European Subsidies Brochure Final

8/8/2019 European Subsidies Brochure Final

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A Study of Unfair Trade Practices

EUROPEAN AIRCRAFT

SUBSIDIES

Loren Thompson


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The global market or commercial transports-- airliners -- is expected to generate over $3

trillion in sales during the next two decades. The United States historically has been theleading supplier to that market. Its solesurviving producer o commercial transports,the Boeing Company, today remains one o thenations biggest exporters. But Boeings rolein the commercial aviation business is beingeroded by Airbus, a company that Europeangovernments established 40 years ago with thegoal o winning a sizable share o the airlinermarket.

That goal has been achieved. Since 2000,Europe has become the dominant supplier oairliners to the global market. However, theremarkable rise o Airbus has been achievedlargely through the use o subsidies romEuropean governments -- some o which theWorld Trade Organization has now ruled areillegal. The cumulative value o these subsi-dies over the 40 years that Airbus has existedapproaches $200 billion in todays dollars. Thesubsidies have enabled Airbus to develop a

feet o transports that can compete aggres-sively in every market niche, without havingto assume the risks that a commercial companylike Boeing must carry. This report is about how European govern-ments implemented a multi-decade campaignto undermine Americas role in the globalaviation market. It begins by explaining thelogic o ree trade, and why commercial air-crat exports are important to Americas uture

place in the world economy. It then describeshow European governments ashioned a rame- work o subsidies or gradually dominating

the airliner market by providing Airbus withbenets not available to its competitors -- most

notably through the use o low-cost (or no-cost) loans to und the launch o new planes. The report goes on to detail complaints bythe U.S. government that led the World TradeOrganization to rule launch aid is unacceptable,and it dissects the largely erroneous claims oEuropean governments that Boeing tooreceives unair assistance. The report concludes that Washington mustact to end Europes use o illegal aircrat sub-

sidies. I it ails to do so, America will lose itsability to compete in the commercial trans-port sector in much the same way that it hasalready retreated in steel, autos, and electron-ics. At its inception, Airbus seemed a remotethreat to Americas dominance o the globalairliner market, and as recently as 20 years agoit claimed only 15% o that market. But today itreceives most o the orders or new planes, andas a result tens o thousands o U.S. jobs havebeen lost -- along with hundreds o billions odollars in export earnings. Had this occurred

as a result o normal market orces, then poli-cymakers would have to accept the verdict othe marketplace. But because it resulted romthe deliberate use o improper subsidies, it is acase study in unair trade practices that mustbe remedied.

INTRODUCTION: EUROPEAN AIRCRAFT SUBSIDIES HAVE HARMED AMERICA


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U.S. Balance of Trade: 1992-2009

+200

+100

0

-100

-200

-300

-400

-500

-600

-700

-800

-900

Source: U.S. Census Bureau, Foreign Trade Division, seasonally adjusted data.

*Data or December 2009 assumed to be average o prior 3 months.

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

Services

Goods

The United States trade decit has risen to unprecedented levels since the Cold War ended, weakening thedollar and raising doubts about its uture as a global reserve currency. The imbalance is caused partly by

policies o oreign governments that interere with the unctioning o market orces, such as European aircrat

subsidies and Chinas eor ts to depress the value o its currency.

$Billions


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Trade is the exchange o goods and servicesacross national borders -- in other words,

between nations. It is such a commonplacehuman activity that its advent predated theinvention o money. By trading, ancient civili-zations were able to obtain items not available within their own borders, and specialize inactivities where they could be most productive.Thus, expansion o trade has been closely asso-ciated with improvements in the human condi-tion, and the rise o great empires in the Medi-terranean, Far East and elsewhere dependedheavily on the emergence o regional trading

systems. However, it was not until relativelyrecently that nations understood how theycould organize their trade relations to producethe most stable, rewarding results.

