WTO Panel Finds “Prohibited Subsidies” in US-EU Boeing Case

1 December 2016

A WTO dispute panel circulated its ruling in an EU-US row over aircraft subsidies (DS487) on Monday, finding that the US state of Washington provides an illegal, “prohibited” subsidy to American aerospace giant Boeing.

The challenge dates back to 2014, when the EU requested WTO consultations on series of Washington state tax incentives, which were provided to Boeing so long as it conducted the bulk of its airplane manufacturing in the state. The incentives were directed particularly to support the Boeing 777X, a type of commercial plane whose wings are made of carbon fibre-reinforced plastic in a bid to improve a plane’s performance and fuel efficiency.

The panel found that while these incentives did fall within the WTO definition of a subsidy, they were not explicitly contingent on prioritising locally-produced products rather than their foreign equivalent.

However, the same panel did find fault with one of the incentives, specifically the “reduced business tax rate.” In order for a manufacturer to remain eligible for this tax treatment, in practice, they must choose domestic over imported wings in production – effectively serving as a “prohibited subsidy” under WTO rules, which are considered the most harmful type of state aid given their ability to significantly distort trade.

The panel therefore recommended that the US remove that particular measure “without delay” and to do so within a 90-day window.

Long history

The WTO saga between the two major traders has been underway for more than 12 years, with the EU and US sparring over allegedly unfair state aid to European manufacturer Airbus (DS316) and the US’ Boeing (DS353). The WTO’s highest court ultimately found violations of international subsidy rules in both cases.

Afterwards, parties of both disputes however could not agree on whether necessary changes had been introduced to bring their respective policies in line with global trade rules. Panels were composed in 2012 to review the claimed compliance steps in each dispute.

Earlier this year, a compliance panel found that the EU and four of its member states had not taken enough steps to bring some WTO-inconsistent subsidies for Airbus in line with global trade rules – findings which were appealed shortly thereafter. (Bridges Weekly 29 September 2016)

The compliance review outcome in the case filed by the EU (DS353) is expected to be circulated to the parties by the end of this year.

The measures under review in this particular dispute are relatively new or revised. They were passed by Washington state lawmakers in 2013, and were deemed to fall outside the scope of the compliance proceedings already underway in the older Boeing case. Following the EU’s request, a separate panel was established last year to hear the new complaints.

Location versus sourcing

After deeming that the seven tax incentives ultimately did constitute subsidies under WTO rules, the panel then examined whether this support was contingent on using domestically-produced products.

Under the WTO’s Subsidies and Countervailing Measures (SCM) Agreement, members are banned from using either export subsidies or import substitution subsidies. The latter refers to “subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.”

In order to qualify for Washington state tax incentives, companies had to meet certain requirements involving where to base their manufacturing programmes. One of these requirements involved building all planes, along with fuselages and wings, within the north-western US state. However, the “business tax rate” that was deemed to be at fault involved meeting an additional requirement: a company would lose this special, reduced rate should Washington authorities deem that the assembly of the plane or its wings took place outside the state.

The panel said that these rules appeared to indicate that it was the location of the actual manufacturing activity – rather than the source of the inputs themselves – that determined whether or not Boeing received this state aid.

Nonetheless, during the panel proceedings the US clarified that using wings produced outside the state would likely disqualify Boeing from receiving the lower business tax rate, which the panel said was tantamount to making this support contingent on using local goods rather than imported ones.

Overall, reading these two requirements together, the reduced business tax rate was deemed to be a “prohibited subsidy,” the panel said.

Officials, industry respond

The panel report was welcomed by European officials, with EU Trade Commissioner Cecilia Malmström calling upon the US to “respect the rules, uphold fair competition, and withdraw these subsidies without any delay."

Airbus, for its part, similarly welcomed the news, suggesting that the results of this ruling and of the other Boeing-focused case indicated that the US airplane manufacturer “caused at least US$95 billion in commercial harm to Airbus, opening the door to trade sanctions against the US in an equivalent amount.”

Meanwhile, Boeing characterised the outcome as a positive one for Washington, while suggesting that appeals could be forthcoming. J. Michael Luttig, Boeing's general counsel, said that if and when the appeals process is concluded, “we fully expect Boeing to preserve every aspect of the Washington state incentives, including the 777X revenue tax rate.”

Evolving sector

Boeing and Airbus have long been the dominant players on the civil aircraft manufacturing scene, effectively setting up a duopoly in the production of large airplanes that has seen limited competition from outside players until recently.

However, the duelling trade disputes have cast a shadow over the industry, dragging on well over a decade and incurring major legal costs for both sides – while still not yielding a final resolution.

Given the prolonged nature of the disputes, Airbus CEO Tom Enders has publicly called for the US and EU to put aside the repeated legal battles and instead push to negotiate “globally applicable” rules on state aid for aircraft production – particularly in light of the recent evolutions in the sector that may require a re-think in government support for this type of industrial manufacturing.

“The duopoly is no longer the reference in the future. We need a global framework,” he said, according to comments reported by the Financial Times.

Indeed, the multi-billion dollar industry has lately seen growing interest from both advanced and emerging economies, with China and Russia reportedly pairing up in manufacturing large civil aircraft similar to the types produced by Airbus and Boeing. Canada’s own “Bombardier” has also been developing larger jets which analysts say could potentially shake up the commercial aircraft market.

Next steps

Under the SCM Agreement, parties have 30 days to decide whether to appeal, given that the case involves a prohibited subsidy. Should that occur, the Appellate Body would release its decision within 30 days, or at most within 60 days.

ICTSD reporting; “Carbon fibre planes: Lighter and stronger by design,” BBC NEWS, 28 January 2014; “China Teams Up With Russia in Bid to Break Airbus-Boeing Duopoly,” BLOOMBERG, 2 November 2016; “US ordered to halt illegal tax breaks for Boeing,” FINANCIAL TIMES, 29 November 2016; “Airbus and Boeing’s greatest threat just arrived,” BUSINESS INSIDER, 18 June 2016.

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