Our take on the WTO panel report

Well, we have necessarily done a quick scan of the 1,000+ page document, skipping all the history and back-and-forth and concentrating on the findings and conclusions that begin on PDF page 288 of the document.

*************

Podcast with Scott Hamilton, Richard Aboulafia and Addison Schonland.

KUOW interview.

**************

As we noted in the previous post, as far as we are concerned there is a pox on Airbus and Boeing, for both have sinned (with Boeing’s sins yet to be detailed in the forthcoming Interim Report due July 16). Both need to go to Confession and then go forth and sin no more.

Having said that, it is clear to any reader that the US won on the fundamentals. Airbus can claim a few significant victories, to be sure. The US failed to get launch out ruled illegal. The US failed to block launch aid for the A350.

But significantly, the WTO found the launch aid provided was illegal on the terms and conditions as being below market rates or not on commercial terms. So future launch aid must be done on a commercial basis.

On this, we are now and have been in the past in full agreement: Airbus should have to go to the commercial markets just like Boeing.

Of course, this raises the question if Airbus has to structure launch aid on commercial terms, why go to the governments at all?

The answer Airbus gives is that the governments want to support their aerospace industries and the jobs they create and this is how they can.

Frankly, we find this to be a weak argument.

Obviously the more socialistic Europe wants jobs programs, but this is no different than the fal-der-all Boeing’s supporters tout in the KC-X tanker program and a host of other military procurements. There are, after all, example after example of military programs the US Defense Department has not and does not want, and tried to kill (Boeing’s V-22 Osprey being one notorious example), but which Congress foisted on the Pentagon in the name of jobs. (Boeing’s C-17 currently is another example; DOD wants to kill it, the USAF says it doesn’t need any more and Boeing and its supporters are doing everything possible to force the airplane to live on.)

So we’ll concede the governments want to maintain a modicum of control over Airbus through providing launch aid. But we personally think the real reason is that even on commercial terms, the governments may well be a more reliable source of funds than the commercial markets.

We don’t like government hand-outs (aka corporate welfare) of any kind, in any shape or in any form. Not for Airbus, not for Boeing. Period.

The WTO panel also rejected the US complaint that Airbus destroyed tens of thousands of US aerospace jobs. Boeing and its supporters have been bleating that Airbus killed McDonnell Douglas and Lockheed commercial airplane business. Not true. This removes a major talking point–or at least it should.

The WTO panel found that the illegal subsidies didn’t suppress pricing but the panel agreed with the US that Boeing lost sales in key countries, including Mexico, Germany and India and several others. Airbus tried to portray to the media that losses were confined to countries such as Sri Lanka, which didn’t matter.

Research and development grants were found by the panel to be illegal–which Airbus, in its media briefing, attempts to turn into a positive because grants from NASA and the US Defense Department are at the root of the EU’s complaint against Boeing’s “illegal” subsidies. If found illegal for Airbus, then these should be found illegal for Boeing and the amount is far greater for Boeing than for Airbus, the company claims. This sounds reasonable and could be a major setback for Boeing when the WTO panel reviewing this case is issued.

The statistical back-and-forth between Boeing and Airbus about how many US complaints were upheld or rejected is, to us, nonsense. This is the basis for which Airbus claims victories–asserting 70% of the US claims were rejected. Boeing, as noted in a previous post attachment, presents a chart that shows most of its claims were upheld.

This is similar to the Northrop Grumman response when the US Government Accountability Office found eight violations by the USAF in the 2008 KC-X contract award while rejecting most other Boeing complaints.

We don’t care. The fact is that launch aid terms and conditions were found to be illegal. $4bn in aid for the A380 was illegal. R&D grants are illegal (watch out, Boeing). And so on.

The US won and the EU lost. It doesn’t matter whether, to use an American football analogy, Airbus was offsides by one inch or by one yard, or whether it was one player or the entire team. Offsides is offsides.

We fully expect a similar outcome in the EU case against Boeing. We fully expect similar spins by the supporters of both sides.

Then what?

We find the whole spectacle tawdry.

14 Comments on “Our take on the WTO panel report

  1. Hasn’t Airbus benefited from NASA discoveries/technologies as well?

  2. NASA discoveries are available to the World for the most part.

  3. @KC135TopBoom and Jay-thanks!

