USTR - U.S. Files WTO Case Against EU Over Unfair Airbus Subsidies
                 
The Office of the United States Trade Representative

U.S. Files WTO Case Against EU Over Unfair Airbus Subsidies
10/06/2004

WASHINGTON – U.S. Trade Representative Robert B. Zoellick announced that in order to level the playing field for American workers and companies, the United States today would file a World Trade Organization (WTO) dispute settlement case against the European Union (EU) regarding billions of dollars in unfair subsidies provided to Airbus by European governments.

"This is about fair competition and a level playing field. Since its creation thirty-five years ago, some Europeans have justified subsidies to Airbus as necessary to support an ‘infant’ industry. If that rationalization were ever valid, its time has long passed. Airbus now sells more large civil aircraft than Boeing," said Zoellick.

The United States and Europe share a trillion dollar economic relationship, and have worked closely on many trade fronts in recent years, most importantly on mutual efforts to advance trade liberalization efforts in the Doha negotiations. Both parties recognize the appropriateness of using the WTO process to resolve trade disputes. The WTO was created for just such purposes. In recent years, the United States and Europe have each brought about the same number of WTO disputes against the other.

In recent months, the United States has been urging the European Commission (EC) to negotiate a new agreement to replace the 1992 U.S.-E.U. Agreement on Large Civil Aircraft. The agreement places limits on certain government support, including limiting it to one-third the costs of developing a new aircraft.

"We urged the EU to agree that neither of us should provide new subsidies to aircraft manufacturers. We offered to simplify our task by using the subsidy definition that the EU and the United States had already agreed to in the WTO. We even were willing to accept subsidies in the pipeline – but then draw the line. That’s a fair offer," said Zoellick. "But the EU and Airbus appear to want to buy more time for more subsidies for more planes. That isn’t fair and it violates international trade rules. Since we could not agree, the United States decided to pursue resolution through the agreed procedures of the multilateral trading system, by bringing a WTO case before an international dispute resolution panel."

Boeing is the leading U.S. producer of airplanes, and Airbus is its main competitor. When the 1992 agreement was negotiated, Airbus accounted for only about 30 percent of the global market. It now represents more than 50 percent of this market. Clearly, the 1992 agreement has outlived its usefulness.

"The 1992 Agreement was negotiated after the United States had won a case against the European subsidies to Airbus and was pursuing another case within the GATT system that preceded the WTO dispute settlement procedures," Zoellick went on to note. "The United States remains interested in an agreement that ends all new subsidies. So as this case proceeds, we remain open to negotiating a new accord – as long as it ends the new subsidies."

Consistent with today’s decision to move forward with a WTO case, the United States also exercised its right, as provided by the 1992 Agreement’s terms, to terminate that agreement.

"American farmers, workers, and businesses can compete against anyone, as long as there is a level playing field. Terminating this agreement reinforces our belief that now is the time to end subsidies, ideally through a new agreement. We remain open to addressing Europe’s concerns with regard to government support they believe Boeing receives. It is in the interests of both Europe and the United States to find a durable solution to this long-standing problem," Zoellick said.

Background:

The WTO Case Against Airbus

The U.S. case alleges that launch aid and other government support to Airbus qualifies as a subsidy under the Agreement on Subsidies and Countervailing Measures (SCM) and that such subsidies are "actionable" because they cause adverse effects or are "prohibited" because they are export-contingent, or both.

The 1992 Agreement does not preclude the United States or the European Commission from bringing a WTO case. The terms and obligations under the 1992 bilateral Agreement are separate and distinct from the terms and obligations of the 1994 SCM Agreement. Compliance with one is not a defense against claims of non-compliance with the other.

The first step in the WTO process is to file a Request for Consultations. The United States is taking this step today. This begins a period of no less than 60 days for the parties to consult in an effort to resolve the matter. If after 60 days the parties are unable to do so, the United States would be authorized to request that a WTO panel be established to make findings on this matter.

Termination of the 1992 Agreement

Consistent with the United States’ view that now is the time to end new subsidies and its decision to file a WTO case, the United States today is also exercising its right, as provided by the 1992 agreement’s terms, to terminate that agreement.

Subsidies to Airbus

Airbus S.A.S. ("Airbus") was established in 1970 as a European consortium of French, German, and later, Spanish and U.K. companies. In 2001, Airbus formally became a single integrated company. The European Aeronautic Defence and Space Company ("EADS") and BAE SYSTEMS of the U.K. transferred all of their Airbus-related assets to the newly incorporated company and became 80 percent and 20 percent, respectively, owners of the company. The operating results of Airbus are fully consolidated in the EADS balance sheet.

