Finally, a Boeing-Airbus Showdown

The European jetmaker has long skirted subsidy rules. Now Washington's WTO complaint will drag that abuse into the light of day

By Stanley Holmes

It's hard to feel much sympathy for Boeing (BA ) these days. Entangled in ongoing Pentagon ethics scandals, the aerospace giant still rakes in $50 billion in revenues and pockets nearly a billion of that in annual profits, even as it struggles to defend its worldwide market share against archrival Airbus.

Nonetheless, the U.S. Trade Representative's decision on Oct. 6 to terminate a 1992 bilateral aircraft-development agreement and file a formal complaint with the World Trade Organization alleging that European Union nations have provided Airbus with billions of dollars of unfair subsidies -- to Boeing's detriment -- was the right move. Frankly, the action is long overdue.

PUSHING TRADE LIBERALIZATION.

  If anything, Boeing should be criticized for backing away from earlier efforts to renegotiate the 1992 deal in order to hold the European governments accountable for their flaunting of the limits it set on government subsidies for commercial airplane development. The Europeans and executives at Airbus have never shown any real interest in renegotiating the 1992 pact, under which commercial jetmakers can receive repayable government loans for up to one-third of a plane's development cost.

Why should they? Such launch aid from Continental governments has given Airbus a clear competitive advantage over Boeing, allowing the European plane manufacturer to grab 50% of commercial aircraft deliveries and 60% of global orders today, vs. less than 30% market share at the time of the 1992 agreement.

"This is about fair competition and a level playing field," said U.S. Trade Representative (USTR) Robert B. Zoellick, in a prepared statement. "Some Europeans have justified subsides to Airbus as necessary to support an 'infant' industry. If that rationalization were ever valid, its time has long passed."

Beyond the high stakes for Boeing, Washington has another reason to press this case before the WTO: The bilateral deal's flaws invite other governments to consider subsidizing their own nascent commercial aerospace industries or other large, capital-intensive segments where the barriers to entry are high. In the interests of trade liberalization, the U.S. government is obliged to pursue this case for every outfit, large or small, that may want to do business around the world.

LITTLE TO LOSE.

  Terminating the pact and filing the WTO case forces the Europeans to engage with the Americans and settle their differences -- or face a potentially unfavorable ruling from the world trade forum. There's an element of surprise here: The Europeans didn't expect this. Forcing the issue could now lead to a new agreement -- and a model for other industries where subsidies have created global trade disputes.

Getting to that point won't be easy. The European Union responded with its own WTO counterclaim, alleging that Boeing has been receiving illegal subsidies from Washington. "The U.S. move in the WTO concerning European support for Airbus is obviously an attempt to divert attention from Boeing's self-inflicted decline," said EU Trade Commissioner Pascal Lamy, in a prepared statement. "If this is the path the U.S. has chosen, we accept the challenge, not least because it's high time to put an end to massive illegal U.S. subsidies to Boeing which damage Airbus, in particular those for Boeing's new 7e7 program."

But Zoellick, Boeing & Co. have little to lose. For years the Europeans have offered mostly unsubstantiated rhetoric or distorted the facts about who receives what subsidies. The key difference here is that Airbus gets launch aid for the development of new commercial planes and Boeing doesn't.

RISKIEST BUSINESS.

  Since its inception in the early 1970s, Airbus has received $15 billion in such support, according to the USTR and European government documents, including $3.2 billion for the mega A380 carrier's development. Commercial plane manufacturing is probably the riskiest business on the planet. Launch aid shifts the risk from Airbus to the European governments because the manufacturer isn't required to repay if the aircraft program is unsuccessful.

Lamy and the Europeans claim that Boeing's new fuel-sipping jetliner -- the 7e7 -- is receiving illegal subsidies. They mostly refer to the $3.2 billion tax break from Washington State that Boeing secured for its new plane program.

But the differences between launch aid, essentially cash up-front, and a tax break spread out over 20 years, is huge. For example, Washington State's help only partially reduces the tax on Boeing aircraft sales. By contrast, Airbus pays no sales levies on its exports. Boeing receives the tax benefit only after it invests its own money in development and begins delivering jetliners to customers, which will begins in 2007. Boeing shoulders all of the initial risk.

If 7e7 sales flop, Boeing receives nothing. If the A380 fails to sell, Airbus doesn't have to repay the $3 billion in loans. And unlike EU support, the tax break is available to every player in the aerospace industry, including Airbus and its suppliers. By Stanley Holmes

SAME BREAKS.

  Moreover, Boeing's $3.2 billion tax break pales in comparison with the total of $6 billion in up-front development aid and production support that the European governments have earmarked for the A380, according to the USTR and European government documents. Besides the $3 billion in launch aid, Airbus has received more than $1.5 billion in local-government support, as stated in European government documents. The city of Hamburg, for example, shelled out $800 million to expand an Airbus production plant for the A380.

Ironically, Airbus and its parent company, EADS, benefit from the same U.S. tax breaks that Lamy in his comments claim are "illegal." Airbus in 1997 received a total of $6.6 million in such assistance when it built a pilot-training facility near Miami International Airport. Dade County offered the European jet builder $3.5 million in tax-free industrial-revenue bonds, $700,000 in county land-lease breaks, and the possibility of $2.4 million in forgiven county rents.

In 2003, EADS, Europe's largest defense contractor, received $8.6 million in tax breaks for locating a Eurocopter assembly factory in Mississippi. That included $6 million from local governments for new buildings to lease to Eurocopter and $2.6 million in state incentives.

OPEN BOOKS.

  Other burning issues the two sides will have to consider include the amount of government research money Boeing and Airbus receive. The EU and Airbus claim that NASA and defense research contracts are huge indirect subsidies for Boeing that violate the bilateral agreement, which limit such indirect support to no more than 3% of commercial plane revenues.

Boeing officials say such funding is significantly less than 1% of such revenues. At the same time, Airbus and EADS have received a similar amount of research and development support from the European Commission and European governments, according to the USTR.

The time is past for skirting these issues. Both sides will have to face each other under the WTO's watchful eye and open their books -- something Boeing CEO Harry Stonecipher has said repeatedly he wants to happen. EADS CEO Phillipe Camus and Airbus CEO Noel Forgeard haven't reciprocated. Forgeard has gone so far as to say Airbus would seek future launch aid for a new A350 jetliner to compete against Boeing's 7e7 aircraft.

With Washington terminating the U.S.-EU pact, it's time to resolve these issues once and for all.

Holmes is a correspondent in BusinessWeek's Seattle bureau