The Blog

Flying the Subsidized Skies

The WTO rules against Airbus.

12:00 AM, Sep 16, 2009 • By REUBEN F. JOHNSON
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

After a long and tortuous path of allegations of illegal subsidies and analysis of financial records, the World Trade Organisation (WTO) ruled last week that the European Airbus consortium has been receiving illegal assistance from the relevant governments. The target of the ruling, which runs over 1,000 pages in length, appears to have been the financial aid given for the launch of the Airbus A380 jumbo jet.

The WTO ruling is the result of a process that began roughly five years ago when the U.S. Government originally filed a case over what it said were unfair trading practices by the European Union. The decision, the details of which are still unknown, has been portrayed as a victory for Boeing, but the tangible benefits--as well as the lack of any enforcement mechanism in the aftermath of the ruling--makes any "victory" more moral and symbolic than anything else.

Complicating matters, the EU has filed a counter-complaint against Boeing--claiming that the military and NASA contracts that Boeing receives from the U.S. Government are subsidies under a different name. However, there are three basic problems with the Airbus argument:

One is that, like the legal process in the United States, the deliberations that the WTO engaged in took so many years that by the time they issued their ruling the aerospace market and the dynamics of the government-industry relationships had altered completely. Since the time that the case was brought before the WTO, Airbus has designed and built another aircraft, the A350, which competes with another program, the Boeing 787 Dreamliner, that did not exist when the dispute was first initiated. Military business or not, it does not seem to affect the ability of Airbus to continue to compete with Boeing and vice versa. Whatever the final ruling is in the 1,000 pages of findings by the WTO, it may be more of a snapshot in time than anything else -- and of little relevance to today's market

Another is that the cyclical nature of defense spending and the changes in how technology has evolved in recent years. This makes the Airbus argument that military contracts can be a boost for commercial aircraft programs a spurious one. After the WTO ruling, the parent company of Airbus, the European Aeronautic Defence and Space Company (EADS), lost no time in making the argument that one man's subsidies are another man's government contract. The military contracts received by Boeing and the work it receives from NASA for support of the Space Shuttle and ISS missions have been deemed as "opaque subsidies" by Louis Gallois, CEO of EADS.

But the reality of Boeing's business is that the military aircraft division of the company is a poor cousin to the commercial aircraft business. Today's economies of scale in the aircraft manufacturing business are such that the military production lines at Boeing's St. Louis plant could not continue to operate without the steady business of the commercial aircraft lines out in Everett, Washington. If there are any subsidies in Boeing's business it is the commercial division supporting the military business unit--not the other way around.

Perhaps the best illustration of the fact that the Boeing military aircraft business is not the fountain of gold that Airbus would have us believe is the history of the infamous and long-running competition to recapitalize the U.S. Air Force's fleet of aerial refueling tankers. There are thus far no winners in this series of competitions, cancellations, and protests, which included a 2003 freezing of the competitive process over Boeing having received insider information on the Airbus bid from a former USAF civilian executive. The bottom line is that Boeing cannot sell an airborne tanker version of one of its passenger aircraft and be competitive. So much for the military being a big boost to Boeing's fortunes in the commercial sphere.

In any case, Airbus executives are throwing stones from a glass hangar. The consortium is currently developing a military cargo aircraft, the A400M, which is designed to compete with the Lockheed Martin C-130J. The difference is that the European aircraft costs around $50 million more per unit than its American analogue, which makes it look like, well, a military subsidy for Airbus's various production units.

Then there is the famous Eurofighter program, which is a cooperative venture between four European nations--the Britain, Germany, Spain and Italy--which has been a huge jobs program for the major partners of the Airbus consortium and is supported by generous (and overly taxed) European taxpayers. Various aspects of the Eurofighter program--like having four separate flight test centers (one in each of the four member nations)--have been monuments to bureaucratic inefficiency. Small wonder that there are those who refer to the program as the "Bureaufighter."

But the larger problems for both Boeing and Airbus--and how "illegal subsidies" should be defined--loom not too far in the future.

Among these looming problems is Brazil's Embraer. Although the company is now largely engaged in commercial aircraft production, it will soon begin licence-producing the Dassault Rafale fighter from France for the Brazilian Air Force and will also start-up a production line for an Embraer-developed military cargo/tanker aircraft, the C-390. Separating the company's defense business from its commercial product lines, which compete with smaller commercial models like the Boeing 737, could become another sticky wicket.

Then there are Russia and China. Both nations have completely state-owned industries in everything but name, and both seem determined to enter the commercial aircraft business on the backs of their taxpayers. Russia is estimated to spend over $9 billion on two commercial aircraft programs--the Sukhoi Superjet 100 and United Aircraft Coroporation MS-21--both led being built by formerly all-military firms. These programs are not just being subsidised by the state--they are being paid for in full by the Russian government, with sales being made to Russian state-owned aircraft leasing companies backed up by loans from Russian state banks so that the planes can be operated by Russian state-run airlines. Kremlin Jets might be a more appropriate name for these aircraft.

China, however, is in a league all its own. China's government-owned and financed AVIC consortium is the only aircraft-building entity in the country. Originally, the mammoth consortium existed with a largely fictitious divide between military (AVIC I) and commercial (AVIC II) business units. Last year the charade ended as the two were merged, but such formalities hardly make any difference in a firm with no private ownership or non-state funding for its programs.

What governments refuse to admit is that aerospace industries are--no matter which nation we are talking about--large, publicly-funded entities that continue to exist because governments do not want to lose the strategic assets that they represent. Trying to draw a line between where government funding ends and commercial profits begin becomes nearly impossible. Additionally, what does and does not constitute state assistance becomes increasingly meaningless in an age of government rescue packages for troubled industries, or at a time when the U.S. Congress votes for production of military systems that are beyond the numbers requested by the Pentagon.

What the Boeing-Airbus dispute should generate would be some intelligent talk about what constitutes unfair trade practices in aerospace, and how to enforce and levy penalties against those who violate those guidelines. As of today, a nation that is sanctioned by the WTO is not required to pay fines or other monetary compensation. The worst that can happen is that other nations can impose tariffs against the offending nation. These sort of trade wars seldom produce the desired outcome, so clearly a change in procedure is needed.

But the WTO process of hearing grievances is not likely to produce anything definitive anytime soon. The EU's counter-complaint against the U.S. practice of providing government contracts to Boeing will not be heard for another six months--and then possibly years more of deliberations before any ruling is issued. The only assured outcome is a lot more work for lawyers, accountants, negotiators and bureaucrats, all of whom have a vested interest in the process being prolonged to the maximum extent possible.

By the time the WTO does make a decision, there will be more nations playing in the aerospace market and the issues will be far more complicated--and the decision rendered even more irrelevant--than the current WTO finding is in the present day.

Reuben F. Johnson is a frequent contributor to THE WEEKLY STANDARD Online.