a key high tech industry. If a local government is not doing anything to attract the business of a large company then it is not doing its job properly. China is pumping untold amounts of money into aviation plus Japan, Brazil, Canada and Russia. If it wasn’t for the governments, there would never be a large aviation industry and we would still be swimming in boats.
    In the end we will do a full circle and come back to the starting point of US and EU negotiations, with years and $100s of millions wasted, all in the name of politics.

  20. Consistency is the hobgoblin of little minds. Well… In any case, it is not a condition that usually afflicts politicians.

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