News Release

Pascal Lamy

No. 137/04
October 6, 2004

US-BOEING: EU TAKES US TO THE WTO OVER SUBSIDIES GRANTED TO BOEING

Today, the EU has requested consultations with the United States in the World Trade Organization (WTO) on massive subsidies granted to Boeing. The EU believes that these subsidies are in serious violation of the WTO Agreement on Subsidies and Countervailing Measures. The US launched a case regarding European support to Airbus earlier in the day. EU Trade Commissioner Pascal Lamy stated: “The US move in the WTO concerning European support to Airbus is obviously an attempt to divert attention from Boeing’s self-inflicted decline. It also shows that the US were never seriously interested in seeking to renegotiate the existing '92 EU-US Bilateral Agreement. If this is the path the US has chosen, we accept the challenge, not least because it is high time to put an end to massive illegal US subsidies to Boeing which damage Airbus, in particular those for Boeing’s new 7E7 programme. Nonetheless, it is a pity that the US has chosen to go to litigation which could destabilize trade and investment, including in Boeing’s 7E7 project. Aerospace workers can rely on the European Commission to defend their interests.”

For many years the US Government has subsidised Boeing, mainly by paying research and development costs through NASA [US National Aeronautics & Space Administration], the Department of Defense, the Department of Commerce and other government agencies. Since 1992 Boeing has received around $23 billion in US subsidies. Moreover, the US Government continues to grant Boeing around $200 million per year in export subsidies under the Extraterritorial Income Exclusion Act (the successor to the “FSC” –  Foreign Sales Corporations legislation), despite a WTO ruling expressly declaring these subsidies illegal.

The latest and most flagrant violation consists in massive subsidies of about $3.2 billion, inter alia, in the form of tax reductions and exemptions and infrastructure support for the development and production of Boeing’s 7E7, also known as “Dreamliner.” The evidence the European Commission has collected over the years clearly demonstrates that the above subsidies violate the WTO Agreement on Subsidies and Countervailing Measures.

Moreover, they also violate the 1992 EU-US Agreement on Trade in Large Civil Aircraft which regulates precisely the forms and level of government support the US and the EU provide to Boeing and Airbus respectively.

Despite repeated invitations by the Commission, the US has declined to participate in the bilateral consultations stipulated by the 1992 Agreement for more than two years. Nonetheless, further to a US request only a few weeks ago, the Commission agreed to discuss the question of a possible revision of the 1992 Agreement provided that this would cover all forms of subsidies including those used in the US and that the US would bring any subsidies for the Boeing 7E7 into conformity with the 1992 Agreement.

Finally, and just when these discussions were taking place (most recently in a constructive meeting on 16 September), the US requested WTO consultations on European support to Airbus. This suggests that the US request for re-negotiation of the 1992 Agreement was never particularly serious.

WTO consultation and dispute settlement procedures

The first step in a WTO dispute settlement is a request for consultation from the complaining member. The defendant has 10 days to reply to the request and shall enter into consultation within a period of no more than 30 days (unless otherwise agreed by the 2 parties). The consultation should aim at finding a positive solution to the issue at stake.

If the consultations fail to settle the dispute within 60 days after the date of receipt of the consultation request, the complaining party may request the Dispute Settlement Body (DSB) to establish a Panel. (However, the complaining party may request a panel during the 60-day period if the 2 parties consider that the consultations have failed to settle the dispute.)

Once the panelists are nominated, the complaining party has normally between 3 and 6 weeks to file its first written submission and the party complained against another 2 to 3 weeks to respond. Two oral hearings and a second written submission follow. On average a panel procedure lasts 12 months. This can be followed by an appeal that should not last longer than 90 days.

For more information:

http://europa.eu.int/comm/trade/issues/sectoral/industry/aircraft/index_en.htm

http://europa.eu.int/comm/trade/issues/respectrules/dispute/index_en.htm

Background Information:

EU – US Agreement on Large Civil Aircraft 1992: key facts and figures

The '92 EU-US Agreement

Until the late '70s, the US enjoyed almost a de facto monopoly in the Large Civil Aircraft (LCA) sector. The Airbus consortium (created in 1969) started competing effectively in the '80s. At that stage the US became concerned about the European competition and the alleged subsidies paid by the European governments for the developments of the early models of the Airbus family. This became a major issue of contention, as the European side was equally concerned by subsidies accruing to US LCA manufacturers through NASA and Defense programmes.

The EU and the US started bilateral negotiations for the limitation of government subsidies to the LCA sector in the late 1980s. Negotiations were concluded in 1992 with the signature of the EC-US Agreement on Trade in Large Civil Aircraft which imposes disciplines on government support on both sides of the Atlantic which are significantly stricter than the relevant WTO rules: notably, the Agreement regulates in detail the forms and limits of government support, prescribes transparency obligations and commits the parties to avoiding trade disputes.

