So Both Sides Got Subsidies in KC-X, Now What?

The World Trade Organization has apparently issued a final ruling saying that Boeing did indeed recieve unfair — not illegal — subsidies that benefit the development of its aircraft fleet.

According to the New York Times, the WTO ruled, in a confidential report, that Boeing received about $5 billion in subsidies. The WTO focused on about $24 billion in R & D contracts Boeing receives from the military and NASA along with Washington state tax breaks that European governments say gave the Chicago-based company a technological and financial edge.

Last summer, the WTO found that EADS had received billions in unfair subsidies as well, something that was key in allowing EADS to eat up large amounts of Boeing’s market share around the globe, according to the U.S. trade representative.

This comes as the U.S. Senate is once again taking up the so called, “Level-Field” bill, that will require the Pentagon to factor in the impact of the subsidies in its evaluation of Boeing’s KC-767-based and EADS A330 MRTT-based offerings in the $35 billion KC-X contest.

“The WTO focused on about $24 billion in R & D contracts Boeing receives from the military and NASA along with Washington state tax breaks that European governments say gave the Chicago-based company a technological and financial edge.”

A bit of a typo in there. The amount is around $2.4 billion, not $24 billion. The $20-some-odd billion is the amount the WTO assessed Airbus as receiving. Airbus received about 10-times as much and that launch aide was not tied to R&D efforts covering many different technologies, but was directed at assisting in the launch of an aircraft into the commercial world.

http://blogs.forbes.com/beltway/2011/01/31/air-force-tanker-program-flies-into-new-political-storm/ for an excellent overview.

A bit of a typo in there. The amount is around $2.4 billion, not $24 billion.

What makes you say that? Every article I've seen on this that mentions a number agrees on the $24 billion. Well, $23.7 billion:

GENEVA (AP) — The U.S. federal government and two states are supplying Boeing with "lavish" subsidies that will eventually reach US$23.7 billion, the European Union said Thursday, adding that the payments are already providing the American plane manufacturer with a massive advantage over rival Airbus.

Of course, it does say "eventually", but that is the way WTO measures.

It also didn't say these were illegal, just that they exist. I saw a number suggesting about $7 billion was "illegal" by WTO standards.

The bloc says the U.S. federal government's share of the alleged illegal payments to Boeing included US$18.9 billion in research funds through NASA and Department of Defense grants, tax breaks and reimbursement of development costs since 1990.

It sure looks like they are talking in the $24 billion range -- I don't see how all the numbers could ALL be typoed by a factor of 10.

Apparently, the official ruling hasn't been released, so we are seeing snippets from others who have seen it.

The EU alleges that Boeing received almost $24 billion in illegal subsidies, such as research grants and free use of technology, from NASA, the Department of Defense, and the states of Illinois, Kansas and Washington. However, how much of this aid the WTO deemed illegal won’t be clear until Monday’s report is published some time this spring.
Boeing also claimed that the WTO had come out in its favor. “The WTO rejected almost all of Europe’s claims against the United States,” it said in a statement. “Nothing in today’s reports even begins to compare to the $20 billion in illegal subsidies that the WTO found last June that Airbus/EADS has received.”

There seems to be a distinction between "subsidies" and "illegal subsidies". As I said, I've read somewhere that the report claims $7 billion of Boeing subsidies are illegal, and Boeing says $20 billion of Airbus subsidies are illegal.

But I see no evidence that the $24 billion subsidy number is a typo, or off by a factor of 10; even if we are talking the illegal part, it looks like $7 billion, not $2.4 billion, is the more likely number (I realise the official report hasn't been released yet, but Boeing didn't dispute the $7 billion number, so I presume it is an accurate representation of what is in the report which they have both seen).

The rulling rejected most all the claims, deflating the number substantially:

“CHICAGO, Jan. 31, 2011 /PRNewswire/ — Boeing (NYSE: BA) today released the following statement, responding to public reports that the WTO panel deciding European Union claims of U.S. government assistance to Boeing has issued a confidential final ruling rejecting the vast majority of Europe's claims:

“Today's reports confirm the interim news from last September that the WTO rejected almost all of Europe's claims against the United States, including the vast majority of its R&D claims – except for some $2.6 billion. This represents a sweeping rejection of the EU’s claims.

“Nothing in today's reports even begins to compare to the $20 billion in illegal subsidies that the WTO found last June that Airbus/EADS has received (comprised of $15 billion in launch aid, $2.2 billion in equity infusions, $1.7 billion in infrastructure, and roughly $1.5 billion in R&D support).

“The WTO’s decisions confirm that European launch aid stands alone as a massive illegal subsidy only available to Airbus, which has seriously harmed Boeing, distorted competition in the aerospace industry for decades, and resulted in the loss of tens of thousands of good-paying U.S. jobs.

“Today's decision will not require any change in policy or practice, or other remedy that comes close to approaching the billions of dollars of launch aid that must be repaid by Airbus or restructured on proven commercial terms. As a result of the June WTO ruling, EU governments and Airbus/EADS must repay or restructure $4 billion in still outstanding illegal launch aid subsidies Airbus received to develop the A380. They must also remedy the adverse effects of the additional $16 billion in other illegal subsidies Airbus received.

“Under the WTO’s decisions, Airbus must now compete in the global marketplace without the massive illegal subsidies it has received since its inception and without which, the WTO held, Airbus would be ‘a much different, and we believe a much weaker’ company than it is today. It will be required to finance airplanes the same way Boeing does – with its own money. Having recently announced it has more than $13 billion dollars of cash on hand, Airbus should have no problem with this new requirement.

“Today's ruling underscores our confidence in the WTO processes and dispute-resolution procedures. We applaud the body for its work and continue to look to Airbus/EADS and the EU to recognize that in today's global market, everyone must play by the rules and abide by WTO requirements. Playing by the rules, for Airbus/EADS, means withdrawing the still-outstanding A380 prohibited launch aid subsidy and financing the A350 on commercial terms. Airbus should confirm its intention to comply with the WTO’s decisions.”

Editor's Note: More information about the WTO cases can be found at www.boeing.com/WTO.

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