U.S., EU Declare Biggest Trade War

U.S., EU declare biggest trade war
Cross-accusations of improper subsidies for Airbus and Boeing

http://www.chicagotribune.com/busine...ck=1&cset=true

By David Greising, Chief business correspondent. The Associated Press contributed to this report
Published June 1, 2005

The U.S. and the European Union launched the largest trade war ever Tuesday, pitting the interests of two giant aircraftmakers as they vie for control of the lucrative market for commercial jetliners.

The U.S. launched its case Tuesday at the World Trade Organization in the face of mounting evidence that European governments plan to provide as much as $1.7 billion in low-interest loans to help Airbus launch its newest plane, the A350.

The EU immediately retaliated, claiming Boeing's 787 Dreamliner has received more than $7 billion in tax incentives and infrastructure support.

However, the EU left out of its case an issue that Airbus has complained loudly about: $1.6 billion in subsidies expected to come from Japan to support Japanese suppliers that will build the wing section of the 787. Trade experts speculated the EU backed away because it feared opening the issue, since many European suppliers receive government support.

The huge dispute between two of the world's largest trading partners threatens to disrupt relations between the U.S. and EU at a time when they need to work together to advance their mutual interests. They are seeking to complete the latest round of World Trade Organization negotiations and deal with the sharp rise in Chinese textile imports, the theft of intellectual property and other concerns.

The stakes also are high for two companies that are among the world's largest exporters and employ many thousands in their respective countries. Boeing has sought the trade case in an effort to disrupt Airbus' launch of the A350, while Airbus has refused to give ground and is seeking launch aid to help counter Boeing's successful launch of the 787.

A senior U.S. government trade official, who spoke on condition of anonymity, tried to paint the dispute in a positive light, saying the two trade giants can focus on other issues now that the aircraft case is before the WTO.

"This put it in a track of its own. ... We can go and deal with other issues separately and work in other areas cooperatively," the official said.

In official statements, U.S. Trade Representative Rob Portman and EU Trade Commissioner Peter Mandelson attempted to contain the aircraft dispute. But acrimony over subsidies is so high that lead officials on both sides of the Atlantic could not agree on whether to seek a negotiated settlement during the expected two-year WTO process.

While U.S. officials said they would like to continue face-to-face negotiations, Mandelson seemed to see no hope for direct talks. "The time for negotiations has been closed," he told The Associated Press.

Mandelson over the weekend had offered to reduce support for the A350 to no more than 30 percent of the start-up cost of the plane in exchange for a promise that supports to Boeing's 787 would be reduced.

Portman rejected the late overture and went to the WTO to request the creation of a panel to rule on whether billions of dollars in state aid are permissible under WTO rules.

The senior U.S. trade official laid out for the first time what sort of remedy the U.S. may seek. The U.S. believes that government launch aid gives Airbus an unfair advantage in its heated competition with Boeing, and the case will seek to eliminate the benefits of the below-market loans that Airbus is required to repay only after its plans are proven successes.

"We can imagine reconfiguring a payment schedule in order to eliminate the adverse effect," the official said. Such an approach would be unusual for the WTO, which historically has not undone existing contracts but instead has focused on changing future conduct.

Officials at Airbus and Boeing, which had engaged in a spirited war of words since Boeing first began raising the subsidy issue last summer, cheered the governments' moves--and continued to air their mutual grievances.

Allan McArtor, chairman of Airbus North America Holdings, said Boeing has been "hypocritical" in attacking launch aid while accepting tax breaks and the support for its Japanese suppliers.

"You'll have to talk to their `chief hypocrisy officer' as to why launch loans made in Europe are so offensive and why the launch loans made in Japan are so acceptable," he said.

Boeing held out hope for a negotiated solution.

"We agree ... that a negotiated settlement is preferable and hope serious U.S.-EU discussions will continue as litigation proceeds," the Boeing statement said.

Officials at European Aeronautic Defense and Space Co. and Britain's BAE Systems, owners of Airbus, in a statement said Boeing's 787 has received more than $5 billion in government aid, making it "the most subsidized airliner ever." Even so, the companies called for a negotiated settlement.

Richard Aboulafia, aerospace industry analyst for the Teal Group, said the U.S. government timed the dispute to help Boeing, especially now that Airbus seems to be on the verge of formally launching the A350 at the Paris Air Show in mid-June as a competitor to the 787.

"The timing is superb: just before the Paris Air Show, just before Airbus gets its new A350 launched," Aboulafia said.

Robert J. Carbaugh, a trade expert at Central Washington University who has published articles about the Boeing-Airbus dispute, said the fight will be a test for the WTO.

"Other WTO disputes affect some people but not whole nations," Carbaugh said. "I'm not totally sure that the WTO is equipped to take on a case of this magnitude, of this political as well as economic importance."