Disciplines on EU and US support

- On the one hand, the agreement puts a ceiling on the amount of direct government support (33% of the total development costs) for new aircraft programmes. It establishes that such support (granted in the form of launch investments, which are repayable royalty-based loans) will be repaid at an interest rate no less than the government cost of borrowing and within no more than 17 years. Basically, this discipline applies to the form of government support mainly in use in Europe.

- On the other hand, the agreement establishes that indirect support (e.g., benefits provided for aeronautical applications of NASA or military programmes) should be limited to 3% of the nation's LCA industry turnover. This discipline is primarily targeted at the support system in use in the US. In contrast to the European system of repayable launch investment, there is no requirement for indirect support to be reimbursed, and the generous ceiling of 3% is calculated on the larger basis of the turnover of the LCA industry and applies per individual year.

European Government Support

European governments provide repayable launch investment – not grants – to Airbus at the time of program launch. European government investments support the European technology research & development sector, just as US Government R&D schemes have sought to do, through NASA, FAA [US Federal Aviation Administration], Department of Defense (DoD) and export tax relief programs. However, EU governments spend 3 times less on aerospace R&D than the US Government.

All European government loans for Airbus programs have been made entirely within the letter and the spirit of the 1992 US-EU Agreement on Trade in Large Civil Aircraft since its entry into force, and this will continue to be the case for all future Airbus programs. The US have not disputed this fact.

- Of the 8 Airbus aircraft launched since 1990, only 3 programs have been launched with government investment.

- Airbus pays royalties to governments over the entire life of the aircraft programs. Interest and principal is repaid on deliveries, even before the programs break even and irrespective of the sale price.

US Government Subsidies

US Government subsidies, mostly in the form of military and NASA contracts, research and development expenditure and tax subsidies have enabled the US aerospace industry to maintain its global dominance for more than 50 years.

- Unlike European launch investment, none of this support has to be repaid – and in fact is not repaid.

- Since 1992, Boeing has received around $23 billon in subsidies from the US Government.

- The total US Government indirect support of the US LCA industry in FY 2003 alone was up to $2.74 billion. This represents around 11.9% of the FY 2003 commercial turnover of the US LCA industry.

- Since 1990, Boeing has outsourced increasingly large shares of its civil aircraft programmes to other countries, e.g., Japan (more than 60% of the 7E7). The governments of these countries subsidize these shares, such that Boeing’s programs also receive substantial foreign subsidies.

- Since 1990 Boeing has avoided paying around more than $1.65 billion in federal taxes through the use of off-shore Foreign Sales Corporations (FSC). This is a direct (and illegal) government subsidy prohibited by international rules.

The real issue is one of competitiveness: from 2001 to 2003, Boeing has invested only $2.8 billion of its own funds in commercial aircraft R&D and capital expenditure compared to $9.4 billion by Airbus. Lack of R&D and capital investment has meant that Boeing has not launched any new programs since 1990.

US subsidies in the form of Defence Procurement

There are massive benefits accruing to Boeing’s large civil aircraft business from military R&D programmes and overpriced DoD contracts, e.g., sales of subsequently converted civil airplanes to the US Department of Defense at inflated prices. Recent examples include:

- Regarding the possible sale of B-767 refuelling “tanker” aircraft, a 2003 Morgan Stanley report establishes a subsidy margin of 9% or $1.6 to $2.3 billion in profits for Boeing. The report argues that the lease deal is the equivalent “at least 700 firm deliveries of Boeing 767s,” that the normal profit margin for the 767 is 6% and that the Pentagon plans to give Boeing up to 15%.

- On 14 June 2004, the US Navy awarded Boeing a contract worth potentially about $44 billion until 2030 for the production and maintenance of 108 civil B-737 and their conversion into long-range submarine hunter Multi-Mission Aircraft. It appears that airplanes will be built at Boeing’s civil plants in Wichita, Kansas, and Renton, Washington.

US subsidies in the form of R&D expenditure

Boeing’s large civil aircraft business benefits significantly from NASA and DoD R&D programmes. In 2003 alone, Boeing received $2.74 billion in subsidies, including around $2 billion from the US Department of Defense and more than $600 million from NASA.

The largest part of funds spent by the government in R&D for a specifically aeronautical product constitutes a reduction in R&D expenses for the main potential user of the technology, i.e., Boeing. This is the case even if the R&D is eventually not successful.

Subsidies to the planned Boeing 7E7: over $ 5 billion

Planned subsidies for Boeing’s 7E7 programme from Washington State ($3.2 billion), Kansas ($0.5 billion), Oklahoma ($0.35 billion). Washington State 7E7 subsidies alone are about as high as European launch investment for A380. The only difference is that A380 launch investment is paid back and is compatible with the 1992, while Washington support is not. In addition, Washington 7E7 production subsidies are illegal under the 1992 Agreement. To this must be added the planned 7E7 subsidies of around $1.6 billion from Japan.

EU-US links in the aeronautics sector

Numerous European companies participate in US programmes and vice versa, e.g.