WTO’s Appellate Body Issues Mixed Ruling on Compliance in EU Aircraft Subsidies Case

17 May 2018

The WTO’s highest court ruled on Tuesday 15 May that the European Union has not fully brought its subsidies for plane manufacturer Airbus in line with global trade rules, agreeing overall with a previous panel while rejecting some the latter’s individual findings. The Appellate Body ruling is the latest development in a case (DS316) that launched in October 2004 and has become one of the most high-profile cases at the Geneva-based organisation. 

The original Airbus case was filed by the United States, which has long argued that state aid to the European multinational plane manufacturer contravenes WTO rules. Washington and Brussels have spent over a decade embroiled in legal cases at the WTO over subsidies to aircraft manufacturing companies, with the EU pushing its own dispute against US government support to Boeing. 

The Appellate Body report on the US’ compliance in that case (DS353) is still pending.

Going forward, the US now has the option to ask an arbitrator to determine what level of concessions that Washington is able to suspend against the European Union. An arbitrator had already begun examining this option before the two sides launched “compliance” proceedings, with arbitration then being put on hold in early 2012.

At the time, both sides agreed that the either party would have the option to resume this arbitration process for assessing the level of suspension, should the EU’s steps to bring its subsidies in line with WTO rules be found insufficient.

If the US does ask the arbitrator to resume their work, that does not preclude the option of the two sides negotiating some sort of “mutually agreed solution” to avert such measures.

Ruling details

The Appellate Body’s report examines whether the EU and four member states – France, Germany, Spain, and the UK – have made sufficient changes in response to previous WTO rulings, which had found various violations of the organisation’s subsidy rules.

In December 2011 the EU claimed it had taken the necessary steps to bring its subsidies into compliance, prompting various legal steps to ascertain whether this was the case. A first review of compliance by a panel led to a mixed ruling in September 2016, which both the EU and US appealed. (See Bridges Weekly, 29 September 2016)

This week’s Appellate Body report confirmed the panel’s approach in assessing the contract and loan conditions for Airbus to receive financing, and found that Airbus managed to secure financing for developing its A350XWB plane model that benefitted from a “lower interest rate for the A350XWB LA/MSF than would have been available to it on the market.”

The terms LA/MSF refer to “launch aid” and “member state financing,” two different ways of describing the subsidies in question. The A350 XWB model is for a new, twin-engine, long-range plane that can transport hundreds of passengers and  is meant to be more cost-effective to operate while producing fewer carbon dioxide emissions, according to a company description.

According to the Appellate Body, this lower interest rate and the financial benefit it conferred meant that Airbus was indeed receiving a subsidy, as defined by global trade rules.

In reviewing the effect of the subsidies, the Appellate Body said, “the existing LA/MSF subsidies that Airbus continued to receive made it possible to proceed with the timely launch of the A350XWB – a high-risk and expensive programme of considerable strategic importance to Airbus – and to bring to market the A380, which had suffered extensive delays.” 

The latter model, the A380, is another type of plane that Airbus describes as “the world’s largest and most spacious passenger aircraft,” and the company has touted its size and consequent ability to transport more passengers as a way to minimise adverse environmental impact from air travel. 

The Appellate Body indicated that those subsidies which lasted into the “post-implementation period” – in other words, after December 2011, when the EU declared its compliance with the WTO rules – had in turn caused “lost sales” for US aircraft manufacturers. 

However, the Appellate Body said it could not complete the analysis of whether these subsidies had also made it harder for the US to compete in the EU and other aviation markets more globally, particularly in some major Asian economies. 

The Appellate Body report also disagrees with certain panel findings, such as the panel’s recommendation that the EU get rid of the “adverse effects” caused by previous subsidies which had lapsed in mid-2011, some months before the deadline for the EU to remove them. These include subsidies provided to a host of Airbus models, which had found to be WTO-illegal in the past but are no longer in place. 

US, EU officials prepare for next chapter

Trade officials from both sides responded swiftly to the ruling, with each highlighting the aspects of the Appellate Body ruling which had been in their favour.

“Today the WTO Appellate Body, the highest WTO court, has definitively rejected the US challenge on the bulk of EU support to Airbus, and agreed that the EU has largely complied with its original findings,” said EU Trade Commissioner Cecilia Malmström.

The EU statement also said that Brussels plans to “take swift action to bring itself into line with WTO rules as regards its remaining obligations,” and Malmström said that the bloc’s executive arm is keeping an eye on the forthcoming Appellate Body ruling on the US’ own compliance regarding subsidies to Boeing, which she termed “massive and persistent.”

For their part, Washington officials highlighted the impact of the EU subsides on the competitiveness of the American aviation industry, and indicated they were ready to take action if needed.

“This report confirms once and for all that the EU has long ignored WTO rules, and even worse, EU aircraft subsidies have cost American aerospace companies tens of billions of dollars in lost revenue. It is long past time for the EU to end these subsidies,” said US Trade Representative Robert Lighthizer.

“Unless the EU finally takes action to stop breaking the rules and harming US interests, the United States will have to move forward with countermeasures on EU products,” he added, without clarifying the timeframe for when Washington would ask to resume arbitration.

Evolving industry, geopolitical dynamics

The aircraft subsidy disputes have brought another dimension to the decades-long duopoly maintained by Boeing and Airbus, which have long dominated the multi-trillion dollar aviation market.

In the years since the Airbus and Boeing cases were first filed, the civil aviation industry has undergone a significant evolution, with new players becoming increasingly predominant participants in the sector, much as Airbus and Boeing continue playing leading roles. Major companies that have grown in profile in recent years include China’s Commercial Aircraft Corp (COMAC), Canada’s Bombardier, Russia’s Aeroflot, and Brazil’s Embraer.

Given the prolonged nature of the dispute, top Airbus officials have called for the EU and US to negotiate a resolution promptly, warning that the long-running trade spat has been disruptive to the wider global aviation industry and could have detrimental economic effects that extend beyond the sector.

“Airbus calls for all parties to accept the global nature of trade and to put an end to the long-running, disruptive dispute. An amicable negotiation with no preconditions is the only viable solution, either between the EU and the US or ideally a global agreement,” said a statement issued by Airbus on Tuesday. 

The company’s chief executive, Tom Enders, also noted that the wider landscape for global trade, including tensions among many major economic players, have made it even more imperative for the subsidy cases to come to a productive close. 

“The current geopolitical climate for trade is worrying, and industry players should not fuel it with unproductive disputes that undermine fair competition worldwide and impact the workers in this industry as well as our customers and operators,” Enders said. 

Boeing officials, for their part, issued their own statement calling for the EU to take swift action to bring the Airbus subsidies into compliance. 

“Now that the WTO has issued its final ruling, it is incumbent upon all parties to fully comply as such actions will ultimately produce the best outcomes for our customers and the mutual health of our industry,” said Dennis Muilenberg, the company’s chairman, CEO, and president. 

While the aviation situation continues unfolding, the EU and the US are also working to address tensions on a series of other trade fronts, including negotiations to avert unilateral, global US tariffs on imported steel and aluminium from the European Union. The EU, as well as Canada and Mexico, have until 1 June to negotiate a solution with the US, according to a deadline set by Washington officials. Four other countries have clinched draft deals to avoid the tariffs, which the US says are justified on national security grounds, while all others are already subject to the duties. (See Bridges Weekly, 9 May 2018

ICTSD reporting.

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