As has been widely reported, the World Trade Organization ruled today that Airbus received illegal subsidies from European Union nations, setting the stage for billions of dollars in sanctions against the world’s leading aircraft manufacturer. But what does all this mean for Boeing?
While the thousand-plus page document has yet to be released, Washington state’s congressional delegation was the first to be briefed by U.S. trade officials, and I just got off the phone with Rep. Jay Inslee, who shared some of the details as well as some thoughts on how this ongoing trade dispute might play out. And while it could be a couple years before WTO sanctions are officially invoked, if ever, Inslee believes the ruling could and should have a near term impact on Boeing’s prospects.
The most obvious and immediate impact could be on the controversial Air Force refueling tanker contract, originally granted to Airbus under disputed circumstances, and now awaiting rebidding as the Air Force reconsiders the specifications for the program. Boeing had originally proposed a tanker based on the 767, which would have kept that model’s Everett, WA assembly line running for the foreseeable future, but in a blow to our local economy the Air Force initially selected a tanker based on the bigger Airbus A330, largely citing that model’s greater fuel carrying capacity.
But whether Boeing ultimately rebids a 767-based tanker, or one built on the larger capacity 777, Inslee argues that the Air Force “can and should” take today’s WTO ruling into consideration. Although the ruling is under appeal, and thus imposition of WTO sanctions are still a year or two off, Inslee pointed out that trade agreements have always given the U.S. a legal right to exercise a “national security exemption” when awarding military contracts, and now the WTO findings have given the U.S. a moral justification as well.
“I don’t know how you can justify to American citizens giving billions of dollars of contracts to a company that has acted illegally,” Inslee told me, arguing that the WTO ruling “should have a bearing on, if not outright bar” another Airbus tanker contract.
As for the impact on sales of commercial airplanes, Inslee explained that once appeals have been exhausted and the WTO sets a dollar value to the sanctions, President Obama could set a tariff of sorts on the sale of Airbus products in the U.S., thus making their aircraft less competitive compared to Boeing’s. While European sources have attempted to downplay Boeing’s victory by claiming that the ruling does not apply to the A350—Airbus’s competitor to the 787—Inslee says that the U.S. could still impose tariffs on the A350 as a sanction for the billions of dollars of illegal “launch aid” assistance Airbus received from European governments for the A380.
Furthermore, the only reason the A350 wasn’t part of today’s decision is that WTO rules prevent plaintiffs from adding to complaints once they’re filed. Inslee says that the U.S. has accumulated plenty of evidence of similar illegal launch aid for the A350 since the current complaint was filed in 2004, and would likely file a new complaint unless an agreement is reached in the interim.
Of course, European nations have also filed a counter-suit alleging illegal government subsidies to Boeing, much of it focused on the billions of dollars of tax credits extended by our own state legislature in its efforts to keep 787 final assembly here in Washington state, but Inslee argues that these subsidies are different in both scale and substance.
While the $3.5 billion tax credit extended Boeing certainly has a huge impact on state coffers, it is significantly less than the $20 billion in direct cash aid Airbus received from European governments. Inslee also notes that unlike the illegal Airbus subsidies, the Washington state tax credits are not technically limited to Boeing only, and would be equally available to Airbus and other aerospace manufacturers should they seek to operate similar manufacturing facilities in state. (Our state constitution technically forbids tailoring tax incentives to specific businesses, though in practice that provision is pretty easy to get around.) In any case, the WTO has in the past been loathe to mess with the nitty gritty of local tax code, and the sovereignty issues that would entail.
So if the Airbus ruling remains on appeal, the counter-suit remains unsettled, the size of the sanction remains unknown, and the ultimate imposition date remains a year or two in the future, how could today’s ruling have any immediate impact on commercial aviation sales? By creating uncertainty in what is already a very volatile business.
“Airlines placing orders with Airbus now, just don’t know how much sanctions will cost them when they take delivery,” Inslee suggested. And considering the huge and long term investment an airline must make in adopting one model or another, that in itself is enough to count today’s ruling as a win for Boeing, and perhaps, for the Puget Sound economy as well.