The Application of the European Community State Aid Rules - Essay Example

The Boeing–Airbus Dispute: A Case for the Application of the European Community Aid Rules" Introduction Industrial policy is being perused by many governments around the world with a sole aim to ensure and to attain both investment and trade benefits which is a crucial factor today in many segments of international economy. U.S has funded its defence purchase programs that augment R&D of aircrafts and Europe has subsidised its Airbus industry through launch aid programs. Further, Korea has invested in the steel export division while Japan has funded for the investments in supercomputers. In each of the above mentioned cases, the employment of an industrial policy choice has an impact on the international economy. In each of the above said cases, the fortification of one sector in one nation may have negative impacts in other nations, thereby resulting in transformation in the style of employment, possibly with a social impact which may be unfavorable to some citizens in the impacted nations. Both Boeing and Airbus are occupying more than fifty percent of the giant civil aircraft market globally. The main dispute originates from the fact that in the year 2003, Airbus (jointly owned by BAE Systems of UK and by EADS of Germany, France and Spain) which excelled the Boeing as the globe’s largest manufacturer of commercial aircrafts with Boeing of U.S.A witnessing a deterioration in its market share to 48% in 2005 from that of 73% in 1993. It was contended by U.S.A that each time when Airbus introduces a new aircraft, a number of European nations are extending financial aid as much as thirty-three percent of its developmental costs. It contended further that without these governments financial assistance, Airbus would have never been able to introduce the range of aircraft it presently has on the market which destabilises the competitiveness of Boeing’s new models. On October 6, 2004, U.S approached the WTO DSM panel for a consultation with the government of Spain, U.K, France and Germany and with EC (European Communities) regarding initiatives impacting trade in giant civil airlines. The main allegations against EC by USA are as follows: Offer of subsidies to Airbus is in contradictory with their commitments under the SCM agreement and GATT 1994. The offer of finance for development and design to Airbus company which is also known as “launch aid” The offer of grants and government-offered products and services to enlarge, expand and improve Airbus manufacturing locations for the development and manufacture of the Airbus A380. The offer of loans on favored terms. The hypothesis and forfeiture of loan resulting from launch aid and other giant civil aircraft manufacturing and development finance. The offer of equity grants and infusion.1 U.S.A also contends that some launch aid offered for A380 AND A340 seem to be unlawful export subsidies in violations of some provisions of Article 3 of the SCM Agreement. Further, the subsidy to the Airbus has caused adverse impacts to U.S in a style contrary to the stipulations of Articles five and six of the SCM Agreement. U.S also contended that the EC initiatives were in contravention of Article XXIII: 1. on the request of U.S, a panel was established by the WTO DSB on 13 June 2005 to look into the grant of subsidies by EU to nourish its aircraft industry at the detriment of the U.S aircraft industry2. \ This never ending tussle between Airbus and Boeing casts doubt upon these companies’ talent to compete in the global market without liberal government financial assistance. This is an interesting international trade law issue which the other members of the WTO keep a careful glimpse on this issue which involves not only large sum of money but also a greater number of jobs. Facts Airbus on December 2000 declared that it had officially initiated an agenda to establish the globe’s major commercial commuter airplane namely A380. However, during the spring 200l, Boeing canceled its program for construction of a new giant aircraft and wanted to focus on the development high speed commercial aircraft. The initiation by the Airbus probably re-engineered a prolonged trade dispute existed between Europe and USA about the offering financial aid for airplane developments that vie unswervingly with non-aided U.S. products like Boeing 747 series aircraft. Between Airbus and Boeing, there has been a long history of brawl over the magnitude of government support from which both companies derive advantages. Earlier, in 1993, both USA and EU executed an agreement thereby placing an overall maximum ceiling for direct government financial aid of thirty –three percent of aggregate of development costs. The US government, in 2004, withdrew from this agreement and requested for the framing of a WTO panel on the subject3. According to U.S trade policy makers, the fundamental hypothesis of the tussle between the America and EU rests upon the dispute that Airbus was able to compete in the market for its larger aircraft mainly due to the receipt of subsidy from governments of UK, Germany, France and Spain. They contended that subsidies to Airbus existed in the guise of debt forgiveness, equity infusion, marketing assistance, debt rollovers etc. However, the U.S. contentions were not accepted either by EU or Airbus4. \ $3.1 b was previously recognised as straight loans which were offered by the 7 of the 9 EU member state regimes for the improvement of A380 out of the