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Get Four
|  | OCTOBER 7, 2004
By Stanley Holmes Finally, a Boeing-Airbus Showdown The European jetmaker has long skirted subsidy rules. Now Washington's WTO complaint will drag that abuse into the light of day It's hard to feel much sympathy for Boeing (BA ) these days. Entangled in ongoing Pentagon ethics scandals, the aerospace giant still rakes in $50 billion in revenues and pockets nearly a billion of that in annual profits, even as it struggles to defend its worldwide market share against archrival Airbus. Nonetheless, the U.S. Trade Representative's decision on Oct. 6 to terminate a 1992 bilateral aircraft-development agreement and file a formal complaint with the World Trade Organization alleging that European Union nations have provided Airbus with billions of dollars of unfair subsidies -- to Boeing's detriment -- was the right move. Frankly, the action is long overdue. PUSHING TRADE LIBERALIZATION. If anything, Boeing should be criticized for backing away from earlier efforts to renegotiate the 1992 deal in order to hold the European governments accountable for their flaunting of the limits it set on government subsidies for commercial airplane development. The Europeans and executives at Airbus have never shown any real interest in renegotiating the 1992 pact, under which commercial jetmakers can receive repayable government loans for up to one-third of a plane's development cost. Why should they? Such launch aid from Continental governments has given Airbus a clear competitive advantage over Boeing, allowing the European plane manufacturer to grab 50% of commercial aircraft deliveries and 60% of global orders today, vs. less than 30% market share at the time of the 1992 agreement. "This is about fair competition and a level playing field," said U.S. Trade Representative (USTR) Robert B. Zoellick, in a prepared statement. "Some Europeans have justified subsides to Airbus as necessary to support an 'infant' industry. If that rationalization were ever valid, its time has long passed." Beyond the high stakes for Boeing, Washington has another reason to press this case before the WTO: The bilateral deal's flaws invite other governments to consider subsidizing their own nascent commercial aerospace industries or other large, capital-intensive segments where the barriers to entry are high. In the interests of trade liberalization, the U.S. government is obliged to pursue this case for every outfit, large or small, that may want to do business around the world. LITTLE TO LOSE. Terminating the pact and filing the WTO case forces the Europeans to engage with the Americans and settle their differences -- or face a potentially unfavorable ruling from the world trade forum. There's an element of surprise here: The Europeans didn't expect this. Forcing the issue could now lead to a new agreement -- and a model for other industries where subsidies have created global trade disputes. Getting to that point won't be easy. The European Union responded with its own WTO counterclaim, alleging that Boeing has been receiving illegal subsidies from Washington. "The U.S. move in the WTO concerning European support for Airbus is obviously an attempt to divert attention from Boeing's self-inflicted decline," said EU Trade Commissioner Pascal Lamy, in a prepared statement. "If this is the path the U.S. has chosen, we accept the challenge, not least because it's high time to put an end to massive illegal U.S. subsidies to Boeing which damage Airbus, in particular those for Boeing's new 7e7 program." But Zoellick, Boeing & Co. have little to lose. For years the Europeans have offered mostly unsubstantiated rhetoric or distorted the facts about who receives what subsidies. The key difference here is that Airbus gets launch aid for the development of new commercial planes and Boeing doesn't. RISKIEST BUSINESS. Since its inception in the early 1970s, Airbus has received $15 billion in such support, according to the USTR and European government documents, including $3.2 billion for the mega A380 carrier's development. Commercial plane manufacturing is probably the riskiest business on the planet. Launch aid shifts the risk from Airbus to the European governments because the manufacturer isn't required to repay if the aircraft program is unsuccessful. Lamy and the Europeans claim that Boeing's new fuel-sipping jetliner -- the 7e7 -- is receiving illegal subsidies. They mostly refer to the $3.2 billion tax break from Washington State that Boeing secured for its new plane program. But the differences between launch aid, essentially cash up-front, and a tax break spread out over 20 years, is huge. For example, Washington State's help only partially reduces the tax on Boeing aircraft sales. By contrast, Airbus pays no sales levies on its exports. Boeing receives the tax benefit only after it invests its own money in development and begins delivering jetliners to customers, which will begins in 2007. Boeing shoulders all of the initial risk. If 7e7 sales flop, Boeing receives nothing. If the A380 fails to sell, Airbus doesn't have to repay the $3 billion in loans. And unlike EU support, the tax break is available to every player in the aerospace industry, including Airbus and its suppliers.
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