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Not an Issue For the WTO

By Peter Mandelson
Friday, April 1, 2005; Page A27

Much has been made recently of the warming of U.S.-European relations.

The best means to translate such sentiments into concrete achievements lies in pulling out all the stops to solve our differences in a reasonable manner. Uppermost in my mind is the long-running dispute between the United States and the European Union over how much support we give our respective aviation giants, Boeing and Airbus. The dialogue over this has pretty much broken down in recent days.

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A lot of ink has been spilled on this issue and much hot air generated.

Yet I worry that one reason the matter remains so much in contention is that most Americans simply haven't been given a full and accurate explanation of the European point of view.

What is the issue? The U.S. government says that money European countries invest in Airbus when it begins a product line -- a new kind of airliner -- is illegal under international rules. Last October Washington unilaterally withdrew from a long-standing treaty with the European Union governing the terms under which support for development of large civilian aircraft could be provided, and it took initial steps toward legal proceedings at the World Trade Organization.

The Europeans, for their part, believe that the United States gives far greater support to Boeing than they give to Airbus -- in the form of federal contracts from NASA and the Pentagon and, more recently, tax breaks from Washington state, in violation of WTO rules. The European Union is not threatening to take the United States to court, but it would have no choice but to launch a counter-case if Washington pulled the WTO trigger.

Going to the WTO would be a mistake. A case of this magnitude would overburden the system; it would inevitably create transatlantic political tension; and the two aircraft makers would have to operate under prolonged uncertainty about the outcome. Significantly, during this drawn-out process, nothing would prevent either side from continuing to offer further financial support, precisely the opposite of what we seek to achieve.

That is why, in January, Robert Zoellick, then the U.S. trade representative, agreed to my offer to seek a negotiated solution. We gave ourselves three months to deal, during which time we would hold off from granting any new support to our respective industries. This negotiation is inevitably complex and delicate. We are dealing with high-profile companies that have totemic status in a sensitive industry. We are also attempting to make comparisons between two very different systems of financial support: the so-called launch money for Airbus vs. the aid to Boeing in the form of federal- and state-level contracts and tax breaks.

In February Zoellick and I agreed that while we would not be able, in such a tight time frame, to reach a comprehensive deal covering all forms of support, we would aim for an achievable and important first step -- removing some aid by April 11 -- and commit ourselves to a further, wider agreement on eliminating all aid. I still believe this is the best way forward.

The question now is, what can be covered in step one? The American side insists on elimination of E.U. launch aid. Here is how it works: Since 1992 European governments have committed some $3.7 billion to Airbus for its new ventures; all this investment, including interest, must be repaid by the company, on the basis of a levy for each plane sold. Once that initial investment is repaid, the company pays royalties on additional sales. It's a win-win arrangement -- Airbus pays the nations back as it is able to sell its planes, and over time the governments concerned make a handsome profit.

This system ultimately causes far less distortion than the support Boeing receives. Since 1992 Boeing has benefited from research and development grants worth more than $20 billion, mostly through NASA and the Pentagon. Washington state will give it tax incentives worth $3.2 billion over 20 years and $4.2 billion in subsidies for physical improvements of its plants and infrastructure. Boeing also receives about $200 million a year through a federal tax loophole called the Foreign Sales Corporation program, which has already been ruled illegal by the WTO. In contrast to the E.U. investment in Airbus, none of these subsidies needs to be repaid. Boeing has also benefited from Japanese launch aid to the tune of $1.6 billion to build the wings for its new 787 Dreamliner.

There is a huge imbalance here, and we cannot be expected to trade our entire investment plan for Airbus upfront in a first step without substantive U.S. offers that would cover federal- and state-level contracts and without a sense of what is to be done about support from third parties. The United States argues that such commitments can be made only in a second stage.

Both sides need to take a balanced, step-by-step approach and tailor what they request from the other to what they themselves are willing to contribute. We in the European Union are ready to significantly reduce the amount of launch investment Airbus may receive as a percentage of the total production costs of a new aircraft, or to reduce the duration of the loan, or a combination of both. In return we would seek a commensurate offer by the United States to lower its subsidies for Boeing. We could then move on to a more ambitious deal after April 11.

This is the rational way forward. Litigating in the World Trade Organization, while guaranteed to line the pockets of both companies' trade lawyers and divert valuable attention from successfully completing the Doha Round of trade talks, our No. 1 transatlantic trade priority, would fail to achieve the economic or commercial objectives of either the U.S. trade representative or Boeing.

When President Bush came to Europe in February, he sought to strengthen the transatlantic partnership. Resolving this dispute amicably is surely what's required if we are to do our bit to achieve that aim.

The writer is trade commissioner of the European Union.


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