The 1,038 page Final Report by a three-member panel of the World Trade Organization on the US complaint about illegal subsidies to Airbus was made public today.
Findings and Conclusions: 5 pages, PDF. These are difficult to grasp when taken in isolation of reading the entire report, which at this posting we’ve not done.
The Interim Report was issued in September and the Final Report in March, but these were supposed to be confidential. Riddled with leaks to Airbus and Boeing partisans and promoted in the press as wins and losses by both sides, the public report is the first opportunity to read it for one’s self and draw conclusions.
At 1,038 pages this is going to take a while.
In a pre-release, embargoed press briefing, Airbus and its parent EADS said the appeals by the US and European Union are expected on points each side believes were in error.
Airbus made the point that this panel report has not been adopted by the WTO as fact and therefore any claims by Boeing that this is the final, and actionable, conclusion is misleading. The panel report may be appealed (and will be), after which the WTO appeals panel must decide on these appeals. After this process is done, the WTO itself must accept or reject the report.
Then negotiations between the US and EU to resolve differences are likely and if a resolution cannot be reached, a sanctions process must be undertaken before any can be imposed, Airbus says. All these steps will take years, company officials believe.
“Both sides will find things in the report [released today] to get excited about,” a senior Airbus official said. But “you won’t find any whiz-bang in it. The sky is not going to fall. [Today] will not fix some kind of deadline for Airbus to pay everything back. The WTO is a kind of arbitration. This is the view of three people.”
The same, of course, will be true of the forthcoming WTO panel finding due next month on the EU complaint over illegal subsidies to Boeing.
According to Airbus, the WTO panel found that Boeing specifically and US aerospace generally had not been harmed by Airbus and its subsidies, rejecting allegations that US jobs were lost to Airbus and the demise of Lockheed’s commercial aerospace division and McDonnell Douglas’ merger into Boeing and exist from commercial aerospace were the result of illegal subsidies to Airbus.
Instead, Airbus says the panel found Boeing’s job losses and market share decline were due to Boeing’s own corporate strategies and decisions to outsource jobs. Likewise, decisions by McDonnell Douglas led to its decline and fall in commercial aerospace. Airbus pointed to a Federal Trade Commission conclusion on this very point when it approved the merger of MDC into Boeing in 1997.
(Editor’s note: Lockheed nearly collapsed in 1970 under the weight of its C-5 military transport program and the bankruptcy of Rolls-Royce, the sole-source engine supplier to the L-1011 commercial airliner then in development. The UK government bailed out Rolls and the US government bailed out Lockheed—only eight months after the formation of Airbus Industries, the forerunner of today’s Airbus. Lockheed split the tri-jet market with McDonnell Douglas’ DC-10, to the detriment of both companies.
(Falling behind the DC-10, the L-1011 never caught up. Had the US government allowed Lockheed to collapse, McDonnell Douglas presumably would have picked up nearly all of the 250 L-1011s eventually sold and the DC-10 would have been a solid money-maker. It is clear Lockheed’s commercial failure was due to the C-5 and Rolls-Royce program difficulties and splitting the market with the DC-10. Douglas’s decline in the commercial market was due to splitting the tri-jet market, the disastrous DC-10 crashes due to design defects and corporate policies—the latter imposed upon Boeing following the 1997 merger which was dominated by McDonnell Douglas influence on the Board of Directors and C-level management.)
Getting back to the Airbus briefing, Airbus says the panel “determined that not one single American job or Boeing profit lost was due to Airbus. All of these things that happened to Boeing are the result of Boeing’s own corporate decision making,” Airbus quotes the panel’s report as concluding.
The company says the panel report does not find launch aid to be illegal, despite Boeing claims to the contrary. Terms must be on a commercial basis, however, and in this there were some violations that are easily corrected for the presumed forthcoming launch aid, or Reimbursable Launch Investments (RLI) as Airbus likes to call it, to the A350.
Airbus quoted the panel’s report as saying, “The evidence and arguments do not lead us to conclude” RLI is illegal. “This will not end launch aid,” Airbus said.
“Boeing will try very hard to paint [today] as a painful and hard decision,” the Airbus official said. “These next few weeks will be hard for us, I admit it. [But] this will not be a one-sided affair.” The Boeing Interim Report is due out around July 16, and Airbus believes Boeing will be found in violation on $24bn worth of subsidies.
“Boeing admitted in the EU case it did get subsidies, like the Foreign Sales Corporation tax breaks. It admitted that a lot of NASA money it got were subsidies.” Airbus said the tax breaks from Kansas, Illinois and Washington State, amounting to more than $3bn, will likely be found to be illegal subsidies.
