Airbus set for Airbus set for new subsidy dogfight with US

Date: 18/01/01

By Tim Jones

IRBUS Industrie executives should thank their lucky stars that US President-elect George W. Bush's 'eeny-meeny-miney-mo' method for picking cabinet members landed them with Robert Zoellick as trade representative.

There were more than a few sweaty brows in the French city of Toulouse, home of the plane-maker owned by European Aeronautic Defence and Space (EADS) and BAE Systems, as the incoming US president nominated hard-line right-wingers to be interior secretary and attorney-general and toyed with handing trade matters to the commerce department.

But Zoellick, a free-trade zealot who lambasted Bill Clinton's outgoing administration for dangerously aggressive commercial policies, is the man most likely to keep the long-running EU-US trade cold war over Airbus subsidies from turning hot.

And the temperature is rising. Clinton formally warned the Europeans at last month's summit that €2.6 billion of apparently risk-free cash from Union governments to help Airbus develop its new A380 'superjumbo' could be detrimental to future relations. The atmosphere was soured at a conciliation meeting of EU and United States Trade Representative (USTR) officials in Washington last week.

The Americans have held back a full-scale attack on A380 launch aid in the face of growing congressional pressure and an anti-Airbus election campaign from right-wing protectionist Pat Buchanan. But they can wait no longer given the potential threat to the US' biggest exporter, Boeing.

The trigger was last month's formal launch of the A380: a double-decker aircraft with 555 seats (compared with the Boeing 747-400's 416) and a range of 8,150 nautical miles. It is not even due to take to the air until 2004 but already Airbus has 60 firm orders, including ten this week from US cargo carrier FedEx. Meanwhile, Boeing's rival 747X is yet to win a single buyer.

USTR officials say all this would be fine, albeit worrying for Boeing, if the world's only two volume aircraft-makers were operating on a level playing-field.

As they have done many times in the past, the Airbus partners agreed loans with their governments to meet colossal launch costs. This in itself did not upset the Americans.

Even Laura D'Andrea Tyson, formerly Clinton's chief economic adviser, noted that "Airbus would not have stood a chance against American producers without massive development, production and marketing support during its first 25 years."

But this is different, says Washington, claiming that the €2.6 billion of the €11.3-billion projected launch costs of the A380 pledged by the British, French and German governments looks like risk-free aid outlawed by a bilateral aircraft subsidy agreement struck between the EU and US back in 1992.

"Airbus companies get loans from governments, but they don't have any fixed repayment obligations," says a US trade official. "Instead, what happens is they only pay back the loans based on a per-plane payment as the planes are delivered and in some cases there's no obligation at all until a certain number of planes have been delivered."

If proved, this kind of 'royalty' payment would be hard for the Union to justify. Article 4 of the the 1992 deal commits the EU to capping government funding for development of future aircraft at 33% of the project cost with loans repayable over a maximum of 17 years. Costs cannot be written off.

The European Commission, which leads the team negotiating with the USTR, is in an awkward spot. The Americans are getting angrier, the Union is in the unusual position of playing the good guy at the World Trade Organisation over the US's foreign sales corporation system of tax breaks for multinationals and yet the Commission can say nothing about the terms of the Airbus loans.

The countries involved have promised to announce the terms of the financing but not until May, once the manufacturing work has been shared out between EADS constituents and BAE.

For this reason, before last week's meeting, the Americans were being conciliatory but the atmosphere changed as the EU made counter-claims. Article Five of the 1992 agreement limits "indirect" aid from the US government to its civil large aircraft industry - which now consists solely of Boeing - to 3% of sales revenue.

At the meeting, EU officials produced calculations showing that spillover support from Pentagon and NASA contracts into civil production was running at €2.4 billion annually, or 7.5% of Boeing's annual sales. The Americans put it at just 1% of sales.

Union negotiators also alleged that Airbus had been cheated out of a €260-million sale to Israeli flag-carrier El Al in the autumn of 1999, after the State Department threatened cuts aid to the Israeli government unless the order was switched to Boeing.

All's fair in love and trade war. Such practices are hardly new; six years ago, Clinton personally badgered Saudi King Fahd into buying €6-billion worth of Boeing and McDonnell Douglas civil aircraft and sweetened the deal with loan guarantees arranged through the US government export-credit agency.

But the Americans are not the only ones playing the game. As El Al executives' eardrums were being burst by Madeline Albright's phone calls in October 1999, President Jacques Chirac was tying up a €2.3-billion sale of 28 Airbus planes to the Chinese government.

Officials on both sides of the pond acknowledge that they have gone about as far as they can, and the battle will have to be joined by Zoellick and Trade Commissioner Pascal Lamy once the two have consulted their political masters.

Zoellick is going to find the Europeans solid. When it comes to Airbus, alliance-building and sophisticated geopolitics is jettisoned by EU leaders. Building the A380 is expected to create hundreds of thousands of jobs, and with elections in France and Germany in 2002 and a euro-referendum to be won in the UK, no price will be too high.