Free trade is the conduct o economic relationsamong nations without government interer-ence. Intererence can take many orms suchas taxes, taris, subsidies and quotas, but whatall such interventions have in common is thatthey impede the unettered pursuit o com-merce. In modern economic parlance, they

distort market orces and diminish the potentialor generating optimum results rom trade rela-tions. The analytic case or ree trade was rstdeveloped during the Enlightenment by philos-ophers such as Adam Smith and David Ricardo.Smith argued that the invisible hand o selinterest would spontaneously regulate marketsin the absence o monopolies or governmentintererence, while Ricardo contended that na-tions could achieve comparative advantage byspecializing in the goods they produced mostskillully or eciently.

These arguments gained a broad ollowing inEurope during the 19th Century, and the result-

ing reduction in trade barriers made it a periodo unprecedented growth. While many coun-tries (including the United States) continued topursue unilateral advantage by taxing importsand subsidizing exports, the cause o ree tradebecame rmly rooted among economists. Pro-tectionist measures taken by the U.S. and othercountries during the Great Depression werewidely seen as contributing to the slide towardwar in the 1930s. Once the Second World Warended, the United States became a proponent

o trade liberalization. In 1948, America and22 other countries ashioned a General Agree-ment on Taris and Trade (GATT) to promotereer exchange o goods and services. Ater sixrounds o tari-reducing measures, the GATTsystem was replaced by the new World TradeOrganization in 1995.Today, the entire structure o global economicrelations depends on sustaining an open trad-ing system. The key eatures o that systemare open access to markets; an absence o tar-

is, subsidies and other trade-distorting poli-cies; and ree fow o private capital, labor andinormation across national borders. Althoughtrade barriers still exist, the main thrust oeconomic diplomacy over the last three gen-erations has been aimed at reducing govern-ment intererence with the ree interplay omarket orces. Countries that seek unilateraladvantage by adopting unair trading practic-es or treating trade partners dierently thanthey themselves would wish to be treated riskunraveling the political consensus that hasmade this the most prosperous, innovative erain human history.

FREE TRADE EMERGED AS NATIONS GRASPED THE BENEFITS OF FAIRNESS


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The global market or jet-powered commer-cial transports rst emerged in the 1950s with

the appearance o planes like the Boeing 707. American companies dominated the marketduring its early years due to the size o the U.S.economy, the long distances Americans otenmust travel within their borders, and the na-tions massive outlays or military technologyduring the Cold War -- technology which otencould be adapted to civil aviation uses. Europe-an companies were handicapped in competingwith American companies by the economic andpolitical ragmentation o the continent, which

undercut economies o scale. In an eort toovercome these obstacles, our Europeangovernments ormed a commercial transportconsortium called Airbus in 1970. Although U.S. aircrat companies benetedconsiderably rom military contracts, theyremained undamentally private enterprises.Airbus, in contrast, was entirely a creature othe governments that had created it, and noneo its early aircrat could have been launchedwithout extensive subsidies rom the member

states. However, subsidies by themselves didnot guarantee success: only 256 o the consor-tiums rst plane, the A300, were sold duringthe 1970s. Meanwhile, Boeing oerings suchas the twin-engine 737 and our-engine 747jumbo jet dominated the global market. Addi-tional oerings rom McDonnell Douglas andLockheed enabled the U.S. to claim over 90% othe market until Airbus introduced the highlysuccessul A320 in the 1980s. The twin-engine,single-aisle A320 attracted considerable market

interest and produced several successul vari-ants, due to appealing perormance eaturesand aggressive pricing.Because the structure o the global airlinerindustry can only sustain two suppliers inany particular niche, the growing success o Airbus made survival o secondary U.S.

