Can the EU and US avert a trade war?
By
Simon Nixon Dec 12, 2005
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The European Union and the United States have both lodged complaints with the World Trade Organisation claiming foul play. What’s going on? asks Simon Nixon.
Why the talk of a new trade war?
Because the US and EU last week lodged tit-for-tat complaints with the World Trade Organisation (WTO), alleging that their respective commercial aircraft manufacturers, Boeing and Airbus, are receiving illegal state aid. The US alleges Airbus has received $15bn in illegal aid, while the EU claims Boeing has benefited from $23bn in subsidies. Unless the two sides reach an agreement within 60 days, the WTO will be obliged to launch an investigation. Should the WTO rule that both sides have broken trade rules, then both parties would be entitled to launch retaliatory measures, which some observers fear could escalate into an all-out trade war.
Is this a new dispute?
No. A decade ago, America won a similar trade row against Airbus over support provided by the German government. At that point, both sides agreed to limit launch aid to a third of development costs. The US contends that the EU has never stood by the terms of that agreement. In 1999, the Clinton administration prepared to file a complaint with the WTO aimed at preventing European governments providing Airbus with more than $3bn of support to help Airbus launch the A380, a 555-sear super-jumbo that would compete with the venerable Boeing 747. But back then, Boeing got cold feet at the prospect of an all-out confrontation with its rival. Until this year, both sides effectively turned a blind eye to continued aid. But now Boeing says that it is tearing up the 1992 agreement and is calling for an end to all state aid.
So why now?
Cynics point to the US election. There is political capital to be gained for President Bush to be seen banging the drum for US jobs when his record on jobs is an election issue. Certainly, the administration’s decision to escalate the dispute is at odds with its usual preference to resolve disputes via bilateral negotiation. Meanwhile, Boeing has its own reasons to raise the temperature in its fight with Airbus. After decades as the undisputed world leader in commercial aviation, Boeing has fallen behind Airbus in terms of market share. Its fightback depends on the success of the 7E7 “dreamliner”, its first new aircraft for a decade, due to go into production in 2006. Boeing fears Airbus is seeking fresh state aid to build a competitor to the 7E7.
How did Airbus take the lead?
State aid undoubtedly helped Airbus get started. Since its creation in 1970, the venture is alleged to have had subsidies worth over $15bn from France, the UK, Germany and Spain. But analysts say Airbus has also outsmarted its US rival: it has a solid product, a clever marketing strategy and competitive prices. As a result, Airbus stole the lead for the first time against Boeing last year and so far this year had delivered 224 aircraft compared to Boeing’s 218. Airbus is likely to consolidate this lead in 2006 following the launch of the A380.
How much aid does Airbus receive?
The core of Boeing’s complaint is so-called “launch aid” - repayable loans offered by governments to help finance the development of new aircraft. The attraction is that, if the aircraft flops, the loan needn’t be repaid. Yet Airbus may not seek such aid for its challenger to the 7E7 since it is planning to adapt its existing A330.
What aid does Boeing receive?
The $23bn Boeing is alleged to have had in illegal aid is largely in the form of tax exemptions and research subsidies. It’s estimated to have had tax breaks worth $3.2bn from Washington state in return for agreeing to build the 7E7 there. It has also benefited from federal tax exemptions for exporters. But the links between Boeing and the US government go beyond subsidies and include preferential treatment in the award of government contracts. Two top Boeing executives were last year forced to resign for having improper dealings with the Pentagon and a former US Air Force official is in prison after admitting giving Boeing contracts while negotiating to get a job with the firm.
What will happen now?
Most observers agree that the WTO is not the place to resolve a political dispute of this size and complexity. Nonetheless, if the WTO is forced to rule and this leads to a full trade war, this would not only disrupt world trade and pointlessly widen the existing transatlantic rift, but it could be particularly damaging to British interests. The UK has a number of world-class aerospace companies that could be affected, including Rolls-Royce, GKN, Smiths, Cobham and Messier-Dowty. That is why observers believe that, once the US election is out of the way, both sides will seek a negotiated settlement.
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