US, EU Trade Blows on Aircraft Subsidies
Washington, Brussels file counter complaints with the World Trade Organization
WASHINGTON, DC / BRUSSELS, Belgium - 10/07/04 - Whatever meager goodwill was gained by the move yesterday - albeit tardy - by Congress to act on the contentious Foreign Sales Corporation - Extraterritorial Income Act (FSC-ETI) export tax mechanism has evaporated as a longstanding dispute over subsidies to commercial aircraft makers is threatening to trigger a transatlantic trade war between US and the European Union (EU).
At the same time that a House-Senate conference committee announced that it had cobbled together a package that would replace the FSC-ETI plan with a package of corporate and individual tax deductions, US Trade Representative Robert Zoellick announced that the US would file a complaint with the World Trade Organization (WTO) charging that the commercial aircraft manufacturer Airbus SAS has received more than $15 billion in "unfair subsidies" from its consortium government partners - France, Spain, Germany, and the UK.
The decision to file the aircraft subsidy complaint came as last month's negotiations between senior US and European Commission trade officials collapsed.
The USTR also said that the US would be terminating the 1992 US-EU Agreement on Large Aircraft, which limited subsidies for US and EU airplane makers - Boeing Commercial Aircraft Co. and Airbus SAS, respectively - to one-third of the production costs for new models.
According to sources, that decision was made because of signals from Airbus over the past several months that it intends to seek government subsidies to launch its new A380 commercial airliner, a prime competitor to US-based Boeing's new 7E7 "Dreamliner" passenger aircraft.
"Since its creation 35 years ago, some have justified subsidies to Airbus as necessary to support an 'infant' industry. If that rationalization were ever valid, its time has long passed. Airbus now sells more large civil aircraft than Boeing,'' Zoellick said.
Airbus last year overtook Boeing as the world's largest airplane maker, capturing a full 54% of the global market for large commercial aircraft.
In response to the US filing, the European Commission immediately filed its own complaint to the WTO claiming Boeing receives "massive subsidies" amounting to almost $23 billion since 1992 from the US government, as well as about $3 billion in new "tax incentives" from Boeing's home state of Washington.
Boeing, which in the past had opposed a WTO case over fears it would anger its European airline customers, has come out in favor of the filing by the USTR.
Harry Stonecipher, CEO of the Seattle-based company, told a press conference shortly after the announcement of the filing that "Boeing will support any course of action the US government feels is necessary to reach a new agreement" that "ends all subsidies."
Yesterday's counter-filing by Washington and Brussels raises the prospect of an unprecedented double ruling by the WTO, that, incredulous observers have said, could conclude that both aircraft makers have been receiving funding that contravenes WTO rules and authorize billions of dollars in two-way trade retaliation.
While the USTR said the US remains open to negotiating "an agreement that ends all new subsidies," EU Trade Commissioner responded by telling reporters in Brussels that "The US move . . . is obviously an attempt to divert attention from Boeing's self-inflicted decline . . . If this is the path the US has chosen, we accept the challenge."
US officials are on the record saying that they "are still hoping for a negotiated solution over the next 60 days," the period of mandatory consultations between the US and the EU to end the dispute on their own - the first step before the US can request a WTO panel to hear the case.
Exacerbating the situation is the fact that the filing by Washington comes with a national election less that a month away and the Bush Administration hoping to shore up its re-election prospects in response to charges from Democrat candidate John Kerry that President Bush "has failed to enforce trade agreements."
According to a high-ranking EU official in Brussels, the USTR's agenda for co-operation with Europe had been hijacked by the presidential campaign.
"There is another debate coming up on Friday and there is no doubt that the Bush team need more ammunition at this stage," the official said in this morning's edition of the International Herald Tribune (IHT).
But the US vehemently denies that election-year politics is driving the dispute.
"They like the status quo and it's convenient for them to write this off as nothing more than election-year politics in the US," a senior US trade official told the Paris-based paper. "What is driving this is the substance and the substance here is that they are looking at a new tranche of subsidies."
The closest the WTO has come to a similar situation was in 1996, when Canada and Brazil each filed cases with the Geneva-based global trade group to block government subsidies to Bombardier and Embraer, their respective national commercial aircraft makers.
Both countries won their cases with each side threatening to "pull the trigger" on more than $3 billion in trade retaliation.
That trigger, fortunately, was never pulled as such a move would have, in effect, cut off all trade between the two countries.
If a negotiated deal can't be reached, the Boeing-Airbus dispute could result in trade retaliation threats that dwarf that amount and possibly trigger a trade war the likes of which have never been seen before.
Currently, the 25-member EU and the US are each other's primary trading partners with business and investment ties that forge the most massive bilateral trade relationship in the world.
They are also the largest players in global trade with each accounting for a full fifth of each other's bilateral trade - or close to $1.2 billion every day.
In 2003, exports of EU-sourced goods to the US amounted to $278 billion, 26% of total EU exports, while imports from the US amounted to $192 billion, or 17% of total EU imports.
The investment links are even more substantial with the EU and US serving as each other's largest global investment partners.
The total amount of 2-way investment amounts to over $1.8 trillion, with each partner employing directly and indirectly about 6 million people in the other.
The share of EU investment in the US amounted to more than 52% of EU Foreign Direct Investment (FDI) over the period 1998-2001 - or about $200 million a year in average - while US investment in the EU amounted to more than 61% of total EU FDI inflows between 1998 and 2001, or about $72 million a year on average.
Are Washington and Brussels prepared to "pull the trigger" on all, or a significant part, of all that?
"We will cross that bridge when we come to it," the US official told the IHT.
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