June 28, 2021, © Leeham News: The US and European Union agreed on June 15 to a standstill in the 17-year old trade dispute over illegal subsidies to Airbus and Boeing.
The World Trade Organization (WTO) found each violated international rules. By the time all was said and done, the US was authorized to levy tariffs on $7.5bn worth of European goods. The EU received authorization to levy tariffs on $4bn of US goods.
Tariffs on goods went beyond Airbus and Boeing products. But it was 15% tariffs on Airbus planes imported into the US and Boeing planes imported into the EU that were the highest-profile and most costly.
Despite initial reports in some uninformed media that the long-running dispute was “resolved,” in fact, only a standstill was agreed. The US and EU now have five years to negotiate a permanent settlement to Airbus’ “reimbursable launch aid” and Boeing’s benefits from tax breaks and NASA.
The two sides also agreed to put China’s commercial aerospace industry in the crosshairs.
Airbus and Boeing each issued statements about the standstill agreement, putting their own spins on the agreement.
“Boeing welcomes the agreement by Airbus and the European Union that all future government support for the development or production of commercial aircraft must be provided on market terms,” A Boeing official said. “The understanding reached today commits the EU to addressing launch aid, and leaves in place the necessary rules to ensure that the EU and United States live up to that commitment, without requiring further WTO action. Boeing will fully support the U.S. Government’s efforts to ensure that the principles in this understanding are respected.”
“Airbus welcomes news of an agreement between the European Commission and USTR regarding the WTO dispute on large civil aircraft,” an official said. “This will provide the basis to create a level-playing field which we have advocated for since the start of this dispute. It will also avoid lose-lose tariffs that are only adding to the many challenges that our industry faces.”
Neither addressed the decision to focus on China. It’s long been a question I’ve had why the US or EU (nee Boeing or Airbus) hadn’t pursued Chinese government subsidies to COMAC before now. COMAC is developing the C919, a direct competitor to the Airbus A320 and Boeing 737. After years of delays, it’s supposed to finally enter service later this year.
COMAC also is co-developer of the twin-aisle CR929, with Russia’s aerospace industry.
Neither China nor Russia hides the fact COMAC and United Aircraft Corp. are state-supported. UAC also is developing the Irkut MC-21, another direct A320/737 competitor.
The amount of government support is opaque. But the Center for Strategic International Studies (CSIS) concluded COMAC is the beneficiary of $49bn to $72bn in government support.
In an analysis Dec. 7, CSIS’ Scott Kennedy largely dismissed the viability of COMAC and its airplane programs. Kennedy also said trade sanctions proposed by the Trump Administration (and later adopted) against COMAC were “wrong-headed” and would hurt Boeing via retaliatory actions by China.
The Wall Street Journal reported in January that Boeing is a financial contributor to CSIS. CSIS told LNA last week that Boeing did not contribute to the analysis or Kennedy’s work, which CSIS characterized as independent.
A contributor to Fortune magazine’s online columns, Ken Roberts, asserted the “US threw Boeing under the Airbus” with the decision to enter a standstill. He goes on to hypothesize the Biden Administration did so because the real issue is about China.
Contrary to Roberts’ conclusions, Airbus and Boeing benefit from the standstill. Boeing isn’t thrown under the “Airbus” or any other bus. Rather, this is perhaps a face-saving way out for Boeing. The last thing Boeing needs right now, financially stressed as it is, is for tariffs to be levied on 737 MAXes and 787s destined for EU-based airlines. The WTO’s authorization to the EU to levy tariffs came while the MAX was grounded by regulators and the 787 deliveries were suspended by Boeing over manufacturing issues. The 787 still is in delivery hell, but the MAX now is recertified by the EU. Boeing doesn’t need the headache of a 15% tax on importing its airplanes into the EU, further annoying its customers already upset over the 21-month grounding.
Airbus was able to get around tariffs on its A320s and A321s destined for US customers by delivering them from its Mobile (AL) assembly line. But the Trump Administration extended the tariffs to the previously exempt components imported to Mobile for final assembly into functioning airplanes. Trump also upped the tariff from 15% to 25%.
The Biden Administration and the EU agreed in March to suspend all tariffs while working out a longer deal. The five-year standstill was it.
The US Trade Representative’s (USTR) statement on the standstill had this to say about China:
“Our goal was clear – to forge a new, cooperative relationship in this sector so that our companies and our workers can compete on a more level playing field. The agreement includes a commitment for concrete, joint collaboration to confront the threat from China’s non-market practices, and it creates a model we can build on for other challenges.”
The USTR also said, “Some economies do not report transparently all domestic subsidies and provide extensive support to their large civil aircraft sector through subsidized equity investment, state lending, and state-directed purchases. The two sides will share information about such subsidies, and identify points where joint work is needed to clarify the extent of state support, with the goal of establishing the basis for joint or parallel action in the future. Some economies also do not permit their airlines to make purchases in line with commercial considerations. The two sides will develop information and consider joint action to ensure purchases reflect those that private, market-oriented operators would undertake.”
Throughout the 17-year long dispute, Airbus on background said any settlement should include addressing subsidies to China and Russia. The EU didn’t pursue this because Airbus didn’t want to offend China. (This is also why the EU and Airbus didn’t complain about Japanese government support for the Boeing 787 work done by the Japanese “Heavies.”)
A former Boeing executive told me Boeing didn’t pursue Chinese subsidies because there were no transparent sales on which to base a complaint over the C919.
The fact that at the time, up to 33% of Boeing’s aircraft deliveries were destined for Chinese airlines wasn’t mentioned. But clearly, Boeing didn’t want to offend the Chinese government, either.
However, it’s about time the US and EU teamed to pursue China’s anti-free market policies. It is clear that neither the US nor the EU could go it alone. Chinese officials would simply play Boeing off against Airbus and vice versa—which is what the government has done for decades.
But COMAC can’t possibly fulfill the need for China’s domestic aviation needs. Airbus and Boeing must be part of the solution.
If the US and EU can now focus on how China ignores international protocols, flaunts WTO rules despite being a member state and simply steals intellectual property, Airbus and Boeing—and other EU and US businesses—will benefit.