By Scott Hamilton
Feb. 24, 2020, © Leeham News: Not so fast, Europe says about Boeing’s claim it is curing illegal tax breaks from Washington State.
The World Trade Organization has to agree to Boeing’s interpretation. This will take at least a year. In the meantime, be prepared for tariffs to be levied on Boeing airplanes by this summer, just as the company hopes the 737 MAX is recertified and deliveries can resume.
Boeing must get the WTO’s approval that the move to suspend the tax breaks will bring the US and Boeing into compliance with a ruling they are illegal.
This process could take a year, said a person familiar with the process. He spoke on the condition of anonymity in order to speak freely.
In the meantime, tariffs that have been authorized for the European Union to impose on Boeing, and other US products, may take effect once the amount is approved. This decision is due in May or June.
“We are confident that, once enacted, this legislation will bring the United States into full compliance and address the lone outstanding finding against it,” Boeing said.
LNA pointed out last week that the EU sought authority to levy tariffs on an old case, relating to federal tax breaks called Foreign Sales Corp. There are other issues, says the source, despite Boeing’s claim. These include tax breaks from Kansas and support from NASA and the Department of Defense.
In a statement, Airbus said it “will review the proposed legislation, which would need to be passed [by Washington State] before implementation. It is of course up to the WTO to rule on the application of compliance measures and whether the legislation would remove the subsidies and their related adverse effects.”
Nevertheless, there is s positive seen on that side of the Atlantic in Boeing’s move.
“It’s the first time it’s acknowledged it had a subsidy,” the source said.
This conceivably could become the basis for negotiation, it was suggested.
The timing is inconvenient for Boeing. The WTO is set to approve in May or June the amount of tariffs that may be levied. This was just about the time Boeing hoped the MAX will return to service. (Recent events suggest this may slip to later in the summer.)
Imposing tariffs on Boeing airplanes may add to the company’s financial strain.
Airbus agreed to split US tariffs with customers whose airplanes were already in production, the CFO said in November on an Asian investors tour. Customers would be liable for tariffs on subsequent airplanes, he said.
Boeing may face a more difficult customer relations challenge.
The MAX grounding hits its anniversary date beginning March 10-13. Boeing already wrote of several billion dollars for customer compensation. Beginning a year from the grounding, customers generally have the ability to cancel their contracts. With 400 airplanes built and stored, Boeing wants to deliver these aircraft and resume cash flow.
Customers in the European Union may demand Boeing cover any tariffs.
The tariff amount the WTO will authorize hasn’t been hinted so far. The WTO granted the US the authority to tax imported Airbus aircraft up to 100% of the airplane’s cost, up to $7.5bn in the aggregate. Non-aerospace products from across the EU are also authorized by the WTO for taxation.
The Trump Administration initially imposed a 10% tax in October. This goes up to 15% in mid-March.
It seems likely the EU will match tariffs on the Boeing airplanes: the MAX as well as 777-300ERs, 777-9s and 787s will be eligible to be taxed: 15%.
There are 48 MAXes that have been built and stored, undelivered, that will be subject to tariffs.
There are 47 MAXes scheduled for delivery to EU companies in 2020. Most are to Ireland’s Ryanair. The others are to lessors AerCap, Avolon and SMBC Aviation.
There are 87 MAXes scheduled for delivery in 2021, to the same companies.
There are 35 787s for 2020 and 19 for 2021.
“It is of course up to the WTO to rule on the application of compliance measures and whether the legislation would remove the subsidies and their related adverse effects”
Can this decision be appealed ? If yes, then EU can appeal it, then sit and laugh since WTO appellate body has been crippled by US and any appellations are delayed indefinitely.
The WTO body is working on a temporary alternate appellate process, until the issues with the existing appellate body are resolved.
Also a group of Western nations have proposed changes to the appellate body that address some of the US concerns. These things will take time but there are solutions on the horizon.