total estimated cost of $ 12 billion for A380 project. According to U.S.A , the quantum of government grant required for A380 mission could infringe Member Nations observance to their multilateral and bilateral commitments , together with the” WTO Accord on Financial Grants and Counterbalancing Initiatives (SCM).” Thus, U.S. has in fact compelled the Airbus supporting nations to make sure that the stipulations and clauses of their backing to A380 are coherent with profitable rates and terms and with their global commitments5. On the other hand, EU alleged that U.S had indeed subsidised the Boeing and offered tax breaks which amounted to US$3.2 billion in the last two decades which amounted subsidies in infringement of GATT and SCM provisions. EU further alleged that the financial help offered by the Department of Commerce, NASA (National Aeronautics and Space Administration) and other Stage agencies, which planned to usher technological development and military security, was really amounted to financial aid that permitted the Boeing to lower the price of its airplanes without sacrificing its profits and facilitated to enhance its market share while impeding or displacing exports by its competitors particularly Airbus.6 Retorting immediately the US action, EU declared the launch of financial aid support for Airbus. Launch aid is nothing but an up-front investment in Airbus project, which will be paid back to governments in the guise of a levy on the sale of each aircraft sold by it. Legal Background It is to be observed that over the past three decades, UK government has financed more than £ 1.2 billion to Airbus and it received back around £ 1.3 billion as tax revenues. WTO is now adjudicating on two simultaneous cases. It was contended by US that extension of financial aid to Airbus violated the WTO regulations on permissible subsidies since loans are extended below the standard commercial rates of interest and these loans are repayable on the quantum of sales7. In retort to US move, EU has initiated a case against the US which alleged the so called extension of subsidized bond payments and tax breaks by some US states. For instance, the Washington State had extended a $3.2 billion tax sob to the Boeing for its 787 Dream liner, which is expected to run till 2024 mainly to hamper the Boeing to shift to overseas nations for its final assembly work8. After US withdrawal from the 1992 bilateral agreement, both EU and U.S have been locked in legal disputes. Analysis In 1992 , both EU and US entered an agreement which is famously known as “ launch aid” which restricted the EU launch aid to thirty-three percent of the development cost of new Airbus replicas and restricting U.S. defence contracts to just four percent of Boeing’s civil aircraft turnover. Launch aid is a program where there will be either no or low –interest financing was made to Airbus by EU governments and Airbus is required to repay the loan only if the model of aircraft was successful. If the model was a failure, the launch aid will be forfeited. U.S and Boeing have argued that such launch aid was unfair as it shifted the commercial risks to European taxpayers from Airbus. One of the main aims of the 1992 agreement was to minimise launch aid given to Airbus. U.S viewed the launch aid as a beginning towards ultimate abolition of subsidies. However, EU considered the agreement as authenticating launch aid within certain limits9. Again during October 2004, there again arose a major trade brawl between the EU and U.S.A. The dispute soared to unprecedented level on May 31, 2005 when both EU and U.S. filed litigation against each other on the same day for the grant of illegal subsidies at WTO panel. The Airbus-Boeing rivalry is well-known one in the industry and of the latest exchange of rages is unlikely to be its last episode. In this never ending rivalry, both Boeing and Airbus have competed on the following; a) technology b) size c) political muscle d) marketing. Technology Both Airbus and Boeing are compelled to transform ahead with risky know-how. In 1990s’ , Airbus persistently chased Boeing, shifting from just twenty percent market share to snatch away the aircraft orders from Boeing in 2001. In the year 2001, Airbus took initiatives to develop the 555-seat A380 to strike over the Boeing’s last bastion, the giant aircraft sector as the Boeing was virtually enjoyed a monopoly over its 415-seat 747 since the late 1960s. However, its effort to retain its monopoly was flopped as Boeing made ferocious efforts to advance its thirty-five year old 747 technology to match the A380 technology as it had committed a chain of technological errors. However, Boeing had succeeded in designing the new midsize long-haul 787 which is made of plastics completely. Boeing Dreamliner was considered to be a success story as it has given about twenty percent fuel efficiency and about thirty percent reduction in maintenance costs. Boeing’s Dreamliner was considered to be fastest selling aircraft between the period 2004 and 2007 as it was able to get more than 700 orders. However, sales numbers of Airbus started to decline from 2006 onwards as delay in the delivery of A380 had upset many customers and made them to switch over to Boeing10. The governments that supported Airbus claimed that it is an “infant industry” which deserved support in a high-risk industry. However, U.S.A has categorised that Airbus is the” poster child for the EU” and is being nourished through its “strategic-trade policy.” As a