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Boeing/Airbus Dispute.

Boeing/Airbus Dispute. Yasunobu Takagi Greg Vaughn Michael Ward. Background. Boeing and Airbus have a worldwide duopoly in large civil aircraft (LCA), planes with more than 100 seats In 2005, Airbus booked orders for 1,111 new commercial airplanes, while Boeing claimed 1,029

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Boeing/Airbus Dispute.

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  1. Boeing/Airbus Dispute. Yasunobu Takagi Greg Vaughn Michael Ward

  2. Background • Boeing and Airbus have a worldwide duopoly in large civil aircraft (LCA), planes with more than 100 seats • In 2005, Airbus booked orders for 1,111 new commercial airplanes, while Boeing claimed 1,029 • Their nearest competitor, Bombardier, totaled only 150 orders

  3. WTO Agreement • Agreement on Subsidies and Countervailing Measures • (i) a financial contribution • (ii) by a government or any public body within the territory of a Member • (iii) which confers a benefit. • All three of these elements must be satisfied in order for a subsidy to exist.

  4. Subsidies: Specificity • Subsidy must be applied to an individual company or sector to be subject to the rules of the SCM. • Four types of “specificity”: • Enterprise-specificity. A government targets a particular company or companies for subsidization; • Industry-specificity. A government targets a particular sector or sectors for subsidization. • Regional specificity. A government targets producers in specified parts of its territory for subsidization. • Prohibited subsidies. A government targets export goods or goods using domestic inputs for subsidization.

  5. Subsidy Categories • Prohibited Subsidies • Based on “export performance” • Local content subsidies • Actionable Subsidies • Injury is established • Serious prejudice • Ag Subsidies are Legal

  6. Two Historical Agreements • 1979 GATT Agreement on Trade in Civil Aircraft • 1992 EU/U.S. Bilateral Agreement • Ceilings set at 3% for indirect support • Ceiling set at 33% for repayable royalty-based loans (Launch aid)

  7. Why bother? • Sales of Airbus aircraft has exceeded Boeing since 2002 and deliveries have exceeded Boeing since 2003. • Both companies took distinct paths in the development of their next aircraft.

  8. Relevant Provisions • Agreement on Subsidies and Countervailing Measures (SCM): 3, 5, and 6 • GATT Article XVI:1

  9. Airbus-Boeing Dispute • Launch Aid • A380 received $3.7 billion, Airbus has requested $1.7 billion for the A350 • The U.S. is challenging A350 launch aid as well as the launch aid for earlier models. • EIB Financing • Airbus received over 700 million Euros to develop the A380.

  10. Airbus-Boeing Dispute cont. • Infrastructure Support • Specific infrastructure created for use developing aircraft. • Debt Forgiveness • Equity Infusions and Grant • Research and Development Funding

  11. Airbus-Boeing Dispute cont. • Airbus Filed Compliant citing U.S. support of Boeing through military spending. • Treatment from states (WA, KS, MO) also cited.

  12. Dispute Timeline • October 6, 2004: U.S. filed request for consultations • November 4, 2004: Consultations held, failed to resolve the issue. • January 11, 2005: EU/U.S. agreement on terms to end subsides in large commercial aircraft • May 31, 2005: Panel Request filed. • June 13, 2005: DSB Deferred Panel Establishment

  13. Dispute Timeline (2) • July 20, 2005: DSB Established the Panel • October 7, 2005: Deputy Director Jara composed the panel • January 31, 2006: U.S. Requested Additional Panels. • February 2006: Press Conference-officials reconfirmed ongoing differences.

  14. U.S. Position • Launch aid distorts the market because it takes the risk off of Airbus and puts it onto E.U. taxpayers • Airbus also has received €1 billion in government subsidized financing, on top of direct launch aid, for several models of aircraft, including €700 million alone for the A380 • Other countries may be tempted to use launch aid

  15. U.S. Position cont. • EU defends launch aid as an offset to defense spending for Boeing • According to the USTR, Airbus and its parent companies, EADS and BAE Systems have comparable revenues from defense spending • BAE Systems is in the top-ten of suppliers to the Department of Defense, and the top defense contractor in the U.K. • EADS is the number one defense contractor in Europe and the second largest defense contractor in the world

  16. U.S. Position cont. • Infrastructure improvements for the sole use of Airbus include: • €751 million to create landfill for Airbus’ Hamburg production site • €182 million for an industrial park next to Airbus headquarters in Toulouse • €125 million from Spain to upgrade manufacturing sites

