What’s a trade dispute in WTO? One member government believes that another member government is violating an agreement or a commitment made to the WTO In addition to “unfair” antidumping levies, cases often focus on non-tariff barriers and administrative trade practices Group # 4 : Carol Blenda Reyes Avila, Fernando Trinidad, Zhao Xuan

AIRBUS Airbus (S.A.S) was established in 1970 as a European Consortium of French, German, and later Spanish and U.K. companies. In 2001, it became a single integrated company. The European Aeronautic Defense and Space Company (EADS) and U.K. based BAE Systems (global company engaged in the development, delivery and support of advanced defense. Australia, Saudi Arabia, South Africa, Sweden, UK, US ) are the owners of Airbus 80% % respectively.

BOEING Founded in 1917, Seattle Washington, with McDonnell Douglas in 1997, is the world's largest aircraft and aerospace manufacturer – largest exporter in the world and the second- largest defense contractor in the world Revenues (Dollars in millions) Years ended December 31, Commercial Airplanes$ 28,263$ 33,386$ 28,465 Integrated Defense Systems32,04732,05232,411 Boeing Capital Corporation ,025 Other Unallocated items and eliminations Revenues$ 60,909$ 66,387$ 61,530

Aircraft Industry: Boeing vs. Airbus Long-running Litigation in WTO: US claims of illegal Subsidies for Airbus/ EU rejection Biggest Trade conflict handled by WTO EADS (Consortium) and Airbus in trouble? EU Complaint: Boeing grants, tax breaks US Complaint: Launch aid (repayable loans by France, Germany, UK, Spain) Job Cuts and Political Protests, 2007 Air Transport and Trade Global Market Share 2003 (2003 orders)Airbus 54% vs. Boeing 46% (2003 deliveries)Airbus 52% vs. Boeing 48% Both companies have suffered after the terrorist attacks of September 11 th, But Airbus recovered faster and delivered more planes than Boeing for the first time in 2003.

INITIAL REASON – ORIGEN OF TRADE DISPUTE Each side claims that a large amount of the other’s subsidies has been channeled toward the launch of new super-sized passenger jets: BOEING 787 “Dreamliner” AIRBUS 380 Super Jumbo 1980’s:The dispute started when Airbus began to obtain all its capital from European government to launch new aircraft 1992: US.-EU agreement on large civil aircraft. It places limits/ eliminate certain government support, including limiting “launch aid” to 33% of the costs of developing a new aircraft. Launch aid - - Financing with no or low interest and repayment is tied to, and entirely dependent on, sales of the financed aircraft. Support should be repaid at an interest rate no less than the government cost of borrowing and within no more than 17 years. Limit indirect subsidies : result from civilian applications of programs financed by the military or entities such as (NASA). Such support was capped at 4% of the total revenue from the sale of a firm’s large commercial jetliners. Prior to the agreement, 75% of development cost was provided by European government for Airbus Boeing was a recipient of indirect support as well: Tax breaks from states (Washington, Kansas, and so on), Technological benefit from govt. sponsored R&D programs. Military contracts

Boeing’s position Case filed with WTO in 2005 in response to the $1.7 billion “launch aid” for its new A350 aircraft, which violates subsidy agreements  Risk-free money – shifts risk from manufacturer to EU taxpayers  Repayment is contingent upon success of aircraft sales.  EU claimed that launch aid was necessary to help an infant industry compete against a mature company.  In , Airbus sold more airplanes than Boeing.  Is argument for launch aid still valid? Airbus counter-filed against Boeing, claiming:  Boeing has been receiving illegal government subsidies through tax breaks and defense contracts.  Launch aid is fully compliant with 1992 agreement  Airbus contends that it has repaid over $6.4 billion in loans, over 40% more than has received.

Airbus’ position Airbus claims that Boeing has been receiving illegal government subsidies. $3.2 billion in tax incentives from Washington State for production of the 787 aircraft Indirect subsidies through US military and NASA R&D contracts Japanese government is providing $1.5 billion in loans to Japanese subcontractors in the production of 787 wings. ( Boeing yet again postponed the maiden test of its 787 Dreamliner, due to structural weakness in the area where the wings attaches to the body of the airplane) Boeing Response WA state tax incentives apply to entire aerospace industry, not just Boeing Airbus and EADS benefit from similar incentives in FL, MS and LA. Defense procurement is not a subsidy  Must provide a “good” to receive compensation.  Airbus receives gov’t funds to subsidize cost of development, which are then sold in the market.  DoD ( Department of Defense) contracts are open to European bids  Boeing’s defense revenues (2003) = $23.7 billion, Airbus’ revenues were $23.8 billion. R&D spending  As a condition of EU agreement to approve McDonnell- Douglas/Boeing merger (1997), Boeing must grant Airbus full access to its government-funded patents.  Airbus/EADS are not required to do the same.

WTO rules Agreement on Subsidies and Countervailing Measures (ASCM)  EU claims US violates: Article 3.1 (a) and (b) (which subsidies are prohibited) Article 3.2 (Effects of subsidies) Article 5 (a) and (c) (5 a – subsidy causes adverse injury to domestic industry of another member. 5 c- subsidy causes serious prejudice to interests of other member Article 6.3 (a) (b) and (c)  US claims EU violates: Article 3 - (Subsidies) Article 5 - (No member should cause adverse effects to another through subsidies) Article 6 - (Serious prejudice – exists if total ad valorem of subsidy exceeds 5% and if subsidies cover operating loss).

