Fragile peace in aircraft subsidy dispute

Date: 26/09/1996

By Chris Johnstone

COMMERCIAL aircraft subsidies were once the stuff that serious transatlantic trade wars threatened to be made of.

That was before a 1992 deal set limits on government help to European and US manufacturers. Since then, apart from the odd outburst from US President Bill Clinton against Europe when Boeing's fortunes took a nosedive in 1993 and 1994, the aircraft aid issue appears to have taken a back seat.

But it would be wrong to talk of peace in our time on aircraft subsidies just because of the recent absence of headline news. The EU-US deal is a fragile formula for peace and industry observers warn that its weakness could be exposed if Airbus or Boeing start to hit fresh economic turbulence.

Basically, the 1992 deal has failed to live up to its early promise.

The original agreement, which set a ceiling on direct aircraft development assistance to Airbus and indirect US aid to Boeing and McDonnell Douglas, was supposed to be widened as soon as possible to cover other upcoming countries with aircraft manufacturing aspirations such as Canada, Japan and Russia.

This has never happened and the EU has roundly laid the blame for that on the US. “They have blocked any attempts to take this further,” said one EU official.

The Union has also accused the US government of making a mockery of the existing subsidy deal by failing to declare any indirect aid to their companies at all. Most US government support comes through spin-off research and development know-how stemming from military and space projects.

Early thoughts of introducing subsidy discipline into other segments of the civil aircraft industry covering, for example, government support to aero engine manufacturers, have also gone nowhere.

Big money is spent on engine development. However, here the head-to-head rivalry between European and US companies has been tempered by transatlantic alliances between the main aircraft manufacturers.

The issue of aircraft subsidies will be raised in the run-up to the World Trade Organisation's (WTO) December ministerial meeting in Singapore. No one on the EU side is looking for a breakthrough. Neither, however, are the EU or US talking of an imminent breakdown of the subsidy deal.

At the moment, officials are broadly taking their line from the companies - and they are happily selling aircraft rather than trading insults.

Airbus and Boeing's fortunes are riding high. Both face the prospect of record orders and profits this year, and a subsidy spat could not be further from their thoughts.

However, both are gearing up for a fresh development spending spree on the new generation of 550- to 800-seat aircraft.

With development costs pitched at anything between 6.4 and 8 billion ecu, either manufacturer could become sensitive if one suspects the other is getting an unfair advantage. That could spell trouble for a transatlantic deal that can be called off at one year's notice by either of the parties to it.