Temporary appellate process is worked on by a group of countries that does not include US – since the whole point is to work around US obstructionism. Also proposed changes to the appellate body are getting shot down by Trump , so I would not expect a resolution any time soon.
“Also a group of Western nations have proposed changes to the appellate body that address some of the US concerns.”
Like how to prevent one country from blocking all progress in the future?!
The point is that an appellate solution already exists for the non-US members, and the US will have to recognize those results, even if they choose not to participate. And the US could choose to participate if it wishes.
The WTO body could enact the so-called Walker Principles, which were commissioned by the body itself. The US does not view that alone as being sufficient, but it would be a great start.
Trump is ham-handed and likes to play hardball, but the vast majority of businesses in the US support the WTO, and only have an issue with the appellate body. The core issue is the difference between how the US and other countries view the appeals process.
In the US, an appeal only looks at the legality, conduct and fairness of the original proceeding. It cannot change the terms of the ruling, only uphold or overrule, and an overruled decision then can be reconsidered by the original body. This ensures the decisions are always the result of representation, or peer review.
In other countries, the appeals process has much broader power. The WTO appellate body has evolved in that direction, it sometimes behaves with a higher authority than the WTO itself, not only making its own rulings, but also using them as precedent for future rulings.
Since the appellate body members are appointed and have limited terms, the true work of the body is done by the career staffers. If they can act with higher authority than the WTO, then the WTO is no longer really representative. Trump has a huge paranoid oversensitivity to this (the deep state).
That is the main driver behind the US objection. You can win a case with the WTO but lose on appeal, not because of the quality of your case, but because the appellate body disagrees with the WTO itself, or references its own precedent.
This basic issue has been recognized by other countries as well. The problem with Trump’s approach is his tactics, he uses a sledgehammer where a scalpel is needed, riles everyone and makes no real progress. He uses his own beliefs as a defense of his lack of cooperation, and by not cooperating, he sustains his own beliefs (self-fulfilling prophecy). That’s a fool’s game, but we are all stuck with him for now.
For what it’s worth, here is an excellent analysis of the issues:
In my opinion launch aid for Airbus is a closed case and the up to $7.5 billion. Closed in a kind of no more new RLI are expected and damage done is invariant.
Boeing on the other side still gets tax breaks. So the damage is still ongoing and EU may get e.g. $7.5 billion per year. Ending the tax breaks will only stop adding more penalties but damage was already done.
I can’t see how a potential stop of tax breaks will alter the current WTO case against the US. The stop may add a ceiling to the penelties but damage already done can for sure taxed by the EU.
I guess the US received a hint EU claims could be a magnitude bigger than vice versa and US law makers are now in a hurry.
Actually the reverse of that is true. Ending RLI has been on the negotiating table since the 1990’s, but the EU has always steered away from it. That has been the core of the dispute.
The WTO has always ruled that RLI represented a subsidy. They also ruled that several actions by the US federal government were also a form of subsidy. The WTO ruled that both sides should eliminate their subsidies, or face penalties in the form of tariffs. The penalties would only apply in the case of non-compliance.
The US government complied and eliminated the actions which had been singled out by the WTO. The WA state tax break was a not a federal program and so continued, but will be eliminated now.
The EU modified the terms of RLI but it was still found to be a subsidy by the WTO. So their tariff was approved.
The US is contending that with the WA tax gone, they are in compliance with WTO rulings. However the WTO may still find this and other US actions weren’t done quickly enough for compliance, and impose some tariff. But as mentioned below, the amount will be far less than that imposed on the EU.
What is possibly going to be most damaging about this fiat accompli of free trade capitalism “ad absurdium” is that a new generation of decarbonised aircraft and aviation infrastructure needs to be funded. How is that going to happen with the necessary tax breaks, government loan guarantees held up in the WTO under threat of Tarifs?
William, that will be up to the WTO and member nations to decide. They could allow for subsidies of new technology if it is fair and balanced for both sides.
This is why many feel that a negotiated settlement is the only long-term solution. That could allow for needed investment mechanisms as long as they are equal and balanced.