suppliers problematic. Lockheed exited themarket in 1986 and McDonnell Douglas

merged with Boeing in 1997, leaving only twocompanies to supply a global market that wasgrowing at an average annual rate o about 5%.At the time o the Boeing-McDonnell merger,U.S. companies still controlled about two-thirdso the market, but this share eroded as Airbusexpanded its oerings and underbid Boeing onprice -- oten in Boeings home market o North America, where 40% o Airbuss early planeswere sold. Although the two surviving compet-itors sought to develop planes that addressed

slightly dierent market niches, every Airbussales success was a loss or Boeing. OnceAirbus elded a ull amily o airliners, it sur-passed Boeing in sales and deliveries, claimingover hal o the market every year ater 2002.Despite Americas diminished role, civilaviation remains a major positive in the U.S.balance o trade. According to the AerospaceIndustries Association, the U.S. had a $54billion surplus in its aerospace trade during2009, with much o that surplus traceable to the

sale o commercial transports. Last year, 40%o all U.S. aerospace industry sales -- $83 billionout o $214 billion -- were civil aircrat, and mostcivil aircrat were exported. Boeing projectsthat global sales o commercial transports willexceed $3.2 trillion over the next 20 years as29,000 new aircrat are delivered. Airbus proj-ects sales during the same period at $3.1 tril-lion or 25,000 planes. Thus, airliners are a po-tential bright spot in the U.S. balance o trade,which currently is running a decit o about a

billion dollars per day in manuactured goods.However, the contribution o commercial trans-port sales to the trade balance would be muchgreater i Airbus had not become such a bigactor in the business, and there is no guaran-tee Boeing will be able to preserve its present47% market share in the years ahead.

THE GLOBAL AVIATION MARKET IS CRUCIAL TO AMERICAS TRADE BALANCE


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Commercial Transport Market Shares, 1960 - 2009

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0

1968: Lockheedreceived rst order

1971: Airbusreceived rst order

1997: McDonnellDouglas merged into

Boeing

1986:Lockheedexited the

market

Boeing average globalmarket share rom1998-2009 = 49.4%

(1998 is when McDonnellDouglas merged with Boeing)

Boeing average globalmarket share rom

1960-1986 = 63%

(1986 is when Lockheedexited the market)

McDonnellDouglas

Airbus

Boeing

196019

6219

6419

6619

681970

1972

1974

1976

1978

1980198219

84198619

8819901992199419961998

2000

2002

2004

2006

2008

Lockheed

GlobalMarketShare,An

nouncedOrders

U.S. producers dominated the global market or commercial transports until the 1990s, when Airbus

began oering a diverse amily o narrow-body and wide-body airliners. As subsidized European aircratclaimed a growing share o the market, two o the three U.S. producers exited the business and the sole

survivor, Boeing, ceased to be the biggest recipient o new aircrat orders.


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Airbus was ounded as a consortium o Euro-pean aircrat companies in 1970 with the explicit

goal o diminishing the dominance o Ameri-can producers in the global aviation market.Recognizing the high barriers to market entryand structural disadvantages that indigenouscompanies aced in competing with marketleader Boeing, the our ounding Europeannations -- France, Germany, Spain and theUnited Kingdom -- embraced rom the begin-ning the need to subsidize Airbus operations.Airbus later evolved into a joint stock companyand then into a wholly-owned subsidiary o the

European Aeronautic Deense & Space (EADS)Company, but the centrality o governmentsubsidies to its commercial transport operationshas never changed. None o the aircrat currentlycomprising the Airbus amily o airliners couldor would have been developed without suchsubsidies.At its inception, Airbus member governmentsstated they were providing subsidies to sup-port an inant industry, subsidies that wouldgradually disappear as the enterprise matured.

That has not happened. The initial agreementto cover costs or the development o the A300 was ollowed by later agreements to und de-velopment o the A310, A320, A330, A340, A350and A380. The latter aircrat, the biggest pas-senger plane in the history o civil aviation, wasalso the most subsidized -- even though its de-velopment was begun ater Airbus had becomermly established in the global market. A 1992agreement between the United States and Eu-ropean countries limited the extent o subsidies

but did not prevent them. Subsidies have takenseveral orms, but by ar the most importantis launch aid, the provision o low-interest orno-interest loans that need not be repaid ithe aircrat model ails to achieve economicsuccess. Such loans make it much easier orAirbus to nance the very high cost o develop-ing new planes. While the nominal dollar val-ue o these loans over time has only added upto about $15 billion, U.S. government experts

have testied that the true market value intodays dollars is roughly $200 billion.