    So from the commentary:

    “Research and development grants were found by the panel to be illegal–which Airbus, in its media briefing, attempts to turn into a positive because grants from NASA and the US Defense Department are at the root of the EU’s complaint against Boeing’s “illegal” subsidies”

    Then I’m not so sure how much merit Airbus/EADS claims will be given that they too have benefited. Maybe some from the US Defense Department, but not so sure from NASA.

    It will be interesting to see what the WTO rules in the Boeing case.

    • A lot will depend on how US R&D grants were targeted. DoD grants targeted at military applications are clearly not in the WTOs purview or that is certainly what the WTO told France when they complained about the KC-X contest a few months ago. In general Airbus R&D grants and loans have been targeted directly at commercial aircraft production while US R&D in general is targeted at military applications or basic research. In fact NASA’s civilian aircraft R&D budget is the most pathetic part of the entire agency budget and it really pales in comparison to items such as military R&D, basic science, and exploration.

      It is quite a stretch to include all US R&D grants to Boeing in the same pot as the EU grants given the fundamentally different nature of the aid. In general the US has taken a trickle down approach to R&D assuming that R&D money spent on military, space, and basic research will trickle into civilian programs, while Europe has taken a more direct or targeted approach spending money on particular civilian applications. The usual economic justification for Europe’s approach has been that given the greater amount of R&D funding spent by the US; Europe needs to take a more targeted approach to R&D in order to use their more limited resources more effectively. Studies conducted in the 1970s and 1980s used to economically justify Europe’s approach often claimed that Europe’s targeted approach was twice as effective on a per dollar basis as the US approach in generating jobs.

      The real issue is not whether or not R&D grants are illegal, but under what circumstances they are. In the WTO ruling some Boeings complaints about R&D grants to Airbus/EADS were supported and others were not. Will the WTO find all Boeing R&D grants to be illegal, No! Will they find some to be illegal, yes! But the real question is how many, and given the different nature of US R&D Aid to Boeing simply expecting similar results doesn’t wash. You first need to ask what specific R&D was found to be illegal and then try to determine why it was illegal and how the why applies to US R&D. The Boeing and Airbus WTO rulings will not end state sponsored R&D, state subsidized loans, or tax breaks for either manufacture, but they will change the structure and use of these tools.

  4. “Research and development grants”

    Afaiu this the topic is handing out money for
    Airbus or Boeing to “learn” something.
    Only a small part of the capability gained
    will find its way into publications.

  5. Governments aiding their manufacturers?! As the good Captain Renault would say, “I’m shocked, shocked to find that …. is going on in here!”

  6. Your comment that the Defense Department has never wanted and doesn’t want the V-22 Osprey is inaccurate. Dick Cheney tried to kill the Osprey to save money when he was defense secretary from 1989-1993. He was opposed and defeated by the Marine Corps, whose desire for the Osprey has never waivered. The Osprey has been supported by every defense secretary since Cheney left office, and still is. You can get the full story by reading my book The Dream Machine: The Untold History of the Notorious V-22 Osprey (Simon & Schuster, 2010).

  7. On the central isue of launch aid, I would say EADS/EU has won the point. Remember the Boeing/US line has always been that launch aid is an egregious form of subsidy. Other forms of subsidy (ie the kind that Boeing gets) are OK.

    The WTO haven’t rejected launch aid per se, although Boeing spin suggests they have. The WTO are very negative about export subsidies and about launch aid programs that contain an export subsidy element. The EADS launch aid programs that contain no export subsidies are OK; and the ones that do are only bad inasmuch as they have these export subsidies.

    I think EADS will need to demonstrate it has done something about export subsidies. Apart from that, it’s a much milder judgment than I was expecting.

  8. FF2,

    Who says the US government is against government loans to industry? The Obama administration just gave the US auto industry tens of billions in loans. They also just guaranteed $8 billion in loans for a nuclear power plant in Georgia and have promised tens of billions more in guarantees. for the industry This on top of the hundreds of billions in loans the Obama and Bush administration made to the financial industry.

