Airbus, Boeing: The Fight Isn't Over

When the World Trade Organization issued its long-awaited ruling Sept. 4 supporting U.S. claims that the European consortium that makes Airbus planes received improper government subsidies, many media pundits viewed the ruling as both a setback for Airbus as well as the tinder for a potential trade war between the U.S. and the European Union. But inside the aerospace industry, the smart money is betting that the effects of the WTO decision will be much more modest.

Indeed, aerospace experts say the WTO ruling will have three practical effects:

Most directly, it will have little impact on the tightly contested battle between Airbus and Boeing (BA) in the passenger-jet business, which was at the heart of the legal dispute. Both companies are working to bring out next-generation aircraft, the 787 Dreamliner for Boeing and the A350 for Airbus.

The ruling could help archrival Boeing, which pushed the U.S. to file the WTO complaint, on a separate, smaller battle: its campaign to wrest away a plum $35 billion U.S. contract for a military refueling tanker plane from Airbus and partner Northrop Grumman (NOC), the Air Force's initial choice.

The lawyers will get rich. The ruling "will provide a source of satisfaction for lawyers and frustration for everyone else," muses Richard Aboulafia, a vice-president of analysis for Teal Group, a Fairfax (Va.) aerospace consulting firm.

Legal Games Aren't Over In the interim ruling—which was presented only to U.S. and EU officials, but which was confirmed by BusinessWeek—the WTO concluded that the $4 billion in aid Airbus received from European governments for development of the A380 super-jumbo passenger jet constituted illegal subsidies. While the WTO is not authorized to impose sanctions against any government that it finds has violated international trade laws, the WTO ruling could empower the U.S. to levy tariffs either against Airbus—or any other European imports—equal to the amount of the improper subsidies.

But experts who have followed the dispute closely view the WTO ruling as only the first act in a legal drama that could last for years. Already, European officials are taking issue with reports that the ruling was a setback for Airbus, a unit of European Aeronautic Defence & Space (EAD.PA). The decision was "not a clear-cut ruling," says a source close to the European Union. "The findings are much more nuanced." (For its part, officials at the Office of the U.S. Trade Representative (USTR) declined comment, except to reaffirm its view that European governments "have provided unfair subsidies to Airbus that harm U.S. interests.")

Most observers expect the EU to appeal the ruling, a process that could take years to play out. "You are a couple of years away until the U.S. can think about retaliating," says John Veroneau, a partner with Covington & Burling who served as general counsel for the USTR when the case was filed in 2003.

Doing Nothing Is an Option Even then, experts note that there's another shoe to drop first: The WTO is expected to rule sometime in early 2010 on the EU's counter-complaint that Boeing's contracts with the Pentagon are tantamount to R&D subsidies—and could well rule against the U.S. in that dispute. And while the WTO rulings could empower the U.S. and EU to impose tariffs against each other—slapping penalties on jets, or even French wine and Washington State apples—trade negotiators could conclude such moves would be counterproductive.

"By the time this is all said and done, the governments may decide to do nothing," says Scott Hamilton, an aerospace industry consultant based in Issaquah, Wash. "That's what Canada and Brazil did" in a mutual dispute over subsidies to both Montreal-based Bombardier (BBDb.TO) and Embraer (ERJ), which is based in São José dos Campos, Brazil.

Indeed, industry veterans say Boeing's intentions in pushing the U.S. to file its case in 2004 were never done with the belief that it could cut off government subsidies to EADS. Rather, Boeing's real intent may simply have been to try to scare private lenders off of providing the financing it needed to finish development of the A380 jet—or even as a smokescreen to deflect attention from its own culpability in a bribery scandal that involved a top executive and an Air Force weapons buyer. "There's been a theory shared by many in the industry that [the WTO case] was filed to divert attention from [Boeing's] own scandal," says Hamilton.

Governments Recognize the Industry's Impact Now, some analysts expect Boeing to use the WTO ruling as a lever to convince Pentagon officials to award it the lucrative tanker contract, which was initially given to a team consisting of EADS and Northrop Grumman but later reopened after the Government Accountability Office found problems with the bidding process.

And while some media reports quoted trade experts predicting that the U.S. and EU will attempt to resolve the dispute through bilateral negotiations, Aboulafia says such talks "will be about as useful as the German-Russian nonaggression treaty," a 1939 pact in which those nations secretly agreed to carve up Northern and Eastern Europe. That's because many countries—be it the U.S., France, or even others like Russia and China that are trying to nurture their own aerospace industries—realize the economic impact of supporting aircraft manufacturers.

Thus, even if the U.S. prevails in its WTO claim, "governments will just find a different way to provide financial support" to their aerospace industry, says Aboulafia. Until then, the legal games will continue.

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