By Ken Pole | June 17, 2021 Estimated reading time 10 minutes, 17 seconds.
A ceasefire has been declared in the 17-year transatlantic aerospace trade war over alleged government support for Airbus and Boeing. The U.S. and the European Union announced June 15 that they would suspend retaliatory tariffs on billions of dollars in non-aviation goods and ensure that future research and development funding would not favor each other’s aviation industries.
Canada and several other countries, concerned about potential fallout for their aerospace sectors, took a strong official interest in the case as it worked through World Trade Organization dispute resolution machinery.
The decision to stand down was announced by the U.S. and European leaders coming out of a meeting in the aftermath of the G7 Leaders Summit in Cornwall, England.
U.S. President Joe Biden, Council President Ursula von der Leyen of Germany, and European Union President Charles Michel of Belgium clearly had a direct hand in protecting the long-term health of companies facing increased competition from the state-owned Commercial Aircraft Corporation of China.
COMAC is finalizing development of its C919, designed as a rival to the Airbus A320neo and the Boeing 737 Max, and it has partnered with Russia’s United Aircraft Corporation to develop a larger, wide-body platform — a development which has prompted Airbus chief executive officer Guillaume Faury to suggest that the current commercial aircraft “duopoly” could become a “triopoly” by 2030.
The retaliatory tariffs had been suspended in March but, as von der Leyen noted, “this meeting has started with a breakthrough on aircraft” and “really opens a new chapter in our relationship because we move from litigation to cooperation.”
Both Boeing and Airbus welcomed the truce. Airbus said in a brief statement that it would be “the basis to create a level-playing field” by sidelining “lose-lose tariffs that are only adding to the many challenges that our industry faces.”
U.S. Trade Representative Katherine Tai agreed. “For about 20 years, we have been at each other’s throat,” she said after talks with EU Trade Commissioner Valdis Dombrovskis, a former Latvian prime minister. “We have been too busy fighting each other.’’ Dombrovskis agreed that “we are strongest when we work with our friends and allies.”
The fight began when Boeing fired the first shots in 2004 when its chief executive officer, Harry Stonecipher, accused Airbus of abusing a 1992 agreement about government support for civil aircraft. That permitted up to a third of aircraft development to be eligible for government loans, which would be repaid with interest as well as royalties once a platform was commercially successful. However, governments’ low borrowing costs gave Airbus access to financing at below prevailing market rates.
Airbus countered that the “member state financing” or “launch aid” complied not only with the 1992 deal but also World Trade Organization (WTO) rules. It also said it had repaid more than called for in its loan agreements with the European governments, particularly France and Germany.
Airbus also said that U.S. military contracts with Boeing and support for various National Aeronautics and Space Administration research and development programs of interest to civil aviation were effectively subsidies. In addition, Boeing had received tax breaks and other support from state and local governments vying for investment in their jurisdictions.
After initial EU-U.S. attempts to resolve the escalating dispute failed in 2005, the U.S. filed a formal complaint with the WTO that the EU had illegally subsidized Airbus, prompting the EU to follow suit the next day with a complaint about U.S. support for Boeing.
As sundry reviews and decisions by the WTO rolled out, the disputed continued to simmer in subsequent years as the two original equipment manufacturers (OEMs) competed for global market share. It came to a boil when Airbus launched the A350 as a direct competitor to the Boeing 787 Dreamliner.
The situation became increasingly complicated when the WTO ruled in an interim report that European governments unfairly financed Airbus, only to issue a subsequent report that payments to Boeing were unfair due to indirect U.S. support through its military programs and NASA. Then the WTO appellate body partly overturned the interim report against Airbus, setting up both OEMs to claim victory in what would become the longest dispute in WTO history with companies and national governments continuing to squabble.
The dispute came back on the boil in early 2019 when the U.S. announced tariffs on $8.1 billion worth of Airbus and other EU-sourced goods such as wine — a $25-billion proposal the WTO whittled down to between $7.5 billion that fall. In February 2020, the U.S. upped the stakes by increasing tariffs on Airbus aircraft to 15 percent from 10 percent. Fearing retaliation in the key European market, asked Washington state, where it is a key employer, to suspend a preferential tax.
The tactic failed because last September, the WTO approved some $4.1 billion in retaliatory EU tariffs on a range of U.S. imports atop the previously proposed $8.1 billion, and the Europeans indicated they would act unless the U.S. backed down.
The U.S. responded with an offer to remove its countervailing action if Airbus agreed to refinance its European loans, a proposal the EU dismissed as “unacceptable” because it meant additional costs to Airbus as the global industry was struggling with the impact of the coronavirus pandemic.
In the dying days of President Donald Trump’s administration, which had tended to play hardball with its European allies, the WTO announced that the EU’s tariffs would still go into effect, but that pressure eased when it became evident that a Biden administration would be more conciliatory.
After the November presidential election, and before Biden could be sworn into office in January, the U.S. said at the end of December that it would widen the scope of its tariffs. That turned around in early March when both sides suspended their tariffs, setting up talks each hoped would end the dispute.
However, William Reinsch, a former U.S. trade official and now an analyst at the Center for Strategic and International Studies in Washington, said that while the truce adds “an element of certainty and sanity” to transatlantic trade, the two sides have “kind of kicked the can down the road,” because issues such as whether Airbus must repay the government subsidies it has received remain unresolved for now.
Reinsch, a lawyer who also spent 15 years spearheading National Foreign Trade Council efforts in favor of open markets, also cited the evolving Chinese presence in commercial aviation. Eventually, he says, Beijing will require domestic procurement and as their aircraft mature, “they’ll start flooding the global market.”
Richard Aboulafia, vice president of analysis at Teal Group, headquartered in Aleandria, Virginia, agreed that the truce would help the U.S. and Europe to present a united front to China, which he pointed out had delayed Boeing and Airbus deliveries during the pandemic while continuing to take COMAC deliveries.
“The Chinese want to close their market and go their own way, and the biggest export market on the planet for Airbus and Boeing just goes away,” Aboulafia said. Adding that the truce won’t stop China, it “at least . . . can prevent a scenario where China divides the West and plays the U.S. and its allies off against each other.”