If both sides do as they please and then take a complaint about the other before the WTO, we end up with an endless series of complaints. That is what we’ve had thus far.
The US and Europe had an agreement. The US decided to rescind that agreement and start this whole mess back in 2003 or so.
That would be the problem with any future agreement, how secure is it and would the WTO recognize it as binding? It could be theorized that it would not be recognized without a worldwide agreement.
That would, of course, be a whole new can of worms to be opened.
The US withdrew from the 1992 agreement in order to bring the case before the WTO in 2003.
That agreement limited EU support of Airbus to 33% of new development programs only, with no support for production. Instead the EU funded the A380 at $6.5B, which at that time was the largest aircraft program assistance on record.
The US was limited by the agreement to support amounting to 3% of Boeing turnover in the commercial sector. The US federal government had adhered to that (the WA state assistance was independent), but the EU claimed military sector contracts as amounting to a subsidy of the commercial side. Of the $2.5B annual total subsidy that was claimed, $2B came from the military. The justification for this was that many Boeing military products are based on commercial products.
The US tried to bring the EU into compliance by means of the agreement, but they would not end their subsidies, and further announced their intentions to repeat that method with the A350. Again, justification offered as per the above.
Thus it became a free-for-all, with both sides offering support and claiming justification by similar activities on the other side, then taking complaints before the WTO.
Eventually the WTO denied the EU claim that the US military spending was a subsidy, but upheld the US claim that RLI was a subsidy. That left the WA state assistance as the remaining US subsidy offence, which will now be ended.
Most observers believe a negotiated settlement will work, but it has to be enforceable on both sides. That’s what I meant about neither side doing as they please.
I always get a kick out of the Euro whiners claim about US military subsidize Boeing.
They elect to hide behind NATO and the US and spend their dollars elsewhere. Then whine.
That also ignores things like the A-400, missiles, fighters etc that they do spend (waste in duplication) lots of bucks on, not to get a robust military but to subsidize Airbus with a tech base.
Germany is the worst case for that. The whole sub force is in dry dock (they have 6) , they have fewer than 100 combat ready MBT, reports are they are lucky to have 20 Jets combat capable.
The US has more MBT in one Armored division (close) than Germany has entirely. Germany is 1/4 the size of the US and has no where near 1/4 of the Military equipment and far less than that able to go into combat.
Recently they whined when the US put the Kabosh on financing another Russian pipeline.
Wow, you say one thing but you put yourself at the mercy of the Soviets (err Russians)
I have recently pondered that Merkhel was a Russian sleeper. I could not imagine polices that keep Germany weak and help the Russians out. Slash your military, don’t fund spare parts and get beholden to the Russians.
That is where the attention should be, look in the mirror, clean up the mess, then point fingers if you are actually no co-codependent on the US.
The United States has long since wanted Europe to contribute more and complain less about American policy. Europe was seen from Washington through the prism of NATO, and, as such, the key focus was not European integration but rather how to make NATO useful in supporting America’s overstretched military forces. Through both Democratic and Republican administrations, the United States has been a force perpetuating the status quo in Europe, acting more often as a brake on, rather than an accelerant for, European integration.
But NATO is not Europe. A NATO-centric approach from Washington misses the shifting power dynamics within Europe. The European Union in Brussels — not the European capitals nor NATO headquarters — has become the political center of gravity for Europe. Continuing to focus American diplomatic energy on individual European states will therefore leave Washington perpetually disappointed. European states are unlikely, therefore, to meet their defense spending commitments of 2 percent of gross domestic product (GDP), because, for most European states, defense is not about national defense but rather about collective defense.
Of course, the total GDP of NATO’s European members is more than ten times that of Russia, which has an economy about the size of Spain’s. They spend three-and-a-half times as much on defence as Russia, which has lately had to cut its budget sharply because of a broader squeeze on its economy. True, Russia has 13 times as many nuclear warheads as western Europe has, but surely France has more than enough to deter an attack?
