WTO rules prevent exclusion of Airbus in tanker bid

Update, Sept. 10: When the WTO Interim Report finding Airbus violated certain rules against certain subsidies under the WTO, Boeing supporters were quick and prolific to jump on leaked reports and briefings and some called for the US Defense Department to exclude the Northrop Grumman/EADS/Airbus bid from the KC-X tanker re-compete.

Airbus supporters were strangely quiet, we thought.

Today, Sen. Richard Shelby (R-Northrop/AL) made public a letter to Ron Kirk, the US Trade Representative, on the issue. The full letter may be found here. A key excerpt:

As we discussed, many press reports are not accurately describing the complete results of the report.  In fact, on every Airbus airplane there was a claim against, the loan mechanism used was ruled legal under the WTO.  It is also my understanding that Reimbursable Launch Investment or “launch aid,” was determined to be an acceptable funding mechanism by the WTO.  Reimbursable Launch Investment was used on the A330-200, the airframe that will be offered for the tanker contract.  The A330-200 was found to have received investment aid within the permissible benchmarks under WTO guidelines – meaning that the funding received was not found to be a prohibited subsidy.  Most importantly, as you stated in our meeting, Boeing was not materially injured by any action taken by Airbus.

If Shelby’s information is correct, this is highly significant. A key Boeing/USTR objective was to have the WTO find that reimbursable loans (“launch aid”) were illegal. If Shelby’s information is correct, the key objective was not achieved.

A second key objective was to block launch aid for the A350, and previous reports indicated this was not achieved, either. If this report is also correct, these are two major points on which the USTR and Boeing failed, and this would be a huge blow to the USTR and Boeing.

None of this diminishes the reported wins over A380 illegal subsidies and research and development issues, but Boeing supporters’ hyperbole over the Interim Report seem overblown and demands that Northrop be excluded from the KC-X tanker competition, based on the [apparently erroneous] understanding that launch aid for the A330 and other A-Series aircraft was found to be illegal, is off target.

Original Post:

For those Members of Congress who demand that the Pentagon exclude Airbus, via Northrop Grumman, from bidding on the KC-X tanker re-compete because a WTO three-judge panel issued an Interim Report finding Airbus received illegal subsidies, guess what:

Another provision in the WTO rules, dating to 1996 and to which the US is a signatory, specifically states that there cannot be “cross-retaliation” in government procurement in response to a WTO action. Further, the same provisions say that international competitors cannot be discriminated against, or excluded,  in favor of domestic companies except under very narrow and specific circumstances.

We’re still putting our information together but were prompted to post this item in response to this Reuters story from Wednesday night that the Pentagon is nearing completion of its Draft RFP for the aerial tanker, for issuance this month. Reuters quotes unidentified sources as saying there will be a provision in the DRFP about the WTO finding, which is still subject to comment, a final draft, adoption and appeal–a process that could take years. Reuters’ sources don’t say what the provision will say.

We have read the relevant sections of WTO rules that make it clear cross-retaliation is expressly prohibited. The entire section on government procurement is designed to protect competition from undue pressure from domestic politicians.

We have a few more days of research, but the language is clear (even for a bunch of lawyers writing rules for an international organization).

There is also express prohibition in WTO rules against a victorious party (the US government, in this case) from jumping the gun on self-help. Engaging in self-help opens the imposing government to sanctions.

Since the politicians are relying on the WTO Interim Report to exclude Airbus (Northrop) from the KC-X competition, they might take note of the WTO prohibitions on cross-retaliation and requirements for fair competition for international suppliers.

7 Comments on “WTO rules prevent exclusion of Airbus in tanker bid

  1. If I read this correctly, the US can simply decide that the tanker is “indispensable for national security” (something I’m sure everybody can agree on) and the government procurement provisions do not apply.

    http://www.wto.org/english/docs_e/legal_e/gpr-94_02_e.htm

    Article 23 of the Agreement on Government Procurement:

    1. Nothing in this Agreement shall be construed to prevent any Party from taking any action or not disclosing any information which it considers necessary for the protection of its essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defence

    And the the reports are true, the WTO apparently had issues with not only the A380 funding, but with the way the entire range of Airbus jets was funded. So how can cross-retaliation rules apply to a sanction against the product found in breach of WTO rules?

    • But seeing as the competition was already run with Norhtrop-Grumman/Airbus participating, it would seem odd or unseemly to suddenly say Airbus cannot participate due to “national security” reasons.

  2. It looks like I was right then, when I said in an earlier comment that “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 (Boeing/USTR).”

    Now, I would assume that a US senator have access to USTR data and that he likely will have been given a clear indication on the wording by the WTO in the preliminary ruling in B vs. A. Therefore, if Mr. Shelby says that RLI was determined to be an acceptable funding mechanism by the WTO, then that’s it; no more speculation required on which way the wind is blowing.

  3. I find this bit interesting…
    “Most importantly, as you stated in our meeting, Boeing was not materially injured by any action taken by Airbus.”

    Which is exactly what USTR was claiming from the beginning.

  4. I guess we won’t know the whole, or real story, until the official release of this ruling. Even then, I am of the belief that advocates on both sides will see it all in their shades and that there shall be very few objective voices out there.

    • That’s right, as we have another Senator saying this….

      WASHINGTON, Sept 11 (Reuters) – A World Trade Organization panel has found that European subsidies for Airbus (EAD.PA) injured its U.S. rival Boeing (BA.N), a U.S. senator said on Friday in remarks that clashed with a colleague’s description of the ruling.

      “They didn’t assess a damage amount, as of yet. But they said there was a violation of the rules and there was harm that happened to Boeing because of this … aid that was illegal,” Senator Sam Brownback of Kansas told Reuters on Friday.

      http://www.reuters.com/article/marketsNews/idINN1152658420090911?rpc=44

  5. Some people seem fairly confident that the WTO will rule against the U.S. on the EU subsidies complaint. How do they know this?

    What if they don’t and the U.S. wins both cases?

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