The Bush administration signaled yesterday that negotiations with the European Union over subsidies to Boeing Co. and Airbus SAS were on the verge of breaking down, raising the likelihood that the two sides will fight the matter out in a high-stakes international trade case.
The rift emerged following a late-afternoon phone conversation between Peter Mandelson, the European trade commissioner, and Robert B. Zoellick, the recently departed U.S. trade representative who has continued to manage the issue from his new job as deputy secretary of state. In a statement, a U.S. spokesman blasted the E.U. for refusing to curb its subsidies to Airbus and threatened to revive a U.S. suit at the World Trade Organization.
Analysts in both the United States and Europe have acknowledged that a WTO decision could harm both Airbus SAS and Boeing Co. because it could deprive the flagship airplane makers of government aid at a time when they are developing new, technologically advanced aircraft.
(Christophe Ena -- AP)
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"Although on January 11 the E.U. agreed to a negotiating structure eliminating large civil aircraft subsidies, over the last two months they have been backtracking and seeking to change the terms of that agreement," said Richard Mills, a spokesman for the U.S. trade representative's office. "It's now demonstrated conclusively that they're not prepared to follow through on that agreement."
European officials expressed shock at the U.S. interpretation of events.
"Peter Mandelson is completely surprised that such a statement should be given to the press. It doesn't correspond to what he took from the discussion with Bob Zoellick today," said Anthony Gooch, the E.U. spokesman in Washington, in response to queries from reporters. "There are clearly difficult issues at stake, but he [Mandelson] doesn't recognize the portrayal of the state of play as offered by the U.S. side. If Mr. Zoellick is announcing that the negotiations are at an end, Mr. Mandelson has not been informed of this development."
Although the E.U. statement left open the possibility that the two sides might patch up their differences, the barbed language used by both Washington and Brussels suggested that they may have great difficulty avoiding international litigation. Analysts in both the United States and Europe have acknowledged that a WTO decision could harm both Boeing and Airbus by depriving the two firms of government aid at a time when they are developing new airplanes.
The confrontation has loomed for months as one of the biggest, and most potentially destructive, in the history of the Geneva-based trade body. In filings with the WTO, the United States and Europe have accused each other of illegally providing government aid to their flagship airplane makers.
Some officials have warned that carrying the dispute all the way to a judgment could wreck chances for U.S.-E.U. cooperation in global trade negotiations and possibly sour transatlantic ties on a host of other issues.
The two sides stepped back from the brink on Jan. 11 when they agreed to try for three months to settle the matter with a pact that would eventually end subsidies for both companies. As part of that truce, they also agreed to a "standstill" on further subsidies. Although the truce was hailed at the time as an important step toward mending tattered transatlantic ties, it was clear that the two sides strongly disagreed over what constitutes a subsidy.
"The United States is willing to hold to the standstill terms of the January 11 agreement that precluded further subsidies," Mills said. "But if the E.U. either breaks or refuses to extend the terms [beyond April 11, when the three-month period for negotiation was scheduled to end], we will return to litigation."
At the heart of yesterday's dispute, Mills said, was the fact that the Europeans sought to insist on ending or reducing two types of subsidies for Boeing that the United States views as being outside the Jan. 11 agreement. One of those involves Japanese government support for construction of certain aircraft components in Japan. The other involves tax benefits that Boeing is receiving under a recently approved revamping of corporate tax laws.
"Those issues were obviously discussed because they directly relate to the subsidization of Boeing," an E.U. official said. "That said, it's no more true to say that new propositions were made on these aspects than on any other areas of subsidy to Boeing." He described the U.S. move as "a completely irrational and incomprehensible response to a difficult but ordinary negotiation."
It remains to be seen whether Zoellick's successor will get the talks back on track or pursue the WTO case. On Thursday, President Bush said he is nominating Rep. Rob Portman (R-Ohio) to the trade representative's job.
