June 12, 2005

Intelligence Brief: Airbus vs. Boeing -- PINR

On May 31, Washington filed a case with the World Trade Organization (W.T.O.) against the European Union's commitment to provide $1.7 billion in "launch aid" to Airbus S.A.S. for its A380 commercial jumbo jet, handing the W.T.O. the most politically sensitive dispute that it has yet had to confront.

From Washington's perspective, the launch aid, which comes in the form of low-interest loans that do not have to be repaid unless the aircraft is profitable, violates W.T.O. agreements banning subsidies. Brussels fired back that U.S. aircraft manufacturer Boeing has received $7 billion in government subsidies in the form of defense and space contracts, infrastructure improvements, tax breaks and the launch aid that Tokyo has given Boeing's Japanese subcontractors for Boeing's 787 Dreamliner, which is poised to compete head-to-head with the A380.

The Washington-Brussels conflict is the familiar fare of trade disagreements, with each side accusing its opponent of breaking the rules. Its significance lies in three directions. Most obviously, the outcome of competition between the two rivals making up the duopoly of manufacturers of large commercial aircraft will impact the economies of the political adversaries in terms of employment, capital procurement, trade balances and technological development, which will have a spillover effect into the military sector.

More generally, the dispute is a test of whether the W.T.O. can successfully manage a conflict between two great power centers concerning an industry that both parties consider to be strategic. Most importantly, for the long-term view, the dispute indicates a fundamental tendency in world politics and global trade for globalization to reach its limits in the harsh realities of multipolar power politics.

The Airbus-Boeing Dispute

The root of the conflict between Washington and Brussels over aircraft subsidies is a major shift in the balance of competitive power in the industry. Once the dominant supplier of large commercial aircraft to the world, Boeing had been losing ground to Airbus for the past three decades, but the tipping point came in 2003 when Airbus for the first time sold more planes than Boeing, a trend that continued in 2004. Boeing's loss of competitive advantage and market share spurred lobbying efforts by the company to have Washington resort to the W.T.O. on its behalf.

Boeing's efforts to gain political support bore fruit in October 2004 when Washington announced plans to file a case over E.U. launch aid and Brussels retaliated with a counter-suit detailing its list of U.S. violations of aid limits. The two sides then settled down to bilateral negotiations in order to avoid an escalation of the conflict to the level of the W.T.O., an eventuality that both sides believed would be contrary to their respective interests in progress on the Doha round of general tariff reductions, cooperation on preserving and strengthening intellectual property rights and a common policy on Chinese exports, particularly textiles.

In January 2005, the talks appeared to be making progress when the two sides agreed that they would suspend aid to the aircraft companies and would not activate a W.T.O. panel until April 11. In the interim, the discussions stalled and finally ended in March, with Washington accusing Brussels of failing to negotiate in good faith and of retreating from a preliminary agreement. Brussels responded that Boeing's pressure on Washington had made the latter inflexible and unprepared to entertain a compromise in which launch aid would be scaled back.

Washington's May 31 move to avail itself of a W.T.O. panel is a sign of its weakness in the dispute. A high-profile public conflict in the W.T.O. is likely to strain U.S.-E.U. relations and make cooperation between the two powers more difficult whatever the outcome of the case. Brussels is the more confident player at the moment, with E.U. Trade Commissioner Peter Mandelson arguing that further negotiations would not be useful and U.S. Trade Representative Rob Portman calling for a restart of bilateral talks even while the cases proceed.

Mandelson's hard line was based on Washington's rejection of a final offer by Brussels to reduce launch aid for the A350 to up to 30 percent of the jumbo jet's start-up cost if Washington would agree to equivalent reductions in aid to the Dreamliner. Both opponents had reached their respective limits, constrained from further compromise by powerful domestic business and labor interests. A prime example of the aggressiveness of those interests is the effort in the U.S. Congress spurred by legislators with links to Boeing to bar Airbus from bidding on Pentagon contracts for aerial refueling tankers.

In an attempt to contain the conflict, Mandelson and Portman issued a joint statement in which they pledged to "remain united in our determination that this dispute shall not affect our cooperation on wider bilateral and multilateral trade issues." It is far from clear that Washington and Brussels will be able to make good on their pledge, especially if a W.T.O. panel disadvantages one of the sides severely.

The Bottom Line

Washington's decision to escalate the conflict with Brussels over subsidies to aircraft manufacturers not only indicates the seriousness with which both parties take competition for sales of the next generation of large commercial jets; it also shows that domestic interests in major power centers are increasingly able to inhibit the compromises necessary for continued movement towards less protected markets.

The same kind of protectionist forces that were behind the votes against the European Constitution in France and the Netherlands, and are resisting the ratification of the Central American Free Trade Agreement in the U.S. Senate, are at work in the Airbus-Boeing dispute.

Report Drafted By:
Dr. Michael A. Weinstein

The Power and Interest News Report (PINR) is an independent organization that utilizes open source intelligence to provide conflict analysis services in the context of international relations. PINR approaches a subject based upon the powers and interests involved, leaving the moral judgments to the reader. This report may not be reproduced, reprinted or broadcast without the written permission of inquiries@pinr.com. All comments should be directed to content@pinr.com.