Airbus and Boeing both receive some commer-cial benets rom military contracts, local taxincentives, and other relatively modest kindso government assistance. Much o this as-sistance is permissible under current tradingrules, and it does not appear to have played adecisive role in shaping the rivalry between thetwo companies. However, Boeing gets nothinglike the multi-billion-dollar inusions o launchaid that Airbus regularly receives. This aid has

undamentally altered the terms o competitionbetween the two companies by enabling Airbusto develop new planes aster than would be ea-sible using private sources o unding, and toprice existing planes more aggressively thanwould be prudent in the absence o governmentprotectors. In eect, launch aid transers manyo the risks o being in the airliner businessrom Airbus to European governments, so thatthe company can operate more boldly in chal-lenging Boeings oerings to the marketplace.

European leaders have not been shy in describ-ing what the ultimate aim o the launch aid is.French prime minister Lionel Jospin told theFrench National Assembly in 2000 that we willgive Airbus the means to win the battle againstBoeing. Airbus executives are even more un- varnished, or example describing the heavilysubsidized A380 as a Boeing 747 killer. Theexistence o European aircrat subsidies was asignicant actor in the decision o Americanproducers Lockheed and McDonnell Douglas

to exit the commercial aircrat business, and isthe biggest single reason why Boeing no longercommands a majority share o global airlinersales. With the ranks o U.S. producers reducedto only one company by the beginning o thecurrent decade and that one company alteringbadly in its competition with Airbus, the BushAdministration decided to abandon diplomaticchannels and lodge a ormal trade complaint.

EUROPEAN SUBSIDIES WERE DESIGNED TO UNDERMINE AMERICAS ROLE


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Selected Commercial Aircraft Types

Numberofseats

600

550

500

450

400

350

300

250

200

150

100

Range in Nautical Miles

1 ,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Single Aisle Families737NGA320

A330-200

A350-800

767-300ER

787-8

787-9

777-200LR

777-300ER

747-8

A380

A350-1000

A350-900

Airplanes in production as o 1/1/10

airbus

Boeing

This chart refects the market positioning o all Airbus and Boeing commercial transports currently in

development or production. Although the two companies oer slightly dierent congurations in each

seating/range category, the market reality is that any major order o Airbus planes is probably a loss or

Boeing, and any major order o Boeing planes is probably a loss or Airbus.


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The 1992 agreement between Europe and theUnited States limiting commercial transport

subsidies had envisioned that government aidwould gradually be phased out. But Europeangovernments made no eort to scale back con-cessionary loans and other subsidies or Airbusduring the 1990s. Ater Boeing and McDonnellDouglas merged in 1997, the combined entityrapidly lost market share in the commercialtransport business due to aggressive pricingby Airbus, leaving it with less than hal o newaircrat orders by the early years o the new cen-tury. Convinced that Airbus was violating its ob-

ligations under the treaty that had establishedthe World Trade Organization, the United StatesTrade Representative (USTR) lodged a ormalcomplaint in 2006.The U.S. case alleged that our European gov-ernments and various agencies o the EuropeanUnion had provided an array o improper aidto Airbus, aid explicitly banned in the WTO Agreement on Subsidies and CountervailingMeasures. The most serious violation cited inthe U.S. case was launch aid, low-cost or no-cost

loans that constituted most o the nancial as-sistance Airbus had received (or instance, $5billion o the $5.7 billion in assistance given tothe Airbus A330 by European governments was launch aid). The United States allegedthat under the terms o the WTO agreement,launch aid was both a prohibited subsidy oexports and an actionable subsidy that un-airly harmed the operations o competing sup-pliers o large commercial aircrat. The UnitedStates also challenged various inrastructure

investments, equity inusions, debt orgiveness,research outlays and outright grants providedto Airbus as unacceptable under current tradingrules. European nations lodged their own com-plaint against the United States in 2007 claim-ing that Boeing too had received improper aid,but they did not allege the existence o anythingresembling launch aid.