counter measure, both Airbus and EU have argued that Boeing enjoyed lucrative U.S. defence contracts which amounted to subsidy as well11. Just before the launch of the 787, in 2004, Boeing had complained that launch aid facilitated Airbus to introduce new aircrafts in one decade while the Boeing introduced just only one 777 in the 1990s. Immediately, after Airbus jeopardised Boeing with its A380, which was financed in part by $3.7 billion launch aid, Boeing retaliated with its 787 in 2004. However, Airbus in retaliation immediately introduced the A350 to confront the 787 and requested for$ 1.7 billion launch aid. By citing the Airbus’s competency to confront the 787 to generous launch aid, the U.S.A unilaterally put an end to the 1992 agreement with EU in 2004. Both EU and U.S.A. approached the dispute settlement mechanism of WTO in 2005. U.S.A emphasised that launch aid should be curtailed immediately and did not want to entertain any discussion on a much larger subsidy program for Boeing. EU contended that since 1992, Boeing derived advantages by way of “unprecedented gifts “ from Washington State worth about $7 billion and fabulous defense grants worth over $ 20 billion. In retort, U.S.A pointed out that BAE and EADS Systems are the number one defense contractors in UK and Europe respectively and that the allegation that Boeing “unlawfully” derived advantages from defense work was not relevant. Boeing / Airbus tussle is a complex one and WTO even today could not be able to figure out how to resolve this obstinate case or technically as in this two cases whose defendants and plaintiff often switch. Given the intricacy of the litigation and its potential economic and political ramifications, it is anticipated to be one of the most renowned legal disputes in WTO annals. WTO may introduce effective sanctions on the erring parties and whatever the verdict may be, its outcome will center on its execution, or, failing that, the succeeding corrective measures’ efficacy in barring these nations from prolonging to employ these unfair trade practices. It is to be recalled that trade subsidies applied by both EU and USA have already been ruled against in a variety of major sectors like cotton, sugar, steel and others. However, the employment of retaliatory initiatives would not seem to be reasonable in the cases of Airbus and Boeing since the sum associated would be so large that they would be possible to activate a trade war of unprecedented proportions which all parties to dispute would be eager to avoid. Thus, this litigation poses a peculiar confront to the credibility and the effectiveness of the Dispute Settlement Body of WTO12. The issue being a complex one, resolution of the issue is expected to take a long time. Though UK wants a negotiated solution to the issue, this would rely on the US coming up with an acceptable offer that would facilitate both sides to compete reasonably13. As the issue is of more complicated and intricate in nature and it involves essential and technical complexities which include the method of establishing data concerning grave prejudice under Annex V of the SCM Agreement , the parties to the dispute agreed to cancel the original schedule for the confront until an indefinite date in the near future. The Chairman of the DSB informed on 3 December 2009, inter alia, the succeeding and bureaucratic intricacies and having considered the volume of materials associated in this business tussle, the verdict is anticipated to be given during the end of April, 2010. Conclusion Both U.S and EU should be aware that they could both be a loser in this brawl. The WTO DSM panel may forward its verdict that subsidies have to be refunded. In such a scenario, there will not be a clear champion, given the great amounts of subsidies received by both sides. Thus, underneath the contour is that neither side can make a victory in this brawl. Further, there arises a question whether the subsidy would be withdrawn or reduced following a WTO ruling. If one goes through the past WTO ruling history, the antecedence in the annals of civil aviation industry does increase uncertainties. In the earlier WTO dispute between Brazil and Canada about subsidies for the manufacturers of regional jet aircraft, Embraer and Bombardier, both the nations had their litigations upheld. As a result, little has transformed in the quantum of subsidies that were administered. It should be remembered by both sides that the brawl costs much and to tie down resources of the management which the both parties would most likely prefer to limelight on projects for the future. If at all, an acceptable solution is to be found out, then only, both sides could be able to save their faces. It is suggested that it is worthwhile to start a new conciliation with a fresh initiative. This demands that all past slaughters pointed against each other should be set aside. Thus, each side should give a top priority to solve their future issues by keeping aside their past misunderstandings. References Peng, Mike W, Global Business. (Cengage Learning, New York 2008)304 Smith, Elton V, Perspectives On International Trade. (NOVA Publishers, New York 2002) 48 UK: Trade and Industry Committee, Recent Developments with Airbus. (The Stationary Office, London 2008) 22 United Nations: Economic Commission for Latin America and Caribbean, Latin America and the Caribbean in the World Economy: 2004-2005 (United Nations Publications, New York 2006) 141 WTO, ‘ DS316 ‘ 2010 accessed on 17 April 2010. Read More