Hence, the member nations of the EU don’t really have to increase their defence spending — despite what the aggressive U.S. administration is telling them — they just have to allocate defense euros more wisely.
The long-term objective of EU defense efforts is to form a single European defense market for which European defense companies will outfit European forces. Of course, the United States is opposed to a single European defence market for the reason that the U.S. wants unhindered access to European defence markets, while the United States itself has long since locked Europe out of the U.S. defense market, as the U.S. military must buy American.
Of course, this situation is alright with the U.S. Government and @Trans World.
Hence, the current U.S. policies that are directed towards Europe today is to divide and conquer — by seemingly supporting the break up of the EU into “pieces” that individually have less power than the European Union itself (i.e. Brexit supported by the current U.S. administration etc.).
So, this has clearly all to do about the U.S. not only wanting to preserve the defence trade (im)balance between the U.S. and Europe, but to further increase this (im)balance as well. In the present-day United States, money has become the measure of everything — the U.S. is obviously not (remaining) in NATO for altruistic reasons (LOL).
In short, therefore, what the U.S. essentially wants is for NATO members to increase their defence budgets for the simple reason that they can then buy (even) more stuff from the U.S. defence industry.
At least, contributors to this blog who is living in the U.S. and/or are U.S. citizens should be honest about the real reasons why the U.S wants their European allies to increase defence spending, and not keep on denigrating European contributors to this blog — who accurately are stating that Boeing, in fact, has long since been subsidised by the DoD — as “Euro whiners”.
Now, the U.S. Department of State*, for example, estimates that from 2014 to 2016 the US exported $62.9 billion worth of defence exports to the EU versus $7.6 billion from the European Union to the United States. These figures demonstrate that U.S. defence firms are extremely competitive in the European defence market and that European firms are not very competitive in the U.S. defence market.
Furthermore, it is worth probing what type of goods and services the DoD purchased from foreign suppliers. From fiscal years 2007 to 2017, the DoD purchased $58.5 billion worth of petroleum, fuels and lubricants from foreign suppliers and this was followed by $35.3 billion in services, $22.8 billion in construction and $20.8 billion in textiles, equipment, supplies and subsistence. This highlights that the majority of foreign purchases by the DoD are geared to low-tech and subsistence goods and services. Interestingly, the high-tech areas that European defence firms specialise in comprise a smaller share of overall DoD foreign purchases. In fact, the U.S. spent twice as much on petrol, fuels and lubricants from foreign suppliers than it did on the combined total of foreign purchases for high-tech goods such as missiles and space, ships, electronics and communication, weapons and ammunition, aerospace and combat and non-combat vehicles.
Finally, it’s obvious that the U.S. currently has an extremely privileged position in European defence markets, even though the U.S. government’s discretionary power disincentivises European business in the U.S. market. This leaves the European Union exposed to a divide and rule strategy by the United States.
OV, this may be a little oversimplified. It doesn’t count US maintenance of military bases and a naval presence around the world, all of which contribute to the economies of the host nations while also positioning US forces in advance as a deterrent.
The US does not pursue a policy of divide and conquer with the EU. Within the EU, there is still a desire for nations to provide their own defense, just as there is within NATO. That is unlikely to change. The EU doesn’t want to be without the US, any more than the US wants to be without the EU.
Trump’s complaints about the 2% funding of NATO are valid, but beside the point. The overall value returned by NATO membership is far greater than the monetary value. Nations are not going to be kicked out of NATO for that reason. Americans would never support that, despite Trump’s rhetoric.
The US spends about 1% of its defense budget on NATO. It’s just something for Trump to bitch about and claim as his achievement. It has little relevance to the reality of defense.
Similarly Trump has gone after nations to pay more toward hosting US forces. By playing hardball, he eeks out a small increase, but again it probably does more harm than good. He doesn’t see that because he mostly thinks about himself. By telling Americans they are being cheated, he stirs up nationalism and distrust, as well as support for himself, which is the true motivation.
