Boeing v Airbus: See you in court

The subsidy row between America and Europe is becoming an eternal triangle

HISTORY suggests an unsatisfactory ending to the current row over aircraft subsidies between America and Europe. The last similar dispute to go to the World Trade Organisation (WTO) was in the 1990s, when Canada and Brazil traded accusations over subsidies for Bombardier and Embraer, makers of regional jets (seating up to 100 passengers) in the respective countries. The WTO found both parties guilty. Neither country applied sanctions. Subsidies continued to flow.

The dispute over subsidies to Airbus and Boeing would be the biggest yet to go to the WTO - which now seems likely after the breakdown last weekend of talks between America and the European Union (EU) - and any sanctions resulting from it could have nasty knock-on effects for other trade negotiations. Nor is the dispute itself as straightforward as the earlier one.

America wants an end to Europe's soft government loans, known as “repayable launch aid”. These allow Airbus to develop new models safe in the knowledge that much of the “borrowed” development money will be written off should the new aircraft not sell well. In practice, Airbuses now sell like hot cakes and governments collect royalties on the aid even after the principal and interest are paid off. Yet should, say, the new Airbus A380 not achieve 500 sales, Airbus's parent company EADS (and its one-fifth partner BAE Systems) will not have to repay any of the $3.7 billion of soft loans advanced to get it off the ground. On the other hand, Boeing, says Airbus, has long received subsidies indirectly via development contracts from NASA, America's space agency, and from the Department of Defence.

In 1992, Europe and America agreed that Airbus's launch aid would be limited to one-third of development costs, while indirect aid to Boeing would be capped at 4% of its total revenues. But last year America tore up this bilateral deal and demanded an end to Airbus's launch aid, declaring that the 1992 agreement had required it to be phased out over time.

One reason for this new tough stance was that Airbus had started to outsell Boeing and, worse, seemed to be successfully launching the A380 to end the age-old long-haul monopoly of Boeing's 747. Airbus has outspent Boeing both on research and development and on capital investment, making its production perhaps one-quarter more efficient than its rival's.

Another reason, suspect some Europeans, is that America knew it was already breaking the bilateral deal. Direct financial support had been provided for the production of bits of Boeing's new 787 jet by the states of Washington and Kansas.

Under the WTO's Subsidies and Countervailing Measures agreement, subsidies to a specific company or specific industry from a government or other public bodies are not allowed. Airbus's launch aid is surely in breach of this, and America would have a good case before the WTO.

Yet the EU too could probably bring a strong case to the WTO. However, this would probably not be just against Boeing, but also against the American firm's Japanese business partners. The new Boeing 787 is being built with the heavy-industry divisions of Mitsubishi, Kawasaki and Fuji, in a consortium known as the Japanese Aircraft Development Corporation (JADC). According to an assessment by David Pritchard and Alan MacPherson of the State University of New York, Buffalo, JADC is being offered at least $1.5 billion in soft loans repayable only if the aircraft is a commercial success, like the launch aid enjoyed by Airbus.

In January, with much fanfare, America and the EU agreed to hold talks for three months (up to April 11th) rather than go to the WTO with the formal complaints that each has prepared. The EU trade commissioner seemed optimistic, and even George Bush said recently that the dispute was manageable. The idea was to go for a limited deal, addressing further issues, such as Japanese aid, later. But the talks have now ended acrimoniously, after the EU - probably sensing that its beloved launch aid is doomed, sooner or later - suddenly demanded that the Japanese aid also be included in the negotiations.

According to industry sources, America is hoping to prolong the process to delay launch aid for Airbus's A350 plane, a spoiler being rushed out to counter Boeing's new 787. But Airbus's boss, Noel Forgeard, says the plane will go ahead without launch aid if need be. The chances are that America, its delaying tactic having achieved nothing, will file a WTO suit next month - with the EU retaliating soon after.

Curiously, this classic national champion's subsidy row has erupted just as the civil aircraft business is becoming truly global. Not only has Boeing outsourced development and production on its latest plane to Japan, it has also changed its business model, selling its large Wichita factory for making fuselages to a private-equity firm. This firm is likely to tout for business from Airbus as well as Boeing. Boeing's defence arm previously sold a huge machine shop in St Louis to a British firm, GKN. The new owners hope to win work from several aerospace firms. Indeed Airbus and Boeing already spend over $5 billion a year each in their rival's backyard, often using the same suppliers.

The aircraft subsidy row between the US and Europe is becoming an eternal triangle.

• Primary Source