International trade. An ill-timed spat

A transatlantic row (again) over aircraft subsidies could jeopardise the global trade talks

TRADE negotiators are masters of brinkmanship. And brinkmanship requires drama. So it should surprise no one that a long-running dispute between America and the European Union over civil-aircraft subsidies flared this week into a headline-grabbing row, featuring an acrimonious telephone conversation and mutual name-calling. This is not the first time they have clashed loudly and publicly over subsidies to Airbus and Boeing. It probably won't be the last. But this latest episode of the saga comes at a dangerous time. Unless it is patched up quickly, the high-volume squabble could threaten the transatlantic leadership that is crucial to completing successfully the Doha round of global trade talks.

The Boeing/Airbus subsidy battle is the biggest commercial dispute between America and the European Union (EU), and one of the most intractable. Washington accuses the Europeans of illegally subsidising Airbus with cheap government loans to defray the costs (and limit the risks) of developing new civil aircraft. Brussels claims America also subsidises Boeing, but that these subsidies simply take a different form, such as state tax breaks and large defence contracts. While there is a worrying lack of clarity over considerable indirect aid to Boeing, the Americans are correct that Airbus, as market leader in passenger jets, is no longer an infant industry and ought to be weaned off soft government loans, which seem a clear breach of trade rules. Taxpayers in both continents would gain from an end to government mollycoddling.

The question is how to get there. Between 1992 and 2004 a bilateral agreement limited - but did not eliminate - the hand-outs, and defused political tensions. Last October, the Bush trade team changed course from negotiation to litigation, announcing it was going to file a formal complaint against Europe's Airbus subsidies at the World Trade Organisation (WTO). The EU promptly filed a similar case against America. In January this year, before any litigation began, both sides agreed to spend three months trying again for a negotiated solution. It is these efforts that are failing, raising the prospect of WTO lawsuits and the political temperature.

Tantrum test

Since this dispute is unlikely to be solved quickly, both America and the EU need to make sure it does not infect the rest of the trade agenda, particularly the Doha round of global trade talks. Ironically, just as it is turning up the volume on Airbus, the United States is offering reasons for optimism on Doha. The appointment on March 17th of Rob Portman - a senior congressman who commands bipartisan respect and has a background in trade - as America's new trade representative suggests Mr Bush is giving trade a high political priority. And Mr Bush's budget, which proposes more than $5 billion of cuts in farm subsidies, suggests a new-found seriousness about disappointing the farm lobby. Domestic budgetary pressure is also being reinforced by WTO decisions: a recent ruling declared America's cotton subsidies illegal. These developments suggest that real progress on cutting farm support is possible.

For all these positive signs from Washington, the Doha round is still an uphill battle. In agriculture there has been far too little progress on tariff reduction, which will do a lot more to help poor countries than reducing subsidies in rich countries. Technical negotiations in Geneva are bogged down over how to convert different types of tariffs to a common standard. Too many developing countries are keener to lambaste the farm-trade sins of rich countries than to open their own markets, whether for farm products, industrial goods or services. A meeting of the G20 block of developing countries last week was long on demands in agriculture and short on progress elsewhere.

There is not a lot of time left to break these logjams. Unless the negotiators make serious progress on the outlines of a deal by the time the world's trade ministers meet in Hong Kong in December, the chances of a successful Doha round look slim. Leadership from Europe and America is no guarantee of success, but without it failure is certain.

This is exactly why the latest public spat over Boeing and Airbus is so unfortunate. In January, when the two sides agreed to try to negotiate a solution, Peter Mandelson, the EU's trade commissioner, said that a serious falling out over the issue would affect the two sides' ability to “co-operate and collaborate” on the Doha round. Now that the negotiations on aircraft subsidies have once again stalled, Messrs Mandelson and Portman need to avoid that very threat.

Editorial. A transatlantic row (again) between the EU and US over aircraft subsidies could jeopardise the WTO global trade talks

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