For more than 40 years European governments have heavily subsidized Airbus. They paid 100 percent of the development costs for early Airbus products, and today Airbus still receives one-third of the billions of dollars needed to develop new commercial airplanes. Even its most recent model, the A350, has gotten billions in public funding. As a result of such substantial and ongoing assistance from European governments, Airbus has been able to capture half of the global airplane market, with significant negative impact on America’s aerospace industry.
The U.S. Case against European Subsidies
In 2004 the USG renounced a 12-year-old bilateral with European governments for their failure to comply with a promised phase-out of subsidies to Airbus. Attempts to negotiate a new phase-out agreement failed, so in 2006 the USG filed a case with the World Trade Organization claiming Airbus had received $25 billion in illegal subsidies. U.S. officials estimated the economic benefit of those subsidies (in 2006 dollars) at more than $200 billion.
The biggest and most impactful of the subsidies is known as launch aid – highly subsidized loans to Airbus for the development of new products. The loans for recent Airbus programs have ranged between $4 billion and $5 billion. Repayment is tied to airplane delivery targets, so they typically do not begin until several years after a program is launched. What’s more, the interest rates on the loans are significantly less than commercial lenders would charge, and in the event a product does not hit a pre-determined sales target, remaining loans on the product are forgiven.
Launch aid provides significant advantages to Airbus, among them artificially low cost of capital, lower program risk, and the ability to price its products lower than the competition. It also enables it to introduce new products faster than it would be able to do otherwise. The continuation of launch aid and other European subsidies to Airbus poses a significant risk to America’s ability to compete successfully in the global commercial airplane market.
The WTO Decision against European Subsidies
In June of 2010 the WTO ruled in favor of the United States on 80% of the total alleged subsidy amounts, and in May of 2011 a WTO appellate panel upheld all of the key findings of the earlier panel. The WTO ruled that Airbus had received $18 billion of illegal subsidies, including $15 billion of launch aid. Airbus-sponsor governments were given until December of 2011 to remove the harmful effects of all remaining subsidies. European governments failed to meet the compliance deadline, so the USG is now seeking a WTO compliance ruling. The ruling is expected sometime in 2015. If the WTO agrees with the USG that European governments have not complied, the US then will be free to initiate the WTO process for imposing tariffs on European exports to the United States.
The EU Counter-Claim
In retaliation for the U.S. WTO case against European subsidies to Airbus, the European Union brought a counter case against the United State alleging “indirect” subsidies to Boeing of $23 billion. The alleged subsidies included NASA and Department of Defense contracts with Boeing for research and development projects; federal, state and local tax breaks; and government support for infrastructure used by Boeing.
The USG’s defense against the charges noted that the NASA and DoD contracts in question were arms-length commercial transactions where Boeing was paid for research commissioned by the two government agencies for their own purposes. The USG further noted that the NASA research projects were undertaken for public benefit, and that the results and benefits were widely shared, including with Airbus. On the issue of tax breaks, the USG noted that the federal tax break on U.S. exports had already been eliminated, and it noted that the state and local tax breaks that were challenged are common economic development tools consistent with WTO rules. Similarly, the infrastructure projects named in the complaint comply with WTO rules because they were public in nature, and not for Boeing’s exclusive use.
The WTO Ruling on the EU Claims
In March of 2011 the WTO dismissed 80% of the total subsidies amounts the EU claimed, and in March of 2012 a WTO appellate panel upheld the earlier ruling. The WTO found $3.25 billion in subsidies to Boeing, noting that an additional $2.2 billion subsidy claim in the form of U.S. export tax credits had already been eliminated. Of the remaining subsidies, $2.6 billion related to NASA R&D programs, while the remainder related to Defense R&D ($154 million) and state and local tax breaks ($500 million). The USG complied with all of the rulings by the September 2012 deadline set by the WTO. NASA and defense R&D contacts were adjusted to secure intellectual property rights for the USG (per the WTO ruling). Some of the other tax breaks had expired and therefore are no longer relevant, and those that remain in place are too small to have a meaningful competitive impact on Airbus.
The EU’s Latest Move
With a compliance ruling against European governments looming in 2015, the EU in February 2015 brought another complaint to the WTO, this time on tax breaks the state of Washington recently enacted to attract new investment by aerospace companies in the state. It is unclear whether there will be a ruling on this latest allegation in 2015. In any event, the USG is confident that the tax breaks fully comply with WTO rules. The state lowered what was one of the highest tax rates in the United States to incentive aerospace investment. The new tax rates are available to any aerospace company, including Airbus, and they will benefit Airbus suppliers already located in the state. Notably, the state is not writing any checks to Boeing, which still will be paying substantial taxes to the state. This contrasts sharply with the ongoing European practice of launch aid, where governments write checks for billions of Euros to Airbus.