Analysis of the Airbus-Boeing Dispute Presented to the World Trade Organization - Essay Example

? Analysis of the Airbus-Boeing Dispute Presented to the World Trade Organization Your Introduction “The Geneva-based World Trade Organization helps establish trade rules in the global environment” (Ireland et al, 2008). The World Trade Organization (WTO) has several legal instruments that are under its control and jurisdiction. This enables it to regulate and monitor the trade activities of different businesses and entities that trade across borders and in several national jurisdictions. One of the areas that the World Trade Organization controls the affairs of large international firms is in the area of subsidy and countervailing. These rules are included in the GATT (General Agreement on Trade and Tariffs rules) issued in 1994. Two major airline manufacturers, Airbus and Boeing together produce almost all the airlines that are used throughout the world. Boeing is a US based entity whilst Airbus is owned jointly by some member states of the European Union; United Kingdom, France, Germany and Spain. Boeing and Airbus grew over the years through mergers and acquisitions of various airlines and parts manufacturers in these opposite sides of the Atlantic. In October 2004, The United States (representing Boeing) brought up a case to the World Trade Organization against Airbus for getting unauthorised subsidies under the 1994 GATT rules. In this complaint, they stated that Airbus has been benefiting from illegal subsidies from their national governments and are guilty of countervailing. This case went on for several years with claims and counter claims and a WTO panel reported on the matter in 2010. An appellate body ruled on it in 2011. This paper examine the details of the two issues and how it was presented by both parties. The paper will begin by examining, the facts of the case. It will also evaluate the arguments of the two parties and the judgement that was passed on the subject. Finally, the writer will pass an opinion on the matter. Background of the Boeing and Airbus Competition “Airbus and Boeing compete head-to-head for major aircraft orders” (Spreen, 2007). Interestingly, Carbaugh (2010) identifies that in the 1970s Airbus produced only 5% of the world's aircrafts. However, in the world today, Airbus manufactures over half of the airliners that are available to airline companies. This can be credited to the various levels of growth in the 1980s which was done through mergers and acquisitions within the European continent. The expansion and growth of Airbus has been supported by cooperation and integration of the European Union. This is because European Union Laws have supported the growth and acquisition of different airline and parts manufacturing entities on the continent. The growth of the EU has enabled the various airline manufacturers to become more united and there is a significant reduction in the level of competition and disagreements that exist between the companies as they operate. On the other side of the Atlantic, Boeing has also grown through the consolidation of different American and Canadian airline and part manufacturers. This expansion is supported by the North American Free Trade Agreement (NAFTA). Canadian, American and Mexican plants and entities come together to work to provide important parts and airline assembling entities for the building of Boeing Airlines. Together, Boeing and Airbus control a huge chunk of the airline manufacturing industry. “The Boeing-Airbus story seems at first sight to provide exactly the kind of argument for aggressive national trade policies that protectionists have always wanted to cite as a textbook example” (Helpman and Krugman, 1989). This is because the two airline carrier manufacturers represent the two great economies of the world. The two companies are significant to the economies of both the United States and the European Union. Due to this, their respective governments have the duty of ensuring that they operate well in the international markets and earn the optimum profits as this is a major aspect of the operation of the two entities. The EU member states who own Airbus and the United States are all members of the World Trade Organization. Due to this, the WTO rules are central for the regulation of trade and activities in order to create a non-adversarial environment for both companies to carry out their trade. In order to maintain their oligopolistic position on the global commercial aircraft manufacturing industry, they both live by the SCM agreement of the General Agreement of Trade and Tariffs. These rules provide standards for defining countervailing activities and other trade malpractices which can harm competition between the two entities. The World Trade Organization is a dispute resolution unit of the GATT (Appleton and Plummer, 2005). Due to this, they have some power to hear cases, set up consultations in the manner of alternative dispute resolution and find solutions where a member state feels that it is getting an unfair treatment in a given nation. The World Trade Organization (WTO) agreement states that countervailing duties may be imposed in accordance with Article VI of the GATT 1994 and any member states that breaches these rules and regulations can be subjected to investigations (WTO Legal Affairs, 2007). In relation to the Airbus and Boeing conflict, the United States complains that Airbus receives unfair subsidies from their respective European governments and this places Boeing at a competitive disadvantage (Caraugh, 2010). This is because as GATT members, they expect both nations to operate without government funding, otherwise the idea of promoting fair trade would be erased if the government of the United States also seeks direct subsidies from its government. This way, there would be a trade war which could go against the spirit of the GATT agreement that both nations are party to. In order to prevent retaliation with a complete disregard to GATT rules, the United States referred the matter to the World Trade Organization. This is because there was a clear breach and there was the need for the two parties to come up with a mutual agreement on the issue. The US filed a case against the European Union governments for providing illegal funding. In a period of 24 hours, the EU also filed a claim against Boeing and the United States on similar grounds (BBC, 2005). Facts of the Case According to the WTO Case Facts (2012), the United States required consultation with the governments of the UK, Germany, France and Spain (Member States of the EU) on the grounds that their governments were providing subsidies that were inconsistent with Subsidies and Countervailing Measures (SCM) and the GATT Rules of 1994. In this case, there were some core measures and accusations that were directly presented to the WTO for further investigations and consultations. They include: 1. The respective governments provided grants of goods and services to develop, expand and upgrade Airbus' manufacturing sites and development production of Airbus A380. 2. Provision of loans on preferential basis and terms. 3. Assumption and forgiveness of debts resulting from launch and other large civil coverage production and development financing. 4. Provision of equity infusions and grants. 5. Provision of research and development loans and grants in support of large aircrafts 6. Other financial contributions to Airbus. 7. Subsidy relating to the entire family of Airbus. All of these arguments were allegedly in contravention with some important aspects of international business and trade that were laid out in the rules of the GATT and the WTO rules and principles. The Launch aid provided for A340 and A380 were alleged to to be in contravention of Article 3 of the Subsidies and Countervailing Measures. These principles were meant to prevent businesses from getting financing from their respective governments since this was going to lead to a situation where the parties involved would get unfair support which would be detrimental to international trade. Also, this was against competition rules because with government support, some businesses could be too powerful and this could prevent others from getting equal opportunities in trade. Also, Article 6 of the Subsidies and Countervailing were designed to prevent adversities to member states who were competing in the same service. In this situation, the United States showed clearly that they were being put in a negative situation since the funding from the various governments were providing an unfair advantage to Airbus and the European economy to the detriment of Boeing and the US economy. In response to these allegations by the United States, the WTO set up a Dispute Settling Body (DSB) to hear the case. It involved representatives from other member states, Australia, Brazil, Canada, China, Japan and Korea. This panel was meant to hear the case, analyse the facts and come up with a conclusion on the situation. In order to facilitate the hearing, the panel classified the accusation into five broad headings which made it easier for case analyses to be conducted: 1. Launch aid or Member State Financing 2. Loans from European Investment Banks 3. Infrastructure and Infrastructure related grants 4. Corporate restructuring measures 5. Research and Technological development funding. United States' Argument The United States made those assertions above with the view of commencing a dispute which will enable them to get a hearing that would ensure fairness and some kind of action from the WTO. This was condensed in the five pointers identified above. The central claim of the United States had to do with the Launch Aid by Member States. According to the United States, they violated the GATT agreement and there was the need for some action to be taken to stop the EU. In view of these subsidiaries from the EU member state governments, the US saw it as a actionable under Article 3.1 and was in contravention with the Article 5 which was causing adverse effects to a member states. The European Union Member States' Counter Arguments In response, the European Union also raised credible issues of funding and subsidies that were against the SCM clause of Article 3.1 of the GATT. This came up in an appeal that was targeted at showing that the situation was pervasive in both camps. These counter-claims were really strong and they had serious implications on the final settlement of the case. In the first place the United States government provided aid to Boeing and related companies. It was established that there were numerous federal and state subsidies