The International Repercussions of the “Boeing vs Airbus” Case

The International Repercussions of the “Boeing vs Airbus” Case

What began in 2004 as an accusation by Washington, against the European Union for providing illegal subsidies and grants to support Airbus productions, has escalated into a fifteen-year legal battle between the US and the EU of counter assaults. In this paper, we will discuss the facts surrounding Boeing vs Airbus, the law applied to the case and the international fall back for the countries involved.

Boeing is one of the world’s leading aerospace companies and the largest manufacturer of commercial jetliners and military aircraft, hence it is the number one US exporter. Airbus, a European consortium, first challenged Boeing’s monopolistic power by creating the A300, the world’s first wide-body twin-engine passenger jet. Since the European aerospace industry attack, the two companies have faced a constant stream of disputes. (case study)

After the US accused the EU of illegal subsidies towards Airbus, the EU counterclaimed with the World Trade Organization (WTO) that the US was conducting the same illegal acts towards Boeing. The WTO determined the illegality of these allegations through a number of international legal agreements. The first is the Agreement on Subsidies and Countervailing Measures (ASCM) with a specific focus on articles 3.1(a), 5(a), 5(c),  6.3 and 7.8. The basis of these articles rest on the determination of the subsidy follows the definition under Article 1 of ASCM. A subsidy exists if there is a financial contribution by a government where “a government practice involves the direct transfer of funds (e.g. grants, loans, and equity infusion).”  or “government revenue that is otherwise due is foregone or not collected”. Furthermore, a subsidy exists where “there is any form of income or price support in the sense of Article XVI of GATT 1994”. This article refers to the [what is General Agreement on Tariffs and Trade]. In any case, a benefit is conferred through the subsidy.

 According to the World Trade Organisation, the European Communities and certain EC member States have granted five main subsidies to the development, production, and sale of large civil aircraft by Airbus. These subsidies are: “Launch Aid” contracts, European Investment Bank loans, infrastructure-related measures, corporate restructuring measures (debt forgiveness, equity infusions, and grants), and research and development funding. Each of these types of funding correlates with the definition of a subsidy under ASCM. 

Under Article 3(a) of ASCM, subsidies shall be prohibited if they are contingent upon export performance. The Panel of WTO found that the “Launch Aid” contract was in violation of this article as it is a royalty-based financing grant of more than $15 billion by certain EU members of State to Airbus which is de facto an export contingent. (1) However, this decision was later overruled by the Appellate Body after it was unable to come to a solid conclusion about the facts surrounding the grant subsidy.

The “Launch Aid” contract was under scrutiny again alongside the other EU subsidies with regard to Articles 5(a) and 5(c). Article 5 states that no use of subsidies should cause adverse effects on the interests of another member. Part 5(a) focusing on injury to the domestic industry and 5(c) on serious prejudice to the other member’s interests. While 5(a) went unsubstantiated, under 5(c) both the WTO Panel and Appellate Body found that the “Launch Aid” contract did not adhere to ASCM. The “serious prejudice” was defined through Article 6.3, which states that it may arise if the “effect of the subsidy is to displace or impede the exports of like products of another member” and “is a significant price undercutting by subsidized product as compared with the price of like products of another Member”. The WTO determined that the Airbus had received a total of $18 billion in illegal subsidies from 1968 to 2006 (6). It has an estimated economic value of $200 billion. (2) According to the Office of the US Trade Representative (6), the subsidies also caused Boeing to fail to procure five sales campaigns, to impede Boeing’s operations in six geographical markets and to lose more than 300 sales aircraft and market share throughout the world. (3) This is a significant prejudice to US investments in Boeing.

In accordance with Article 7.8, if the WTO Panel determines that a subsidy has adverse effects on the interests of another member, then the member providing the subsidy must take appropriate steps to remove the effect or withdraw the subsidy. The governments that sponsored airbus were given until December 2011 to remove all illegal subsidies that were deemed to have adverse effects. However, the WTO found that these governments not only failed to rectify these violations but provided an additional $5 billion to Airbus in “Launch Aid”.(2) 

As a result of the following subsidy violations and the complete disregard to resolve the issue, the World Trade Organisation, on 2nd October 2019, authorized the United States to impose tariffs on up to $7.5 billion of European Goods. As of October 18th,10% of these tariffs will be imposed on Airbus planes, while 25% of duties will be on various products, such as alcohol and cheese. Furthermore, the WTO has given the US government the right to increase these tariffs to 100%. As these tariffs were approved by the World Trade Organisation, the EU cannot retaliate by imposing tariffs on the US.

While the increase of tariffs will help the American government, it will have a negative impact on Americans. Americans will be forced to pay by more for their products while the government reaps the rewards. Some of these European companies whose products are getting taxed may decide to reduce or stop the export of their goods to the US. This could hurt US businesses as they will lose out on profits and will have to look for a different manufacturer to export from. 

As assumed, European companies will be impacted the most due to the increase in tariffs. However, it is important to note that there were only four countries, France, Germany, Spain, and Britain,  providing subsidies to Airbus yet, many more countries will be punished. For example, Irish products like Kerrygold butter and Bushmill Whisky will be taxed 25%. This country and these companies were not involved in the court case therefore, why should they be punished? 

By looking at just one example we can see the impact these tariffs will have on markets and businesses. Jameson and Bushmill whiskey are two famous competing brands. One must ask why put a tariff on Bushmill but not Jameson? Bushmill will lose a large amount of profits and consumers to its competitor as many customers will buy the cheaper brand. Thus, Bushmill’s stock price could decrease and could cause serious financial difficulty for the company. This is only an example of one product which is taxed, however, these same ramifications, or worse, will happen to all the products which unlucky enough to be chosen. How is it fair that the result of a court case revolving around illegal subsidies to Airbus be allowed to affect so many innocence businesses and countries? 

If the WTO finds the EU in full compliance after removing all illegal subsidies, then the US will not be able to impose these taxes legally. This may not happen for many years, solidifying an everlasting impact on these companies. After the prices rise for these products, consumers will be more inclined to buy a cheaper brand. As consumers tend to be creatures of habit, they will be unlikely to change back to the original brand after the price returns to normal. That being said, supermarkets may decide to keep the retail price of the product the same even though the trade price has dropped, enabling them to make more profit. Yet this still hurts the products company. As a result, consequences to these tariffs will be felt across the EU trade market for years to come.

It is also important to point out that only 10% of tariffs will be imposed on Airbus. In my opinion, the company and countries at fault should be the only ones punished. I certainly think the other companies would agree. [say more - What???]

In conclusion, out of all the parties involved the American government is the only one benefiting from the Airbus vs Boeing case. Yet many innocence parties across Europe who were not even a part of this case will be subjected to unfair repercussions. Therefore, did the World Trade Organization do their job properly? Was justice found? In my opinion, I don’t believe it was. Justice is supposed to reimburse the ones effected, punish the party involved and deter the party from committing the act again. Only one of these will result from the imposition of the tariffs. 

References:

1) [https://trade.ec.europa.eu/doclib/docs/2010/september/tradoc_146503.pdf]

2) [http://www.boeing.com/company/key-orgs/government-operations/wto.page]

3) [https://www.americanactionforum.org/insight/boeing-vs-airbus-explaining-the-latest-tariffs-on-the-eu/]

4) https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm#collapseD

5) https://www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_art16_jur.pdf

6) https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/april/ustr-proposes-products-tariff