    Given the United States use of government loans to industry since the US government filed suit in 2004 the fact that government loans to industry are OK as long as you don’t tie them to exports is the best outcome the US government could have hoped for. It would have been awfully embarrassing if all of those auto company loans had been found to be illegal. What was found to be illegal though were the loans tied to exports, government paid for improvements to manufacturing industries, and commercial R&D grants to improve commercial products, exactly the kind of stuff the US government as a rule of thumb doesn’t do.

    So in reality how could the decision be anything more than a moral victory for Airbus when the US government in all likelihood will in the future underwrite loans for Boeing on the same level as Airbus, given their new-found skepticism of market fundamentalism? The US would never even after the crash of 2008 agree to give RLI tied to exports to Boeing, but loan guarantees, no problem. Boeing’s real goal has always been to make Airbus’ cost of capital the same as theirs. With the type of loans and support Boeing doesn’t get and will never get now determined to be illegal they have achieved much of their real goal through this ruling. As far as the moral victory goes, Airbus can keep that, the moral victory plus the the new more restricted for of RLI Airbus will need to agree to will get you a cup of coffee.

  9. John, I admit I based my comment on the conclusions page, but skimming through the content (it goes on and on and on), I have to revise my take somewhat.

    The WTO are looking out for two kinds of subsidies: prohibited and “specific”. It found a couple of prohibited subsidies where loans were tied to export performance, which is outright banned. In my view EADS and the EU governments have no choice but to adapt the affected loans.

    The specific subsidies are where governments give loans to a company that are not made available to other companies. These are actually OK unless you can prove that substantial harm is caused by them. The WTO have no difficulty in identifying EU launch aid as specific loans, but they’re struggling on the harm question.

    The problem, I think, is that the WTO rules are designed for situations where there’s an elasticity of supply. Typically if someone wants something then a manufacturer somewhere will supply it. Incumbent airframe manufacturers have such a huge advantage that it is in effect impossible to enter the market without subsidies. The WTO eventually accept that Airbus wouldn’t have introduced the models it did without the subsidies, but to say this depressed prices for Boeing would be to explicitly allow Boeing to take advantage of monopoly pricing in the absence of another airframe manufacturer entering the market. This would be an odd argument for a World Trade Organisation to adopt.

    The WTO somewhat skirt around the issue. They don’t suggest any concrete remedies. They also don’t make clear which of the subsidies cause the harm. There’s a throwaway sentence around about page 800 where they have said they have effectively bundled all the subsidies together in the absence of any better way of dealing with them.

    This isn’t a moral issue, but a highly technical one. But as such, it’s quite likely to get lost in the works.

    Incidentally, I believe that Boeing has been very careful to pretend that its subsidies are available to everyone. I have always thought this a nonsense. If a subsidy distorts competition, it’s irrelevant whether a competitor hypothetically might have got the subsidy (but didn’t). However if they avoid the label of “specific”, then the question of harm doesn’t arise at the WTO, unless they are categorized “prohibited”. So Boeing may be off the hook.

  10. FF2,

    Thanks for your response, I think you have definitely helped my understanding of the issue a little more. I think your comment, “Incidentally, I believe that Boeing has been very careful to pretend that its subsidies are available to everyone” sheds a little more light on the EU vs US approach to subsidies. It’s not that all governments don’t provide subsidies it’s that they provide the subsidies in different forms.

    Nonetheless the WTO must make certain assumptions about what subsidies are actionable and what are not for the trade regime to work. If they tried to eliminate all subsidies they would need an army of several million to enforce rewriting the economic rules of every nation in the world, so while while identifying specific harm is rather difficult identifying specific or direct subsidies is not so difficult. The WTO had no problem identifying US tax law that allowed Boeing to shelter billions in overseas earnings related to exports as prohibited as well as identifying EU loans tied to exports or direct EU aid for Airbus production facilities as prohibited. The WTO has a very difficult time though identifyingindirect subsidies, be they general research, military contracts, road, rail and infrastructure improvements or general tax breaks in theory available to everyone but in practice available only to large incumbent producers.

