Boeing-Airbus Feud Seems Silly in the Context of Rising Competition from Emerging Economies

The escalating feud between Boeing and Europes Airbus over illegal subsidies is increasingly looking like sibling rivalry at a time when both companies are facing rising competition from emerging economies like China and Brazil, who are even more aggressively promoting their aerospace businesses.

The inability of the two aerospace companies to agree on what constitutes an illegal subsidy also undermines the WTO, the very organization that the U.S. and the EU would like to see challenging the most overtly unfair trade practices of governments in emerging economies.

Airbus won the latest trade battle when the World Trade Organization (WTO) determined last week that Boeing received illegal U.S. government subsidies amounting to at least $5.3 billion, revealed in a report released last Thursday. Airbus claims Boeing could not have launched the 787 without the subsidies and that this program caused the company to lose $45 billion in sales.

The ruling was in response to a complaint brought by the European Union claiming that Boeing had received $24 billion between 1989 and 2006 in illegal subsidies.

Airbus, which had originally filed the complaint in response to an earlier Boeing complaint against EU, was, of course, pleased with this ruling. Boeing has shot themselves in the foot with the WTO proceedings, said Rainer Ohler, Airbus Head of Public Affairs and Communications. The company has achieved a massive condemnation of its U.S. funding mechanisms provided the U.S. is willing to implement the ruling – while the European mechanism has been approved as a legal instrument.

Boeing fired back by denying the significance of these findings. “The ruling rejects 80 percent of the EU’s claims against the U.S., finding no more than $2.7 billion of impermissible subsidies to Boeing not previously remedied, said Michael Luttig, Boeing executive vice president and general counsel. That amount includes $2.6 billion in NASA R&D funding, which is but a small fraction of the total amount challenged.”

Luttig further states that the report “confirms the massive market advantage Airbus has enjoyed from billions in illegal government subsidies provided to fund the company’s commercial airplane product line since its inception more than 40 years ago.”

This recent development follows a WTO report released last year in which the WTO ruled that Airbus had been illegally backed by $20 billion from European governments, and Airbus has continued to seek additional subsidies.

This WTO estimate does not include some of the Department of Defense funding that Boeing has received over the years. Rather, the reports focus lies mostly on the $2.6 billion in R&D grants from NASA used on Boeings commercial planes.

The remaining subsidies the WTO ruled illegal came from business and occupation tax breaks from Washington State and the City of Everett, which is estimated to amount up to $4 billion between 2006 and 2024, as well as a $2.2 billion U.S. tax credit that was repealed back in 2006. The illegal subsidies even include the $11 million that the state of Illinois paid to help relocate Boeing’s headquarters to Chicago.

The most recent spate of accusations over illegal subsidies has been ongoing since October 2004, when the US withdrew from the 1992 Bilateral EU-US Agreement on Trade in Large Civil Aircraft, which regulated government support to the aircraft industry, and charged Airbus with violating the 1992 agreement and receiving illegal subsidies.

The WTO rulings have little practical impact because the trade body does not have the ability to enforce its rulings. But to the extent that Airbus and Boeing each reject the findings of the WTO, each appealing the organization’s judgment, they are helping to undermine an organization that remains one of the last bastions of free trade. They may also be undercutting the only arena in which the U.S. and other developed countries can challenge unfair trade practices by emerging economies . Airbus argues that governments have always supported national aerospace “champions.” With the rise of countries like Brazil, Canada, China and Russia developing their own aerospace industries, many are suggesting it may be time for Boeing and Airbus to agree on a new framework for what constitutes appropriate government aid.