Global trading system at risk: the trade war between Airbus and Boeing

The granting of governmental subsidies1 that distort international trade and efforts to discipline such subsidies have proved to be two of the most intractable problems in the development of international trade law.2 In simplified terms, the intractability of the problem can be ascribed to two opposing views concerning the use of such subsidies. On the one hand, many countries view the use of economic aid to business to be an important aspect of assisting economic growth and development.
On the other hand, other countries consider that granting subsidies to business3 constitutes an unfair advantage. Their own domestic producers should not be required to compete against the treasuries of foreign governments. This second group, therefore, considers that there should be strong disciplines on the granting of subsidies, which have effects on international trade.
In addition, there should be effective remedies, including the countervailing duties that can be quickly invoked to offset any negative effects that might arise from another government's subsidies. In contrast, the first group generally has been opposed to further disciplines on the use of most types of subsidies, and instead holds the view that it is the remedy of the countervailing duty which has distorted trade and needs to be further controlled.
While the GATT has long provided a number of obligations4 related to subsidisation and concomitant remedies (most importantly the countervailing duty), these obligations were considered to be subject to a number of problems,5 not the least of which was their weak disciplines and legal uncertainty. Inevitably, these deficiencies led to an increasing number of conflicts. The WTO's Subsidies and Countervailing Measures Agreement now goes some way to finally bringing more rigorous discipline and clarity to the rules that govern this area.6
Getting government subsidies that distort international trade and efforts to discipline such subsidies is becoming a problem area in the development of international trade law.7 Such actions of the governments are leading to trade wars between states and multinational enterprises like Boeing and Airbus Industries.
Recently, there has been a tug of war between Airbus and Boeing - the leading airplane manufacturers. An existing dispute between these two giant plane makers has been resolved by a WTO appeal tribunal. These proceedings were initiated on the basis of a US complaint against the European Union. The most complex and voluminous case ever to have such a dispute has been decided by the apex dispute resolution body of the WTO ie: the appeals panel. The original ruling last year ran more than 1000 pages, and the appellate body's report is of more than 600 pages. The panel reached to the following interesting decisions regarding the dispute:8
--- The US plane maker Boeing lost market share to its European rival, Airbus, as a result of billions of dollars in low-cost government loans.
--- The appeal panel rejected claims by the United States that state financing for the Airbus A380 superjumbo jet was prohibited under global trade rules.
--- Loans extended to Airbus over the course of four decades had constituted unfair subsidies that caused Boeing to lose aircraft sales.
--- The loans - known as launch aid - that Airbus received from Germany, Spain and Britain for the twin-deck A380 jets were prohibited because governments had expected a significant export market for the planes when they granted the support.
--- Loans granted to Airbus were export subsidies and critical to the United States and Boeing, which have sought to circumvent European plans to finance Airbus's forthcoming wide body jet the A350-XWB, using the same type of financing mechanism.
--- Boeing had received at least $5.3 billion in improper US government subsidies to develop the 787 and other jet models, giving an unfair advantage over Airbus. That ruling has been appealed.
--- "Wiped the state clean" on the issue of whether lunch aid had constituted an export subsidy and suggested that the issue could now be re-litigated.
--- "Real fight" going forward would be over financing for the A350-XWB.
--- Without the government launch aid, Airbus would not have been able to develop any of the major aircraft models that it did.
--- The appeals panel also found-that in the absence of the subsidies, Airbus would today have a smaller share of the large civil aircraft market.
The appellate ruling did not find European launch aid loans for the A380 to be prohibited. But it did find many of them to be actionable,9 which will require European governments to propose some form of remedy in the coming months to offset the benefit of any outstanding subsidies.
The plea of the United States has been that all loans ruled as noncompliant by the WTO should be repaid or refinanced on ordinary commercial terms. The European Union has indicated to examine the issue and to determine the next steps in this dispute. However, it appears that presently there are no significant consequences for Airbus or the European support system from the said decision. WTO's findings are likely to require only limited changes in European policies and practices.
Airbus makes repayments of its loans as its planes are delivered to customers under the current terms of the government regulations. It is learnt that Airbus has so far delivered 43 of 244 orders for the A380. The vast majority of those sales have been to non-European customers.
How competition is forcing entities and governments to use escape clauses from the global trading regulations is visible from the dispute, and it indicates the future directions of the global trading system. We hope that sanity will prevail among the major trading partners and serious efforts will be made by industrialised countries to abide by the rules of the global trading system to avoid future conflicts.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates) 1. A grant, made by the government, to any enterprise whose promotion is considered to be in the public interest. They may take the form of research-and-development support, tax breaks, provision of raw material at below-market prices, or low-interest loans or low-interest export credits guaranteed by a government agency.
2. There has long been a distinction in international trade between subsidies which are made contingent on the export of the product (so-called "export subsidies") and those which are granted regardless of whether a product is exported or consumed domestically (so-called "domestic subsidies").
3. The W.T.O. defines two broad categories of subsidies: those that are "prohibited" and those that are "actionable" - that is, subject to legal challenge or to such countervailing measures as punitive tariffs. Prohibited subsidies are those that are specifically designed to promote exports or to encourage production using domestically made components.
4. These obligations comprised the whole of the original GATT 1947 Article XVI (or what is now paragraph A of Article XVI). Article XVI was subsequently amended in 1955 with the addition of what is now paragraph B to that Article. This 1955 addition related only to the use of export subsidies and divided such subsidies into those granted to "primary products" and those bestowed on all other "non-primary products". With respect to export subsidies on primary products, contracting parties were merely required to "seek to avoid" the granting of export subsidies on such primary products, and such subsidies were not to be applied so as to result in a contracting party having "more than an equitable share of the world export trade" in the relevant product.
5. The major limitation placed on the use of the countervailing duty was found in paragraph 6 of Article VI, which required that before a countervailing duty could be applied against any imported good, the effect of the subsidisation must have been such "as to cause or threaten material injury to an established industry, or is such as to retard materially the establishment of a domestic industry". In other words, before a countervailing duty could be imposed, the foreign subsidies must be having a negative effect on the relevant domestic industry of the importing country. While this could be a significant limitation on the use of the remedy, among other problems, Article VI provided little guidance on how much injury was required nor did it provide any significant indication as to how this injury was to be determined.
6. Under W.T.O rules, any prohibited subsidy must be withdrawn within 90 days of the adoption, by all 153 member states, of a dispute panel's finding.
7. Actionable subsidies, meanwhile, are not prohibited per se, but they can be challenged if the complaining country shows that the subsidy caused material injury - a loss of jobs, profit or production capacity - or "adverse effects" to its industry, like a loss of export market share or sales.
8. WT/DS316/AB/R.
9. Under Article 19, when a panel or the appellate body has determined that a measure is inconsistent with a covered agreement, it may recommend that the member concerned bring the measure into conformity with the relevant obligation.