Europe Should Honor Its WTO Commitments in Airbus Launch Aid Decision

Stephen Ezell September 8, 2020
September 8, 2020

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The 16-year long dispute between the United States and European Union (EU) over the latter’s excessive launch aid, or production subsidies, for EU aircraft manufacturer Airbus came a step closer to resolution in October 2019 after a World Trade Organization (WTO) compliance panel ruled that the United States could impose annual tariffs of up to $7.5 billion as a countermeasure to Europe’s launch aid, which has harmed the U.S. aerospace industry by inducing significant lost sales of Boeing civil aircraft. Yet, almost a year later, the European Union continues to drag its heels and has failed to come into full compliance with the WTO ruling; this despite the fact that the European Union has championed itself as a paragon of multilateralism and the rule of law, while presenting itself as the WTO’s leading cheerleader.

The dispute has wended its way through WTO halls since 2004, with the European Union losing at virtually every turn, as four WTO panel and appellate reports, rendering decisions from 2011 to 2018, consistently found that the EU’s launch subsidies violated WTO rules. For instance, in May 2011, a WTO appellate body confirmed that the EU and four of its member states (Germany, France, Spain, and the United Kingdom) had extended more than $18 billion in WTO-inconsistent subsidized financing to Airbus, which cost Boeing sales of more than 300 aircraft, significantly eroding its global market share. Airbus has benefitted from European launch aid for many of its aircraft-development programs, including the Airbus A380, A350 WXB, and A321.

Yet, despite the fact the WTO has consistently ruled against Europe’s launch aid practices, the European Union has continued to use the practice on subsequent generations of aircraft. After a May 2018 WTO compliance report confirmed again that the EU provided additional billions of dollars in subsidized financing to Airbus (and that by then Europe’s WTO-inconsistent launch aid subsidies had exceeded $22 billion), the United States filed for remedies and in October 2019 won the $7.5 billion arbitration award, the largest in WTO history (meaning that, until such time as the injurious action is fully abated, the WTO has authorized the United States to respond by imposing up to $7.5 billion in tariffs annually on European exports to the United States).

The “launch aid” that the EU and its member states have provided has allowed Airbus to secure financing on better-than-commercially-available terms (i.e., at financing rates better than readily available in commercial markets). Moreover, repayment terms on the loans are often tied to aircraft delivery targets, meaning repayment doesn’t begin until a number of years after a product’s launch. Further, the loans have included terms dictating that if a product failed to hit pre-determined sales targets, remaining loans on the product would be forgiven. In effect, Europe’s launch aid represents a “creation subsidy,” meaning it facilitates the creation of competing products, which likely would not have occurred without the subsidization, and it thus distorts competition that would otherwise take place on market-based terms.

Throughout this saga, Europe has countered at the WTO that U.S. (including U.S. state) subsidies to Boeing were comparable to EU launch aid for Airbus. But the differences are orders of magnitude apart. In its WTO case against the United States, Airbus challenged over 24 different federal and state programs: The WTO flatly rejected 23 of the EU’s challenges. The WTO did rule in one specific case that a Washington state business and occupancy (B&O) tax subsidy ran afoul of WTO rules, potentially advantaging Boeing to the tune of $325 million (a small fraction of the $22 billion in launch aid Airbus has enjoyed). Moreover, in March 2020, Washington state repealed the business and occupancy tax in question, bringing the United States into complete compliance with WTO rulings on the matter.

Despite this, the European Union is awaiting a WTO ruling, expected this fall, regarding its potential ability to impose tariffs stemming from the B&O subsidy as a response to U.S. tariffs. At the same time, Airbus has asserted that its July 2020 move to amend its A350 Repayable Launch Investment contract with the French and Spanish governments has brought its financing contracts in line with the WTO rulings (although this step was taken unilaterally and not in consultation with the U.S. government). And while this represents a small step in the right direction, Airbus continues to benefit from billions of dollars’ worth of launch aid on its books. United States Trade Representative Robert Lighthizer has rightly noted that, in total, “The EU and member states have not taken the actions necessary to come into compliance with WTO decisions.”

It’s time for the European Union and its member states to come into full compliance with the WTO’s ruling that Europe must fully abandon its practice of assisting Airbus with financing on better than commercially available terms. This is especially important because as China endeavors to become an ever-more significant player in the global civil aircraft industry—China’s state-owned Commercial Aircraft Corporation of China (COMAC) and China Aviation Industry Corporation (AVIC) have already themselves benefitted from many billions of dollars’ worth Chinese government subsidies—the country is going to use every tool at its disposal, including a wide variety of innovation mercantilist ones, to develop its aircraft industry. That makes it imperative for nations that genuinely believe in the tenets of rules-governed, market-based, private-enterprise-led trade to ensure they’re not embracing market-distorting practices that disadvantage enterprises competing in accordance with the rules of the global trading system. (At the same time, both the United States and the EU should bring a joint WTO case against China for its aviation subsidies.)

What makes the European Union’s recalcitrance in the face of repeated WTO rulings against it in this case so galling is that European policymakers have in recent years lashed out against U.S. trade policy for bypassing the WTO. In Davos, in January 2018, German Chancellor Angela Merkel warned U.S. President Donald Trump about the dangers of mercantilism. Others in Europe have contended that the Trump administration is out to kill the WTO system. Former EU Trade Commissioner Phil Hogan has stated that, “The European Union remains a staunch supporter of the multilateral trading system and firmly believes that a WTO with an effective dispute settlement system is indispensable for ensuring open and fair trade.” Amen. Except when it comes to decisions it doesn’t like. Despite extolling the virtues of the WTO, the European Union’s refusal to abide by the institution’s rulings here shows what the EU really thinks about the WTO and the rules-based trading system.

Having been authorized by the WTO to impose up to $7.5 billion of tariffs annually on EU exports to the United States, America has imposed 15 percent tariffs on Airbus aircraft and tariffs of up to 25 percent on a variety of other European goods, including consumer non-durable products ranging from French cheeses and German jams to Spanish wine to British scotch and liquors. In other words, the European Union’s unwillingness to come into full compliance on Airbus subsidies means it’s only harming a wide variety of its own industries and employees across the continent, only inflicting on them additional unnecessary harm and suffering in the face of the global coronavirus pandemic. It’s also important to note that even if the EU finally complies with the ruling, it will have benefited from years of massive subsidies that harmed the U.S. economy. The ruling does not require Airbus or the EU to pay Boeing or the United States compensation for the economic damage it inflicted. All it does is to say stop doing any more.

In mid-August, the Trump administration made some modest modifications to the $7.5 billion product-tariff list (removing from the list certain Greek and UK products and adding an equivalent amount of tariffs for products from France and Germany), but it took a light touch calculated not to significantly ratchet up tensions, as even former EU Trade Commission Phil Hogan acknowledged. As such, the United States has left the door open for a true and final resolution of this ongoing dispute. For the interests of ensuring that international trade in advanced-technology industries unfolds on genuinely market-based terms, for the international trading system and respect for its institutions, and for the interests of a wide variety of European producers (and U.S. consumers), it’s time for Europe to fully walk through it.