US, EU Debate Compliance in WTO Airbus Case

18 May 2017

Earlier this month, delegates from the US and EU gathered at WTO headquarters for hearings in the long-running case concerning government support provided by the 28-nation bloc to European aerospace giant Airbus (DS316). The Appellate Body made part of the debate available for public observation last week.

The multi-billion euro dispute dates back to 2004, when the US requested WTO consultations with the EU. The US cited concerns at the time that the bloc and four EU member states had provided financial support for Airbus to develop and produce large civil aircraft in a manner that violated global trade rules.

One year later, Brussels brought its own challenge against Washington’s support to Boeing, which at the time was the other major player in the aircraft manufacturing sector (DS353). The two cases, together with a newer dispute (DS487) concerning tax incentives provided by the state of Washington to Boeing, have become among the most high-profile at the global trade arbiter, given their commercial significance.

The years of litigation have also prompted calls from industry players – including the head of Airbus – for negotiating some type of solution that would end the litigation, including global rules on aircraft subsidies. (See Bridges Weekly, 1 December 2016)

After years of legal proceedings, the Appellate Body found violations of the WTO’s subsidy rules in both cases. In late 2011, the EU said that it had brought its support for Airbus in line with WTO rules, while the US disagreed and asked a panel to examine this compliance issue.

A compliance panel found in September 2016 that the EU needed to do more to resolve the trade rule violations. That finding later saw appeals from both parties. (See Bridges Weekly, 29 September 2016)

Appropriate steps taken?

The WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement) defines the government support measures that qualify as subsidies, along with outlining what actions members can take in response. Furthermore, it says that in cases where WTO judges have found that one member’s subsidies are having “adverse effects” on another member’s interests, the former “shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy.”

Last year’s compliance panel ruling said that the EU cannot build its case around compliance based on this state aid having expired on its own, given that Airbus had received that government support in full as previously scheduled. 

In the hearing broadcast last week, the 28 nation-bloc argued that the SCM Agreement gives two compliance alternatives: “remove the adverse effects” or “withdraw the subsidy.” The EU also argued that the compliance panel’s approach amounted to a requirement that the adverse effects be removed in order to be WTO-compliant, even if the subsidy itself had already been removed.

Brussels said that a subsidy can end, should that aid be terminated or expire. The EU suggested that withdrawing an illegal subsidy can happen in many ways, arguing that it has demonstrated that the “benefit from each expired subsidy has ceased to flow, and that each subsidy was therefore withdrawn.”

For its part, Washington agreed with the compliance panel, suggesting that the expiry of state aid does not mean that the EU was therefore excused from its responsibility to ensure that this same subsidy was not causing “adverse effects” to another WTO member.

Implications for local content subsidies?

The SCM Agreement also prohibits local content subsidies – those that require using domestic goods over imported goods.

The compliance panel found last year that subsidies provided to firms “so long as they engage in domestic production activities” do not constitute local content subsidies. In supporting its analysis, the panel referred to a provision in the General Agreement on Tariffs and Trade (GATT) which exempts “the payment of subsidies exclusively to domestic producers” from national treatment obligations.

The panel also observed that in past disputes, local content subsidies were only found when “requiring firms to use certain amounts of domestic goods as production inputs, i.e. to discriminate between upstream sources of domestic and imported goods in favour of the former.”

Citing past WTO cases, the US questioned whether this interpretation was consistent with an earlier panel’s ruling that also dealt with the SCM provision on local content subsidies. According to the US, the panel in that dispute found that a preferential tax rate that was dependent on basing certain manufacturing activities locally was, in effect, a local content subsidy. 

Along with citing a procedural flaw for Washington’s “appeal” on this subject, the EU responded that past panel rulings were also based on different factual issues – meaning that the two panels’ interpretations were not inconsistent.

Next steps

The two sides agreed in 2012 that they would collaborate to help the Appellate Body release its report to members within 90 days from when the appeal was notified.

However, the WTO’s highest court said earlier this year that it would not be able to finish its work in that timeframe, given the size and scope of the subject matter, along with the difficulties posed by staff shortages and hefty workloads.

ICTSD reporting.

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