Airbus and Boeing trade blows

Jun 1st 2005
From The Economist Global Agenda

A dispute between America and Europe over subsidies paid to Airbus and Boeing has been referred to the World Trade Organisation. The row threatens to drive a wedge between the world’s two biggest trade blocks at a time when their concerted efforts are needed to give the Doha round of world trade talks a chance of success

CONGRESSIONAL investigators, probing the funding of the “Spruce Goose” in 1947, were aghast at one aspect of the project’s funding. Over and above some $18m of government money that had been poured into Howard Hughes’s vast seaplane, they were alarmed to discover that the tycoon had even spent some $7m of his own cash on an aircraft that only ever left the ground once. How times have changed.

On Monday May 30th, after years of bickering and months of increasingly acrimonious negotiations, America’s government said it would take a case regarding European government subsidies to plane-maker Airbus to the World Trade Organisation. The next day, the European Union retaliated by reactivating its own WTO complaint against Boeing, Airbus’s American arch-rival, for receiving unfair subsidies.

The falling-out has come over “launch aid”, a repayable government hand-out that amounts to a substantial portion of the development costs of Airbus’s new planes. This implicit subsidy reduces Airbus’s risks when bringing out a new model as the loan can be written off if the plane is a commercial flop. The European consortium’s new A380 superjumbo benefited from a loan of $3.7 billion, for example, which will not have to be repaid should Airbus fail to sell more than 500 units. The Americans argue that payments such as this contravene WTO rules that forbid direct government subsidies of specific companies or industries.

Airbus counters that Boeing also benefits from government largesse in the form of development contracts from NASA and the country’s Defence Department. The Europeans add that Boeing has also received direct support from the coffers of some American states where the company has production facilities—namely Washington state and, in the case of Boeing’s newest plane, the 787 “Dreamliner”, Kansas.

In 1992, a transatlantic agreement set “launch aid” for Airbus at a maximum of one-third of development costs, and also limited indirect aid to Boeing at 4% of the firm’s revenues. The deal held until last year, when the two sides fell out over whether it stipulated that launch aid for Airbus be phased out over time. They agreed to negotiate, thus averting immediate action at the WTO. But talks broke down after the Europeans insisted that a subsidy paid by Japan’s government to a consortium making wings for Boeing’s 787 be included in negotiations. A late offer to cut Airbus’s launch aid from Peter Mandelson, Europe’s trade commissioner, was rejected by his American counterpart, Rob Portman, who took the case to the WTO.

Both commercial and political factors are at play in the timing of America’s move. Until recently Boeing ruled the skies. But by 2003 Airbus had overtaken its rival in terms of planes delivered. Last year Airbus sold 320 planes, bringing in €20 billion ($24.8 billion) while Boeing sold only 285 jets for $21 billion. Worse for Boeing is that Airbus has outspent it on capital investment and R&D in recent years, setting itself up well for the future.

Last month Airbus’s 555-seat A380 successfully completed its maiden flight. The European group hopes that the vast new plane will plug the gap so far filled by Boeing’s ageing 747 and transport large numbers of passengers between important hub airports, where smaller aircraft will whisk them to their ultimate destination. So far, to Boeing’s chagrin, orders have been brisk (though on June 1st Airbus admitted that deliveries of the new plane would be delayed by up to six months for some customers because it had underestimated the complexity of the project).

Boeing’s view of the future of air travel differs from that of its European rival. It is betting big on the 200-300 seat 787 Dreamliner, which is expected to enter service in 2008. The plane is smaller than the A380 and better suited to flying travellers “point-to-point”, taking them directly between smaller airports.

Boeing might have expected Airbus to settle for a straight battle between these rival visions, but it did not. Soon after the Dreamliner was unveiled, the European group announced an aircraft that will compete with it head-on, the A350, further threatening Boeing’s hopes of regaining its lead over Airbus. The American decision to take matters to the WTO is partly a measure to forestall launch aid of $1.7 billion for Airbus’s spoiler.

America’s desire to protect Boeing from mounting competition has a political dimension over and above a deep personal dislike that fermented between Mr Mandelson and Robert Zoellick, Mr Portman’s predecessor, while the two sides were still on negotiating terms. The original decision last year to seek remedy at the WTO coincided, not accidentally, with George Bush’s campaign for a second term in the White House. Stirring up a transatlantic trade row that, according to a Senate resolution in April, threatens 60,000 American aerospace jobs, may have consolidated support for the Republicans and pushed some wavering voters their way. Keen Europeans, for their part, tout Airbus as an example the EU’s co-operative industrial success. Neither side is likely to concede defeat in a process that could occupy the WTO for up to two years.

Some trade officials think that the longer the issue is parked at the WTO, the better—for the dispute can now, they argue, be insulated from the trade agenda while broader issues are dealt with. Firm leadership is needed from America and Europe to add impetus to the Doha round of world trade talks. Negotiations on farm trade got a boost with the recent resolution of a tricky technical issue, but the haggling over how to liberalise trade in industrial goods and services is faltering.

The recent appointment of Mr Portman, a political heavyweight, suggests President George Bush is making trade a priority. And Mr Bush’s budget, which proposed over $5 billion of cuts in agricultural subsidies, suggests a tougher line with America’s influential farm lobby. But these signs of a possible breakthrough could be undermined if the Airbus-Boeing dispute distracts negotiators. They need to make a big collective effort if a deal is to be reached when the world’s trade ministers meet in Hong Kong in December, by most reckonings the last chance for Doha. It would be a pity if a row over aircraft subsidies were to play a part in scuppering these crucial talks.

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