Over its 35 year history, Airbus has benefited from massive amounts of EU member state and EU subsidies that have enabled the company to create a full product line of aircraft and gain a 50 percent share of large commercial aircraft ("LCA") sales and a 60 percent share of the global order book. Every major Airbus aircraft model was financed, in whole or in part, with EU government subsidies taking the form of "launch aid" – financing with no or low rates of interest, and repayment tied to sales of the aircraft. If the sales of a particular model are less than expected, Airbus does not have to repay the remainder of the financing. EU governments have forgiven Airbus debt; provided equity infusions; provided dedicated infrastructure support; and provided substantial amounts of research and development funds for civil aircraft projects.

Since 1985, the United States has been involved in several major rounds of negotiations with the Airbus partner governments and the Commission with the objective of achieving greater disciplines over the subsidies provided to Airbus. In 1989 and 1991 the United States brought two cases at the GATT challenging Airbus subsidies. The first case challenged a German program that offset adverse exchange rate fluctuations on sales of Airbus aircraft, and the second, broader case challenged overall subsidies to the Airbus consortium. The first case ended in a victory for the United States after a GATT panel determined that the exchange rate scheme constituted a prohibited export subsidy. The EC blocked adoption of the panel report, which was permitted before the creation of the WTO, but Germany subsequently withdrew the scheme.

The United States withdrew the second case in July 1992 after the two sides negotiated a bilateral agreement limiting government support for large civil aircraft programs. The agreement included a prohibition of future production support and a limitation on the share of government support for the development of new aircraft programs to 33 percent of the project’s total development costs.

After 12 years, the United States believes the 1992 agreement has outlived its usefulness and needs to be terminated. Expected to lead to a progressive reduction of subsidies, the 1992 agreement has instead become an excuse for EU governments to continue subsidizing Airbus. The $3.2 billion in launch aid that the EU governments have committed for the new Airbus A380 is the largest amount of funds committed for a single project. The EU has provided further loans and infrastructure that has pushed the total amount of A380 subsidies to approximately $6.5 billion. Airbus is now contemplating the launch of another competitor (A350) to the recently-launched Boeing 7E7, and has indicated its intentions to request subsidies for that aircraft as well.

In addition, Airbus’ market share has increased markedly over the agreement’s lifetime. Its share of the market had already increased from 16 percent in 1988 to 30 percent in 1990, prior to the agreement’s signing; it reached 50 percent in 1999. In the meantime, McDonnell Douglas’ market share dropped precipitously, culminating with the firm’s purchase by Boeing in 1997. Airbus’s success in gaining additional market share is exemplified by the goals it has set for itself over its lifetime: In 1975, Airbus aimed to gain a 30 percent share of the world aerospace market. By 1994, it had declared that nothing less than 50 percent would do. It has exceeded that goal.

In 1997, the EC conditioned approval of the merger of Boeing and McDonnell Douglas on a commitment by Boeing to license to Airbus any "government-funded patent" that could be used in the manufacture or sale of large civil aircraft. Airbus has no similar commitment to share the fruits of government-funded technology with Boeing. The United States has sought to include a mutual commitment of this kind in a new bilateral agreement.

In 1999, a WTO panel reviewing a complaint by Brazil found that Canadian aircraft financing with launch aid-type terms was a prohibited export subsidy. Another panel, reviewing a case brought by Canada, found that Brazil’s interest rate subsidies to its aircraft manufacturer were also an export subsidy.

Efforts to Negotiate a New Bilateral Agreement

The last major USG effort to address subsidies to Airbus was in 1999 – 2000, when the United States sought to head off subsidized financing for the A380. The considerations at that time included a possible WTO case. For its own business reasons, however, Boeing did not support such a course. As a consequence, the Clinton Administration did not pursue a WTO case at that time.

Matters changed significantly this year as talk surfaced of new subsidies for a new Airbus plane. Subsequently, USTR Zoellick had several conversations with EU Trade Commissioner Lamy in late Spring and early summer regarding this matter. USTR and EC trade officials met in July and more recently in September with the goal of securing a commitment to end new subsidies.

In August, President Bush instructed USTR Zoellick to pursue all options to end the subsidization of Airbus, including the filing of a WTO case, if need be. USTR has sought to end the subsidies through the negotiation of a new bilateral agreement. The EC has been unwilling to agree on the goal of ending all new subsidies, much less on how to achieve this goal.

USTR Zoellick met with Commissioner Lamy on September 30 to discuss this matter. The EC remains opposed to the goal of ending new subsidies for large civil aircraft.

While the United States remains committed to resolving this matter through the negotiation of a new bilateral agreement, we have concluded that filing a WTO case at this time is necessary to ensure that, one way or another, the playing field is leveled. The WTO offers an agreed multilateral forum for resolving trade disputes according to agreed rules.