that were given to Boeing Company and McDonnell Douglas Corporation before it merged with Boeing. First of all, there were numerous state and local government subsidies that were made to Boeing and its related companies. These state and local government subsidies were projected to be in contravention with the SCM agreement. Secondly, there were numerous federal programs that were means of funding Boeing and its related companies. This included the US Department of Defense grants and subsidies. There were also National Air and Space Administration (NASA) grants and sponsorship packages that Boeing benefited from and made a lot of financial gains from. This was similar to the state subsidies given to Airbus by the European governments. In terms of taxes, there were various US Department of Labor exemptions that were granted to the Boeing. There were also other federal tax incentives that the US government granted to Boeing in the period that was investigated. The values of the claims were stated. In terms of aeronautic research and development grants, Boeing got about $2.6 billion in subsidies and this include payment to enable Boeing to get benefit from NASA and other access to equipment and procurement contracts (Lester, 2012). There were also tax subsidies valued at around $2.2 billion which included federal exemptions, exemptions from the Washington State and other tax rate reductions that enabled Boeing to get some cuts which affected their innocence significantly. Eight of Boeing's subsidiaries had other minor tax benefits and rebates that were relevant in reducing their taxes due. This included several reimbursement, government economic development exemptions, employment subsidies and many others which amounted to approximately $550 million (Lester, 2012). The EU also alleged that there were other Washington State incentives and income tax breaks which were all prohibited in the GATT rules and the SCM Agreement's Article 3 (Lester, 2012). The EU stated that Article 5 gave them the right to take action against Boeing since they were adversely affected by the actions of their competitor. Ruling The ruling on the case brought by the European Union has not been finalized yet. It is still before the panel and is being heard as at the time of completing this paper. The ruling that has come out relates to the findings of the case brought by the United States. In the findings, it was shown that in terms of prohibited subsidiaries and export subsidiary, the main issue lies on Article 3.1 (a) which has a footnote which states that a grant is forbidden if it is “geared to induce the promotion of future export performance by the recipient” (WTO, 2012). This implies that there are more requirements that must be met before a company can be denied a subsidy. The article is not breached merely on the grounds of anticipated export. It can be done by examining the design, structure and other important facts that are included in the situation. Due to this, it was found that some of the actions of the European Union and certain Member state governments were not right under Article 5(c) of the SCM agreement. This is because it caused some damage to the interests of the United States and there was evidence of serious prejudice. The main area of contention was the Launch Aid and the Member state funding that was given by the member states for some major research and development projects for Airbus (WTO, 2012). Also, some specific help given indirectly to some companies in the Airbus group by the French and German governments were identified to be in contravention with the SCM Agreement. These financing were specifically given to dislodge Boeing in some specific production systems. In other words, they were given to counter Boeing in entering some markets, namely, the Chinese, Korean and European markets. Also, Boeing was able to prove to the panel that in some instances, the funding was given directly to enable Airbus to lose contracts and take over projects and models that provided carriers that were purchased by major airlines around the world. This means that the conducts were tantamount to a direct sabotage and this was clearly in violation of the SCM Agreement and US suffered a clear prejudice (WTO, 2012) Some specific cases were excluded from the accusations brought forward by the United States. Cases relating to the transfer of interests to some aviation plants linked to Airbus in the European Union were not considered prejudiced. However, these said interest transfers are being challenged under European Union competition laws by Boeing. The claims that Airbus' actions were meant to displace Boeing in Brazil, Mexico and other developing countries were not taken by the panel. This is because they were so remote and did not really have a direct bearing that could cause prejudice in the situation at hand (WTO, 2012). Also, claims that there were unwritten contracts and other hidden arrangements by the EU Member states to finance Airbus were not taken by the panel. This is because these agreements wre not so official in nature and hence, could not be used to adjudicate the matter (WTO, 2012). Although the ruling of the EU case brought against the United States has not been finalized there have been some rulings on the issue. The World Trade Organization found that some defense budget