WTO Upholds Ruling for Airbus in Saying Boeing Got Illegal U.S. Subsidies

Boeing Co. (BA) subsidies from the U.S. and individual states damaged rival Airbus SAS by more than $5.3 billion, World Trade Organization judges said as they upheld an earlier ruling.

The WTO’s Appellate Body today backed a March 2011 report finding the U.S. provided aid to Chicago-based Boeing through federal research grants and state support in developing aircraft including the 787 Dreamliner. Airbus parent European Aeronautic, Defence & Space Co. (EAD) has said the aid to Boeing cost it $45 billion in lost sales from 2002 to 2006.

Both the European Union and the U.S. appealed the initial ruling. Appellate judges in Geneva reversed an earlier finding that only two of 23 Department of Defense programs gave illegal aid, saying today that subsidies from all 23 programs violated global trade rules. They also reversed an earlier ruling that tax breaks from Kansas didn’t cause adverse effects.

“This whole thing is quickly losing meaning,” Richard Aboulafia, vice president of the Teal Group, an aerospace consulting group in Fairfax, Virginia, said in a telephone interview. “The whole point of the WTO is to give the other side the right to retaliate in some way. But if both sides claim that right, then we have a recipe for mutually assured destruction, and nobody wants that.”

EU Trade Commissioner Karel De Gucht told reporters in Geneva that the subsidies are “a blatantly unlawful way of supporting” Boeing’s business.

‘Dramatically Reduced’

The Appellate Body backed the U.S. in its argument that aid for Boeing’s 777 aircraft didn’t harm the Airbus A340. Judges today “dramatically reduced” the harm to Airbus in terms of market share and lost sales and orders, said Bob Novick, external counsel for Boeing at WilmerHale in Washington.

The appeals judges reduced the number of lost sales campaigns due to the subsidies to six from 12 in the initial panel report, Novick said by telephone. They also found that Airbus lost 118 orders because of the aid, down from 300 in the first report and below the 436 alleged by the EU, he said. Judges said Airbus was hurt only in one market -- Australia -- rather than the 10 mentioned in the first panel report, he said.

The WTO has also ruled that Airbus received billions of euros in low-interest loans from EU governments, and the U.S. has asked the trade arbiter to approve retaliatory sanctions of as much as $10 billion for the EU’s failure to comply with that ruling. Tim Reif, general counsel for U.S. Trade Representative Ron Kirk’s office, said the U.S. is “close” to deciding whether to ask for a WTO panel on the issue of EU compliance on the Airbus ruling.

Unconditional Talks

The 27-nation bloc says a solution to the trade dispute, the world’s most costly, must only come through negotiations. “I have always been saying we are ready to start unconditional discussions,” De Gucht said. “That remains so.”

The dual cases have become increasingly important as competitors from China, Canada and Brazil emerge, and the rulings may set industry-defining guidelines for government support in the $70 billion civil-aviation industry.

Judges originally found that Boeing got at least $5.3 billion in illegal aid between 1989 and 2006 and was slated to get $3 billion to $4 billion in incompatible future aid based on Washington state tax measures. Today’s appellate ruling means the harm caused by the subsidies may be found to exceed $5.3 billion, though the panel didn’t name a figure.

The EU has estimated the total amount of subsidies between 1989 and 2006 at $19.1 billion. The amount of harm is important because it is the basis on which a government can request permission to impose a specific level of sanctions.

Aid Breakdown

The illegal aid includes NASA research and development programs for $2.6 billion between 1989 and 2006 and Department of Defense programs with aid as high as $1.2 billion in the same period. There were also three Washington state tax breaks valued at as much as $4 billion from 2006-2024 and foreign sales corporation export subsidies amounting to $2.2 billion until 2006, as well as $476 million in Kansas aid.

The U.S. and Europe filed counter-cases at the WTO in 2004 after the administration of President George W. Bush unilaterally walked out of a 1992 aircraft-aid accord with the EU. Toulouse, France-based Airbus, which had a record 1,419 orders in 2011 to extend its lead over Boeing, delivered 534 aircraft last year while its rival delivered 477.

“So it’s Canada and Brazil all over again, just as expected,” said Nick Cunningham, an analyst with Agency Partners in London, referring to a similar set of dueling complaints filed by the two countries in the 1980s, concerning alleged subsidies paid out to Bombardier Inc. and Embraer SA.

“This should mean that they’ve fought to a standstill,” Cunningham said of today’s ruling. “It’s all been a waste of time prompted by Harry Stonecipher’s ill-advised decision to pursue the issue back in 2004,” he said in an e-mail. Stonecipher was Boeing’s chief executive officer from December 2003 until March 2005.

To contact the reporters on this story: Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net; Andrea Rothman in Toulouse, France, at aerothman@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net

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