Union alleges US failure to declare aircraft aid threatens bilateral deal

Date: 01/08/1996

By Chris Johnstone

WASHINGTON is endangering a four-year-old peace deal between the Union and the US over government help to manufacturers of large aircraft, according to EU officials.

They maintain that the US government has refused to come clean about spin-off aid to civil aircraft producers Boeing and McDonnell Douglas from military and space programmes, and has stubbornly blocked moves to widen the bilateral deal to new countries or update it.

The July 1992 deal averted a looming transatlantic trade war over aircraft subsidies by setting ceilings on the state loans which Europe's Airbus consortium could draw on for building new aircraft and the less tangible indirect spin-off aid the US could give its manufacturers from government-sponsored research and defence programmes.

Ever since the deal was signed, say EU officials, the US has made a mockery of its discipline by declaring no indirect aid at all to its manufacturers.

“At the same time, the industry is saying it is getting quite a lot of benefits ... It is incongruous,” said one.

The EU also complains that the Americans have blocked the widening of their bilateral subsidies deal to cover Japan, Canada, and Russia - countries which sooner or later could seriously enter the market as makers of large passenger aircraft.

The EU-US bilateral deal was originally intended to be widened within a few years.

Even a technical modification to transfer existing limited subsidy rules under a 1979 General Agreement on Tariffs and Trade deal to the World Trade Organisation has been prevented by the US, say EU sources.

They describe the transatlantic agreement as “fragile”, but add that it is not in imminent danger of collapsing. However, the EU and US can call a halt to the subsidies agreement after giving only a year's notice.

Airbus prefers to make no official comment, although any temptation on the part of its last managing director Jean Pierson to say “I told you so” would be understandable. He warned in 1992 that policing US indirect subsidies could be unworkable.

European manufacturers brush off current worries as a matter for politicians, adding that they could be tied to wider EU-US trade disputes.

But industry observers say manufacturers on both sides of the Atlantic might join the recriminations if the aircraft industry suffered a repeat of the 1993 recession or a fresh development race. The 1993 recession sparked Boeing to announce 28,000 lay-offs and prompted Clinton to turn on alleged Airbus aid and call the subsidies agreement into question.

The first scenario appears unlikely. At present, the world's two biggest producers - Boeing and Airbus - have never had it so good. Airline orders are rolling in and profits have returned to the heavily cyclical industry.

Airbus, the French, German, British and Spanish consortium, has already beaten its total for the whole of 1995, with 143 aircraft orders to July. The consortium says it could be on track to beat Boeing on total sales - something it has only ever achieved once before, in 1994.

Boeing announced a second quarter profit of 374 million ecu last week, turning round a loss of 185 million ecu in the same period a year earlier.

However, both manufacturers are gearing up to build a new generation of large aircraft for the next century with at least 550, perhaps as many as 800, seats. But they are taking very different approaches. Boeing is looking to build two models which will be enlargements of its 747, while Airbus is considering designing a totally new aircraft. However, the research and development price tag for each is estimated at anything between 6.4 and 8 billion ecu.

Airbus says its profitable record should enable it to cover development funding for the new aircraft through bank loans. However, it admits that it might have to call on government funding for the first time in years.

It also warns that any US breach of subsidy discipline on indirect government subsidies for Boeing's programme would be a matter of serious concern.