Making airplanes is one of the most prestigious things countries can do, a testimony to their technical skills, engineering prowess and aspirations on the world stage. It can be a source of national pride, but also a flashpoint. Nothing illustrates this more than the global rivalry of Boeing Co. and Airbus SE, the Coke and Pepsi of the skies. The 16-year-old trade dispute is coming to a head as the U.S. and European Union prepare to launch a barrage of tariffs on each other’s exports.

1. What’s the fight about?

State aid, the increasingly common practice of governments doling out support to key manufacturers or industries. In 2004 the U.S. lodged a WTO legal case against the EU for its member state support to Airbus. In 2011 the WTO ruled that the EU provided Airbus with billions of dollars of illegal subsidized financing that enabled Airbus to launch its widebodied and short-haul planes. The EU opened a parallel case against the U.S. that argued Boeing benefited from state subsidies as well as space and military contracts, which defrayed the cost of civilian aircraft development. In 2012 the WTO determined Boeing had received at least $5.3 billion in illegal U.S. aid. The cases continued to wind their way through the WTO dispute process until 2019, when the WTO authorized the U.S. to retaliate with tariffs against $7.5 billion worth of EU exports. In October 2020 the EU won WTO permission to hit back with tariffs on $4 billion of American goods.

2. Why is this flaring up now?

The U.S. is stepping up pressure on Germany and France with extra tariffs on some of their goods, a move designed to squeeze the 27-nation bloc into settling the dispute. The EU has drawn up its own list of American products to hit with levies, and may target politically important industries for U.S. President Donald Trump and his Republican allies including aircraft, coal, farm products and seafood. In 2019, the WTO said the U.S. continued to provide illegal subsidies to Boeing via a Washington state preferential tax scheme that disadvantaged Airbus. The U.S. subsequently said it complied with the ruling after the state ended its tax rate reduction for Boeing, but the WTO has not yet confirmed the U.S. claim.

3. What kind of state aid did Airbus and Boeing get?

The governments of Germany, France, Spain and the U.K. provided Airbus with subsidies via launch-aid loans for aircraft development, equity infusions, debt forgiveness and various other financial contributions. The U.S. government provided Boeing with subsidies via federal research and development funding, state and local tax programs and infrastructure-related funding. Both the U.S. and EU allege that the other’s measures fail to adhere to the WTO’s Agreement on Subsidies and Countervailing Measures, which governs the use of state aid programs.

4. Why are these companies so important to their governments?

For more than 20 years Boeing and Airbus have maintained a duopoly in the large civil aircraft market, which is being squeezed as the Covid-19 pandemic reduces demand for new planes. Sales are commercially and politically important because they support thousands of jobs and represent a critical component of Europe and America’s overall trade balance. Geopolitical rivalry is baked into the relationship between the two companies. Airbus, based in Toulouse, France, was created half a century ago as a consortium bringing together the resources of European aerospace companies including France’s Aerospatiale, Germany’s Deutsche Airbus and Construcciones Aeronauticas SA of Spain. The political, industrial and technological aim was to challenge the dominance of U.S. passenger jet manufacturers: Boeing with its 707, 737 and 747 models, McDonnell Douglas with the DC-8, DC-9 and DC-10 range and Lockheed with its three-engined Tristar.

5. Could this be resolved without more tariffs?

Airbus said on July 24 it had agreed to make changes to the repayable launch aid from France and Spain for the A350 jet to remove justification for U.S. tariffs against European goods. The EU swiftly demanded that the U.S. scrap its punitive tariffs. The bloc’s trade chief, Valdis Dombrovskis, said on Twitter in October that the EU would “immediately re-engage with the U.S. in a positive and constructive manner to decide on next steps. Our strong preference is for a negotiated settlement.” French Finance Minister Bruno Le Maire said on Oct. 16 he’s in favor of moving forward with retaliating against the U.S. in order to encourage a resolution to the dispute. Le Maire’s comments came a day after Trump said the U.S. will take action if the EU goes ahead. “If they strike back, then we’ll strike much harder,” Trump said.

6. What is the U.S. end game?

The U.S.’s original goal was to thwart launch aid financing for the Airbus A350 XWB -- the rival to Chicago-based Boeing’s 787 Dreamliner. But Airbus has delivered more than 360 A350 XWB aircraft to date. At this point the only real benefit the U.S. can obtain, aside from applying retaliatory tariffs on European exports, is to prevent European launch aid financing for any new Airbus series at non-market rates. This could be a hollow victory, however, as the state of the airline industry has reduced the incentive for Airbus to develop new aircraft series in the near future. For the longer term, Airbus has unveiled designs it’s studying to build hydrogen-powered aircraft as it races to bring a zero-carbon passenger plane into service by 2035. Both sides say they want to reach a settlement, potentially in the form of a new bilateral aircraft accord.

For more articles like this, please visit us at bloomberg.com

©2020 Bloomberg L.P.