On September 4, 2009 the World TradeOrganization panel reviewing the 2006 complaint

released a preliminary ruling siding with theU.S. on several key issues. It ound that mucho the launch aid given to Airbus was prohibitedunder current trade rules, and that many othermeasures were at least actionable in the sensethat they had harmed Airbus competitors. Theruling will be nalized in 2010 with only mod-est changes, meaning that i European nationsail to quickly withdraw prohibited subsidies,the United States has the right to take ormalsteps to protect its interests. The process or ad-

dressing actionable subsidies is more complex,because it is related to the degree o damage in-curred by Airbus competitors. But the act thatmost launch aid was deemed unacceptable byan impartial panel o international experts wasa clear victory or the United States, and willundoubtedly lead to U.S. sanctions i Europeangovernments ail to comply with the nding.While the European counter-claim alleging im-proper aid to Boeing has yet to be decided, it islikely to yield a less denitive nding rom the

WTO because there is no claim o launch aidand Airbus or its parent company have receivedbenets similar to those that Boeing is allegedto have gotten. Details on the European com-plaint are contained in the next section. Themore pressing question in the near term is howthe ederal government should respond to theWTO nding that the American aircrat indus-try has been victimized by illegal subsidies giv-en to Airbus. The trade body has said in eectthat the United States was unairly deprived o

many thousands o jobs in its aerospace sectorand many billions o dollars in aerospace exportearnings. The debate over what to do aboutthat act will ocus initially on the Air Forcesnext-generation aerial reueling tanker program(where a modied A330 has been oered) -- andon European plans to subsidize development oan alternative to the Boeing 787 Dreamliner.

THE WORLD TRADE ORGANIZATION HAS RULED SUBSIDIES ARE UNFAIR


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The Boeing 787 Dreamliner was conceived as a technological breakthrough

that would reduce uel consumption and exhaust emissions through extensive

substitution o lightweight composite materials or heavier metal parts. Airbus is

seeking several billion dollars in prohibited subsidies rom European governments

to und development o an A350 competitor to the Dreamliner.


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European supporters o Airbus have sought torebut American criticism o commercial trans-

port subsidies in their case beore the World Trade Organization and elsewhere. The Eu-ropean response distills down to three basicthemes: that Airbus subsidies are consistentwith the way the commercial transport sectorunctions; that Boeing has not suered substan-tial harm rom said subsidies; and that Boeingtoo receives government subsidies that are sim-ilar in scale and character. The United States Trade Representative has rejected all threelines o reasoning, arguing that Airbus not only

has ailed to respond to the heart o the U.S.complaint, but has tacitly admitted its transgres-sions against normal trade practices as it soughtto minimize their signicance.With regard to the contention that governmentaid to Airbus is consistent with prevailing prac-tices in the aerospace sector, most o that aidhas been received in the orm o low-interestor no-interest loans to assist the developmento new aircrat. Since the European responsedoes not allege that Boeing received similar

launch aid and Boeing is the only real competi-tor to Airbus, the European claim is alse on itsace. It may have some validity when appliedto lesser orms o assistance, but those werenot at the heart o the U.S. case. With regardto the contention that Boeing has not sueredsubstantial harm rom European subsidies, thatharm was extensively documented in the initialU.S. complaint and Airbus supporters ail to o-er compelling counter-arguments. Because virtually every Airbus sale is a Boeing loss in

the commercial transport market as currentlystructured, European governments eectivelynegate their own position on this score oncethey concede that subsidies exist.With regard to the contention that Boeing hasreceived assistance similar in character andscale to what Airbus gets, European govern-ments have cited an array o ederal, state and

local benets that they say cumulatively amountto heavy support. The main ederal programs

cited are Foreign Sales Corporation tax ben-ets, and contracts Boeing has received romthe Department o Deense and NASA. How-ever, the Foreign Sales Corporation provisionwas not aimed solely at the aerospace sector, itconerred a relatively modest benet comparedwith European launch aid, and it was repealedin response to a case brought beore the WTO.Federal contracts or military and civil aero-space hardware are not subsidies because theyrequire the delivery o goods and services in re-