  17. U.S. Position cont. • EU states provide funding to Airbus for research and development through grants which Airbus uses for commercial research • In addition, before the European Union would approve the 1997 merger between Boeing and McDonnell Douglas, they required Boeing to license patents developed with government assistance to Airbus, while Airbus does not have to do the same for Boeing

  18. EU Position Regarding 1992 EU/US Agreement on LCA Disciplines • Limitation of direct government support for the development of new aircraft to 33% of the total development costs. ( mainly applied to EU) • Limitation of indirect government support to 3% of the nation’s LCA industry turnover. ( mainly applied to US)

  19. EU Position – cont. 1992 Terms and Conditions • All EU government loans for Airbus has been made entirely within the letter and the spirit of the 1992 Agreement. • US has never disputed this fact, instead, asserted that this agreement has outlived its usefulness.

  20. EU Position – cont. 1992 Terms and Conditions • Boeing has NOT complied with the limitation of indirect support to 3% of the nation’s LCA industry turnover. • Boeing avoided more than $1.2 billion in federal taxes through the use of off-shore FSC. • This is direct government subsidies prohibited by international rules.

  21. EU Position – cont. • EU Government loans for Airbus • Not all Airbus launched w/ government subsidies • Boeing has NOT launched any new programs by its own fund since 1990. • Boeing investment – only $2.8 billion of its fund • Airbus investment – $9.4 billion of its fund

  22. EU Position – cont. • EU launch investment • Launch investment will be repaid at an interest rate no less than the government cost of borrowing and within no more than 17 years based on 1992 Agreement • Airbus has repaid EU government more than $6.7 billion, which accounts for 40% of total amount Airbus has received • Boeing will NOT have to repay US government, including NASA and Defense Department

  23. EU Position – cont. The real reason behind the US decision is not that much the EU subsidies to Airbus, but the fact that “commercially, Airbus is a huge success” and that the Boeing “fears competition”. -Peter Mandelson, EU Trade Commissioner

  24. Conclusions • Both Boeing’s and Airbus’ subsidies most likely violate WTO rules • The WTO will probably find both countries at fault • Neither side will benefit from a trade war between the U.S. and EU • Boeing and Airbus are strong enough to compete against against each other without subsidies • The U.S. and EU should both discontinue subsidies

  25. Sources • USTR. Trade Facts; Summary of EU Subsidies in U.S. WTO Case. http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2005/asset_upload_file486_7766.pdf • USTR. Trade Facts; BAE Systems and EADS – Major Defense and Space Contractors in the EU and the United States. http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2005/asset_upload_file151_7765.pdf • Gillie, John. Airbus’ Victory Rings Hollow.Knight Ridder Tribune Business News. 18 Jan 2006: P.1 • Betts, Paul. Canada Puts a Twist in Aerospace Subsidy Row. Financial Times London. 2 Feb 2006: P.18 • SpeedNews. Commercial Aircraft Orders and Deliveries – December 31 , 2005.www.speednews.com/lists/05o&d.pdf • European Association of Aerospace Industries. http://www.aecma.org/Position/TradeJan02.pdf#search='1992%20Bilateral%20EUUS%20Agreement‘ • http://en.wikipedia.org/wiki/Airbus • General Agreement on Tariffs and Trade. Article XVI. • World Trade Organization. Agreement on Subsidies and Countervailing Measures. Articles 3, 5, and 6.

  26. Sources • Airbus. Boeing 787 / Trade issues: EADS and BAE Systems are supporting a negotiated solution. http://events.airbus.com/dynamic/media/press_release.asp”1725 • Europa. EU-US Agreement on Large Civil Aircraft 1992: key facts and figures. http://europa.eu.int/rapid/pressReleasesAction.do?reference=MEMO/04/232&format=HTML&aged=0&language=EN&guiLanguage=en • Europa. EU/US Agreement on Terms for Negotiation to end Subsidies for Large Civil Aircraft. http://europa.eu.int/rapid/pressReleasesAction.do?reference=MEMO/05/4&type=HTML&aged=0&language=EN&guiLanguage=en • EurActiv. Madelson: EU is ready for the “biggest legal dispute in WTO’s history”. http://www.euractiv.com/Article?tcmuri=tcm:29-140198-16&type=News

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