    I think the mistake we make is to assign some sort of moral compass to subsidies instead of a legal one. Morally they are all subsidies regardless of what form they take, but legally they are quite different. The US adopted its system of subsidies in the wake of WWII when it was dominant in all industries and it felt it no longer needed specific trade barriers or targeted subsidies to promote its industry but rather needed general subsidies to promote national security and general economic goals. Europe however, had much of its industries devastated and it needed targeted subsidies to rebuild. There is nothing intrinsically wrong with either approach and truth be told the European program of targeted subsidies is probably more effective on a per dollar basis. As far as the WTO goes though because Airbus subsidies are more targeted, specific, and easy to relate to exports and trade which is what the WTO regulates the sum of both rulings will likely come down harder on Airbus.

    In sum Boeing wants to blunt the effectiveness of targeted EU subsidies and create a playing field in terms of the cost of capital for new aircraft while at the same time maintaining its advantage in indirect subsidies in the form of R&D, tax breaks, military contracts, and so on. Given that WTO rules seem to prohibit direct subsidies while they tend be silent on things such as military expenditures I have felt that Boeing stands far more to gain from the WTO case (e.g. I include both the EU and US cases) than they do to lose from it. Which is why they and the US have pursued the case so doggedly to the point of potentially even igniting a trade war.

  11. Boeing are taking the lead in this dispute, firstly by breaking off the previous bilateral arrangement and then by getting the US to take the EU to WTO arbitration.

    I think they’re partly looking for tactical advantage: The 787 and its subsidies are in the bag and they see an opportunity to make development of the A350 more difficult for Airbus. It’s a means to attack the EADS tanker option for the US Airforce. Also Boeing are sincerely outraged by what they view as Airbus’ unfair trading practices, even if people like myself think they’re being a tad hypocritical.

    I am curious, though, about Boeing’s game plan. What do they want and expect to happen as a result of this dispute? In particular, do they expect to fix a new bilateral agreement? As far as I know, EADS are happy with the current arrangement but in any case want an agreement. Given this, we can assume the terms of any new agreement would be more favorable to Boeing than last time. The WTO judgments would simply be bargaining chips to be used in the haggle for the new argreement.

  12. FF2,

    I think you have it they are looking for tactical advantage as you put. I would call it a comparative advantage, but it’s the same the thing. As far as the 787 subsidies go, I don’t know why EADS didn’t complain about those. Yes they were subsidies from the Japanese government and they were to Japanese companies so Boeing or the US would not be directly liable, but the real point of this current contest is how each side pays for future aircraft development, not about development of past aircraft. The Japanese loans have the same effect in a lot of ways as Airbus RLI, they take a significant amount of financing that needs to be raised off of Boeing’s hands and places it in the States hands in this case the Japanese government. The Japanese and for that matter Italian loans were probably the strongest element Airbus had and if they want to close this source of funding to Boeing in the future they should have brought the issue up.

    Boeing’s game plan I think is very simple, they want to change the rules Airbus has operated under in the past and raise the cost of funding new aircraft development for Airbus. Basically they want to never repeat the period of 1988 to 2008 when Airbus introduced the A320, A330, A340, and A380 vs. the 777 for Boeing, due in no small part to their advantage in obtaining development capital at more favorable rates and at a lower level of risk. To meet these ends Boeing wants to remove any type of funding Airbus has access to that they don’t. Namely forgivable loans and loans where repayment is based on export orders and not a commercial repayment scheme. This is what the WTO decision gave them and they will try to hold Airbus to these conditions. Airbus will probably keep the right to receive up to 1/3 of development cost in government guaranteed loans, but that’s not a very big deal since the US government guarantees loans for private businesses in the US all the time and Boeing could likely equalize their capital access costs or even have lower costs than Airbus if the EU is going to let Japan continue to fund the development of major aircraft assemblies.

    So yes in the end the conditions for any follow on agreement should be more favorable to Boeing. If your a Boeing supporter you will naturally believe this is a good thing. If you are an Airbus supporter you will likely worry that Airbus needs an advantage in having lower capitital cost to balance out Boeing’s advantage in having lots of very profitable US government contracts and better access to US government R&D. Airbus’ complaints to the WTO largely focus on these two elements and they would like to restrict Boeing’s access, but I tend to believe that will be very difficult for them to do under WTO rules.

Leave a Reply

Your email address will not be published.