Saturday, February 05, 2011

The WTO: The U.S. Government Has Illegally Subsidized Boeing


For the past six years, the World Trade Organization (the “WTO”) has presided over its largest trade dispute ever. This dispute, between U.S.-based Boeing and EU’s Airbus, will likely shape the future of the $1.7 trillion passenger-aircraft market. In 1992, both the U.S. and the EU struck a compromise agreement authorizing government aid to both companies. Following an increase in Airbus’ market share, however, the U.S. renounced the agreement in 2004 and filed suit at the WTO against the EU alleging illegal government subsidies to Airbus. The EU retaliated with a suit against the U.S. alleging illegal government aid to Boeing.

The WTO held this past Monday that Boeing was the recipient of approximately $5 billion of illegal federal, state, and local government subsidies. Under WTO law, government subsidies are considered illegal only if they “steal” sales from competing companies, and Airbus estimated that it has lost approximately $45 billion of sales as a direct result of the illegal subsidies to Boeing. Despite this week’s decision, Boeing claims that Airbus is the bigger culprit in this dispute because in June 2010, the WTO ruled that Airbus had also received roughly $20 billion in illegal government aid, four times that of Boeing. 

Some of the subsidies that the EU alleged Boeing received included research grants and free use of technology from the Department of Defense and the National Aeronautics and Space Administration, as well as tax breaks and other incentives provided by the states of  Washington, Illinois, and Kansas. Although the EU alleged that these illicit subsidies totaled $24 billion, the WTO ruled that the amount of improper government aid was only $5 billion. The WTO report does point out, however, that Boeing was set to receive another $2 billion in state and local subsidies in the future, thus bringing the total amount to $7 billion. In its defense, Boeing asserts that almost $2 of the $5 billion in illegal subsidies resulted from a repealed U.S. tax law, and the amount to be remedied is only $3 billion.

Both companies wonder how the dispute will be resolved because the WTO has no mechanism for the enforcement of its decisions. The WTO cannot even force countries to eliminate the illegal subsidies. What the WTO can do is authorize retaliatory tariffs on products from countries that fail to abide by its decisions. Since both the U.S. and the EU plan to appeal the current decision, the imposition of such tariffs in the near future is highly unlikely. The two parties will probably negotiate a settlement, which will include an agreement on an acceptable form of government aid for Boeing and Airbus. Designing a framework for government support is no easy task, however, because aircraft manufacturing is a source of high-paying jobs and is a matter of national pride. It is likely that the intentions of Brazil, Canada, Russia, India, Japan, and China to enter the passenger-jet market will force the U.S. and the EU to resolve the present dispute amicably and instead focus their efforts on innovation.

Discussion Questions:
1. Should government aid to passenger jet manufacturers be outright forbidden to avoid such protracted litigation at the WTO and other forums?
2. One of the arguments in support of government aid for aircraft manufacturers is that it enables companies such as Boeing and Airbus to bring new models to the market more quickly. If government subsidies aid innovation and rapid market delivery, should we allow them in other industries?

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