Research and development grants, including those received by Airbus, “are as dead as a doornail,” Airbus said, and Boeing received these from NASA and the Defense Department.
The A330-200, on which the EADS KC-45 tanker is based in the current USAF tanker recapitalization competition, will not be named as a plane that received prohibited subsidies,” Airbus said. Rather, the plane will be named as having received actionable subsidies to displace sales in places like Sri Lanka. But this should have no effect on the KC-X competition and Airbus says the US Congress cannot demand the panel’s finding be taken into account by the Air Force in assessing the cost of the tankers because such action is prohibited by the WTO rules.
Summing up, Airbus says, “This process will take years to come with no pre-conditions for negotiations. It will come back to either some subsidies will be provided or none will be provided.”
Needless to say, it will take us a while to read and digest the public copy of the report.
Aviation Week has this story on a topic we’ve touched on before, and that is the trade dispute is serving as a blueprint for the emerging competition to Airbus and Boeing about how to structure state aid to the commercial aviation industry.
This Aviation Week story is about the supplier down-selection for the Comac C919 but it makes an oblique reference to massive state aid for the development of this airplane.
This column in The Hill, the Congressional newspaper, discusses the US support for the Boeing 767 program.
Mobile (AL) passed an amended incentive (subsidy?) agreement yesterday for the EADS KC-45 tanker. Details are being kept secret and some officials who voted for this weren’t privy to it. Here is the story. If this sounds like Boeing and Charleston (SC) for the 787 Line 2 incentives, it is.
Here is the Market Watch write up of the public report.
The US Trade Representative claims victory in the case. The easiest way to find a variety of reports is to go to www.news.google.com and enter “wto airbus” into the search engine. We can’t keep up with the reports here.
Formal Airbus Statement:
The WTO panel report in the US case against the EU published today confirms Airbus’s earlier predictions: 70 percent of the US claims were rejected and wild allegations have been proven wrong. Neither jobs nor any profits were lost as a result of reimbursable loans to Airbus.
“These results are in line with the previous versions of the WTO panel’s findings. Airbus, the EU and the Member States are closely analyzing the report in advance of a possible review by the WTO Appellate Body”, said Rainer Ohler, Head of Public Affairs and Communications of Airbus.
Research grants were condemned with important implications for the coming report on US subsidies to Boeing. Airbus expects the WTO to issue the interim report on Boeing subsidies very soon. “Only the availability of the report on the parallel case on Boeing subsidies will bring the necessary balance to allow for a possible start of negotiations, without any preconditions,” Ohler added.
Airbus expects this WTO dispute to continue for a few more years. As in all other trade conflicts, resolution will finally only be found in trans-Atlantic or even multilateral negotiations.
Key findings in the report are:
“The United States has not established … that, through the use of the subsidies, the European Communities and certain EC member States cause injury to the United States’ domestic industry….” (Para. 8.4)
“This decline [in wages and employment] clearly reflects the significant cost-cutting and efficiency programs instituted by Boeing, as well as increased outsourcing…” (Para. 7.2110)
“The United States has not established … that the effect of the subsidies is significant price undercutting.” “The United States has failed to demonstrate the effect of LA/MSF (“Repayable Launch Investment”) … caused Airbus to lower prices with the effect of causing significant price suppression, price depression or lost sales.” (Para. 7.2011)
“We see nothing inherent in the LA/MSF contracts which, in and of itself, renders them a form of financing that by definition will always involve below-market interest rates. … LA/MSF is not synonymous with any particular degree of subsidy intensity.” (Para. 7.532)
A380 LA/MSF is not a prohibited subsidy per se – illegality depends on the specific provisions in the loan agreements (Para. 8.3). A380 LA/MSF was otherwise found to be structurally sound.
The United States has not established that A330-200 LA/MSF – provided only by France – is a prohibited subsidy. (Para. 8.3):
“We consider that the commitments … did not confer any of the benefits the United States asserts were enjoyed by Airbus. Accordingly, we dismiss the United States’ complaint against the alleged USD 1,700 million LA/MSF measure for the A350.” (Para. 7.314)
“We note that the … rules … do not require a panel to specify how the implementation of recommendations … should be effected by the subsidizing member…. In the absence of any requirement to do so … we do not make any suggestions concerning steps that might be taken to implement those recommendations.” (Para. 8.8)
We have asked Boeing for its response and if one is received, we’ll post it.