Aircraft-Subsidy Battle Is Going Back to WTO

By Paul Blustein
Washington Post Staff Writer
Tuesday, May 31, 2005

The United States and the European Union are headed back to high-stakes international litigation over subsidies to Boeing Co. and Airbus SAS, after talks aimed at settling the dispute broke down yesterday.

U.S. Trade Representative Rob Portman issued a statement announcing Washington's intention to press ahead with a case against the E.U. at the World Trade Organization that he will ask the Geneva-based trade body today to appoint a panel of judges. The U.S. case, which alleges that European governments illegally subsidize Airbus, had been held in abeyance for several months pending an attempt to reach a negotiated agreement, but Portman said the Europeans "are forcing our hand" by refusing to halt government aid for new Airbus jets.

The E.U. indicated that it is prepared to restart its own WTO case against Boeing, which alleges that the Chicago-based aircraft maker also benefits from illegal subsidies, including some provided indirectly through military contracts. Peter Mandelson, the European trade commissioner, issued a statement calling Portman's announcement "surprising and disappointing" and said he will make the E.U.'s position known today, but it appeared likely that Brussels would follow through on its long-standing threat to respond in kind. "That is a consistent position we have had," said Anthony Gooch, the E.U.'s spokesman in Washington.

The two sides had been trying since January to reach a settlement because the potential ramifications of pursuing their respective WTO cases to the end appear so grim.

The aircraft industry provides thousands of high-skill, good-paying jobs on both sides of the Atlantic. Failure to resolve the clash amicably could undermine prospects for cooperation between Washington and Brussels on other issues, in particular the WTO's Doha round of negotiations aimed at lowering trade barriers worldwide.

In an unusual move to damp down worries about the Doha round, Portman and Mandelson issued a joint statement shortly after Portman's initial announcement about the airplane matter. "We remain united in our determination that this dispute shall not affect our cooperation on wider bilateral and multilateral trade issues," the statement said. "We have worked together well so far, and intend to continue to do so."

Even if the aircraft fight doesn't poison other aspects of transatlantic relations, however, it could result in an outcome disastrous for both sides, with each found guilty of subsidizing its aerospace champion. When a country is found to be violating international trade rules, it must either stop the offending practice or its exports may be subject to punitive duties by the complaining country. Indeed, uncertainty about such a ruling could make it difficult for both aircraft firms to sell products they are now developing, some analysts fear.

The two sides have operated since 1992 under an agreement allowing Airbus to receive a certain amount of "launch aid" -- loans from the British, French, German and Spanish governments to finance the cost of developing new planes. But that arrangement came under strain in the past several years as Airbus passed Boeing in worldwide sales, and the Bush administration escalated the dispute by filing its WTO case in October 2004, prompting an immediate counterclaim by Brussels.

Hopes arose in January that the two sides could avert a mutually destructive confrontation when they said they would try to strike a deal aimed at ending all subsidies. But prospects for such a pact have dimmed as Airbus has begun angling for more than $1 billion in launch aid for the A350, a midrange plane designed to compete against Boeing's planned 787 Dreamliner. Sharp words and public threats have been lobbed from both Washington and Brussels.

In a bid to keep the matter from returning to the WTO, Mandelson proposed in a telephone call with Portman on Friday that each side cut its subsidies by a significant amount with further cuts to come later. But that overture only irritated the U.S. side when the Europeans disclosed it to the press over the weekend.

"Unfortunately, at this point, the E.U. is no longer willing to hold off on launch aid, and has only proposed to reduce subsidies not end them," Portman said in his statement. "We continue to prefer a negotiated solution, and we would rather not have to go back to the WTO. But the E.U.'s insistence on moving forward with new launch aid is forcing our hand."

WTO cases take many months, and sometimes years, to adjudicate, leaving the combatants many opportunities to settle, a point that Portman's statement emphasized.

"We still believe that a bilateral negotiated solution is possible," Portman said. "But the negotiations won't succeed unless the E.U. recommits to ending subsidies."

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