Sunday, December 11, 2011

Airbus dispute set to take off again

The large aircrafts subsidy issue never ceases to die! The Airbus-Boeing duel manifested in the trade disputes between the United States and European Union since 2004 is back in the news. Both Airbus and Boeing are manufacturers of large commercial aircrafts having an almost equal market share in this sector.

The genesis of the dispute at the WTO is when the United States challenged certain subsidies and launch aid given by EU and EU member countries to Airbus as being in contravention of EU's commitments under the GATT and SCM Agreement. The dispute itself was a long winding one beginning in 2004 and finally ending in an Appellate Body decision at the WTO in 2011. The Appellate Body in its Report found,

" Summary of key findings

The Appellate Body today upheld the Panel's finding that certain subsidies provided by the European Union and certain Member state governments to Airbus are incompatible with Article 5(c) of the SCM Agreement because they have caused serious prejudice to the interests of the United States.  The principal subsidies covered by the ruling include financing arrangements (known as “Launch Aid” or “Member state financing”) provided by France, Germany, Spain, and the UK for the development of the A300, A310, A320, A330/A340, A330-200, A340-500/600, and A380 LCA projects.  The ruling also covers certain equity infusions provided by the French and German governments to companies that formed part of the Airbus consortium.  Additionally, it covers certain infrastructure measures provided to Airbus, namely, the lease of land at the Mühlenberger Loch industrial site in Hamburg, the right to exclusive use of an extended runway at Bremen airport, regional grants by the German authorities in Nordenham, and Spanish government grants and regional grants by Andalucia and Castilla-La Mancha in Sevilla, La Rinconada, Toledo, Puerto Santa Maria, and Puerto Real.  The Appellate Body  found that the effect of the subsidies was to displace exports of Boeing single-aisle and twin-aisle LCA from the European Union, Chinese, and Korean markets and Boeing single-aisle LCA from the Australian market.  Moreover, the Appellate Body confirmed the Panel's determination that the subsidies caused Boeing to lose sales of LCA in the campaigns involving the A320 (Air Asia, Air Berlin, Czech Airlines, and easyJet), A340 (Iberia, South African Airways, and Thai Airways International), and A380 (Emirates, Qantas, and Singapore Airlines) aircraft.

However, for different reasons, the Appellate Body excluded certain measures from the scope of the finding of serious prejudice.  In particular, the finding under Article 5(c) of the SCM Agreement no longer includes the 1998 transfer of a 45.76% interest in Dassault Aviation to Aérospatiale; the special purpose facilities at the Mühlenberger Loch industrial site in Hamburg, Aéroconstellation industrial site and associated facilities (taxiways, parking, etc.) in Toulouse, or the various research and technology development (R&TD) measures that had been challenged by the United States (Spanish PROFIT Programme, grants under Second, Third, Fourth, Fifth, and Sixth EC Framework Programmes; 1986-1993 R&TD grants by French government;Luftfahrtforschungsprogramm I, II, and III German grants; grants by Bavarian, Bremen, and Hamburg authorities; civil aircraft research and development and aeronautics research programmes by the UK government).  The Appellate Body also reversed the Panel's findings of displacement in Brazil, Mexico, Singapore, and Chinese Taipei, and of threat of displacement in India.

Moreover, the Appellate Body disagreed with the Panel’s views on when subsidies can be considered as being de facto contingent upon anticipated export performance.  Consequently, the Appellate Body reversed the Panel's findings that the financing provided by Germany, Spain and the UK to develop the A380 was contingent upon anticipated exportation and thus a prohibited export subsidy under Article 3.1(a) and footnote 4 of theSCM Agreement.  The Appellate Body also rejected the United States’ cross-appeal of the Panel finding that it had not been established that certain other member State financing contracts constituted prohibited export subsidies.  As a consequence, the Appellate Body reversed the Panel's recommendation that the European Union withdraw prohibited subsidies within 90 days.  The Appellate Body also found that the United States' claims regarding an alleged unwritten launch aid/member State financing programme were outside its jurisdiction.  In addition, the Appellate Body reversed the Panel’s findings regarding the rate of return that a market lender would have demanded for launch aid/member State financing loans because they were not based on an objective assessment; but found that a benefit was conferred even on the basis of the European Union's calculations.  Finally, with respect to the actionable subsidies that have been found to cause adverse effects to the interests of the United States, the Panel's recommendation that the European Union “take appropriate steps to remove the adverse effects or … withdraw the subsidy”

The EU in December 2011 claimed to have complied with the WTO Report. However, the US Trade Representative Office seemed to disagree,

Today, U.S. Trade Representative Ron Kirk announced that the United States is requesting that the European Union (EU) enter into consultations regarding the notification it made on December 1, 2011, claiming to have fully complied with the World Trade Organization (WTO) ruling that subsidization of Airbus aircraft is contrary to WTO rules. The United States has reviewed carefully the limited information in that notification. It appears to show that the EU has not withdrawn the subsidies in question and has, in fact, granted new subsidies to Airbus’ development and production of large civil aircraft.
The United States is also requesting authorization from the WTO Dispute Settlement Body (DSB) in Geneva to impose countermeasures annually in response to the EU’s claim that it fully complied with the ruling in this case. The amount of the countermeasures would vary annually, but in a recent period would have been in the range of $7-10 billion. This step will preserve U.S. rights, but any actual imposition of countermeasures would not occur until after further WTO proceedings.
“The WTO clearly found that every single grant of launch aid to Airbus, for every single aircraft that company produced, was a WTO-inconsistent subsidy that caused unfair adverse effects to U.S. industry and jobs,” said Ambassador Kirk. “Our action today underscores what we have said all along – that the United States cannot accept anything less than an end to this subsidized financing. The United States remains prepared to engage in any meaningful efforts, through formal consultations and otherwise, that will lead to the goal of ending subsidized financing at the earliest possible date.”

The US has threatened sanctions against the European Union for failing to eliminate the subsidies. Airbus has hit back with a claim that it has complied with the order. The dispute promises to linger on.

The dispute itself raises interesting questions of limits of domestic policy vis a vis WTO rules. What kind of subsidies can a member country provide to its local manufacturers? When would it be considered in violation of the WTO? What restrictions does the SCM Agreement impose on the subsidy domain of member countries ? Another interesting issue is that the interests of two large corporations is the centre of focus in this dispute. Another instance of "privatisation of international law" ?

As Airbus and Boeing battle it out in the WTO, China seems to be catching up. This report in the Bloomberg Business Week notes the rise of the Chinese competitor to Airbus and Boeing. The state-owned Commercial Aircraft Corporation of China (Comac) can end up as the competitor to Airbus and Boeing. It would be interesting to analyse the subsidies that it receives from the Chinese Government. Would it be inconsistent with WTO provisions? A classic ground for a dispute in 2020 in the WTO- EU/US against China on subsidies to Comac? Plausible!

No comments: