WTO Appellate Body Finds US Support for Boeing Illegal

14 March 2012

The WTO's highest court confirmed this week that Washington had violated international trade rules by providing its flagship aircraft manufacturer, Boeing, with billions of dollars worth of illegal subsidies. The decision, which largely upholds an earlier panel ruling (DS353), is the latest twist in a high-profile row between the two sides over domestic support to their respective airplane industries.

In its report, the Appellate Body largely agreed with a previous WTO panel that Boeing had received illegal state sponsored support between 1989 and 2006 worth more than US$5 billion in total (see Bridges Weekly, 6 April 2011). Subsidies granted after this date were estimated to be worth over US$3 billion.

The Appellate Body also found that support for Boeing from the US Department of Defense and the National Aeronautics and Space Administration (NASA) in the form of research and development funding constituted illegal subsidies under the WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement).

In addition, the Appellate Body determined that reduced tax rates for aircraft manufacturers in the US state of Washington, federal tax breaks for foreign sales corporations, and friendly industrial revenue bonds issued to Boeing by the city of Wichita in the US state of Kansas were illegal under the SCM Agreement.

All subsidies were confirmed to have severely damaged the commercial position of Airbus, which makes them "actionable" under the SCMA. In other words, these payments must be withdrawn and may be subject to countervailing, or anti-subsidy, duties.

Both sides claim victory

Following the public release of the Appellate Body report, which had been issued privately to Washington and Brussels in late February, both sides applauded the ruling as victory.

EU Trade Commissioner Karel De Gucht welcomed the result as vindication that Washington is indeed at fault for providing Boeing with billions of dollars in prohibited subsidies.

"This landmark ruling clearly shows the US has used an unlawful way of supporting business that has stood in the way of fair competition," he said.

For Washington's part, US Trade Representative Ron Kirk instead highlighted the decision as a "tremendous victory" for the US, since illegal aid given to Boeing was found smaller than unlawful EU support for Europe's major passenger plane producer Airbus - a case that had also reached the global trade body. (DS316).

"It is now clear that European subsidies to Airbus are far larger - by multiples - and far more distortive than anything that the United States does for Boeing," he said.

Along similar lines, Boeing stressed that the WTO decisions in both cases "establish conclusively and finally that European subsidies competitively disadvantage Boeing and American workers and will continue to do so until launch aid is eliminated."

Types of subsidies not comparable, EU says

The EU rejected these views, however, stressing that the type of subsidies could not be "directly compared" as "there is a significant difference in the way the EU and US supported their industries."

"The EU provided repayable loans, which are fully paid back by Airbus and where any subsidy element is only a small interest rate gap; while the US provided non-repayable funding of billions of dollars, as confirmed by the Appellate Body today."

Brussels also says that, while the EU subsidies might be higher in numbers, the adverse effects for Boeing are actually much smaller due to the nature of the payments.

In May 2011, the Appellate Body had determined that EU member states were at fault for giving below-market interest rate loans to Airbus to the tune of US$18 billion and had requested Brussels to bring its measures into compliance (see Bridges Weekly, 25 May 2011). In particular, it criticised the EU's Launch Aid programme for offering direct commercial financing with relaxed or non-existent conditions for repayment.

Washington recently rejected Brussels' claim from December 2011 that it had fully complied with the adverse Airbus ruling. The US then threatened trade retaliation of between US$7 to US$10 billion and sought a WTO compliance ruling to authorise such countermeasures (see Bridges Weekly, 7 December 2011).

The parallel disputes together form the world's largest trade spat, affecting jobs in an airplane market worth more than US$2 trillion.

Next steps

The US now has six months to comply with the ruling. If the EU finds that Washington has not met this obligation, it can seek a non-compliance determination at the WTO and impose retaliatory countermeasures.

For long, though, experts have argued that the conflict cannot be resolved through adjudication and that WTO rulings can, at best, be informative for a bilateral negotiation process between the parties.

Though in theory both sides can request authorisation to impose countermeasures, this could result in a tit-for-tat row, adversely hurting both manufacturers to the advantage of the civil aircraft industries in third countries such as Canada and Russia. A mutually solution thus appears the most likely scenario.

ICTSD reporting; "In Appeal, W.T.O. Upholds a Decision Against Boeing," THE NEW YORK TIMES, 12 March 2012; "U.S. Calls WTO Boeing Appeals Ruling a Victory; Airbus Says EU is Winner," BLOOMBERG, 12 March 2012; "WTO appeal faults Boeing subsidies: sources," REUTERS, 9 March 2012.

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