The United States and its Western European allies are on a collision course over U.S. complaints that massive European subsidies to Airbus Industrie are an unfair trade practice that threatens a thriving American industry. A senior administration official calls it the most important transatlantic trade dispute for the rest of this decade.
At stake is Europe's dream of regaining its position as a major supplier of civilian airplanes to the world, its attempt to bridge the technology gap between itself and the United States and Japan, and the future in civil aviation of McDonnell Douglas Corp.
A major U.S. manufacturer, McDonnell Douglas, fell behind Airbus in orders in 1986 and may be forced out of the business if its newest entry fails to pick up steam.
The St. Louis-based company is worried about increased Airbus orders this year and the threat that two new models announced in June will cut into future sales of its still-unbuilt MD11 wide-body jet. The company "is fighting to survive in this cutthroat business," McDonnell Douglas Vice President James E. Worsham said at congressional hearings in June.
Currently, the U.S. makers -- Boeing Co. and McDonnell Douglas -- hold the dominant position in the civilian aircraft industry. The Europeans are fond of pointing out that between them, those two companies hold about 75 percent of all orders for civilian airplanes. Boeing, the clear leader, makes 56 percent of all civilian airplanes sold in the world. But the effects of nearly $9 billion in subsidies that four European governments have given Airbus over the past 17 years will not be fully felt for 5 to 10 years -- when the U.S. industry may be behind the eight ball. "By then it is too late to fix it," said a senior administration official.
The issue is coming rapidly to a head, with Boeing and McDonnell Douglas putting pressure on the Reagan administration to file a broad-based trade complaint against the four countries -- France, Britain, Spain and West Germany -- that have formed Airbus Industrie.
In addition, the U.S. companies are threatening to file narrower trade complaints accusing the four European governments of illegally subsidizing Airbus and the consortium of "dumping" the planes in the U.S. market at prices below the cost of production.
The broader trade complaint could bring a presidential decision to impose a wide variety of sanctions on the Europeans. It would put the weapon of U.S. retaliation behind negotiations that the United States is holding with the European Community and the nations that belong to the consortium.
The U.S. industry would like President Reagan to initiate the complaint, as he has done in other cases over the past 27 months. If he doesn't, however, the companies will file the complaint themselves, along with more narrowly based cases. It was this combination of a protest, known as a "301 complaint," along with charges of dumping that led President Reagan to impose sanctions last year in a semiconductor trade dispute.
Industry sources said that if there is no progress in ongoing talks, they want to file the subsidy and dumping complaints this winter so the decisions will be announced in the heat of the 1988 presidential campaign. The industry expects that kind of timing to intensify pressure on the Europeans.
While they have their trade guns at the ready, industry sources emphasized they don't want a confrontation because of the certainty that U.S. trade sanctions would trigger European retaliation.
"It would be a real trade war. No one wants it to come to that," said an industry source.
With the stakes so high, both sides are playing hardball. According to congressional testimony, European airlines threatened to cancel orders for McDonnell Douglas planes if that company continued pressing the Reagan administration to enter the trade dispute. McDonnell Douglas Chairman Sanford N. McDonnell bowed to that pressure last February, asking Deputy U.S. Trade Representative Michael B. Smith and Commerce Undersecretary Bruce Smart to ease the pressure they were putting on the Europeans. This move angered Smith, Smart and influential senators who had become interested in the issue because of McDonnell.
Now, however, he is pushing once again for action.
But administration officials and industry representatives said the United States and the EC, which is negotiating for the four-nation consortium, remain far apart after a series of talks here and in Europe over the past two months. "There is a massive gulf," said an industry source.
"On a scale of 10, we are 9 apart. We are nowhere near a settlement. The U.S. government is a long way from an agreement with the community on this one," said the senior administration official.
The official suggested that there is no need to go ahead with high-level talks scheduled for February unless there is progress in lower-level talks this month in reducing the basic philosophical differences between the two sides. The high-level talks would be between U.S. Trade Representative Clayton K. Yeutter and EC Trade Commissioner Willy de Clercq.
EC officials, who took a more optimistic view than the Americans of talks Yeutter and Smith held with their European counterparts last month, were stung by those comments. Francoise Bail, a spokeswoman for the EC, said in Brussels that there has been progress in the talks even though "there are fundamental problems which still divide us."
"We are determined to continue to negotiate," she said.
According to the senior administration official, there are three main issues:
The Europeans insist that they must have the right "forever" to continue subsidizing Airbus to make sure it survives.
Members of the consortium, particularly West Germany, are demanding special coverage that would insulate Airbus from exchange rate fluctuations, which is "unheard of in trade negotiations of this sort."
"They want the ultimate bailout clause" so they can save the Airbus "if it is threatened with disaster."
Commerce Undersecretary Smart testified in June that Airbus received at least $5 billion in subsidies from the government of France, Britain, Spain and West Germany since the project started in 1969.
U.S. officials said none of the four major families of aircraft produced with those subsidies has turned a profit, and little if any of the funding has been repaid the governments.
In June, the governments announced as much as $4 billion in additional subsidies to design and build a new family of wide-body jets -- the A330 and A340 -- that are to compete head-on with McDonnell Douglas' MD-11, announced six months earlier.
While Airbus insists those planes will make a profit, U.S. administration and industry sources said there is no chance of Airbus winning enough orders to cover their development and production costs.
But the subsidies have allowed Airbus to sell their planes at bargain-basement prices -- as low as $35 million to $40 million for a plane whose true costs, including a reasonable profit, amount to $50 million to $60 million, according to the American industry.
U.S. makers said these discounts, along with government pressure on state-owned airlines to buy Airbus planes, undercut their efforts to sell planes in Europe and other countries.
This aspect of the subsidies especially concerns McDonnell Douglas, whose DC-9 jet competes directly with the new Airbus A320, which was flown for the first time publicly last June at the Paris Air Show.
As part of its sales effort, Airbus is beginning to make inroads in the U.S. market, where it has gotten 158 orders in the past two years. Sixty-two of those orders came in 1986, and by 1996 Airbus projections call for 459 sales to U.S. airlines. Its biggest customers so far have been Northwest and American. It is this increase in U.S. sales that is making Airbus vulnerable to U.S. complaints of unfair trade.
The Reagan administration "is adamantly opposed" to insuring the consortium against exchange rate fluctuations, pointing out that there was no protection for U.S. manufacturers while the dollar was so high that they became uncompetitive. But a bailout probably wouldn't cause a major problem because the United States has set its own precedents for such actions when the government kept Lockheed Corp. and Chrysler Corp. alive when they were threatened with collapse.
Some EC members have suggested solving the trade dispute by guaranteeing Airbus 30 percent of the global market -- in effect setting up an anticompetitive cartel. The administration opposes that on philosophical grounds. So do the U.S. manufacturers, since Airbus' 30 percent would come at their expense.
The senior administration official said any agreement at this point would require both sides to paper over their differences. "The EC is counting on the United States to back down," said an industry source.
"The United States understands that the EC can't afford to let the Airbus go out of business," he continued, indicating a willingness to allow some sort of "safety net" to remain.
"But if the EC thinks it is essential for them to get one-third of the world aircraft industry by hook or by crook, that's a different case.
"That's the road that leads to a full-scale conflict," he added.