turn or payments. The regulatory rameworkgoverning such contracts usually precludesdirected awards, and the activities covered bythe contracts lie largely outside the scope o theWTO agreement on subsidies and countervail-ing measures.The state and local subsidies that Airbus back-ers allege Boeing has received really do exist,but their signicance is exaggerated by Europe-an governments and Airbus itsel receives simi-lar kinds o disbursements. For example, the

partial sales-tax orgiveness that Boeing obtainsrom the state o Washington or its commercialaircrat sales is more limited in scope than theAirbus exemption rom European valued-addedtaxes, and Boeing gets no benet rom the or-giveness unless it rst spends its own moneyto develop and market a saleable product. Fur-thermore, the same benets are available to Air-bus and its parent company when they site op-erations in Washington and other U.S. states, asthey now have. The WTO will probably declare

some state and local subsidies that Boeing re-ceives to be improper when it rules on the pend-ing European case, but those subsidies cannotcompare with the huge benet conerred onAirbus by 40 years o launch aid.

THE EUROPEAN RESPONSE TO U.S. COMPLAINTS IS WEAK AND MISLEADING


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CONCLUSION: WASHINGTON MUST ACT TO ELIMINATE UNFAIR SUBSIDIES

For orty years, European governments haveconspired to undermine Americas leading role

in the global market or commercial aircrat.The representatives o those governments havemade little eort to conceal their intentions, andthey have largely succeeded. As a result, tenso thousands o U.S. aerospace jobs have disap-peared, and hundreds o billions o dollars inU.S. export earnings have been lost. The WorldTrade Organization has now ound that the sub-sidies Airbus leveraged to achieve its presentmarket dominance were improper and largelyprohibited by prevailing trade rules. To prevent

urther erosion in the U.S. aerospace industryand trade balance, Washington must take oursteps in response to the WTO ndings: The U.S. government must forcefully commu-nicate to European governments that urtheruse o illegal subsidies to develop new planes willnot be tolerated, beginning with the proposedA350 challenger o the Boeing 787 Dreamliner.The Europeans suggest that the A350 lies out-side the scope o the recently decided subsidiescase, but it is clear that plans to provide that

program with over $4 billion in launch aid would be condemned in any WTO review, so Washington must stop the plans rom beingexecuted beore additional damage is done toU.S. interests. Because European governments have repeat-edly demonstrated that they are unwilling tobe honest or helpul in resolving the subsidiesdispute, the U.S. government must determine what sanctions it can impose under exist-

ing trade rules to compensate or the unaircompetitive advantages that Airbus receives.To minimize the likelihood o a spreading trade war, these sanctions -- such as taris, quotas

or other constraints -- should be conned tothe commercial transport sector where the

subsidies dispute originated.

The U.S. government must incorporatesome redress o unair Airbus subsidies intocurrent plans or acquiring a new Air Forceaerial reueling tanker. The modied Airbus A330 that was oered by a team competingagainst Boeing in the rst round o competitionor the tanker contract would not have beendeveloped in the absence o over $5 billion inimproper aid. To contemplate making an award

without compensating or the unair advantagethe Airbus plane has received would in eectreward bad behavior and penalize Boeing ornot engaging in similar impropriety. More broadly, the U.S. government mustdetermine what redress o past Europeantransgressions is necessary to balance thecompetitive landscape in the commercial trans-port business. The whole market has now beendistorted by the emergence o an aircrat amilyand pricing structure that would not exist in the

absence o illegal subsidies. It is not enough toavert urther use o improper aid in the uture;steps must be taken to correct the negativeconsequences that aid has already produced orU.S. companies and their workers. These steps will require some time toimplement, and they must take into account anyurther rulings the World Trade Organizationmakes concerning subsidies. But there is nolonger any excuse or delay in acting. Americas

global economic standing is under siege, andit cannot tolerate the continued use o illegalmeasures by other nations to put its exportersat a disadvantage in global markets.


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Printed in the United States of AmericaMarch, 2010

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European Subsidies Brochure Final

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