Actions taken by US & EU Oct – US requested consultations with EC. EC responded with counter-request. January, 2005 – Both sides agreed to 8-point framework for bilateral relations 1Secure comprehensive agreement to end subsidies on large aircraft 2Principal shareholders are Airbus and Boeing 33 month negotiation window 4Negotiation will apply to US and EU, could broaden agreement to include others 5Pledge not to request WTO panels or offer new Gov’t support commitments to aircraft manufacturers during negotiations 6Use definitions of subsidies in ASCM 7Enforcement through transparency and DSB procedures 8Establish agreed-upon terms and conditions for withdrawal from agreement April, 2005, negotiations break down over items 1, 4, 5 and 6. May, 2005 – US filed request for panel with Dispute Settlement Board (DSB) with WTO. EU filed counter-request same day.

US-EU Agreement on Terms for Negotiation to End Subsidies for Large Civil Aircraft (LCA) – Position as of May 31, Establish fair market competition and development in both US and EU – Goal is to end subsidies -During negotiations, the parties will make no new government support commitments for LCA development or production The agreement will include the U.S. and the EU Enforcement of compliance to be exercised via increased transparency and Dispute Settlement Procedures Both parties agree to not request establishment of WTO panels relating to pending disputes Early in 2005, Airbus was holding little more than 1 percent of the Japanese market, and that share was heading toward zero.  EU unwilling to eliminate subsidies. Will agree to reduce them.  EU unwilling to support standstill of government launch aid during negotiations  EU wants inclusion of Japan in negotiations  Transparency is important to maintain clear channels of communication.  Reflects MHI’s strong involvement with Boeing, along with the heavy subsidies it receives from the Japanese government

Reality Trade disputes are normal actions in a world of highly competitive global economic systems. Disputes are useful and expected. Share a trillion dollar economic relationship We have been able to work together in the past. We initiated the WTO Doha round together attempting to regulate trade. The Airbus/Boeing presence is stereotypical of a duopoly market. The market success of each firm is highly dependent on the price and output decisions of its competitor. Fair Market Rules Apply for optimum Market Performance THEREFORE Define what “subsidies” entail ( Appendix 1) 1. The U.S. federal government and two states are supplying Boeing with "lavish" subsidies that will eventually reach US$23.7 billion 2. Airbus has taken advantage of decades of European subsidies worth the equivalent of more than US$100 billion (euro75 billion) to capture long-standing Boeing Co. customers and become the world's largest seller of planes Eliminate Launch aid for Airbus and all incentives provided by state and local governments for both companies Agree to have open competition on Defense contracts and general government contracts in both nations

Recommendations Settlement of dispute is essential:  Avoid negative trickle-down effect on developing nations if issue is not resolved - Makes better business sense to liberalize trade worldwide:  Increase consumer base in other nations  An open market self-regulates: Fairer competition; increased accessibility Existence of price controls Higher quality of control of products  Need to avoid marginalizing WTO. If deemed inadequate, trade disputes will proliferate and remain unresolved.  Dispute settlement is the central pillar of the multilateral trading system, and the WTO’s unique contribution to the stability of the global economy.  Without a means of settling disputes, the rules-based system would be less effective because the rules could not be enforced. The WTO’s procedure underscores the rule of law, and it makes the trading system more secure and predictable.

References DISPUTE SETTLEMENT: DISPUTE DS317, United States — Measures Affecting Trade in Large Civil Aircraft, “EU accuses U.S. of paying billions in Boeing subsidies” USA Today, 3/23/2007 DISPUTE SETTLEMENT: DISPUTE DS316, European Communities — Measures Affecting Trade in Large Civil Aircraft, Boeing Versus Airbus: Flight Risk, Outsourcing Challenges CIO, By John Newhouse March 01, 2007 Office of the United States Trade Representative – “No New Subsidies”, October 6, 2004, Office of the United States Trade Representative = “Trade Facts, A comparison of current US and EU positions and the Jan. 11 Agreement”, May 31, 2005, “Nose to Nose”, Boeing vs. Airbus, June 23, 2005, The Economist “ Any Dream will do”, June 27 th 2009, The Economist. “Enough is Enough”, Aircraft Subsidies, Jul. 22, 2004, The Economist A unique contribution, UNDERSTANDING THE WTO: SETTLING DISPUTES Boeing, “Commercial airlines” BBC News, “Q&A: Boeing and Airbus” (10/07/04) retrieved from The Office of the United States Trade Representative “U.S. files WTO case Against EU over Unfair Airbus Subsidies” ( ) from Economist “ Towards the Wild Blue Yonder” (04/25/02) Cage, Sam. “WTO to Probe EU Claims of Boeing Subsidies,” Washington Post, Feb. 17, Office of the United Trade Representative, “A Comparison of Current EU positions and the Jan. 11, 2005 Agreement.” May 30, 2005,

Appendix 1 What is a subsidy? In economics, a subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector Subsidies represent payments to producers by the government which reduce their variable costs of production and encourages them to expand their output. The effect of a subsidy with a downward sloping demand curve is to increase the quantity of goods sold and to reduce the market equilibrium price. This is shown in the diagram below Government subsidies are often offered to producers of merit goods and services and industries requiring some protection from low cost international competition The subsidy causes the firm's supply curve to shift to the right because the firm's costs are reduced. This means that more can be supplied at each price. Equilibrium price falls from P to P1 and quantity traded expands from Q to Q1 Producer subsidies may also come in the form of guaranteed minimum prices from the government (or some other central buying agency. The more inelastic the demand curve the greater the consumer's gain from a subsidy will be. Indeed when demand is perfectly inelastic the consumer gains the entire subsidy because the market price will fall by the entire amount of the subsidy. When demand is relatively elastic, a subsidy will have more of an impact on quantity bought and sold and will cause only a small fall in the market price.