Trump support for Brexit is related to the same nationalism that he advocates for the US. Most Americans were sorry to see that happen, but the UK is a free nation and has the right to do what it thinks is best. How that will ultimately work out remains to be seen. The US is hoping that relations will remain good between the UK and the EU.
I am pretty much with Rob and what he has posted.
I don’t hate the EU or any nations in it.
I do disagree and strongly with some policies.
I would be an isolationist but that proved a disaster post WWI.
Current administration approach is equally wrong, this should not be transactiontinal and the damage that does vastly exceeds any return.
I don’t contend in any way the US is perfect. Clearly its not, Boeing’s meltdown is a poster child for some of it but certainly not all.
We also do not have imperialistic aims. US is pretty much isolationist, most don’t follow the world though they should
Russian and China clearly want to expand and have. Ask the Uyghurs how its going. Or how Poland, Latvia, Lithuania, Romania, Hungry felt about the USSR.
Clearly the US is not making any exterior claims and has not done so in 100 years.
Pure anti US simply makes it worse. Disagreement should always be encouraged. Close to 80 years since a huge conflict, its worth that alone let alone not having the KBG or the Gestapo knocking on our door.
The fundamental problem is that the US Saudi Petrodollar deal makes US deficits inevitable and almost necessary. The deal, happened under the Nixon years, as the US was coming of a gold standard, and was that the US would provide intelligence and military security to the Kingdom of Saudi Arabia in return for the Kingdom only accepting US dollars. There was other stuff in there but it was considered a smart move to strengthen the US dollar. This makes it necessary for every other country in the world to earn US dollars and sell to the US directly or indirectly. If Switzerland wants oil it can’t use swiss francs. The US Federal Reserve can as a result issue vastly more ‘paper money’ than it otherwise could because the rest of the world needs it. To me it seems the deficits flow out of the need of other nations to earn US dollars. Some of the world resents this. mumar Qadaffi did (dreaming of a pan African currency backed by gold and oil), China does. There is a vast US military and intelligence apparatus protecting this state of affairs. I suspect the decarbonisation of energy carriers will eventually destroy the petro dollar. (that may be good for US manufacturing). The Saudi’s (MBS) is already trying to sell Aramco. Aramco is KSA.
The revenant data has been known for at least a decade on both sides.
A close look I’m sure would reveal that Airbus has benefitted from some NASA and some ‘ U.S Military’ research and development ‘ aide’
So what we still have is the typical schoolyard ‘ urination’ contest with both sides yelling ‘ he(they) did it first .. ‘
and taking the contest- complaint thru the principals office to the international ‘ school board ‘
Time to break out the popcorn and ask for a discount on the soda, and find the most comfortable seat. Act 30 is about to start.
In a talk show here they interviewed a marginally educated younger US citizen who offered that low ( or high cost of) education,
lack of proper health care and similarly lacking elements of basic civilization in the US were due the high military spending to “police and protect” the Globe, Europe.
Former ambassador John C. Kornblum looked flabbergasted!
What a trash statement. US activities have never been about anything beyond self serving. ( by intention. in effect a lot of egoistical moves died on greed and incompetence.)
The WTO rulings was a lot less against Boeing than Airbus. So the tariffs will also be a lot less. Just ask Mr Scott.
Boeing self-certification and a clown-FAA were much more worth than tax breaks and subsidies. For that the EU doesn’t even need a WTO ruling, they can easily put billions of $$$ into MAX fines.
For the 787 self-certification the EU can still use the WTO. Only needed is that EASA checks every self-certification document.
At this point you have to wonder if Boeing could even manage to shoot itself in the foot if it had an atomic hand grenade.
Oh, we didn’t really mean to take those tax breaks after all?
Oh, we arn’t moving out of Washington State? Well, you know we were just kidding before?
How massive a melt down Boeing is having is jut beyond belief. If someone wrote a techno thriller (No Highways in the Sky) we would throw the book out as it was so implausible.
And yet its real. They could not manage a chicken coop.