and NASA grants were systems through which unfair subsidies could be processed and as such, the USA was ordered to pay $5.3 billion in illegal subsidies in 2011 (Freedman, 2011). The Appellate Body stated that under Article 7.8 of the SCM rules, the guilty parties were either to remove adverse effects or withdraw subsidy (WTO Ruling, 2012). Due to this the various reports indicated that each of the parties were to either pay back the subsidiaries or find a way of getting it reversed in their financial systems. According to Lester (2012), there were various claims and counter-claims that make it difficult to determine who is right and who is wrong in the case brought by the United States. Lester goes on to summarize the findings under two main headings based on the Panel and the Appeal Commission's rulings: Panel's Ruling It was identified that many export subsidies of the EU were not consistent with the SCM agreement's Articles 3.1 (a) and 3.2. Also, they stated that the EU failed to show evidence that the Washington State tax incentives were tied to export and as such, could not be considered non-compliant. It was identified that the Research and Development subsidies of the United States did not impede the European Union in other third countries' markets. Due to this, there was no significant loss of sales. This was different from the EU measures which were identified by the panel to be seriously prejudiced and aimed at excluding the US from operating in the markets. However, some Washington State tax subsidies and property rebates given by state and municipal authorities were given in serious prejudice to Airbus. Appellate Body Decision The appeal dealt with the existence, and specification of the claims in areas like subsidies. This also included cases where the prejudice and adverse effects of these subsidies were examined in a much more objective manners. In doing this Article 1 was explored and 'subsidy' was defined to include financial contributes and benefits that a competing firm gained. Most of the major findings were upheld and important claims that were made by both parties were upheld by the appeal body. In effect, both parties were given a final calculation of how much they were to pay in terms of illegally acquired subsidies and prejudice. Both parties have appealed against most of the findings and they are pursuing certain elements of the dispute (Lester, 2012). Conclusion The WTO is a major body that is involved in regulating and settling disputes relating to international trade amongst member states. In this paper, the dispute between Airbus and Boeing is a major situation that involves major taxpayers in two major economic regions of the world. The conflict brought by the US cited the EU for getting unfair subsidies. However, the EU raised counter issues that indicated that Boeing, the US manufacturer also benefits from illegal subsidies. In doing this, there as the need to define certain key elements of unfair prejudice and subsidies. Unfair prejudice means putting another nation in a position where they cannot compete in a given place. In other words, coming up with an action that excludes another company from a different WTO nation from competing in a region in the world. Subsidies include all financial contributions that benefits a firm. In this definition, Boeing's tax cuts were held to be subsidies. In the end, both parties were given a quota of money that they got through means that are against the WTO rules. These funds were to be either paid or written off through an acceptable means. Reference Appleton, Arthur and Plummer, Michael (2005) The World Trade Organization: Legal, Economic and Political Analysis London: Springer. BBC World Service (2005) Flare up in US-EU air trade row. [Online] Available at: http://news.bbc.co.uk/2/hi/business/4594581.stm Retrieved: November 4, 2012. Carbaugh, R. (2010) International Economics Mason, OH: Cengage Freedman, J. M. (2011) WTO Says US Gave at least $5.3 Billion in Illegal Aid to Boeing. [Online] Available at: http://www.bloomberg.com/news/2011-03-31/boeing-received-at-least-5-3-billion-of-illegal-government-aid-wto-rules.html Retrieved: November 4, 2012. Helpman, E. and Krugman, P. (1989) Trade Policy and Market Structures Boston: MIT Press. Ireland, D., Hoskisson, R. and Hitt, M. A. (2008) Understanding Business Strategy: Concepts and Laws. Mason, OH: Cengage Lester, S. (2012) “The Airbus-Boeing Subsidy Disputes: With Both Parties in Violation, is there an End in Sight?” American Society of International Law Journal. [Online] Available at: http://www.asil.org/insights120509.cfm Accessed: November 4, 2012. Spreen, W. E. (2007) Marketing in the International Aerospace Industry Surrey: Ashgate Publishing. World Trade Organization Legal Affairs (2007) World Trade Organization Archetype Index 2 Volume Set. Cambridge: Cambridge University Press. WTO Case Analysis (2012) Dispute Settlement Dispute DS316: European Communities: - Measures Affecting Trade in Large Civil Aircraft. [Online] Available at: http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm Accessed: November 4, 2012. WTO Ruling Summary (2012) EC and Certain Member States: Large Civil Aviation Case [Online] Available at: http://www.wto.org/english/tratop_e/dispu_e/cases_e/1pagesum_e/ds316sum_e.pdf Accessed: November 4, 2012. Read More