EU offers US aid cut to end aircraft row

BRUSSELS (Reuters) - The European Union has offered to cut by 30 percent loans likely to be provided for Airbus's new A350 airliner in a bid to avert a huge legal battle with the United States, which is defending its aviation giant, Boeing.

An EU official said on Monday the bloc's trade chief, Peter Mandelson, had also offered to discuss the terms of any "launch investment" loans made by European governments to satisfy Washington of their commercial basis.

Mandelson's move is aimed at rescuing negotiations on how to eliminate subsidies enjoyed by the aircraft manufacturing rivals -- which collapsed amid acrimony in March -- and avoiding a full-blown showdown at the World Trade Organization (WTO).

"Mandelson has proposed ... to suggest to our member states that they reduce by around 30 percent the amount of launch investment that would be made available to the A350," said the official, who requested anonymity.

Airbus has estimated it will cost 3 billion euros ($3.76 billion) to develop the mid-size jet, a rival to Boeing's planned 787 Dreamliner. Airbus Chief Executive Noel Forgeard has said the company is likely to ask for up to 1 billion euros in repayable state loans from European governments.

Mandelson's offer is similar to a previous proposal rebuffed by former U.S. Trade Representative Robert Zoellick, but it is more detailed on the scope and timing of lending cuts.

EU officials say they are also hoping the proposal will be better received this time by the new U.S. trade representative, Robert Portman, with whom Mandelson was planning to speak by telephone later on Monday.

"What we are suggesting is a balanced solution ... whereby a cut on one side would be matched by a commensurate cut on the other side," said Mandelson's spokeswoman, Claude Veron-Reville.

"There is no question of Airbus disarming on its own while Boeing is just considering what it could do on the side."

Washington and the 25-nation EU put aside competing lawsuits at the WTO in January to negotiate a deal cutting billions of dollars of state support to the aircraft titans.

The EU then offered at that time to cut Airbus launch aid loans by about a third to reach an interim agreement and to leave a comprehensive deal on eliminating subsidies to later.

But the United States insisted all Airbus loans must be stopped, forcing the EU to counter that a range of Boeing benefits should be put on the table.

Boeing's aid includes tax breaks in its industrial homeland, Washington State, federal contracts for military and space research and support from Tokyo for building wings in Japan.

Negotiations broke down in March, and the agreed April 11 deadline for a deal passed.

Washington took its aircraft subsidies case to the WTO first, worried that "launch aid" soft loans from EU states for Airbus's latest product, the A350, could challenge Boeing's Dreamliner, a 250-seat long-range aircraft.

It has warned it will reopen its case if fresh support is approved for Airbus, opening what could be the largest commercial dispute in history and putting severe strains on transatlantic relations.

Diplomats say European governments are likely to grant loans to launch the A350 in a matter of weeks, giving Mandelson a narrow window of opportunity to get talks back on track.

Airbus, owned by Franco-German-Spanish aerospace firm EADS and Britain's BAE Systems, snatched the crown as the world's largest commercial aircraft maker from Boeing in 2003.

"Boeing's aid includes tax breaks in its industrial homeland, Washington State, federal contracts for military and space research and support from Tokyo for building wings in Japan."

Notice how Reuters presents this statement as fact without mentioning that Boeing and the US Government dispute the assertion that defense contracts are a government subsidy in the same way that outright loans to Airbus subsidize that unprofitable company. This is typical of the MSM today: shallow, biased, poorly researched analysis leading to an article that merely repeats the claims made by both sides in a trade dispute.

I worked in finance for a large defense contractor for several years and I know that defense contracting is not necessarily more profitable than the typical non-defense business. Defense contractors have to invest a lot of capital in production facilities and the profitability of these companies depends greatly on how much equipment they're producing in any year and their utilization of production capacity. If congress cuts back on the amount of equipment they produce, their return on capital drops dramatically. I would bet that defense contractors in the S&P 500 rank around the middle of that group in most measures of profitability. The Europeans are exagerrating the amount of support that Boeing gets from the US government while they insist on direct subsidies to Airbus because they need the Airbus jobs to counter high unemployment. This amounts to just stealing jobs from Boeing at our expense. Europe really needs to roll back socialism and all the restraints on free enterpise in Europe that lead to high unemployment.

"'What we are suggesting is a balanced solution ... whereby a cut on one side would be matched by a commensurate cut on the other side,' said Mandelson's spokeswoman, Claude Veron-Reville."

The European negotiator Mandelson looks like a real treacherous, lying eurosocialist bureaucrat. He starts with a situation that is totally unbalanced, with Airbus receiving far more government support than Boeing, then proposes making equal reductions in government support and calls that a "balanced solution." His proposal still ends up in a totally unbalanced situation where Airbus receives huge direct cash subsidies in the form of loans that will never be repaid, while Boeing receives no direct subsidies and has to produce and execute superbly to make defense contracts pay off.

This item about tax breaks from Washington State is just laughable: those tax breaks probably amount to no more than a couple hundred million dollars at most, while Airbus is asking for billions of dollars in direct cash subsidies. It also looks like Reuters is not accurately reporting the size of the loans Airbus is seeking from european governments. I've read elsewhere that total launch aid loans to Airbus for the A350 are now around $15 billion, which is much more than the numbers in this article.

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